First Business Financial Services Aktie

Hello, and welcome to the First Business Financial Services Second Quarter 2026 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded.

And today's comments may contain forward-looking statements that are subject to risks and uncertainties. Actual results may differ materially from those discussed. Please refer to the company's earnings release, investor presentation and SEC filings for additional information, including risk factors and reconciliations of any non-GAAP financial measures.

I would now like to turn the conference over to First Business Financial Services CEO, Dave Seiler. Please go ahead.

Good morning, everyone, and thank you for joining us. We appreciate your time and your interest in First Business Bank. Joining me today is our CFO, Brian Spielmann.

We encourage you to review our earnings release and supplemental earnings call slides, which are available through our website at ir.firstbusiness.bank, along with our other investor materials.

Our team's outstanding execution drove our exceptional performance in the second quarter. We reported earnings per share of $1.84, which included a net benefit of $0.14 related to 2 one-time events. Excluding this benefit, EPS grew 18% from the first quarter and 26% from last year's second quarter. Pretax pre-provision earnings grew to a record $19.8 million for the quarter and were up 15% for the first 6 months of 2026, reflecting strong contributions across the bank. We are very pleased with this performance.

I'll cover the one-time events first. During the second quarter, we released the remaining $1.5 million of a deferred tax valuation allowance related to the changes in Wisconsin state law enacted in 2023. Brian will cover this in greater detail. This resulted in an $0.18 benefit to second quarter earnings per share and about a 9 percentage point decrease in the effective tax rate for the quarter.

The second onetime item was $405,000 in SBA-related severance costs, which offset the tax-related EPS benefit by $0.04. At the end of May, we exited our national out-of-footprint SBA 7(a) lending activities. You can see a summary of the financial impact of this decision on Slide 5 of the earnings supplement. Over the past 10 years, we invested in expanding our SBA talent and capacity on a national basis, but we were ultimately unable to achieve the volume and profitability required to meet our internal targets for economic returns. This was primarily due to what we came to recognize as a mismatch between the industry standards for SBA underwriting and compliance and our own internal standards. We determined that building the national SBA volume at scale would require a level of underwriting flexibility that was inconsistent with our standards for credit quality. We struggled to build a sales team that consistently produced loan volume using our underwriting standards. We built a robust SBA loan closing and compliance operation that met the high standards we expect of all our lending activities, but which may have resulted in overprocessing the loans to ensure perfect compliance with SBA requirements. This drove up processing costs.

You can see on Slide 5 that outside of the onetime severance costs we recorded this quarter, this decision is immediately net positive to our earnings expectations. From a strategic perspective, it's particularly compelling given the capacity that is now freed up for management to prioritize more profitable growth opportunities. For example, we see significant opportunity to take share and grow relationships across our existing bank markets, particularly in Milwaukee and Kansas City. We also continue to prioritize hiring the best talent to accelerate growth in our higher-yielding niche C&I lending businesses and our private wealth management business. And we continue to seek opportunities to increase fee income. This includes our participation in limited partnership investments, which Brian will discuss. Before moving on, I do want to note, our SBA preferred lender status is unchanged and 7(a) and 504 lending will continue as needed to support clients within our bank markets.

Moving to our operating results. Our second quarter performance rounded out an outstanding first half of the year and positioned us to achieve our full-year 10% growth goals. We focus on progress against our long-term strategic plan, which you can see on Slide 17. Our first half performance was very strong. Revenue grew 11% over the first half of 2025, exceeding our 10% annual goal, even with the elimination of SBA gains on loan sales. Our first half efficiency ratio measured 59.31%, achieving our sub-60% long-term target. And tangible book value grew 15.2% over the prior year, surpassing our 10% growth goal. Our momentum is strong.

Quality balance sheet growth was central to this success. Loans grew 10% annualized during the quarter, and I'll note that included the transfer of $23.7 million in SBA 7(a) loans from held-for-sale to loans and leases receivable as of June 30. Excluding the transfer, loans grew an annualized 7.2%, which was in line with the expectations we communicated last quarter given the extremely strong first quarter growth rate and above-average payoffs. Payoffs in the quarter were approximately 2x or $50 million above our quarterly average over the past 2 years. We saw broad growth in conventional loans across our bank markets with particular strength in our Southeast Wisconsin and Kansas City markets.

Multifamily lending and owner-occupied CRE were strong and picked up pace while investor CRE declined. Asset-based lending continued to benefit from new leadership and a growing sales team. Portfolio balances grew 19% annualized during the quarter and were up 48% annualized year-to-date. Loans, including the transfer from held-for-sale, were up $212 million or an annualized 12.6% in the first half of 2026. This is ahead of our target pace and positions us to achieve 10% annual growth for the full year. We do continue to see elevated prepayment fees compared to our historical experience.

Prepayment fees totaled $1.3 million, up from $642,000 in the first quarter and above our 12-quarter average of $562,000. We expect this will slow in the second half of the year, but third quarter will likely remain elevated. Recent payoff activity has largely reflected client-driven events, including property sales or refinancings in the secondary market and M&A activity involving commercial clients. Our clients and our markets continue to be strong and steady, and they like doing business with us. Our Net Promoter Score reflects the strength of our relationship model. You can see this on Slide 17. Looking ahead, we expect to drive continued loan growth as we grow our team. We are opportunistic recruiters, and we attract and retain producers with proven track records of growth. Our talent is a differentiator for First Business in any economic landscape.

Growing our team also continues to benefit our funding profile. Core deposit growth outpaced loan growth in the quarter, increasing 12% annualized following our robust 18% growth in the first quarter. Growth came from several areas with our Kansas City market and asset-based lending team leading the way. Our focus on hiring the best treasury management talent and maintaining a disciplined approach to business development continues to pay off. Like our outlook for loan growth, we expect deposit growth to be approximately 10% on an annual basis.

I'll also highlight fee income for the quarter, which grew 18% year-over-year even with the absence of SBA gain on sale revenue. Private wealth again generated record revenues and provides annuity-like support for our revenue growth and diversification goals. You can see more on our fee income trends on Slide 11. Over the past year, the Private Wealth team has added $508 million in assets under management and administration, of which approximately 70% is new client dollars. Our South Central Wisconsin and Kansas City markets were the largest contributors to this growth. On credit, we were pleased to see nonperforming assets decline during the quarter, and our overall asset quality remains stable. You can see this on Slide 13. We continue to expect progress towards resolving our largest 2 nonperforming assets later this year.

Before handing it off to Brian, I'll reiterate our commitment to 4 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. I'll cover the economics of the SBA decision first. Our SBA 7(a) strategy had been to sell 75% of our loan production and retain 25% on balance sheet. Effective June 30, we have moved all held-for-sale balances on balance sheet and any new production is expected to be retained on balance sheet and service through the life of the loans. We currently have about $15 million in process that should fund by the end of 2026.

Using our historical SBA spread of 4.9% and an assumption of 75% of $15 million for incremental loans held on balance sheet, we estimate approximately $140,000 in incremental net interest income and $20,000 in incremental servicing income per quarter by 2027. This helps offset the loss of approximately $500,000 in average quarterly SBA gain on sale revenue.

On the expense side, salaries and benefits for the eliminated positions averaged about $650,000 per quarter. This brings the net pretax income benefit to approximately $310,000 per quarter in 2027 or about $0.03 per share after tax. That should equate to about 30 to 50 basis points of improvement in our efficiency ratio, all else equal.

And now on to our normal financial review. Second quarter net interest margin increased 22 basis points to 3.78% from 3.56% in the first quarter. You can see a breakdown of this on Slide 8 of our earnings supplement. Recall that first quarter net interest margin included a 5 basis point impact of fewer accrual days in the quarter, putting it at 3.61% or 17 basis points lower than Q2 for comparative purposes. The 17 basis point difference primarily reflects the deployment of excess cash held at the Fed during the first quarter into loan growth during the second quarter and an increase in prepayment fees. This contributed to a 24 basis point increase in earning asset yields, while the rate paid on average total bank funding increased just 2 basis points.

As Dave mentioned, elevated loan payoffs and related prepayment fees provided a meaningful lift to net interest margin this quarter. Fees in lieu of interest contributed 37 basis points to margin compared to 26 basis points in the first quarter and our historical average of 20 basis points. Looking ahead, we continue to target net interest margin of 3.60% to 3.65% for the year. We also continue to expect 10% growth in fee income for the year and our 17% year-to-date growth over last year's first half supports this expectation.

Note that compared to the linked quarter, second quarter fee income declined by just $206,000 despite swap fees decreasing $466,000 and the elimination of SBA loan sale gains, which totaled $592,000 in the linked quarter. The modest linked quarter decline in total fee income highlights the resiliency of our diversified revenue base.

Private wealth helped offset pressure from lower swap fees and the elimination of SBA loan sale gains, increasing $380,000 from the first quarter, including approximately $247,000 of seasonal tax processing fees. Private wealth fees grew $509,000 or nearly 14% on a year-over-year basis, showing this business' strength as an off-balance-sheet, capital-free revenue generator.

Our strong fee revenue also reflected growth in income from limited partnership investments, which is reported in other noninterest income. These fees grew to $796,000 for Q2 and totaled $1.1 million for the first half of 2026. This compares to $1.2 million for the full year 2025. We continue to look to optimize our limited partnership investment strategy, and we expect returns to grow over time as the portfolio investments mature.

Looking at expenses, we had some moving parts related to compensation. Total compensation expense decreased by $79,000 from Q1. This includes several large items. Salaries and benefits declined mainly due to 1 month of SBA-related cost savings amounting to about $217,000. You can see our outlook for SBA-related cost savings on Slide 5 of the earnings supplement. Payroll taxes were also lower by $593,000 following the annual cash bonus payouts in the first quarter. These declines were almost fully offset by a $446,000 increase in annual cash bonus accruals compared to the first quarter, along with $405,000 in onetime severance costs related to the SBA exit. Other noninterest expense included a $552,000 impairment on historic tax credit investments, which has been more than offset by related tax benefits recognized in the current and prior periods.

In addition, data processing expenses increased $212,000 due to annual tax processing costs associated with our private wealth clients. On an operating basis, noninterest expense declined $189,000 or almost 1% to $26.9 million. Excluding SBA severance expense and the impairment on tax credit investments, our second quarter expense level was largely in line with the first quarter. We expect the ongoing run rate to trend modestly lower through the remainder of 2026 as SBA-related personnel savings are fully realized while continuing to selectively reinvest a portion of those savings into revenue-producing talent in our existing bank markets, nationwide niche C&I businesses and private wealth.

I'll remind you that our primary expense management objective is achieving annual positive operating leverage. That is annual expense growth at some level modestly below our targeted level of 10% annual revenue growth. We achieved operating leverage of 6.2% compared to the linked quarter and 6.4% compared to the prior year quarter, which supported a very strong efficiency ratio. On a year-to-date basis, operating leverage was 2.4%. The effective tax rate was 7.2% for the second quarter, reflecting the benefit of this quarter's $1.5 million deferred tax asset valuation allowance reversal. Excluding this one-time benefit, our effective tax rate was 15.9%.

For background, in 2023, Wisconsin enacted a law which excluded small business funding interest from state tax. In the fourth quarter of 2023, we established a deferred tax valuation allowance of approximately $3.2 million based on forecast estimates and preliminary state guidance. In the fourth quarter of 2024, we released $1.7 million of this allowance due to improved guidance from the state. This quarter, we released the remaining $1.5 million due to historical and forecasted Wisconsin taxable income. For the full year 2026, we now expect our effective tax rate to be approximately 13% to 15%, reflecting the benefit of this quarter's deferred tax asset valuation allowance reversal. After that discrete item, we expect the effective tax rate to normalize to approximately 15% to 17% for the second half of 2026 and in 2027.

Finally, our strong earnings continue to generate capital. As shown on Slide 15, our CET1 ratio at June 30 exceeded our 9.5% internal target, and our total capital ratio remained above our 12% internal target. Maintaining capital levels above our internal targets provides flexibility in how we deploy excess capital. Our priority remains investing in the business to support organic growth, which we believe creates the greatest long-term value for shareholders. At the same time, we evaluate other capital management alternatives, including our common stock dividend and our $5 million share repurchase authorization. When prudent growth opportunities do not fully utilize our excess capital, share repurchases remain an attractive tool to return capital to shareholders and enhance shareholder value.

And now I'll hand it back over to Dave.

Thanks, Brian. This was an outstanding quarter. Our primary measures of success were strong with a solid runway for the back half of the year. We are growing in our bank markets and in our niche C&I lending businesses, and we are taking share in a number of ways. We continue to benefit from ongoing M&A disruption in our markets by attracting bankers and clients who see the value in our superior relationship model. We are earning more of our existing clients' business as their needs evolve and they learn of our complementary abilities, be it in private wealth services, treasury management services, et cetera. And we never stopped seeking our next opportunity to win high-quality new relationships. First Business continues to be equipped for growth and our strategic plan guides the way.

