First Business Financial Services, Inc. 2026 Q3 Earnings Call

Please go ahead. Thank you, and good morning, everyone.

We appreciate you joining us today, and I am pleased to report an outstanding third quarter of 2026 for First Business Bank. We produced record pre-tax, pre-provision, and bottom-line earnings that reflect our consistent execution against our long-term strategic plan. Our EPS grew 6% compared to $1.84 in the second quarter, or 15% when you take out the $0.14 of net one-time benefits last quarter. EPS were also up 15% year-over-year. On a year-to-date basis, EPS grew 20% over earnings for the first nine months of 2025. These outcomes were driven by strong operating fundamentals as reflected in pre-tax, pre-provision earnings that grew 13% year-over-year and 14% on a year-to-date basis.

This record performance and double-digit growth shows the compounding earnings power our team has produced through high-quality, well-priced loan growth that is predominantly funded by relationship-sourced core deposits. For the third quarter, total loans were up 10% annualized, marking our 20th consecutive quarter of loan growth. Core deposits were up 14% annualized, outpacing loan growth and further strengthening our funding profile. Tangible book value per share grew 13% year-over-year and 13% on a compound annual basis over the past five years, reflecting the consistent value creation that is central to our long-term strategic plan. These results reflect a consistent theme. We are a focused business bank executing at a high level, growing the right way, and building long-term shareholder value. Our five-year strategic plan is our operating manual and our North Star.

Our current plan runs through 2028, so last quarter represented the halfway point of our plan period. You can reference slide five in the earnings supplement, which shows our progress against the plan's key metrics that define success for First Business Bank over the long term. On revenue growth, we are tracking at 10% year-to-date, in line with our long-term annual target of 10% or better. This is despite a modest fee income headwind related to our exit from our out-of-footprint SBA business last quarter. Other areas of fee income have grown meaningfully, and our strong net interest margin and balance sheet growth have supported 11% growth in year-to-date net interest income. On the efficiency ratio, our outstanding year-to-date result of 57.87% was helped by Q3 coming in at an impressive 55.12%, which Brian will cover.

These results include some benefit from Q3's favorable expense timing and robust net interest margin. More importantly, they demonstrate the compounding benefit of positive operating leverage, revenue growing faster than expenses quarter after quarter, yielding meaningful efficiency gains. We do not manage to a single quarter's efficiency ratio, and we expect to see this metric tick up in the short term as we invest for profitable and scalable growth. Our priority is to operate with modest positive operating leverage on an annual basis. If we do that right, as we have historically, the efficiency ratio continues to improve over time. On core deposits to total funding, we ended the quarter at 76.7%, above our long-term target of greater than 75%, and meaningfully improved from the 74% we reported in mid-year. This reflects a favorable mix shift, which included substantial growth in non-interest-bearing deposits in the third quarter.

While some of this increase was temporary in nature, the overall improvement in funding mix reflects the successful execution of our treasury management strategy. Our year-to-date return on average tangible common equity of 16% is ahead of target. As pre-tax, pre-provision earnings continue to compound and our balance sheet scales, our internal capital generation grows as well. You can see this in the tangible book value growth line. We will prudently deploy this capital to ensure we grow shareholder value in tandem. You saw in our release that we executed our buyback program this quarter. We will continue to repurchase shares under the plan as it makes sense, given our stock price and other capital priorities over time.

We are on target or ahead of target across every major dimension of our strategic plan, and we are doing it the right way, through relationship-driven growth, a funding profile that continues to improve, disciplined expense management, and prudent capital allocation. Turning to production, our 10% annualized loan growth reflects true new business production across our markets and niche C&I lending businesses during the quarter. CRE loans were the primary source this quarter and were up approximately $77 million or 14% annualized from the second quarter. Our South Central and Southeast Wisconsin markets showed particular strength. These are markets where we have deep relationship infrastructure and experienced teams. The production we are seeing there is a direct reflection of the investments we have made in banker talent over the past several years. It is also a model for the growth we believe we can achieve over time in our other smaller markets.

We also saw solid contributions from our higher-yielding niche C&I lending businesses. For example, floor plan lending added $13 million of new loan outstandings during the quarter, up 9% from the second quarter. Our new originations have been more than sufficient to absorb the industry headwind of elevated payoffs and still deliver on our 10% loan growth target. I will point out that year-over-year loan growth was also 10%, reflecting consistent relationship-driven production across our bank markets and specialty lending businesses. Our loan pipelines have moderated somewhat heading into the fourth quarter, primarily reflecting the timing of client activity. That said, our longer-term growth outlook remains strong, and we continue to target approximately 10% annual loan growth. We remain confident in achieving that level of growth for 2026 and 2027.

On the funding side, deposit growth in the third quarter was outstanding and continued to reflect the underlying strength of our relationship model. Core deposits grew $101 million during the quarter, representing 14% annualized linked quarter growth and marking the fourth consecutive quarter of growth exceeding $80 million. This outpaced loan growth for the third quarter and followed a robust first half of 2026. Non-interest-bearing deposits were notably strong, up $57 million from June 30. While a portion of these balances may be temporary, treasury management fees provide another measure of underlying growth in new deposit relationships. These fees, which are included in service charges on deposits, increased 15.9% during the first nine months of 2026 compared with the prior year period, providing further evidence of strong relationship growth. Winning the primary operating account is competitive work, and we're pleased with the outcomes our bankers are earning across our markets.

Looking ahead, we expect core deposit growth to remain healthy through the remainder of 2026 and into 2027. Turning to asset quality, non-performing assets increased $2.2 million during the quarter. The primary driver was an additional $5.7 million non-accrual multifamily loan tied to a previously disclosed relationship in Southeast Wisconsin. In total, that relationship had $22.7 million in non-performing loans and $3.3 million in performing loans as of September 30. The broader portfolio remains stable, and we are not seeing systemic stress across any particular industry or geography. I'd characterize overall asset quality as stable. Our year-to-date net charge-offs remain well-controlled, and allowance for credit losses stood at 1.06% of total loans at September 30, which we believe is appropriately calibrated to the risk profile of the portfolio.

With respect to our two largest non-performing relationships, both are actively being worked through, but we do not expect resolution on either of these in 2026. The foreclosure process on the land parcels of our $22.7 million non-performing relationship in Southeast Wisconsin has been extended from Q4 of this year into Q1 of 2027. Our $6 million asset-based lending loan continues through the legal process. The court date for resolution of this loan has also been extended into Q1 of 2027. We continue to believe that we will have full collection of that loan. Finally, I'll reiterate our commitment to our four key objectives: prioritizing high-quality relationship-based growth, diversifying our revenue streams, maintaining long-term positive operating leverage, and preserving a culture that attracts and keeps the highest quality talent. We believe consistent execution of these growth strategies will continue to support strong shareholder returns.

Now I'll hand it off to Brian.

Thanks, Dave. Good morning, everyone. Our net interest margin came in at 380, up two basis points from the second quarter and up 12 basis points from 368 in last year's third quarter. You can see a breakdown of this on slide eight of our earnings supplement. The linked quarter improvement reflected a stronger contribution from loan yields, apart from fees in lieu of interest, along with a more favorable funding mix as strong core deposit growth reduced our reliance on wholesale funding. These benefits more than offset a lower contribution from loan fees. Fees in lieu of interest, primarily prepayment fees and asset-based lending fees, declined $468,000 from the second quarter to $2.8 million. Even with that decline, they remained above historical averages and contributed 31 basis points to our third quarter margin.