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FIRST BUSINESS FINANCIAL SERVICES, INC. (FBIZ)·Q3 2024 Earnings Summary

Executive Summary

  • Q3 2024 delivered stable net interest margin at 3.64% (within the 3.60%–3.65% target), record pre-tax, pre-provision earnings ($15.4M), and EPS of $1.24, up vs both Q2 2024 and Q3 2023, supported by double‑digit loan and deposit growth .
  • Operating revenue rose to $38.1M, net interest income to $31.0M, and tangible book value per share increased 9.7% annualized vs linked quarter and 12.5% YoY .
  • Asset quality remained solid: NPAs were 0.52% of assets (down sequentially as a percent) and allowance coverage of non‑accruals was ~183% despite elevated charge‑offs tied to equipment finance transportation exposures .
  • The Board declared a $0.25 dividend (20% payout on Q3 EPS), and the company completed a $20.0M 7.5% subordinated debt issuance to support loan growth and Tier 2 capital .
  • Consensus estimates were unavailable from S&P Global during this session due to a daily limit; estimate comparisons therefore cannot be presented (S&P Global consensus unavailable).

What Went Well and What Went Wrong

What Went Well

  • Strong balance sheet growth with loans +10.3% YoY to $3.05B and core deposits +8.8% YoY to $2.38B; net interest income +8.4% YoY and adjusted NIM improved sequentially to 3.51% .
  • Record PTPP adjusted earnings ($15.4M; 1.70% adjusted PTPP ROAA), positive operating leverage, and tangible book value per share growth of 12.5% YoY, underpinned by prudent expense management and revenue diversification .
  • Private Wealth AUM&A reached $3.398B (+16.6% YoY), generating $3.3M in fee income (+10.8% YoY) with management highlighting strategic expansion across markets: “We grew Private Wealth assets under management and administration to $3.4 billion… which was up 11% from the third quarter of last year” .

What Went Wrong

  • Non‑interest income fell 16.2% YoY and 4.9% QoQ to $7.1M, driven by lower SBIC mezzanine fund returns and weaker swap fee income YoY; SBIC income dropped to $193K vs $1.2M a year ago .
  • Provision for credit losses rose to $2.1M (vs $1.7M in Q2 2024), reflecting higher specific reserves in equipment finance and SBA borrowers within C&I; net charge‑offs annualized increased to 0.20% .
  • Ongoing sector‑specific weakness in transportation within Equipment Finance persists; management expects similar credit impact near term as the portfolio winds down: “We continue to see weakness in the transportation sector… expect the credit impact… to be in line with the past several quarters” .

Financial Results

MetricQ3 2023Q2 2024Q3 2024
Operating Revenue ($000s)$37,026 $37,965 $38,071
Net Interest Income ($000s)$28,596 $30,540 $31,007
Total Non-Interest Income ($000s)$8,430 $7,425 $7,064
Diluted EPS ($)$1.17 $1.23 $1.24
Net Interest Margin (%)3.76% 3.65% 3.64%
Adjusted Net Interest Margin (%)3.66% 3.47% 3.51%
Efficiency Ratio (%)61.96% 62.75% 59.50%
ROAA (annualized, %)1.19% 1.14% 1.13%

Non‑interest income breakdown:

Component ($000s)Q3 2023Q2 2024Q3 2024
Private Wealth Mgmt Fees$2,945 $3,461 $3,264
Gain on Sale of SBA Loans$851 $349 $460
Swap Fees$992 $157 $460
Service Charges on Deposits$835 $951 $920
Other Non‑Interest Income (incl. SBIC)$2,021 $1,681 $1,148
Total Non‑Interest Income$8,430 $7,425 $7,064

Key balance sheet and KPIs:

KPIQ3 2023Q2 2024Q3 2024
Loans & Leases ($000s, period‑end)$2,764,014 $2,985,414 $3,050,079
Core Deposits ($000s, period‑end)$2,189,264 $2,309,635 $2,382,730
Wholesale Funding ($000s, period‑end)$467,743 $575,548 $587,217
NPAs / Total Assets (%)0.52% 0.53% 0.52%
Allowance / Non‑Accruals (%)176.06% 183.96% 183.38%
Tangible Book Value/Share ($)$30.87 $33.92 $34.74
Private Wealth AUM&A ($000s)$2,914,665 $3,248,663 $3,397,941

Q3 2024 actual vs estimates:

  • Consensus EPS (S&P Global): Unavailable (S&P Global daily request limit exceeded; consensus comparison cannot be provided).
  • Consensus Revenue (S&P Global): Unavailable (S&P Global daily request limit exceeded; consensus comparison cannot be provided).

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
Net Interest Margin targetOngoing3.60%–3.65% long‑term target Maintain 3.60%–3.65%; neutral balance sheet positioning; adjusted NIM up QoQ Maintained
Effective Tax RateFY 202416%–18% 16%–18%; similar expected in 2025 with tax credit pipeline Maintained/Extended
Compensation Expense Run‑RateQ4 2024“Approximate this level” after Q2 commentary (~$16.2M in Q2) ~Q3 base + $700K add‑backs → ~$15.9M run‑rate for Q4 Lowered vs Q2 run‑rate
SBA Loan Sale GainsH2 2024 onwardPipeline to build in H2 2024 Expect gains to increase as production and construction loans fully fund Raised qualitative outlook
DividendRegular quarterly$0.25 per share $0.25 per share; 20% payout on Q3 EPS; payable Nov 20, 2024 Maintained
Wholesale Funding StrategyOngoingUtilize efficient wholesale funding to match‑fund fixed‑rate assets Continue to optimize mix (brokered deposits, FHLB), hedge portions to reduce costs Maintained