Thank you for taking the time to join us today. We're happy to take your questions now.

[Operator Instructions] Your first question comes from the line of Tim DeLacey with Raymond James.

This is Tim on for Danny. I appreciate the comments on the prepayments on the ABL fees on the NIM and that you reiterated the long-term guide. But just curious if you can share any puts and takes around the near-term path with the commentary that prepayments could remain elevated here near term?

Yes. I would say, on average, we have 20 basis points in our net interest margin of prepayment and ABL fees and other fees in lieu of interest. And so that's kind of how we -- what we manage to. And just given the current climate that we're seeing right now with the elevated payoffs and our ability to collect those prepayment fees. So when we're thinking about that 3.60% to 3.65% long-term targets, we're typically considering about 20 basis points there. And it's just going to be obviously the vagaries of the prepayment activity, which we saw in the second quarter, and we'll have a little bit more of that probably in the third quarter.

Okay. I appreciate that commentary, Brian. And then just maybe flipping over just to the -- on the growth side. We've been hearing from a lot of banks that just competition is increasing for both loans and deposits. So curious if you could just share any commentary on the competitive dynamics that you're seeing in your markets.

Sure. As it relates to competition, we think competition is always strong. When we're fighting for new depository clients, there's always competition. Rates is important. And the same thing we're seeing on the loan side. But we feel like if our folks are out and they're doing the right activities, we win our fair share. I don't really see a meaningful shift in competition levels now versus really at any time over the last 5 or 6 years.

Your next question comes from the line of Jeff Rulis with D.A. Davidson.

I appreciate the detail on the SBA out of market exit. I wanted to kind of just -- as we sharpen the pencil here, I just wanted to see why that quarterly benefit wouldn't kick in, in Q3 of this year. You kind of stated as '27 quarterly. I guess, is there any cleanup of severance or anything further in the second half that would mask some of that benefit to earnings immediately?

Nothing material on the severance side, remaining. I would think it's more about the timing of when those loans in process of closing and those that have closed that are in process of funding. Those remaining balances that I referenced about $15 million. That will just take some time. We expect that to be pretty much wrapped up by the end of the year. but it might take a little bit. So that's really the timing difference there between the immediate impact versus 2027.

Got it. So that would be more of a spread income benefit delay versus -- I mean, the salaries and benefits should impact immediately, correct?

Yes. That's right away. And then the spread benefit is later on, correct. Then we have the estimated on average $500,000 of gains that we won't have going forward. And that's why we have that as far as what's in people's models and our estimates, we're taking that out, of which all that's being offset by the compensation. But to get to the $0.03 benefit that we're estimating, there's the spread income impact that doesn't come in fully until 2027.

Got it. All right, Brian. And I guess the follow-on is just -- and again, not to get too cute with this. But I guess the go forward is you've got that incremental bump into net interest income, do you look at that long-term margin guide of 3.60% to 3.65% is incrementally higher? And then I guess, do you look at reserving any different if you look at the loan loss reserves for this or it's pretty immaterial, I guess, potentially?

Yes. So on the margin side, I would say temporarily, there's a little bit of benefit there, but that portfolio is going to continue to amortize down, and we're not expecting any material new SBA 7(a) business. We'll have some that will be in market occasionally, but nothing significant. And so it's really a matter of or other niche C&I areas, maintaining those and growing those that contribute that are already included in our target of 3.60% to 3.65%.

And then on the allowance side, I would say it's generally immaterial. It's not really a lot of balances. There's guaranteed portions that are already pulled out of the calculation. We'll see a modest benefit, all else equal, once those start to unwind, but nothing significant or worth really noting in the estimates.

Your next question comes from the line of Damon DelMonte with KBW.

Just to kind of circle back on the margin and the impact from the prepayment fees and fees in lieu of interest. I think Dave said in his comments that the prepayment fees are about $1.3 million this quarter. Is that correct?

Yes.

Okay. And then the fees in lieu of interest was like 37 basis points this quarter. Is that...

Yes. In total, that's $3.2 million of fees in lieu of interest, of which the $1.3 million was prepayment fees.

Okay. So in total, it was just $3...

Yes. Just the largest driver of those fees was prepayments up $645,000. The rest of those buckets of fees in lieu of interest were just not as significant to the drivers of the increase.

Okay. Got it. All right. Great. And then if you look at like the cost of funds this quarter, it looks like deposit costs were down a little bit, but then you had increase in Federal Home Loan advances, so that was a little bit higher. I guess kind of how are you thinking about the funding mix going forward? And do you expect there to be additional pricing pressures or pressure on the cost of funds going forward?

Yes. I would say on the wholesale side, it's really a balance of either using home loan advances or broker CDs as we do our match funding. And so we kind of actually switched out of broker CDs into home loan advances in the quarter for some of our cash flow hedges for our match funding. So that's what you saw for some of that rate differential there. From just a total funding perspective, when we think about what we're trying to do on the core deposit side, it's still competitive. I think our -- the cost of acquisition remains high. We're confident though in our ability to lend that out with our various niche C&I and our conventional C&I where we can still maintain that 3.60% to 3.65% going forward.

Got it. Okay. And then obviously, a strong first half of the year for growth. And just kind of curious with the way that the pipelines are shaping up going into the back half of the year, you seem well on target to at least hit the 10% bogey that you guys strive for. I mean, is there anything to maybe think about being softer here in the third quarter before kind of ramping back up in the fourth? Or do you think it would be pretty steady like what we saw here in this quarter in the 10% range?

Right. I think we're still looking at the 10%. If you look at this past quarter, we had a little noise in there. If you subtract out those SBA loans that were transferred from held-for-sale, we were at about 7.2% loan growth, but then we also had $50 million higher than average on payoffs. So if you take out the SBA transfer and you correct for the excess $50 million in payoffs, we're just under 13%. I mean, so what that tells me is our business development activities are going really well. But we're not in a position to certainly say that we expect to be higher than 10%. I think we will -- we target 10%, and I think that's what we can expect in the back half and also into 2027.

Your next question comes from the line of Nathan Race with Piper Sandler.

Appreciate all the perspective, Dave, on the exit of SBA. Just curious if you can speak more broadly in terms of some of the other out-of-footprint lending that you do, whether it's ABL or floor plan, and why those lines or verticals make more sense to continue going forward, just given maybe deposit gathering opportunities or just higher yields or returns overall?

Right. Maybe start a little bit with a little more color on SBA. So SBA, I mean we've been looking at -- the senior management team has been looking at that for probably the last 3 or 4 years and trying to evaluate, is this a business we want to stay in? We've tried a lot of different things. I think we've had 3 leaders in the last 10 years, and we could just never get it profitable and never get it to a point where there was, I guess, a clear path to profitability.

But when we look at our other business lines, I mean we've got asset-based lending. We've got a new leader there. He's been in place a little over a year. That's growing really well. We see the same thing in floor plan lending. We think there's a ton of opportunity for us to grow floor plan lending. We like our accounts receivable financing area and our equipment finance. And all of those have been much more profitable for us than SBA. So the thought is we were spending a whole lot of management time on SBA and really wanted to just focus our efforts on growing these other business lines that we see clear paths to even higher profitability on.

Nate, I can add to that, too, real quickly in terms of the profitability and the dollars, right? You can see in the decision we made in the quarter, an immediate accretive impact in 2027. That would not be the case with any of our other C&I products. There's already a benefit to the bottom line for those. There's more opportunity, and that's where we want to spend more of our time in growing those areas.

Okay. Got it. And I apologize, Brian, if I didn't catch it earlier, but just in terms of the fee income run rate outlook for the back half of the year. Just with SBA revenue going away and obviously, a nice wealth management increase in the quarter. It sounds like there's some seasonal factors there that helped in addition to the strength in equity markets. But just curious how you think about the overall kind of run rate in the back half of the year and kind of what the growth expectation is as you look out to 2027 as well?

Yes, you kind of hit it on the head there with the other areas that will offset SBA, in particular, private wealth with the significant increase in AUM. We like the run rate to improve there in the second half and into '27, as well as the service charge income, which we continue to have strong run rates from. So I would think we'll probably be down a little bit relative to the past 2 quarters in the second half of the year, but not materially. And we like that $8-plus million run rate. And then going off of that into '27, we'd like to continue to say 10% growth. It's really going to be more dependent on how our underlying portfolio investments mature and our limited partnership investments that we've deployed here in '26, but still feel really good about that longer-term 10% growth rate in fee income.

Right. And maybe just to add on a little bit, Nate. I mean, we're really excited about the private wealth growth. And yes, while equities have increased and portfolio values have increased, over the past year, we've added a little over $350 million of new client dollars in private wealth. So we continue to add new relationships there. Our service charge income is up 21% over the same period last year. So we're seeing a lot of things where we're growing the core business, and we think that really positions us well in terms of fee income going forward.

Got it. That's really helpful. And just one clarification question on just the trajectory for loan yields. If we get back to kind of like a 20 basis points average for -- I think that implies like something around [ 6.50% or 6.65% ] for kind of a better starting point for loan yields in the third quarter. Does that sound right to you, Brian?

Yes, that's fair.

We have reached the end of the Q&A session. I will now turn the call back to Dave Seiler, CEO, for closing remarks.

Thank you for joining us today. We appreciate your time and interest in First Business Bank. Have a great day.

This concludes today's call. Thank you for attending. You may now disconnect.

Good afternoon. Welcome to the First Business Financial Services First Quarter 2026 [Audio Gap]. I would now like to turn the conference over to First Business Financial Services Inc. CEO, Corey Chambas. Please go ahead.

Good afternoon, everyone, and thank you for joining us. We appreciate your time and your interest in First Business Bank. Joining me today is our President and Chief Operating Officer, Dave Sailor; and our CFO, Brian Spillman.

Today, we'll discuss our financial performance, followed by a Q&A session. I'd like to direct you to our first quarter earnings release and supplemental earnings call slides, which are available through our website at ir.firstbusiness.bank.

We encourage you to review these along with our other investor materials. Before we begin, please note, this call may include forward-looking statements, and the company's actual results may differ materially from those indicated in any forward-looking statements. Important factors that could cause actual results to differ materially from those indicated in the forward-looking statements are listed in the earnings release and the company's most recent annual report Form 10-K and as may be supplemented from time to time in the company's other filings with the SEC, all of which are expressly incorporated herein by reference.

There you can also find information related to any non-GAAP financial measures we discuss on today's call, including reconciliations of such measures. We are very pleased with our strong start to 2026.

Our team's execution was exceptional. We won new relationships in a highly competitive environment, growing loans and deposits at a pace that well exceeded our expectations. We grew fee income by nearly 16% year-over-year with strong contributions from multiple sources. I'll highlight our Private Wealth business, which again produced record revenues and provides annuity-like support for our revenue growth and diversification goals.

Asset quality remained stable in our core performing portfolio, and we were pleased to see some swift progress toward resolving our largest nonperforming asset, which was downgraded last quarter.

At the bottom line, we grew net income and earnings per share by more than 9% over last year's first quarter, even as our margin returned to a more normalized level after being elevated in early 2025, which was residual from the period of rapid Fed tightening. And perhaps most importantly, our strong earnings and disciplined capital deployment drove 14% year-over-year growth in tangible book value per share.

This success reflects our commitment to 4 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 are very pleased with the momentum of our first quarter results, which Dave will discuss more now. Dave?

Thank you, Corey. Our outstanding first quarter growth positions us well to achieve our long-term goals. As you know, we aim for 10% loan and core deposit growth on an annual basis. In the first quarter, we grew loans by $126 million or 15%, far outpacing our plan. Growth came from across our markets, led by Madison, Milwaukee and Kansas City, as well as from asset-based lending, which is generating some great momentum under the new leader we brought on a year ago.

The growth occurred late in the quarter with $90 million or 72% in March. That had margin implications, which Brian will cover and it included some pull forward of growth we had forecasted for the second quarter. After an extremely strong first quarter, our pipelines are lighter going into Q2, and we will have some known payoffs in the second quarter. Therefore, we expect the second quarter to be lighter on growth than Q1 with normalization in the second half of the year, placing us on track to achieve our 10% annual growth goal for 2026.

Our 10% growth expectations are driven by continued positive trends in our businesses and the banking industry. Our largest markets in Southern Wisconsin continue to benefit from a strong regional economy. Our clients in the manufacturing and distribution space are doing well. Commercial real estate occupancies have remained strong particularly in multifamily properties.

