FIRST BUSINESS FINANCIAL SERVICES, INC. Q3 FY2026 earnings call

• Strategic Execution: Management reports record earnings driven by consistent execution of the five-year strategic plan (through 2028). The company is tracking at or ahead of targets across all major dimensions, including revenue growth (10% YTD), efficiency ratio, and capital generation.
• Loan Growth: Achieved 10% annualized loan growth, marking the 20th consecutive quarter of growth. CRE loans were the primary driver (+$77 million QoQ), supported by strong activity in South Central and Southeast Wisconsin. Niche C&I businesses, such as floor plan lending, also contributed significantly (+9% QoQ).
• Deposit Strength: Core deposits grew 14% annualized, outpacing loan growth and strengthening the funding profile. Non-interest-bearing deposits increased by $57 million. Treasury management fees rose 15.9% YTD, indicating strong relationship-based growth.
• Net Interest Margin (NIM): Reported at 380 basis points, up 2 bps QoQ and 12 bps YoY. The improvement was driven by higher loan yields (including fees in lieu of interest) and a favorable funding mix due to core deposit growth.
• Asset Quality: Overall asset quality remains stable. Non-performing assets increased by $2.2 million, primarily due to a $5.7 million non-accrual multifamily loan in Southeast Wisconsin. Allowance for credit losses stands at 1.06% of total loans.
• Private Wealth: Identified as a standout fee income driver, representing ~50% of quarterly fee income. Assets under management/administration grew 11% YTD to $4.2 billion, with year-to-date fee income increasing 13%.

The transcript does not provide a breakdown of financial performance by specific product segment in absolute terms or revenue contribution percentages. The company operates as an integrated bank with primary focus on Commercial & Industrial (C&I) lending, Real Estate (CRE) lending, and Private Wealth management. Key aggregate metrics for the third quarter include: Record Pre-tax pre-provision earnings; Net Interest Income increased $4.2 million (12% YoY); Total Loans grew 10% annualized; Core Deposits grew 14% annualized ($101 million increase); EPS grew 15% YoY to $1.84; Return on Average Tangible Common Equity was 16%; and Efficiency Ratio improved to 55.12% in Q3.

• Loan Growth: Maintains guidance for approximately 10% annual loan growth for both 2026 and 2027. While Q4 pipeline is softer due to timing, long-term outlook remains strong.
• Net Interest Margin: Expects Q4 NIM to decline from the Q3 level of 380 bps due to normalized prepayment fees and modest upward pressure on funding costs. However, NIM is expected to remain comfortably above the long-term target range of 360-365 bps for the next few quarters.
• Efficiency Ratio: Expects the efficiency ratio to tick up slightly in the short term (Q4) due to planned investments in marketing, technology, and selective hiring. However, the long-term goal remains positive operating leverage on an annual basis.
• Effective Tax Rate: Full-year 2026 effective tax rate expected to be between 13% and 15%. Normalized long-term rate expected to be 15%-17%.
• Capital Deployment: Continues to prioritize reinvestment in the franchise for loan growth. Share repurchases will continue when stock trades below intrinsic value, having already used $2.9 million of the $5 million authorized buyback program.

• Credit Concentration: Two largest non-performing relationships are being actively worked but resolution is not expected until Q1 2027. One involves a $22.7 million multifamily/land parcel relationship in Southeast Wisconsin where foreclosure has been extended. The other is a $6 million asset-based lending loan currently in legal proceedings.
• Funding Cost Pressure: Potential compression of net interest margin if deposit betas rise faster than anticipated amid heightened competition and rising interest rates, although management believes they can manage this through their branch-light model.
• Operational Investment Costs: Planned increases in expenses for marketing, technology, and talent acquisition in Q4 2026 may temporarily impact efficiency ratios before yielding returns in 2027.

Q: Analyst asked about the softness in the Q4 loan pipeline and whether it signals systemic issues.

A: CEO Dave Seiler explained that while the pipeline is softer, it is likely due to timing rather than market changes. He noted that First Business tends to close larger loans, so one or two deals could quickly bring the pipeline back in line with the targeted 10% growth rate, maintaining confidence in the long-term outlook.

Q: Analyst sought clarity on the drivers of the elevated 380 bps NIM and what constitutes a normalized level excluding fees in lieu of interest.

A: CFO Brian detailed that 31 bps of the margin came from fees in lieu of interest (prepayments/ABL fees), which is above the historical average of ~25 bps. Excluding these temporary benefits, the underlying margin is around 374 bps. He reiterated that the long-term target remains 360-365 bps as prepayment fees normalize and deposit costs adjust.

Q: Analyst questioned the sustainability of low-double-digit growth in Private Wealth and potential headwinds.

A: CEO Seiler affirmed that growth is sustainable, driven by recent hires and expansion into non-Madison markets like Southeast Wisconsin and Kansas City. He emphasized that Private Wealth is becoming increasingly integrated with commercial banking relationships, providing durable, recurring revenue that diversifies the fee income portfolio.

Q: Analyst asked about the resolution timeline and process for the non-performing Southeast Wisconsin real estate relationship.

A: CEO Seiler confirmed that control of the five land parcels is expected around the same time in Q1 2027, following the extension of the foreclosure process. He noted that finding buyers for the parcels may happen at or after the court date, potentially occurring piecemeal rather than all at once. He expressed confidence in the market's interest in these assets.

Q: Analyst inquired about the trajectory of the efficiency ratio and return on tangible common equity (ROTCE) through the end of the strategic plan in 2028.

A: CEO Seiler stated that ROTCE is currently running at 16%, ahead of the >15% target. Regarding the efficiency ratio, he acknowledged they are ahead of schedule (below 60%) and may adjust future targets. Management highlighted the use of AI and robotic process automation to drive productivity and further improve the efficiency ratio beyond current expectations.