First Business Financial Services, Inc. Q2 FY2026 earnings call

Overall Q2 2026 Financial Results • Reported GAAP earnings per share (EPS) of $1.84, including a net 14 cent one-time net benefit from two events: a $1.5 million release of remaining deferred tax valuation allowance (an 18 cent EPS benefit) and a $405,000 one-time SBA severance charge (a 4 cent EPS offset). Excluding the one-time benefit, EPS grew 18% quarter-over-quarter and 26% year-over-year. • Pre-tax, pre-provision earnings hit a record $19.8 million for the quarter, and grew 15% year-to-date through June 2026. • Net interest margin (NIM) increased 22 basis points to 378 basis points, driven by deployment of excess Fed cash into loan growth and elevated prepayment fees. • First half 2026 revenue grew 11% over the first half of 2025, the first half efficiency ratio hit 59.31% (beating the long-term sub-60% target), and tangible book value grew 15.2% year-over-year, exceeding the 10% annual target.

Balance Sheet & Loan Growth • Total loans grew 10% annualized in Q2, including a $23.7 million transfer of out-of-footprint SBA 7a loans from held-for-sale to loans receivable; excluding the transfer, loans grew 7.2% annualized, in line with management expectations after a very strong Q1 and $50 million (2x the two-year quarterly average) in elevated payoffs. • Core deposit growth outpaced loan growth in Q2, increasing 12% annualized after 18% annualized growth in Q1, led by the Kansas City market and asset-based lending team. • Asset quality remains stable, with non-performing assets declining in the quarter, and management expects to resolve the two largest non-performing assets by the end of 2026.

SBA Exit Rationale • Management exited national out-of-footprint SBA 7a lending after 10 years of investment, as the business failed to meet internal return targets. Key issues included a mismatch between industry SBA underwriting/compliance standards and the bank's strict credit quality standards, higher processing costs from the bank's over-compliance processes, and an inability to build a consistent loan volume sales pipeline aligned with bank standards. • The exit frees up management capacity to prioritize higher-return organic growth opportunities in existing core markets (Milwaukee, Kansas City) and high-yield niche business lines.

Capital Position • The CET1 ratio exceeds the bank's 9.5% internal target, and the total capital ratio exceeds the 12% internal target, providing excess capital for deployment. Top priority is organic business investment to drive long-term shareholder value, with share repurchases (under a $5 million authorization) and dividends as secondary options for returning excess capital when organic growth opportunities are not sufficient.

Core Strategic Priorities

1. Deliver high-quality, relationship-based growth
2. Diversify revenue streams to reduce reliance on net interest income
3. Maintain long-term positive operating leverage
4. Preserve a high-performance culture that attracts and retains top talent

This transcript does not break out financial performance into distinct formal product segments, though it details performance for key business lines: 1) National out-of-footprint SBA 7a lending: The bank exited this business in Q2 2026, recording a one-time $405,000 severance charge; the business previously generated an average of $500,000 in quarterly gain-on-sale revenue, with quarterly personnel costs averaging $650,000. 2) In-market SBA lending: The bank retains its SBA preferred lender status, with 7a and 504 lending continuing to support existing in-market clients, with approximately $15 million of in-process loans expected to fund by end of 2026. 3) Private Wealth Management: Generated record revenues in Q2, with fee income growing 14% year-over-year and increasing $380,000 from Q1 2026; over the past 12 months, the business added $508 million in assets under management and administration, 70% from new clients. 4) Asset-based lending: Portfolio balances grew 19% annualized in Q2 2026 and 48% annualized year-to-date, with the business benefiting from new leadership and a growing sales team. 5) Limited partnership investments: Generated $796,000 in non-interest income in Q2 2026, with $1.1 million generated in the first half of 2026, compared to $1.2 million for all of 2025.