We are also seeing signs that new development is picking up after a slight slowdown in 2024 and 2025. Additionally, we continue to expect the 2026 changes to federal tax policy should be a tailwind for our business clients and C&I portfolio.

We continue to see tangible benefits from talent acquisitions as well. We recently hired a new President for our Private Wealth business. We are also seeing positive results from producers and asset-based lending who were hired in the second half of 2025.

Obviously, we are looking at the same wildcards as everyone else, and we'll continue to monitor for any impact of oil prices and geopolitical uncertainty. So far, it's been business as usual. I also want to highlight our exceptional double-digit growth in core deposits this quarter.

First quarter balances were up 18% from the linked quarter and up 14% year-over-year. That's not an easy feat in this environment. Our focus on hiring the best treasury management talent and maintaining a disciplined approach to business development continues to pay off.

We are pleased to see this core deposit growth coming from multiple bank markets and our private wealth group. Our strength is in taking market share, as you saw this quarter. So we are confident in our team's ability to not only maintain existing client relationships, but also to continue bringing in new deposit balances.

As with loans, we continue to target 10% growth on an annual basis. Another highlight was our strong noninterest income, which grew 16% compared to last year's first quarter.

Private Wealth produced record revenue of $3.9 million, up 11% year-over-year. This business consistently generates more than 40% of our total quarterly fee income. Strong deposit growth contributed to service charges increasing more than 26% year-over-year, displaying our team's impressive success in adding and expanding full business banking relationships and our other fee income sources, which tend to be variable from quarter-to-quarter, posted favorable results for the quarter.

Moving to credit. We saw some rapid progress on our largest nonperforming asset. Recall that we downgraded $20.4 million in CRE loans from a single Southeast Wisconsin based client relationship on nonaccrual status last quarter.

In Q1, $3.4 million of land development loans in this portfolio were sold at par. You can see the benefit of this to our nonperforming asset ratio on Slide 12 of the earnings supplement.

Appraisals exceed carrying values on the land and the remaining $17 million of loans with no specific reserves recorded. We expect ongoing resolution, but the timing will be variable, based on current activity, we don't anticipate additional progress to occur before the second half of 2026.

The remainder of our portfolio was stable, and you can see our favorable trends on Slide 11. Before I hand it off to Brian, I'll note that this is Corey's last call before his retirement next week.

I want to thank Corey for his leadership and service to first business bank, it's difficult to summarize as many contributions to our company, so I'll leave you with this.

During Corey's tenure as CEO, First Business Bank has produced cumulative shareholder returns of nearly 700% outperforming bank and regional bank indices by a multiple of more than 3x and the Russell 2000 by more than 200 percentage points.

This is no coincidence. Cores are visionary, and we are grateful for his leadership and friendship. We are also very happy that Corey will be continuing to serve on our Board. Now I'll hand it off to Brian.

Well said, Dave, thanks. First quarter net interest margin increased 3 basis points to 356 and there are some noise in both the first and linked quarters. You can see a breakdown of this on Slide 6 of our earnings supplement.

First quarter NIM included the 5 basis point impact of fewer accrual days in the quarter. Excluding this impact, first quarter NIM was 361, which will be in line with our internal budget expectations.

As a reminder, fourth quarter NIM included 10 basis points of compression from the nonaccrual interest reversal on the downgraded CRE NPL.

Excluding this, fourth quarter NIM would have measured [ 3.63 ]. There was no nonaccrual interest reversal activity in Q1. The 2 basis point difference in these adjusted NIM measurements primarily reflects the late quarter timing of loan growth.

As Dave mentioned, the bulk of our significant loan growth came late in the quarter. Two-thirds of the growth was from our C&I portfolios, which are higher yielding than CRE, and we expect this to benefit our net interest margin going forward. You can see the historical trend of this yield differential on Slide 5 of the earnings supplement.

Looking out at the year, we think the early momentum of C&I loan growth in Q1 positions us well to operate within or toward the lower to middle portion of our targeted $3.60 to $3.65 range for the year.

Our outlook assumes a stable to modestly changing interest rate environment. Margin performance is expected to be driven primarily by balance sheet mix and our targeted annual 10% loan and core deposit growth rather than additional rate tailwinds.

On the funding side, ongoing core deposit growth has improved our funding mix over time, and we continue to manage deposit pricing with discipline in a competitive environment. Where needed, we supplement with wholesale funding to match fund fixed rate loans and maintain NIM stability.

On noninterest income and expense, I'll remind you that quarterly comparisons are impacted by last quarter's accounting classification change related to limited partnership investments. Specifically, last quarter, we reclassified $904,000 out of our other noninterest expense and into other noninterest income to net against the related revenue.

This expense represented the bank's share of costs for the first 9 months of 2025 related to our latest run of limited partnership investments. Our strong first quarter fee income supports our expectation of 10% growth for the full year compared to 2025, and we view first quarter as a good starting point for quarterly fee income in 2026.

Looking at expenses, we saw the typical first quarter increases related to compensation. Compensation expense increased by about $1.4 million in Q4, mainly due to first quarter resets for payroll taxes and 401(k) match contributions along with annual merit increases and higher average FTEs, which were up about 5.7% from a year ago.

Looking ahead, payroll taxes will come down throughout the year, but new FTE adds will go up. Professional fees were also higher in Q1, increasing by about $445,000 in Q4. Elevated recruiting costs and seasonal legal fees related to the company's annual 10-K and proxy filings drove the increase.

We typically base our full year expense forecast on first quarter actuals, which remain an appropriate run rate for 2026. I'll reiterate that our primary expense management objective is achieving annual positive operating leverage that is annual expense growth at some level modestly below our target level of 10% annual revenue growth.

The effective tax rate was 15.2% for the first quarter. Our effective tax rate varies modestly quarter-to-quarter, in part due to the timing of tax benefits received from our investment and limited partnerships and the timing of stock compensation vesting activity.

We continue to expect our effective tax rate will be within our expected annual range of 16% to 18% for 2026. Finally, our strong earnings have continued to generate excess capital to facilitate organic growth. We continue to believe reinvestment in the growth of the company provides the best return for our shareholders.

We do, of course, evaluate all capital management tools at our disposal to maximize shareholder returns. And now I'll hand it back over to Cory.

Thank you, Brian and Dave. Dave was the architect of our current 5-year strategic plan, and you can see our outstanding progress toward achieving the goals of this plan on Slide 15. I believe nothing has been more instrumental to achieving the success than our culture. So I'll take a final opportunity to bang the drum on this. Our culture defines us and it is our secret sauce. It is in the DNA of First Business Bank to be passionate about our people and obsessed with our strategic plan, and it's foundational to our mission to be an entrepreneurial partner to our clients, investors and communities.

This intense cultural focus has been fundamental in achieving our superior long-term shareholder returns. It has been my north star of sorts, and I'm confident Dave's leadership will bring continued success. We have the right team in place to continue achieving both strong earnings and above industry growth, and I'm excited for the future of First Business Bank.

Thank you for taking time to join us today. We're happy to take your questions now.

Thank you. The floor is now open for questions. [Operator Instructions]. Your first question comes from the line of Daniel Tamayo of Raymond James.

Thank you. Good afternoon, everybody. First, I just wanted to say congratulations on your retirement, Cory. It's been a pleasure working with you over the last few years and obviously, good luck to Dave. I guess on the heels of that, I'll throw out a longer-term question here for you, Dave, as you look to the future.

Looking at Slide 15 with your goals and progress on it in the 2024 to 2028 goals from a profitability perspective, you guys, obviously, have talked about this 10% growth, and I think that certainly holds.

But just curious how you think about from a profitability perspective, I guess, if it's efficiency or return on tangible common equity, how do you anticipate changing any of these long-term goals and progress, the slide or anything like that as you think about your leadership. And if not, what's the plan over the next few years to get these to get or keep these numbers kind of at these levels?

Yes, good question. So we are -- our strategic plan is a 5-year strategic plan. We're a little over 2 years into it.

And every quarter or more often, we look at all of these metrics and and evaluate if there's still the right metrics for us to be looking at.

And I would say right now, you look at our efficiency ratio, for example, that blipped up a little bit this quarter for reasons that I think we've outlined in some of our comments already. So we expect that to kind of return to where we wanted to be over the next -- over the balance of the year and in the upcoming quarters.

At this point, we still think these are good metrics for us to be working on, and we've identified 5 strategies from our strategic plan, and we have teams of leaders working on each of the strategies.

And at this point, I think we think they're all -- these are the right targets for us.

All right. Good start, Dave.

I am not official yet, Danny.

All right. Fair enough. And then I think I get what you guys are saying on the margin. I'm assuming this is going to be an annual thing. I mean it's just the math, right, of the fewer days in the first quarter. But as we think about modeling the margin we should think about modeling that down a bit in the first quarter going forward and then popping back up in the second quarter remaining in that -- the targeted range, Brian?

Yes. That's a fair statement. I would say we're always going to have the first quarter accrual mechanics issue, right? But for us, specifically for this quarter, to me, it was more of a timing difference on when our funding came in versus when we deployed that funded in the quarter.

That to me is more of the driver on why the NIM was reported outside of our range. If we would have had the loan growth aligned with that funding growth earlier in the quarter, the NIM would have been within our range.

So that's more of it. But I think your point is bad, though in terms of the quarterly first quarter estimates that there's going to be that day basis impact us all.

Okay. And as it relates to that dynamic with the late in the quarter loan growth, like you're thinking basically the margin comes back up into the range in the second quarter and then relatively stable from there?

Yes.

Okay. All right. I will step back -- appreciate it.

Your next question comes from the line of Jeff Rulis of D.A. Davidson.

I wanted to check on the expenses. Brian got your comments there. I just seemed a little high. I mean maybe I'm just still updating the model on the reclass a little bit. But if I heard that right, that this level kind of flat line for the year? If I guess, if I just annualize it and then run it off of across full year '25, something in the high single digits. Is that kind of where we should be thinking?

Exactly, spot on.

Okay. while I got you, Brian, on the -- do you have the margin for the month of March, just to try to jump off point.

We don't have that. And it would be influenced by the late growth. That's kind of the point behind the late growth commentary is that the more Q1 margin of $359 million being impacted -- sorry, by 356 being impacted by that. So it's going to be pushing us back into our range based on that March activity.

Okay. Fair enough. You were pretty clear about the resuming back into that range. So I'll stick with that. Just was curious. Maybe just the last 1 on the growth. Dave, I think you alluded to the geography, but maybe the -- do you have a breakout of maybe the mix of that growth pretty strong, but was it the mix of existing customers versus new? I think you mentioned maybe that was a 60-40 split last quarter or something, but just trying to get a sense for market share gains or existing customers?

Yes. Well, we don't have a mix between existing clients and new clients. I think it was as we stated before, it was really across all of our Southern Wisconsin bank market. It's in Kansas City as well as asset-based lending. I would say within those groups, it really wasn't concentrated in any particular area.

It was spread fairly evenly. And I would say, always our growth is going to be driven by new. We do more loans to existing clients over time. but the driver of our growth is always going to be new client relationships.

Well, I think 1 of the things you can look at that reinforces that is the growth in our service fee income. Debt. We've had very rapid growth in our service fee income, and you don't get that without adding new clients. On service charges?

Yes, Yes. Okay. And Corey, thanks for the conversations over the years, all the best and appreciate what you've done, and Dave, I look forward to catching up in Nashville in a couple of weeks. So thanks.

Thanks, Jeff. Thanks, Jo.

Your next question comes from the line of Nathan Race of Piper Sandler.

Comments earlier. Congratulations, Cory, Dave. -- been great. I wanted to checking on just the fee income outlook, Brad, I think you mentioned kind of a stable outlook. Just curious kind of what momentum you're seeing on the SBA front.

Obviously, Wealth Management has shown some nice growth year-over-year as well. So just curious how you're thinking about kind of the overall year-over-year trajectory?

I can speak to the total broader fee income piece and then maybe Dave has a couple of comments on SBA. But the total fee income line, I think, is consistent with the prior messaging around 10%. And year-over-year growth expectations with Q1 being a good starting point for that? I know we had some noise in Q4, but really strong performance from those more consistent annuity streams for us, private wealth service charges and other, which now includes starting to build more of our SBIC investment product there that will start kicking off more returns as well over time.

But that's really the primary drivers of that fee income, which again, we believe is a 10% growth in total for us throughout '26. Dave.

Yes. And on the SBA side, we actually expected that to be a little bit higher this quarter after the shutdown late last year. But I think as we look at pipelines we expect it to be relatively flat going forward.

Okay. Got it. And Dave, I think you mentioned earlier, you're expecting some softer growth in the same quarter, just given maybe some pull-through and some expected payoffs this quarter. So is it fair to expect maybe like mid- to low single-digit growth in the same quarter and then get back up to that kind of high to low double -- high single digit to low double-digit trajectory in the back half of the year.