Earnings Call Themes & Trends

TopicQ1 2024 (prior two)Q2 2024 (prior one)Q3 2024 CurrentTrend
AI / Technology initiativesLimited detail in releasesHigher computer software expense; investing in tech to support growth RPA team in‑house; AI training; several bots deployed; automation to scale efficiently Accelerating execution
Deposit pricing & cost of fundsCore deposit rate rising with competition Avg core deposit rate 3.34% (+14bps QoQ) Proactive deposit rate reductions pre/post Fed cut; surgical repricing of exception clients Cost moderation underway
SBA pipeline & gainsBuilding pipeline for H2 SBA gains $349K; pipeline building Gains $460K; expect increases as construction loans fully fund; team rebuilt to 8 BDOs Improving momentum
Equipment Finance – TransportationReserving methodology building; emerging charge‑offs Charge‑offs exceeded new non‑accruals; transportation weakness noted Continued sector weakness; expect similar net charge‑offs near term; portfolio reduced to ~$46M Still pressured; de‑risking
ABL default resolution$6.5M balance; full repayment expected; Chapter 7 process timeline $6.5M balance; resolution likely late 2024/2025 $6.4M balance; resolution likely late 2024/2025 Gradual progress
Private WealthAUM&A $3.121B (Dec) to $3.320B (Mar) AUM&A $3.249B; record $3.5M fees AUM&A $3.398B; $3.3M fees; fees to pick up in Q4 due to timing Growth continuing
Wholesale funding & hedgingIncreased term brokered deposits; FHLB decreased Brokered deposits up; hedging to reduce costs Wholesale deposits up; FHLB up; continued hedging of wholesale deposits Active optimization

Management Commentary

  • “Our ability to consistently deliver quality growth was supported by our team’s outstanding balance sheet management, resulting in a strong and stable net interest margin that remained within our target range of 3.60%–3.65%.” — Corey Chambas, CEO .
  • “We simply don't have any areas of concern [in office CRE], primarily due to the location of the properties, loan structures and strength of the sponsors… we have no nonperforming loans in the [office] portfolio and almost 90%… have recourse.” — Dave Seiler, President & COO .
  • “Adjusted NIM for the third quarter was 3.51%… the majority of the adjusted NIM benefit in the quarter came from the loan portfolio… we wouldn’t expect to see a meaningful change in our margin due to the recent and anticipated rate cuts.” — Brian Spielmann, CFO .
  • Strategic plan focus 2024–2028: deposit‑centric growth, positive operating leverage, RPA and AI adoption, and TBV growth ≥10% per year by 2028 .

Q&A Highlights

  • Deposit costs: Management is proactively lowering deposit rates, both broad‑based and surgical, while aiming to keep NIM within 3.60%–3.65% and maintain neutral IRR positioning .
  • Operating leverage and PPNR: Expect continued double‑digit balance sheet and revenue growth with modest positive operating leverage in 2025 as fee lines normalize (SBA, SBIC); comp growth managed via tech efficiency .
  • Wealth fees: Q3 decline vs Q2 due to timing; expect Q4 pickup as fees lag quarter‑end AUM levels .
  • Credit/reserves: Reserve levels are appropriate; elevated specific reserves in small‑ticket transportation expected to taper over time absent macro deterioration .
  • Expense run‑rate: Q3 comp benefited from $700K adjustments; Q4 run‑rate expected near Q3 base plus add‑backs ($15.9M) .

Estimates Context

  • S&P Global Wall Street consensus estimates for Q3 2024 EPS and revenue were unavailable due to an S&P Global daily request limit exceeded during this session. As a result, we cannot present beat/miss vs consensus for this quarter (values would normally be retrieved from S&P Global).
  • Implication: Without consensus, focus shifts to internal trajectory—stable NIM within target, sequential adjusted NIM improvement, record PTPP, and YoY EPS growth suggest resilient fundamentals .

Key Takeaways for Investors

  • Stable margin strategy is performing: NIM remained within target and adjusted NIM improved QoQ, aided by loan yield increases and active funding optimization—supportive for near‑term NII durability even through rate cuts .
  • Growth engine intact: Double‑digit loan and deposit growth with disciplined underwriting and match‑funding should continue to drive top‑line expansion and PTPP in 2025; watch for deposit cost relief as repricing progresses .
  • Fee normalization ahead: SBA gains and SBIC realizations are expected to ramp in 2025, adding consistency to non‑interest income after 2024’s softer realized gains; potential incremental support to operating leverage .
  • Credit watch: Transportation within Equipment Finance remains the primary credit headwind; expect similar net charge‑offs near term as the portfolio winds down; overall asset quality metrics remain solid with strong allowance coverage .
  • Capital and dividend: Sub debt issuance strengthens total capital; dividend maintained at $0.25 (20% payout on Q3 EPS), leaving capacity for organic growth while supporting shareholder returns .
  • Tactical focus for trading: Near‑term stock reaction may hinge on evidence of deposit cost moderation in Q4, NIM holding in target band, and visible improvement in SBA gains; downside risk remains tied to transportation credit normalization pace .
  • Medium‑term thesis: A deposit‑centric, branch‑lite model with specialty finance and growing Private Wealth offers diversified revenue, scalable efficiency via RPA/AI, and a long track record of TBV growth—positioned to outperform peers on PTPP and TBV compounding through the cycle .

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