• Full-year 2026 loan growth and deposit growth are both targeted at 10% annualized; first half 2026 loan growth is already ahead of target pace, positioning the bank to hit the full-year goal even with elevated Q2 payoff activity. • Full-year 2026 net interest margin is guided at 360 to 365 basis points, maintained from prior outlooks, despite temporary Q2 NIM lift from elevated prepayment fees. • Full-year 2026 fee income growth is targeted at 10% year-over-year, maintained from prior guidance; year-to-date fee income is already up 17% year-over-year, supporting the target. • The full-year 2026 effective tax rate is expected to be 13% to 15%, down from prior estimates due to the Q2 2026 deferred tax valuation allowance release; the rate is expected to normalize to 15% to 17% in the second half of 2026 and full-year 2027. • Ongoing operating non-interest expense is expected to trend modestly lower through the end of 2026 as SBA personnel cost savings are fully realized, with a portion of the savings reinvested into revenue-generating talent in core business lines; the bank maintains its objective of annual positive operating leverage with expense growth modestly below 10% targeted annual revenue growth. • The exit from national SBA lending is expected to generate an incremental 3 cents after-tax EPS per quarter starting in 2027, with a 30 to 50 basis point improvement in the efficiency ratio (all else equal), due to $650,000 in quarterly personnel cost savings offsetting the loss of $500,000 in average quarterly SBA gain-on-sale revenue, plus incremental net interest and servicing income from on-balance sheet retained SBA loans. • Elevated prepayment fee levels are expected to remain high in Q3 2026, then decline in the second half of 2026, returning toward the 12-quarter average of 20 basis points contribution to NIM.

• Competition for loans and deposits remains consistently strong across all of the bank's core markets, increasing customer acquisition costs for core deposits. • Elevated loan payoff activity driven by client property sales, secondary market refinancing, and commercial M&A creates near-term volatility in net interest margin and prepayment fee revenue. • The SBA exit required a one-time severance charge, and incremental net income benefits from the exit will not be fully realized until 2027 due to timing of remaining in-process loan funding.

Q: How do elevated near-term prepayments change the near-term NIM outlook, and what competitive dynamics are you seeing for loans and deposits? / A: Management noted the baseline 20 basis points average contribution of prepayment and related fees to NIM, which is already factored into the 360-365 basis points full-year NIM target, with elevated levels expected to persist only through Q3. On competition, management stated competitive intensity has not meaningfully shifted from levels seen over the past five to six years, and the bank wins its fair share of clients when executing on its relationship-based model. (298 chars)

Q: Why is the full net quarterly benefit from the SBA exit delayed until 2027, and does this exit change your long-term NIM guidance or required reserve levels for SBA loans? / A: All SBA personnel cost savings are realized immediately, but the ~$15 million of remaining in-process SBA loans will take time to fund and move onto the balance sheet, so the incremental spread income from holding these loans will not fully accrue until 2027. Management maintained the 360-365 basis points NIM guidance, as retained SBA loans will amortize over time and growth in other niche C&I businesses is already factored into the target. Reserve impacts are immaterial due to small balances and existing SBA government guarantees. (411 chars)

Q: How are you thinking about funding mix going forward, and is loan growth on track to hit the 10% full-year target in the back half of 2026? / A: The quarter-over-quarter shift between FHLB advances and broker CDs was just a tactical adjustment for match-funded cash flow hedges driven by rate differentials, not a strategic change. Core deposit acquisition costs remain high, but management is confident it can maintain NIM within target through growth in profitable niche lending. Adjusting for the SBA loan transfer and elevated Q2 payoffs, underlying loan growth was near 13%, so management remains on track to hit the full-year 10% target, and does not expect a material slowdown in back half growth. (423 chars)

Q: Why is exiting national out-of-footprint SBA lending appropriate but your other out-of-footprint niche C&I businesses (ABL, floor plan) still make sense to keep? / A: Management spent three to four years evaluating the SBA business, tried multiple leadership changes over 10 years, and could never create a clear path to profitability aligned with internal return targets. In contrast, all other out-of-footprint niche C&I lines are already profitable, growing strongly (especially ABL under new leadership) with clear paths to higher profitability, and freeing up management time from SBA allows more focus on growing these higher-return businesses. All other niche lines are immediately accretive to earnings, which was not the case for the national SBA business. (409 chars)