Yes, I think that's probably reasonable for Q2, Nate. A little bit depends on payoffs and those aren't -- some of those are in flux right now.

So we can't predict them 100%, but I think that's a reasonable point, and we still expect to be at 10% for the year.

Okay. And then maybe 1 last one. Any color that you could shed on the charge-offs in the quarter and just how you're budgeting or thinking about charge-offs over the balance of this year. It doesn't sound like there's been much movement on the ABL credit that we've talked about, which again, shouldn't really result in any loss content. But -- and within that context, it also seems like the Southeast properties are still slated to sell that part similar to what we saw this quarter. So we're just hoping to get any color along those lines, please.

So I can talk about the Southeast properties and the asset-based lending credit that we have. So on the Southeast properties last -- last quarter, we talked about how we're going to work this out of this over time.

And we started that with a little over $3 million in payoffs with no losses in the past quarter. Right now, we are pursuing foreclosure on the rest of the properties in that nonperforming portfolio.

And so we shouldn't really expect any resolution in Q2. That's probably more the back half of the year based on how long those proceedings take in Wisconsin.

And again, as it relates to the asset-based lending credit that's going to be an end of the year type of end most likely.

But there -- we've had no negative news there. It's just moving through the court system very, very slowly. But we're being told that's what we should expect in this case.

Okay. That's helpful. I appreciate the color.

Hey, on the broader charge-off question. I would say for Q1, nothing kind of unusual to report kind of a broad mix of charge-offs coming from SBA, C&I. I will say that EF finance improved from a charge-off perspective from Q4 to Q1. So that's a good indication that we're improving and working for that portfolio.

I think we had about 25 basis points of charge-offs in the quarter. little higher than we would think. We tend to think around 20 basis points on average for the year. So -- but nothing that's alarming to us by a means.

Just to add to that, Nate, that transportation segment of that equipment finance portfolio, which started out at about $61 million is down to $18.1 million or $18.2 million, something like that.

So we're making nice progress on that.

Okay. Got you. Very helpful. I appreciate all the color. Thanks, guys. Hope have a great weekend.

Your next question comes from the line of Damon DelMonte of KBW.

First off, Corey, congratulations on the retirement. I think I've been covering you guys for probably close to 12 years. So it's been an enjoyable run. And Dave, I look forward to working with you in your new role.

So congrats.

Thank you.

Sure. So with that, I guess, most of my questions have been asked and answered.

But Brian, I may have missed this, but do you know what the fees and low of interest were included in the margin this quarter?

We're about $2.2 million. So that's more in line with kind of run rate, a little bit higher than the run rate. That's up from the prior quarter. But remember, the prior quarter had the nonaccrual interest rate reversal in Q4, so...

Right, right. That's right. Okay. And then kind of along the lines of credit and trying to figure out provisioning going forward. The reserve do you expect to kind of maintain this reserve level? And then if you kind of have average net charge-offs of 20 basis points kind of just back into the provision that way? Is that a good way to think about it?

Yes. That's all I think about it, Dan. I think the macro piece of this equation with the subscribed to Moody's, right? So that's the wildcard. -- with geopolitical, but I think all else equal, you're provisioning for growth off this reserve level with the 20 basis points that's appropriate.

And we saw -- for example, this quarter, $1 million of the provision was due to loan growth of about 2.9% in the quarter. So that will come back down. Obviously, as we talked about with Q2 growth coming back down, but yes, with the uncertainty around the macro, to me, that's no change is a reasonable place to be.

Got it. Okay. Great. That pretty much covered everything else. So thanks for taking my questions and take care.

Your next question comes from the line of Brian Martin of Brand.

Just maybe [Audio Gap] where you're optimistic going into the year? [Audio Gap] And maybe areas that aren't really optimistic about in terms of delivering the targeted growth this year.

Sure. Well, I mean, I think if you look for the -- where it's going to come from for the rest of the year, I think we're going to continue to see nice growth in our -- from our ABL team also from our accounts receivable finance team.

Kansas City is looking really good. We continue to add talent in Kansas City. And our -- particularly our Southern Wisconsin markets are still strong.

We have good teams in both of those markets. So we should continue to see growth there.

Okay. And in terms of the build-out, it sounds like you're still adding some folks in Kansas City. Is that primarily complete at this point? So you've got a full team there just more areas you're adding down there?

I don't think we'll have a lot more ads down there, Brian, but we could have another ad. And in order for us to continue to grow at 10%, we have to continue to add folks really across our markets.

So I think we will likely have another ad in Kansas City this year.

Got you. Okay. And then maybe just jumping to the -- just the fee income per section. And I appreciate the color you guys have already given your comments, Brian. Just in terms of the lumpiness that kind of seems within this portfolio. Do you still expect some lumpiness count throughout the year? I know the movie made or reclasses just kind of trying to think about the quarterly movement or progression? Is it -- do you expect a little bit more consistency? Is it still going to be a little bit lumpy as we go along?

I would say, yes, is the answer. There's still going to be lumpiness, but that's something we're working on and trying to improve, right? We talked about the success of our private wealth and our service charges, those are becoming more and more consistent in annuity like more so than they had before.

And then I also just really kind of briefly talked about our investments in small business investment company funds, -- we're deploying more capital there. There's a 5% limit, right, for regulatory capital, but we're doing that over time to add a more stable level of fee income to the quarterly run rate.

So that will take some time, but that's the part of our process to smooth those earnings out on a quarterly basis. But it's just the nature of swap fees and SBA gains -- it's just going to be lumpy still, but it's why we're really focused on that 10% year-over-year growth.

Yes. Okay. Okay. that covers -- Damon got the credit cards other than that, I'm good and just the same comment that both guys have made. It's been great working with you over the years, Corey, and I wish you the best in retirement and Dave, it's been good to continue to know you and continue to work going forward. So congrats on everything, and thanks for taking the question.

Thanks, Brian. Thanks, Brian.

That concludes our Q&A session. I will now turn the conference over back to CEO, Corey Chammas, for closing remarks.

Thanks. First, I'd just like to say I appreciate all the relationships I've dealt with all of you over the years. So I will definitely miss that. I miss you all. Overall, I just want to say thanks, everybody, for your interest in First Business Bank joining us today, and I hope everybody has a great weekend.

This concludes today's conference call. You may now disconnect.

Hello, and welcome to the Annual Meeting of Shareholders for First Business Financial Services, Inc. Please note that today's meeting is being recorded.

I would like to welcome Jerry Kilcoyne, Board Chair, who will lead the meeting. Mr. Kilcoyne, the floor is yours.

Good morning, and welcome to the 2026 Annual Meeting of Shareholders. I am Jerry Kilcoyne, First Business Financial Services, Inc. Board Chair.

First, we will hold the Annual Shareholder Meeting and report the voting results on the 4 proposals listed in the proxy. Then we will allocate time for shareholder questions after the Annual Shareholder Meeting is adjourned. Shareholders who entered the meeting using their voter control number, may submit questions by clicking on the Q&A icon in the upper right corner of the meeting center screen as shown in the example on the slide. If you are a shareholder and enter this meeting as a guest and would like to submit a question during the Q&A, please disconnect and rejoin the meeting using your voter control number to be validated as a shareholder. Your voter control number can be found on the notice or proxy card that you received.

I call your attention to the rules of conduct for submitting questions. Questions can be submitted at any time during the meeting and will be answered during the Q&A session following the conclusion of the Annual Shareholder Meeting.

I now call the 2026 First Business Financial Services, Inc. Annual Shareholder Meeting to order. Shareholders have been asked to vote on the 4 proposals outlined in the proxy statement and summarized on the slide. All shareholders as of February 18, 2026, can vote their shares. If you have already voted, your vote has been counted. If you have not yet voted, or would like to change your vote, you can do so online by selecting Cast Your Vote on the meeting broadcast page. Voting will close in the next few minutes.

[Voting]

While we're waiting for any fiscal -- while we're waiting for any final votes to be cast, I'd like to acknowledge the First Business Financial Services executive officers shown on the slide and thank them for a strong year of operating and financial performance in 2025, and for their excellent leadership.

I would also like to take a moment to recognize Ralph Kauten, who will be retiring from the Board at the conclusion of this meeting. Ralph has served as a Director of First Business Financial Services, Inc. since December of 2018, is Chair of the Audit Committee, and a member of the Operational Risk Committee. He has served on the First Business Bank Board since July of 2004 and served as First Business Bank Board Chair from June 2018, until November of 2018. We thank Ralph for his 22 years of dedicated service to the Board, the company and our shareholders.

As previously disclosed, Corey Chambas will retire effective May 2, 2026. Corey joined First Business Bank in 1993 and has served as Chief Executive Officer of First Business Financial Services, Inc. since January 2006. On behalf of the Board and the entire organization, I extend our deep appreciation to Corey for his visionary leadership, which has been instrumental in driving our growth, shaping our culture, preserving our mission and building shareholder value over the past 3 decades. We congratulate Corey on his retirement and thank him for his 32 years of dedicated service to the company and our shareholders, as well as for his many contributions to the commercial banking industry over a more than 40-year career.

The company is well positioned to execute its planned leadership transition when Dave Seiler, currently President and Chief Operating Officer, assumes the role of President and Chief Executive Officer effective May 3, 2026. As announced on April 15, 2026, Dave has also been appointed to the company's Board of Directors concurrent with his appointment as President and Chief Executive Officer. Corey Chambas, who has served on the Board since 2002, will remain a member of the Board following his retirement.

Voting is now closed. Abby Cowart of Computershare, the Inspector of Elections, has informed me that we have a quorum. I will now share the preliminary results.

The nominees, Carla Chavarria, Jerry Kilcoyne and Daniel Olszewski were elected to serve as directors. The First Business Financial Services, Inc. 2026 equity plan was approved. The compensation of the company's named executive officers was approved. And Crowe LLP has been ratified as our independent registered accounting firm. These results are preliminary until verified by Computershare. The final results will be detailed in a Form 8-K filing.

The company's Board of Directors thanks you for attending the Annual Shareholders' Meeting and for your continued support. This concludes the 2026 Annual Meeting of Shareholders, and the meeting is adjourned.

I'm now pleased to open the Q&A session to answer any questions submitted by our shareholders. Please adhere to the rules of conduct shared earlier. Sara Krople, audit partner with Crowe LLP, our independent registered accounting firm, is also available to respond to appropriate shareholder questions during the Q&A session.

I will now ask our Corporate Secretary, Lynn Ann Arians, to read the questions. Lynn Ann, are there any questions from shareholders?

There are no questions.

Thank you, Lynn Ann. This concludes the Q&A session. A recording of the meeting will be added to our Investor Relations website in the near future. Any time you have questions, please feel free to reach out to the company via our Investor Relations website.

This concludes the broadcast. You may now disconnect.

Good afternoon. Welcome to the First Business Financial Services Fourth Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note that this event is being recorded.

I would now like to turn the conference over to First Business Financial Services, Inc. CEO, Corey Chambas. Please go ahead.

Good afternoon, everyone, and thank you for joining us. We appreciate your time and your interest in First Business Bank. Joining me today is our President and Chief Operating Officer, Dave Stiller; and our CFO, Brian Steelman. Today, we'll discuss our financial performance followed by a Q&A session.

I'd like to direct you to our fourth quarter earnings release and supplemental earnings call slides, which are available through our website at ir.firstbusiness.bank. We encourage you to review these along with our other investor materials.

Before we begin, please note, this call may include forward-looking statements, and the company's actual results may differ materially from those indicated in any forward-looking statements. Important factors that could cause actual results to differ materially from those indicated in the forward-looking statements are listed in the earnings release and the company's most recent annual report Form 10-K and as may be supplemented from time to time in the company's other filings with the SEC, all of which are expressly incorporated herein by reference.

There, you can also find information related to any non-GAAP financial measures we discuss on today's call, including reconciliations of such measures. First Business Bank finished 2025 with another outstanding quarter. Our team continued to produce high-quality growth, particularly on the deposit side. Core net interest margin remained resilient and our revenue streams were diversified and strong. Notably, our private wealth business continued to expand, delivering record and significant annuity-like and our focus on positive operating leverage again drove improved efficiency. These highlights contributed to strong profitability for the quarter and year as pretax pre-provision earnings grew nearly 15% over 2024. Return on average tangible common equity was over 15% for the year, and most importantly, for shareholders, tangible book value per share of 14% from a year ago.

I'd also like to draw your attention to earnings per share, which you can see on Slide 4 of our earnings supplement. EPS growth is perhaps the most universal metric across industries, and our track record is outstanding. First Business Bank's 2025 EPS grew 14% over 2024, exceeding our long-term annual goal of 10% earnings growth. Over the past 10 years, we've grown earnings per share at 12% compound annual rate. Going back to the year of our IPO in '05, our 20-year compound average annual EPS growth is 10%, a very long period of outstanding performance. We know how to execute to achieve our double-digit growth mandate, and we aim to continue doing so in 2026 and beyond.

On the strength of these results and expectations for continued financial success, our Board of Directors approved a 17% increase to our quarterly cash dividend. We are very pleased with the positive momentum of fourth quarter results, which Dave will discuss more now. Dave?

Thank you, Cory. In the fourth quarter, we again delivered growth, producing strong bottom line results that reflect consistent performance. We believe this is a differentiating strength of First Business Bank and it is a direct outcome of our deep commitment to relationships and diversification.

I would like to take a moment to address an isolated credit situation. During the quarter, we downgraded $20.4 million of CRE loans related to a single Wisconsin-based borrower with total loans outstanding of $29.7 million. You can see the impact of this on our asset quality ratios on Slide 12 of the earnings supplement. Obviously, this is disappointing. The strength of our underwriting, our markets and our deep relationships are notable here, however. This is a long-standing client. Over several years, they acquired a series of parcels for multifamily development. They were unable to advance these parcels to development phase, resulting in high carrying costs that exhausted their free cash flow.

This client stress is isolated and reflects internal management challenges. The majority of the nonperforming loans are collateralized by tracks of land zoned for multifamily and located in Southeastern Wisconsin, mainly in the corridor between Milwaukee and Chicago. These are very healthy markets and land value appraisals exceed the carrying value of the loans. As such, a specific reserve was not recorded, which reflects our general philosophy of having 2 or more ways out of the loan. We did record a nonaccrual interest reversal totaling $892,000, and this compressed our net interest income and lowered our margin by 10 basis points in the fourth quarter. You can see this on Slide 7 of the supplement. The performing loans in this relationship consists of 4 stabilized multifamily projects, all of which are located in Wisconsin.

On a full year basis, net interest income grew 10%, meeting our double-digit growth goal. We attribute this strength to our robust loan and deposit growth to continue to outpace the industry, along with disciplined pricing and management of funding sources and costs. Fourth quarter noninterest income displayed similar resilience. Private Wealth generated a record $3.8 million of fee income, up 11% year-over-year as we had added new relationships and expanded existing relationships. Service charges were up nearly 20% year-over-year, demonstrating real success in adding full banking relationships which is a litmus test that illustrates growth of our business banking relationships.

These trends bolstered revenues and moderated the impact of business-driven variability in other line items. These include lower SBA gains, which resulted from the government shutdown and lower swap and loan fees, which could be highly variable and declined from the third quarter. As a reminder, swap fees were unusually high in the linked quarter. We also recorded lower income from partnership investments in our other income line. This reflects a variable income stream from quarter-to-quarter and this item was additionally affected by an accounting classification update during the fourth quarter, which Brian will cover.

Our income diversification is design, supporting our long-term double-digit revenue growth goals in a variety of market conditions. For full year 2025, this drove 10% operating revenue growth, which achieved our annual double-digit goal. Paired with operating expense growth of about 6.5% for 2025 we achieved positive operating leverage for the fourth consecutive year and by a wider margin than we would expect in future periods. This is also partially a function of the accounting classification update that Brian will explain.

Moving to balance sheet growth. You can see the highlights on Slide 3 of the earnings call slides and our quarterly loan and deposit growth trends on Slide 5. Loan balances grew about $39 million or 5% annualized during the quarter and $261 million or 8% over the same period last year. On an average basis, loans grew 8% annualized compared to the linked quarter. We experienced elevated CRE payoff activity during Q4, contributing to our more moderate pace of loan growth compared to recent periods. I'll note that total payoffs in 2025 exceeded 2024 levels by almost $70 million. If we normalize for the $70 million, adjusted full year 2025 total loan growth would be about 11%.

We continue to see solid loan demand in our bank markets and pipelines look strong for the first quarter. We would expect to see growth rebound to our typical double-digit pace in 2026. Our loan growth expectations are driven by continued positive trends in our business and the banking industry. Our largest markets in Southern Wisconsin benefit from a strong regional economy. Our clients in the manufacturing and distribution space are doing well. Commercial real estate occupancies have remained strong and steady particularly in multifamily properties. We are also seeing signs that new development is picking up after a slight slowdown in 2024 and 2025.

We are seeing tangible benefits from talent acquisition. Our Kansas City market, Northeast Wisconsin market and asset-based lending group, each have new presidents in place who joined over the past 18 months. Their sales and hiring efforts led to growth in Q4 and their pipelines continue to expand. We are also seeing some nice refinance opportunities in commercial real estate that we haven't seen in a while. Lower interest rates tend to create more activity and demand, and we are seeing that bear out. Additionally, we expect 2026 changes to federal tax policy should be a tailwind for our business clients and C&I portfolio.

I'll note that we are seeing secondary market activity pick up in CRE, so that may drive some ongoing payoff activity. We also expect double-digit growth in core deposits will continue in 2026. Fourth quarter core deposit balances were up 12% from both the linked and prior year quarters. The majority of growth came from core interest-bearing and money market client accounts and it more than offset runoff of higher cost CDs and wholesale deposits, bringing support to our net interest margin.

On the asset quality. Outside of the new and isolated nonaccrual relationship, the balance of our portfolio continues to perform as expected, and we have no areas of particular concern. The transportation loans in our small ticket equipment finance portfolio continue to shrink, and our CRE markets remain strong. You can see our performing portfolio on Slide 11 of the earnings supplement.

Net charge-offs totaled $2.5 million and were primarily from previously reserved equipment finance loans. Now I'll hand it off to Brian.

Thanks, Dave. Fourth quarter net interest margin declined by 15 basis points to $3.53, reflecting 10 basis points of compression from a nonaccrual interest reversal on the downgraded CRE nonperforming loan. Excluding this, net interest margin would have measured 3.63%. Even with the increase in nonperforming loans, our NIM target range remains 3.60% to 3.65%. You can see a breakdown of this on Slide 7 of our earnings supplement.

On a full year basis, net interest margin remained relatively stable, declining 2 basis points from 3.66% in 2024 to 3.64% in 2025. We are pleased with our ability to maintain a strong and stable margin, and this again shows the value of our risk mitigating match funding strategy. Looking ahead, our target range for net interest margin is unchanged. Our current outlook supports this in tandem with double-digit annual loan, deposit and revenue growth. Our balance sheet is essentially interest rate neutral. So the timing of any potential rate changes is not as consequential to our margin as it may be for others. Thus, our continued 10% targeted growth in net interest income is not predicated on additional interest rate cuts for hikes.

While deposit pricing pressure has eased modestly since the Fed began cutting, the cost of acquiring a new deposit client remains extremely competitive, but we do not believe this is unique to First Business Bank. On the asset side, we continue to shift our loan mix toward higher-yielding C&I relationships, which also typically come with lower cost deposits. See Slide 6 of the earnings supplement. Our conventional and specialty lending teams are seeing strong pipeline activity, as C&I loans make up a larger share of our portfolio, we expect average loan spreads to improve, helping offset continued pressure on deposit pricing. On noninterest income and expense, we had an accounting classification case and change of note during the quarter. We have historically recorded revenue earned from our Eddy partnership investments and other noninterest income. While any expenses related to these investments were recorded in other expense.

In the fourth quarter, we reclassified the expenses related to the investments to net against the related revenue and other fee income. This now presents the benefit of all of our partnership investments, and we will continue this method on a go-forward basis. Specifically, during the fourth quarter, we reclassified $904,000 out of noninterest expense and into other noninterest income to net against the related revenue. This expense represents the bank's share of costs for the first 9 months of 2025 related to the latest round of limited partnership sentiment. Excluding this reclassification, income from partnership investments decreased $383,000 to $477,000 during the fourth quarter. I'll also note that when we exclude the $904,000 reclass from other noninterest income for Q4, the adjusted noninterest income number approximates a good starting point for quarterly fee income in 202,6, with the expectation of 10% for the full year.

Recall also that our third quarter results included $770,000 in nonrecurring fee income items. These included a $537,000 fee related to an exit of an account receivable finance credit and $234,000 in BOLI insurance proceeds during that quarter.

Moving to expenses, which were well contained in Q4. Compensation expense decreased by about $291,000, mainly due to a decrease in annual cash bonus and accruals. Looking ahead, we continue to have a higher level of open positions we are actively working to fill, and we are always looking for opportunistic hires. Compounded with increase in benefit costs, we expect 2026 compensation levels to grow a bit more than in 2025. I'll reiterate that our primary expense management objective is to achieve annual positive operating leverage. That is annual expense growth at some level modestly below our target level of 10% annual revenue growth.

Our effective tax rate varies modestly quarter-to-quarter, in part due to the timing of tax benefits received from our Invent limited partnerships. Our 2025 effective tax rate of 16.8% was within our expected annual range of 16% to 18%, and we continue to believe this range is appropriate looking forward. Finally, our strong earnings have continued to generate excess capital to facilitate organic growth. Our increased dividend boost shareholder returns, and we continue to believe reinvestment in the growth of the company typically provides the best return for our shareholders. We do, of course, evaluate all capital management tools at our disposal to maximize shareholder returns.

And now I'll hand it back over to Corey.

Thank you, Brian. Our 2025 performance toward our long-term strategic plan goals was excellent and can be seen on Slide 15. These outcomes demonstrate the value of consistency and execution. We continue to achieve our above-industry growth by investing in talent, prioritizing profitable long-term client relationships, investing in technology to build out efficient scalable systems and never losing sight of the criticality of prudent underwriting. We are very optimistic about the future and believe our focus, discipline and consistency will continue to serve First Business Bank and our shareholder as well.

I want to thank you for taking time to join us today. We're happy to take your questions now.

[Operator Instructions] And the first question comes from Daniel Tamayo of Raymond James.

Corey, Dave, Brian, maybe just starting on that -- the CRE relationship that drove the increase in NPAs. I appreciate the details that you gave in the prepared remarks. But maybe just digging a little deeper there. The timing of the appraisal that you referenced, just curious when that was done? And then if you have the current LTV and debt service coverage on the relationship as a whole?

Okay. A couple of questions in there. Let me see how much of that I can get it for you, Dan. Most of the appraisals, we just got several in just now at the end of the year. A couple of other ones are a little bit older, mainly land for development, as Dave said, and those are the ones where we have fresher appraisals, particularly any of significance in terms of size. This goes across 7 properties. So the large properties, we've got fresh praises out.

And the other question that you asked was the loan to value. The properties are all cross-collateralized. So overall loan-to-value across those 7 properties is 72% on the LTV. I don't have a cash flow, again, because the biggest part of this is land. So approximately or 3/4 of it is land because there's a couple of properties that are already developed mainly for multifamily, I think, as we mentioned, in terms of for development, and then there's a couple of multifamily properties in there as well.

Okay. That's great. And then as it relates to credit cost -- I mean, credit expectations in the coming year, you guys have had a pretty good run here. There was obviously some charge-offs related to this loan in the fourth quarter. But how should we think about what needs to flow through now and then in terms of charge-offs and how that might move the NPLs as we work through the year.

Sure. Just to clarify, the charge-offs that we had for the quarter were not related to this. So based on those appraisals, we didn't have to take any even any reserves on this. So no specific reserves, no charge-offs. Charge-offs that we had really for the quarter and for the year, we're pretty much almost all related to the equipment finance, the small ticket equipment finance where we had that transportation portfolio that we've been grinding through. So a lot of those were already reserved for methodology there, just kind of going back in time -- is time based on delinquency on that small ticket portfolio. And so things that are going to be charged off in that portfolio get reserved in advance as they go past due. And then as time expires on the clock, so to speak, then we charge those off. So that's where all the charge-offs came through for the quarter.

So on this one, no credit costs at this point. We think we're in pretty good shape here based on the appraisals that we have. It's real estate. So that takes some time to work through, but it's a pretty straightforward process. We're still working with the borrower on multiple options of what we can do on this one. But ultimately, if things don't work out on real estate, as you know, there is a foreclosure process that's pretty straightforward. It does take some time to go through, but it's pretty straightforward.

And then maybe just one on the fee income side. Just a clarification on your guidance, Brian. The 10% growth for overall fees. So we're pulling out the $537,000 reclass and then the $234,000 BOLI claim and then growing off of kind of that number into I guess, the best way to think like annualize it or just go fourth quarter to fourth quarter, that's the way we should be thinking about it?

Yes. And when you're excluding those 2, you're talking about full year, right? So full year '25 million exclude those 2 items and then grow off of that. Yes. And full year, 10% expectations there.

Okay. And that includes a rebound in SBA gains, I'm assuming off of the fourth quarter level to something that's meaningful.

Correct.

The next question comes from Jeff Rulis from D.A. Davidson.

Maybe just on the last one. So like a $3 million base, is that fair on fee income?

For '26?

The base to grow off of 10%.

Sorry, for '25. Yes. Sorry about -- that's a good time.

And back to the larger problem loan, it sounds like the question is the time line of resolution. It sounds like it might be a bit. But maybe just checking in on your expectations over the balance of this year or beyond.

Yes. It does take some time if you kind of go all the way to the end of a foreclosure, getting the property, share of sale, all that process that you know. But we do think because there are multiple pieces of real estate here that there can be shorter-term progress potentially with some pieces of this, even in the very near term and kind of chipping away at it through the year. And potentially, if everything went well, it could be sooner than later. But likely toward the end of the year for full resolution on everything would be best guess and really is a guess because there's just a lot of variables on timing and what might happen.

Yes, that's good detail. So we could see some smaller wins. It doesn't -- it's not a full all-in kind of recovery or not. It's a -- you could see sales and things that minimize the NPAs in short well, over the course of the year, we could see that come in?

Correct. Over the course of the quarter, I wouldn't be surprised if there was something happening every quarter over the course of the year in terms of making progress on the different pieces.

Another quick 1 on the equipment finance, could you just remind us of the balance there, what that maybe is at the year-end and what that was the prior year? And expectations for -- to keep that stable, you keep shrinking it?

Right. So that's the transportation segment of that equipment finance portfolio. I believe we're at $21 million at the end of the quarter. And I think that went down about $20 million over the course of the year. Going back when we initially started having issues with that, it was $61 million. So we're down to 20%. Remember, these are 5-year deals, generally, 5-year loans. So I believe we're getting to the point that the people who have made it through the really tough transportation economy thus far are much more likely to make it going forward.

And 1 last one, if I could, Corey. Looking at Slide 15, a pretty remarkable progress on those goals, if not achieve them. You've had some wind at your back. But I guess -- just strategically, do you revisit those a couple of years early. I mean hybrid bank, I guess, would hope to just maintain that. But any thoughts on how you look at those goals or it takes a lot of work just to stay there.

Yes. Good point. We have made tremendous progress because a few of these things were at all times we want to do our -- particularly things like the employee engagement score, our Net Promoter Score. Those were forever and always. But a few of these were the end of the plan in 2028 to hit the ROE goal on that, to hit the efficiency ratio goal. And as you alluded to, we hit that ROE goal of over 15% in '24 and '25. We're below 60% on the efficiency ratio on '25. So okay, now what are you going to do? So for us, I would say I don't think we'll recast those. But given that we hit that ROE goal, we'd like to stay there. That's pretty damn good. So if we're in the ballpark of that, over these next 3 years, we would consider that good. And efficiency ratio is one where -- it's kind of like your golf handicap. I want to just keep bringing that thing down. And our ability to -- also like a golf handicap, the lower you go, the harder it is to keep improving, but we would expect to continue to improve on that. We won't recast our goal to be different than to get below something lower than 60 by 2028.

But at this point, I would say our goal will be to try to make improvement on that every single year going forward. And that's kind of our -- we've talked a lot. It's a little different than standard bank speak where everything is. Looking at efficiency ratio, we really look at operating leverage. So we're going to want to -- we had really big positive operating leverage this year with expenses growing significantly less than the growth rate in revenues, but we'll expect to continue to have positive operating leverage every year. That's kind of -- we set our goal -- our budgets every year. It's a key measure that we look at overall and for our different business units and lines and things like that. So we would expect to continue to make progress on that efficiency ratio.

Next question comes from Nathan Race of Piper Sandler.

I was hoping you could maybe just help us with the starting point for the margin in the first quarter. I know that tends to depend on the production that's coming through the pipeline in terms of mix. So I would be curious if you just comment on kind of what type of loans you're seeing in the pipeline these days, which sounds like it's pretty strong and maybe how that could translate into the margin starting point for the first quarter.

Yes. I'll actually have Dave maybe start on the mix of pipeline and then I can talk about the margin.

So the pipeline in Q4, going into Q1. So I mean, we're really seeing right now, our pipelines, our business lines are strong. So it's a mix of commercial real estate and C&I. I don't really have a great flavor for you on the the mix. But I can tell you that our asset-based lending pipeline, it is particularly good. And those are higher-margin deals.

And so I would just add to that with the comment on ABL with the expectation of SBA picking up and just the success we've continued to have in other of those C&I areas. When you adjust for the nonaccrual interest in Q4, that resets us at 3.63%. And with the mix that we're seeing in the pipeline, we feel like it's a great place to be and within our range of 3.60% to 3.65%. We're going to continue to compete on both sides of the balance sheet. We feel like we have the ability to maintain that.

And then I would be curious just in terms of what you're seeing from a deposit pricing competition. Now that we've had some additional rate cuts in the back half of last year. Just curious if you're seeing kind of rational deposit pricing competition, particularly as some of the larger competitors in Wisconsin are spanning into other geographies?

Right. As you know, I mean, particularly 6 to 12 months ago, it was extremely competitive for new deposits. it's still very competitive. Our sense is it's eased just maybe a little bit, but still competitive.

Maybe 1 last 1 for me for Corey. Obviously, M&A optimism is continuing to build across the space. And I know you guys have a very kind of narrow strike in terms of the type of acquisition opportunities that would fit your model. But just curious if you're seeing any opportunities out there that could align or maybe kind of augment the franchise that you guys have today?

If I have to give you a word answer, I'd say no, but I'll give you more than that. We're so unique, as you know, with our model, that there's just not many things that look like us. We don't value branch networks. So basically everybody else has branches. So that's problematic. And additionally, we think as we've looked at things, I know it's counter to the industry what's happening with M&A. But we believe that the best way to drive value for your existing shareholders is through organic growth. You're not diluting them by issuing shares to somebody else for their franchise, which you would -- I mean, it sort of makes sense that you think that franchise is less valuable than your franchise, if you're the 1 buying them, but you're still giving their shareholders your valuable shares.

So we're just big believers in organic growth as the best way to generate value for existing shareholders.

I appreciate the extra color, Corey.

The next question comes from Damon DelMonte at KBW.

Hope everybody is doing well today. First question, I just wanted to, Brian, clarify on the comments on the margin. I think you said that because of the strong ABL pipeline and SBA picking back up that the margin would reset in the 3.63% range. So is that implying that the delta between the 3.53% and [ 3.63% ] that you'll benefit from next quarter? Is that how we should think about it?

No, I would start by saying that the delta between the 3.53% and 3.63% is the 10 basis points of nonaccrual interest reversal that happened in the quarter from the real estate nonaccrual loan. So that alone, that was about 8 months of interest that we reversed. So from that resetting, you're going to have a higher run rate closer to $364 million right away in Q1. And then from there, the strong pipelines predominantly in C&I, you mentioned asset based line and others, that gives us the ability to maintain our spreads and hopefully increase our spreads while paying for those expensive deposits and then staying within our guide of 3.60% to 3.65% on net interest margin.

And then with regards to expenses, I think you had said comp is going to grow a little bit more than we saw this year, and I think this year it was around 7.5% or so percent. And how about like the rest of the expense base? What are you expecting for growth there?

Yes. I would say modest increase. I mean, we're expecting to grow 10% revenue as we continue to talk about, and we want that positive operating leverage. So if compensation is going to increase a little bit more than 7.5% this year, there's not much left for the rest of the expenses, and that's consistent with our approach to generating annual positive operating leverage.

And then just lastly, if you look back over the last 8 quarters, I think 6 of them, you guys came in, call it, 7% to 9% growth linked quarter annualized loan growth. I guess, what gives you confidence that you can get back to a consistent double-digit type of growth rate in loan growth for '26?

Yes. Damon, as we look at it, remember, we're trying -- our goal is 10% over the course of the year, right, over 12 months. And so we're seeing that based on pipelines that we're seeing, and we're also looking at potential for some rate cuts, although that seems to be maybe that probability is decreasing a little bit. But also the potential benefit from the new tax policy is something that we think could spur some investment by our client base and create some loan opportunities, particularly like in areas like equipment finance.

And I would add to that, Damon. I think if you look back at our CAGR for '20 through '25 on loans and lease growth, it's 10%. So we've done it. There's been a little bit of softness as of late. But I'm reminded of -- I can't remember when it was, but there was a time when I actually remember sort of making an excuse about slowness in our loan growth, this is maybe 10 years ago or something like that. And I was starting to like kind of imagine economic things that were going on that were causing this in the reality, as I saw over time was it was just some of our teams weren't that strong, right, at that time.

And so I believe, for us, it's about our people and our teams. And if we have the right teams in place, we're going to get our 10%. I'm just very confident. And right now, we feel really good about it. We mentioned ABL. We've really rebuilt that. We have a new leader there who's brought in a business development team, which is twice the size of the team that we had before, for example. And in our Northeast and Kansas City markets, we had really good growth in the fourth quarter. And I think it's probably the best -- those are our 2 smallest bank markets, and that was the best growth we've ever had out of those 2 markets.

So -- and our massive banks kind of a machine that rolls along and our Milwaukee area bank is somewhat the same. So if we get -- if we have Kansas City and Northeast, those leaders are -- we've had new leaders there maybe 18 months ago or something like that. I think the 2 people that are running those 2 bank locations came into place. They've worked on rebuilding teams. So again, we're in the people business, best team wins, and we think we've got the best team we've ever had. So that's what the confidence we can keep rolling at that 10%.

Yes. And I'd just add 1 more thing, Damon, that it really isn't a new bus volume issue for us. It was really higher than I'd say, normalized payoff levels for us in -- particularly in the second half of the year that impacted that growth number that you're referencing.

The next question comes from Brian Martin at Janney.

I think it was Corey that said that last, I couldn't hear, sorry. But the -- maybe it was Dave, sorry. The payoffs versus the production this quarter, I guess, just in general, can you just give -- I guess, it sounds like from your last comment that it was more about the payoffs. Just a, I guess, can you give us some context over the course of '25, what the payoffs and production look like? And then just how do you feel about the subsiding, if you will, of the payoffs as you enter '26. It sounds like that was more of the issue. I get they're sporadic, but just -- any context you can help ride on that would be helpful.

Sure. So just starting from the payoff point of view, right? The payoffs we think we're about $70 million higher than our, I'd say, our average payoff level if we look back on a quarterly basis our last 8-plus quarters. So $60 million of that -- of those payoffs were in the last 2 quarters of the year. So if we add that $60 million to $70 million back in, we end up at an annualized growth rate of between 10% and 11%. So that's much closer to our target. The payoffs, I think a number of those payoffs were multifamily properties going into the secondary market, and those tend to be larger and lumpy.

And piggybacking on that, Brian, on Dave's comments on that. But the secondary market, it seems like there's a little bit of balloon activity ballooning right now on commercial real estate. So think of deals that were done 5 years ago on a 5-year note because if we're going to get paid out on the real estate loans, when we go in the secondary market, it's going to be at the end of term because they're not going to -- we have prepayment features in there or swaps or something that's going to cause them to wait till the end of that term. But on the other side of that coin is other banks have commercial real estate loans that they did 5 years ago that are now ballooning. And we're getting looks at things, and that's part of that pipeline that Dave was referencing before. And the beauty of those deals on the CRE side is they're fully funding. It's not like doing a construction loan. We love doing construction loans, but they take 18 months or 2 years to get fully funded. So we think there's going to be some opportunities kind of have a little bit of offsetting penalties. It just depends which quarter you get the payoffs in and which quarter you get the new deals that you can get out there and win.

Got you. And those -- the payoffs that 60 to 70 was that annually was that high -- much higher that's -- is that right?

Right, right. It was -- we think we had an extra $60 million to $70 million of payoffs above what we'd consider normal payoff levels.

Okay. And then just the production, production was pretty consistent this year with -- if you look at those last 8 quarters, pretty consistent year-to-year.

Yes, yes. I mean, it was really at the rate we look for.

Understood. Okay. And then maybe just a little bit of comment about the specialty businesses. Just kind of where on the C&I side, how to grow throughout the year in '25. How much did that contribute to growth? And then just your outlook? I know you talked about ABL, but just in terms of moving up that percentage, just remind us where it's at today and just kind of how you're thinking over time, you see that trending.

But we're pretty flat in that over '24 in terms of that -- some of those niche areas relative to the total balance sheet. We would expect that to lift because that's down -- our current level is down from where it had been at some point. So we had good growth in other segments that weren't in there over the last couple of years, and that's been a little slower. Because in the last, say, 2 years, ABL has been slow. Accounts receivable finance has had some payoffs and been down a little bit. So that hasn't grown at the pace of the average balance sheet, and we would expect that to be picking up.

Our Floor Plan finance business has grown steadily. So that's been a good performer there. And we think we'll continue to be -- but where the lift is going to come from, we think it's happening like already in ABL, good activity, good pipelines, booking deals, BDOs in place. And then we would think the accounts receivable finance business would grow more as we move forward. And again, just a reminder, those 2 business lines are countercyclical. We never know what's going to happen in the economy. So those could get a lift there. But those, along with SBA, we would hope to contribute more. So we would like to see that percentage move up. It's been as high as 25% of the total book. And ideally, we'd like to move it back there.

And I would just say our equipment finance business leveled off a bit in '25, but we think there might be some good opportunities there in part due to the new tax law that could drive some activity there.

Got you. And just remind me the -- just the kind of where you're at percentage-wise versus kind of where you think it trends. I guess, I don't know if it's a multiyear kind of scale up kind of where do you see it moving to over time?

Yes. On the specialty specialty niches, at year-end, we were about 23%. We, like I had mentioned, 25% had been our kind of the goal we were shooting for. We got to that and a little bit over that a couple of years ago. And so we want to get back there and we'd like to get back there kind of in short order. And anything -- it all helps margin, help strengthen margin. So we'd like to see that continue to grow. And if we could get that up to 30% over time, that would be really nice for us.

And then just 1 on the fee income side. Just kind of the area you talked about several areas there in terms of contributions. I mean where do you see the most lift in potential lift in fee income? And then just the -- I don't know if you gave more details on the IC revenues. But just in terms of kind of how -- just annually, if we think about that, what they were in '25 versus how we think about the potential growth in that that business in 2016 would be helpful.

So I'd say the 2 areas that we probably look at first our private wealth, right? So that's a business that we shoot for 10-ish plus percent growth in. So that would be our goal there. And then the other area that we'd expect more pickup is in SBA gain on sale. And so as we look at that, I think last year, if you look at the 4 quarters, we averaged right around $500,000-ish in terms of gain on sale per quarter. And we'd expect that to grow some this year.

And I also think we would see overall for that whole fee income category, we're looking for 10% growth, I think we would expect greater than 10% growth in the IC piece just because we've been investing. So there's a J curve on those businesses, those phones as they ramp up. And so we've been in the the downside of the J curve on that a little bit, and we would expect more of that to be above the line in terms of the J curve and contributing more as we build that portfolio internally.

And then just 1 last one. I think was the -- you talked about the credit quality earlier, in particular, the 1 credit this quarter. The other credit that's been out there that's taking a little bit of time to work through the process. Can you just remind us where that stand mean? I guess, in terms of the potential to come down, it sounds like you could see some wins on the 1 that came on this quarter, just given the sizing of the pieces there. But in terms of the other 1 that's out there, I mean, could we see some resolution on that in the near term? Or is that still a little bit a ways out?

Right. That's the asset-based lending credit we have. It's been fair since '23, I believe. So that one, it's all in the court system. I mean things can happen at any time. But right now, the court date is set for later in the year, later in '26. So that could be with us for a little while. And it's not from what we're being told, it's not really unusual in that state's court system. So unfortunately, it just takes way too long.

We have no further questions. I will turn the call back over to Cory Chambers for closing comments.

All right. Thank you all for joining us today. We appreciate your time and your interest in First Business Bank, and we look forward to sharing our progress again next quarter. Have a great weekend.

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating, and we ask that you please disconnect your lines.

Good afternoon. Welcome to the First Business Financial Services Third Quarter 2025. [Operator Instructions] [Technical Difficulty]. CEO, Corey Chambas, please go ahead.

Good afternoon, everyone, and thank you for joining us. We appreciate your time and your interest in First Business Bank.

Joining me today is our President and Chief Operating Officer, Dave Seiler; and our CFO, Brian Spielmann. Today, we'll discuss our financial performance, followed by a Q&A session. I'd like to direct you to our third quarter earnings release and supplemental earnings call slides, which are available through our website at ir.firstbusiness.bank. We encourage you to review these along with our other investor materials.

Before we begin, please note, this call may include forward-looking statements, and the company's actual results may differ materially from those indicated in any forward-looking statements. Important factors that could cause actual results to differ materially from those indicated in the forward-looking statements are listed in the earnings release and the company's most recent annual report Form 10-K and as may be supplemented from time to time in the company's other filings with the SEC, all of which are expressly incorporated herein by reference. There, you can also find information related to any non-GAAP financial measures we discuss on today's call, including reconciliations of such measures.

First Business delivered another outstanding quarter. Our team again produced high-quality loan and deposit growth sourced from core client relationships. We maintained a strong net interest margin and produced positive operating leverage, driving improved efficiency.

Private Wealth assets continue to expand, delivering significant annuity-like fee income and operating revenue reached record levels, reiterating the value of our revenue diversification.

These highlights contributed to robust profitability metrics. Year-to-date ROA grew 15 basis points to 1.23% compared to the same period of 2024. Year-to-date return on average tangible common equity grew to over 15%, up from just under 14% in 2024. And most importantly for shareholders, we grew tangible book value per share an impressive 16% from a year ago.

We are very pleased with the quality of this quarter's results, which Dave will expand upon more now. Dave?

Thank you, Corey. Third quarter performance was very strong across the board and reflects our consistent growth and profitability. Our model is designed to drive 10% long-term growth, and we view quarterly results as a tool for tracking our success towards this. Our pretax pre-provision earnings are a good indicator of the success of our model. We saw 18% growth from the second quarter and 20% growth compared to the first 9 months of 2024.

Credit costs can impact results meaningfully and the provision for credit losses this quarter was better than expectations, leading to earnings per share growth of 26% from the second quarter and 25% year-to-date.

A primary driver of these exceptional results was the record level of noninterest income generated during the quarter. That include elevated swap fees and income from SBIC funds as well as 2 nonrecurring items, which totaled about $770,000 that Brian will cover.

Swap income grew nearly 6x from the linked quarter and income from SBIC funds grew over 4x from the linked quarter. While both items are variable quarter-to-quarter, third quarter levels exceeded our expectations and were outside our historical range. This quarter's fee income performance showcases our successful revenue diversification efforts that we believe provide significant long-term benefits and differentiate us from our peers.

Fee income comprised 19% of our operating revenue for year-to-date 2025 and 2024 compared to about 15% for peers. I'll highlight, as a business-only bank, we've achieved this outperformance without the heavy fee revenue stream of a residential mortgage or consumer business. This reflects the success of our investments for growth and efficiency and high-quality, high-producing talent we attract. It's also one of the drivers of our strong ratio of operating revenue per average FTE, which has been 30% to 40% above our peers over the past 5 years.

Looking ahead, we'd expect annual fee income growth to approximate 10%. However, we would expect Q4 operating fee income to be more in line with our recent 4-quarter average. Net interest income growth was also substantial and reflects continued and robust balance sheet expansion. You can see the highlights on Slide 3 of the earnings call slides and our quarterly loan and deposit growth trends on Slide 4.

Loan balances grew about $85 million or 10% annualized during the quarter and $286 million or 9% over the same period last year. We had strong growth across our geography with our Kansas City and Northeast Wisconsin markets leading the way. We continue to see solid demand for our conventional and niche C&I products and pipelines look strong for the fourth quarter.

Activity levels in our asset-based lending group continue to exceed what we've seen in the last 2 years, and we are positioned to capture growth opportunities in this space. Our accounts receivable financing business is similarly poised for growth.

We've been investing in these businesses, which also performed well during economic downturns through business development officer hires, technology and process improvements.

We know how to lend to these clients, and our solid underwriting process has historically driven better-than-average loss rates across cycles. We value the strong risk-adjusted returns our niche C&I businesses provide.

We also continued to see strong growth in core deposits, up 9% from both the linked and prior year quarters. Our South Central Wisconsin market led the way in our deposit growth by landing several large new relationships.

We track service charges on deposits as a proxy for new relationship deposit growth and these fees grew 25% from last year's third quarter. On to asset quality, which was pretty stable with nonperforming assets decreasing slightly during the quarter.

Net charge-offs totaled $1.3 million and were primarily from previously reserved equipment finance loans. In total, NPAs decreased by $5.2 million to 0.58% of total assets compared to 0.72% last quarter. Our overall portfolio continues to perform as expected, and we have no areas of particular concern. The transportation loans in our small ticket equipment finance portfolio continue to shrink, and our CRE markets remain strong. Additionally, we don't have direct consumer exposure so we wouldn't be impacted by things like credit card and auto loan delinquencies. This is a positive differentiator for our business-focused model.

Before passing it to Brian, I'll make one quick note on the government shutdown. We do not currently anticipate any negative credit exposure related to the federal government shutdown. We do, however, depend on federal government processing to complete SBA loan closings. This may affect the already variable timing of SBA loan sale premiums. Our SBA loan pipeline is strong. And while pricing continues to be extremely competitive, we continue to win deals.

Now I'll hand it off to Brian.

Thanks, Dave. Third quarter net interest margin grew 1 basis point to 3.68%, reflecting our continued strong balance sheet management. You can see a breakdown of this on Slide 6 of our earnings supplement.

As you know, our margin includes fees in lieu of interest, which refers to the recurring but somewhat variable amount of interest income we earn from items like prepayment fees, collection of nonaccrual interest and asset-based loan fees. These fees increased by $482,000 from Q2 and contributed 23 basis points to margin in Q3, up 5 basis points compared to 18 basis points in Q2.

Fees in lieu of interest contributed 21 basis points on average this year compared to 16 basis points on average over the past 3 years. On a year-to-date basis, net interest margin grew to 3.68% from 3.62% for the same period of 2024.

We're very pleased with our ability to maintain a strong and stable margin in this environment. And this again shows the value of our risk-mitigating match funding strategy.

Given the current interest rate environment, I'll remind you that our balance sheet is intentionally interest rate neutral. Looking forward, we continue to target a range of 3.60% to 3.65% for margin.

A few additional notes on our record fee income this quarter. The $770,000 in nonrecurring items, Dave mentioned, consists of 2 distinct components. First, a $537,000 fee was recognized related to the exit of an accounts receivable finance credit. While these types of fees are not unusual, the size of this particular fee was larger than typical.

Second, we received $234,000 in BOLI insurance proceeds during the quarter, and we offset this income with a contribution to the First Business Charitable Foundation. As Dave mentioned, we expect SBIC income and swap fee income will return to more typical levels in the fourth quarter.

We expect to continue investing in additional SBIC funds as a long-term earnings catalyst and effective use of capital. SBA gains are a bit of a wildcard for the near term given the government shutdown and potential backlog at the SBA, but we expect they will rebound and benefit from our continued investment in the business.

Our expenses were well contained in Q3. Compensation expense grew about $900,000 due to an annual cash bonus accrual update tied to strong total bank performance. Excluding this accrual update, compensation expense declined by about $183,000.

I'll note that we currently have a higher level of open positions we are actively working to fill. Compounded with increases in benefit costs, we expect 2026 compensation levels to grow a bit more than the 7% year-to-date growth in 2025.

I'll reiterate that when we think about expenses, our primary objective is achieving annual positive operating leverage. That is annual expense growth at some level modestly below our target level of 10% annual revenue growth.

We saw a significant positive operating leverage in the third quarter due to our 16% revenue growth. We would expect this gap to narrow to a more normal level as revenue growth returns to our long-term target of 10%. This reflects consideration of the high revenue produced this quarter, including some onetime items as well as our ongoing commitment to investing in talent and technology for growth.

On taxes, our effective tax rate varies modestly quarter-to-quarter, in part due to the timing of tax benefits received from our investment and limited partnerships. Our 2025 year-to-date effective tax rate of 16.3% was within our expected annual range of 16% to 18%, and we continue to believe this range is appropriate looking forward.

Finally, our strong earnings are generating more than enough capital to facilitate our expected organic growth. We continue to believe reinvestment in the growth of the company typically provides the best return for our shareholders. But of course, we regularly evaluate all the capital management tools at our disposal to maximize shareholder returns.

And now, I'll hand it back over to Corey.

Thank you, Brian. Our 2025 progress toward our long-term strategic plan goals has been excellent and can be seen on Slide 12. These outcomes demonstrate the value of consistency and execution. We continue to work our plan by focusing on solid underwriting, building out efficient systems, prioritizing client relationships and profitability and investing in talent.

We are very optimistic about the future and believe our discipline and consistency will continue to serve First Business Bank and our shareholders well.

I want to thank you for taking time to join us today. We're happy to take your questions now.

[Operator Instructions] For your first question, Daniel Tamayo from Raymond James.

Maybe just a clarification first on the fee income guide. The 10%, I think you said 10% next year. Is that an all-in number? Or should we be pulling any of these onetime items out that you've had in '25 so far?

I would say it's adjusted for the Q3 items. If you pull those nonrecurring items out, $77,000 and adjust off of that based off the kind of 4 quarter average, excluding that, that's your good starting point then for 10% growth off of that.

Got it. Okay. And then maybe looking at the margin. So if you normalize the fees in lieu of interest, your core margin is really kind of exactly where it should be in terms of where you're thinking about the guidance you've given, 3.60% to 3.65%. Deposit costs have continued to rise a bit, just thinking about understanding the match funding nature of your balance sheet. But as we do get rate cuts, just thinking about how these -- the funding side and the loan side would be coming down, you're expecting those betas to be pretty similar kind of initially and over the next few quarters?

Correct. Our betas on both sides of the balance sheet have historically been pretty consistent, which gives us comfort in the continued message around that 3.60% to 3.65%. On the deposit side, new client acquisition is expensive. So we're bringing on clients at, say, SOFR right now, but then we're having opportunities to lend out at -- in our specialty areas at SOFR plus 4, so we have that spread that contributes to the net interest margin long term.

And kind of point to that on Slide 5 of the supplemental materials, but this kind of shows our long-term growth rate in the C&I businesses versus the CRE business and so where we think our ability to continue to do that and be able to pay for those higher cost deposits.

I would add that when we're having those conversations for new clients with those higher prices, we're having conversations around expectations for rate cuts. And so that's built in early on with the conversation, and we're having luck bringing when those rates down when there are rate cuts to help stabilize margins.

Understood. That's helpful. And just a cleanup question here. Do you have the classified or criticized balances at quarter end or at least the direction from where they were at June 30.

We have that in the Q that will be filed tomorrow. I can tell you they're very consistent, nothing materially changed. We actually have a decrease in our total NPLs that you saw in the release, but nothing significant to report in terms of the adversely classified population.

Next question will be from Jeff Rulis from D.A. Davidson.

I wanted to maybe refine just a small part of the margin. The fees in lieu, could you remind me if there's any historical -- those tend to be higher, lower or not impacted in times of rate reductions. Is that something to think about? I know that we model for core, but I just wanted to see if the next 12 months, if we see additional rate cuts if that is any impact on that figure?

Yes. The fees in lieu of interest have historically been pretty idiosyncratic, where on average, that's why we get some of the average detailed long-term average because it's around 20 basis points, I think, but we'll have spikes here and there. Cory, do you want to add to that?

Yes. The one thought I have on that, Jeff, is the biggest piece of fee in lieu, it comes from a variety of places, but the biggest one would be from our asset-based lending group. They have -- their deals are contractual. So if somebody breaks a contract, that's where we get significant fees in lieu. But unlike thinking, well, rates are going down, so people might leave, those are all floating rate deals. So they're going to float. It's not like a fixed rate real estate loan when the rates go down, somebody might want to refinance. Those deals refinance because the company gets stronger and it becomes bankable on a conventional basis. But as -- but those deals aren't fixed rate deals where that would become attractive. So I was trying to think of any forces of movement in rates, but I don't really see anything with that.

Got it. I appreciate it, kind of chasing that down, but pretty clear. On the -- I guess, kind of a segue to the asset-based lending. The large loan, the $6.1 million, that seemed locked up in litigation for a while. I just wanted to check in on that time line. And does this feel like a '26 event? Just any update there would be helpful.

Yes. Well, I think your description is pretty good, Jeff. It's locked up in litigation. So there's really no change, and it's taking a very long time, but it's -- there's really no change in our belief that we're going to get -- fully recover that.

And given the geography of where this is, that's normal as we understand it from the court system there is it's just really slow.

Got you. Okay. And maybe one last one, just on, I think Brian sort of teased the capital close of the formal remarks, but just saying looking at growing capital and just wanted to kind of reconfirm the priorities. I think, obviously, organic growth, you've got a fantastic position in that and don't really need to chase other opportunities. But maybe if you could touch on other capital tools as well as if there was one area on the acquisition front that you would consider what would that be?

I can speak to the capital tools and maybe Corey or Dave will jump in on the M&A front. But as far as the capital tools we have that we evaluate quarterly and annually is going to be just our common stock dividend increase. We've done that for 13 consecutive years. We'll evaluate that now here going into January. And just a reminder, we also have a $5 million repurchase agreement out there with [indiscernible]. There's no maturity on that. And so that's something we also continue to evaluate in terms of best use of that, comparing it to on balance sheet growth we have been doing of late to drive that shareholder value.

And just to tack on to that, Jeff, you're not wrong. Capital has continued to build. We're above where we're comfortable with our capital levels. And we've been able to do that through strong earnings even though we've been growing at 10%. So we are accumulating a bit extra. So at some point, maybe we grow a little faster, that would be awesome. But 10% growth is a pretty good mark already as it is. But then as Brian said, yes, then at some point, you look at other capital options.

On the acquisition side, I think an ideal acquisition candidate for us would be something that would fit inside our private wealth business, some kind of money management business. Unfortunately, those are really rare, hard to find. And as we've -- when we've looked at those before, we've gotten very close. Those are typically owned by individuals, 1 or 2 people, and then you're sort of dealing with an emotional seller. And the one time I can tell you years ago, we were -- I mean, we were like on the precipice of this thing happening and then the guy couldn't sell his baby.

It just -- so you have emotional sellers harder to do deals in that space, I think, because of that. So other than that, is something that tucked into one of our niche areas where we have nice platforms built out and could add a little more scale. That would be a fine fit for us as well. But again, when we can do 10% organically, we're not going to overpay. We're not going to stretch on something that doesn't fit our credit standards, which is typically why those other businesses screen out when we do take a look at those. We're just -- as we've said in the past, we play in the top quartile in the credit spectrum of any of the businesses that we're in, any of the business lines or niches. And by mathematical reasoning, average is below that. So the typical one you see is going to be not going to fit into our credit standards. So that's why those typically fall by the wayside.

Next question will be from Nathan Race from Piper Sandler.

Going back to the margin discussion, Brian, just given the variability around the fees in lieu of interest, wondering if you have any thoughts around kind of just the adjusted margin outlook. I know you reiterated 3.60% to 3.65% on a reported basis, but if we strip that out, any thoughts on just kind of how that adjusted margin stabilizes in the future or perhaps expands?

Yes. I would say stability is the key there. And I would go off of our long-term average that we've been talking about 20 basis points. And so just backing into that, I could say 3.4% to 3.45% is going to be our adjusted margin range and expectations. So you can tell we're right around there right now, but have a little bit of room there still to continue to go after these nice deposit relationships. But again, the ability to lend that back out in those higher-yielding C&I areas is going to be key.

Understood. That's helpful. And I appreciate that you guys are still expecting 10% loan and deposit growth going forward. Just curious, when you look across your Wisconsin, Kansas City footprint, do you see -- and also the national verticals, do you see enough opportunities to generate that growth with the existing team? Are you guys looking at any markets or any kind of adjacent areas to your footprint where maybe you want to establish your presence or is kind of the existing landscape fertile ground enough to execute on that growth outlook?

Right. So when we look at our Southeast Wisconsin market and the Kansas City market, we don't have high market shares in those markets. So we think there is a really nice opportunity to grow market share and grow those markets for us. And then additionally, all of our niche C&I businesses are national. And we think we have a lot of runway in front of us there. So I think we're pretty optimistic right now in terms of being able to continue the growth for the foreseeable future.

And I would add something to that as well, Nate, we set our Board meeting this morning. The Board was asking us about it because it's like, "How long can you keep doing 10%?" And we'd say, "Well, we've been doing it, and we believe we can continue to do it if we can add talent." So that's part of -- because the first part is, is there a market opportunity, and Dave just outlined that there's lots of market opportunity and some of our other specialty businesses, there's lots of national opportunity in those. So then it's about talent. Do you have the right talent and enough talent.

And we -- since we started this last strategic plan, we've added 21 business development officers. So as long as we can keep adding that business development talent, we have the market -- markets have capacity. And so if we can keep attracting and retaining the talent, and that's where we really -- our culture is really important to us. It has people happy working for us. They don't leave. So we don't have a kind of a hole in the bucket as we're bringing new people in. So good performers like it here, and that also attracts talent from the outside because folks want to be on a winning team. And so that helps us to continue to grow that business development talent pool. So as long as we keep winning the talent game, we can continue to grow at this kind of a pace.

Got it. Makes sense. Really helpful. One last one, Brian, on expenses. Is the 4Q in terms of the fourth quarter run rate, is it similar to expect something that we saw here in 3Q and that would put you around 8% growth for this year. Is that kind of a decent proxy as you think about the expense growth trajectory into 2026?

Yes, it's a good place to start. We had our bonus accrual update here in Q3 because of the strong performance that brought in about $900,000 of additional expense, but that also means then a higher run rate to finish the year. And then we talked about a lot of open positions. So I think he maybe could back out a little bit, but it's a pretty good spot to start -- to that 8% growth rate relative to our 10% operating revenue targets, so.

Next question will be from Damon DelMonte from KBW.

Just looking for a little bit more color on the investment and wealth management area. If you look at the kind of the year-to-date revenues generated by that area, it's had a nice lift over 2024. Is that more of a function of adding new accounts and new customers? Or is there more market appreciation baked into those numbers?

So well, it's a combination of the 2, right? Obviously, markets have done very well, but we have a lot of focus on building new relationships and acquiring new relationships. So I would say it's a good mix there, but we've done a nice job adding relationships this year.

Okay. Great. And then you guys have mentioned about -- Cory, I think you mentioned about the talent hires, 21 business development officers since your last business plan. What has been your recipe for success for adding people? Is it from market disruption where people are getting displaced? Is it been just opportunistic relationship building with people in the markets that you kind of cross path with? Like what's kind of been the driver of the additional people?

Yes. I would say it's more of the latter relationships. The people who run our different -- our market presidents, people who run different business lines, we let them know that part of their job, they're supposed to be out prospecting for new clients, but they're also supposed to be prospecting for new bankers. And that should be -- they should be treating it the same way. They should be knowing in their market who the talented folks are. And you need to cultivate those relationships over long periods of time. And so they're working that all the time.

And like I said, when people see you winning and being successful and then if they get uncomfortable where they are because potentially they've gone through an acquisition and things have changed or whatever makes them not real aligned with the philosophy of the organization that they're with. If you're the one who's developed a relationship, just like a prospective client, we -- you might have heard us say before, we like to say we have foam fingers that say we're #2 because we want to be in the position to take over that relationship when somebody becomes disgruntled with the large bank that they're with and that typically happens. We want to be there, have the relationship and they move to us kind of no questions asked when they finally throw in the towel. Same thing with the talent that we want. We want to develop those relationships and work those.

And it also happens in the same way with some of the folks, the person who's fairly newly in charge of our asset-based lending group, been in the industry a long time, has a lot of good relationships. The guy who's running our SBA group. I mean their BDOs are people they've worked with in the past. So they're following those leaders that they've worked with in the past. And so that's primarily how we get the talent.

Got it. Okay. I appreciate that color. And then I guess just lastly, obviously, a very positive and continued positive outlook for loan growth. So is it fair to assume that kind of the overall borrower sentiment remains positive in the markets that you're in? Others have kind of talked about borrowers kind of being a little bit more reluctant waiting for rates to come down or more clarity on the prospects for their business. But it seems like you guys continue to just power through regardless of the broader sentiment. So just curious on your local sentiment.

Yes, I'd say it's pretty positive. I would say the -- if you took a sampling of our business clients, probably the -- or most common answer that you would get is that this year is their third best year ever. And the last 2 were the best ever. And so it's really good. Things are still really good, just not quite as good as they were the last 2 years. So people are positive. They've had to deal with questions about tariffs and different things that make life a little confusing. But I would say most of our clients are -- they're entrepreneurial. They're positive, optimistic people, otherwise, you wouldn't start a business because that's a tough endeavor. And they do kind of what we do for the most part. They just put their head down and say, "We're just going to keep winning and we're going to succeed." And so while there is some uncertainty, I don't think any of them are kind of going into a shell in any way, shape or form.

Next question will be from Brian Martin from Janney.

Just one question, Brian, just back to margin, just one thing. The funding pressure, a little bit of funding uptick you saw on the core margin, if you will. I guess are you beginning to see that stabilize in terms of -- it sounds as though you would given kind of the dynamics of holding the margin steady, but just kind of wondering how you're seeing the trends there on the funding side and what may be the driver of that this quarter?

Yes. I would say the driver of this quarter in particular is specific to some CD relationships we brought on at the end of Q2. That's really what drove a decent amount of that pricing pressure reported in Q3. I would say from what we're seeing in newer opportunities with now 2 rate cuts behind us, the pressures -- the premium we're seeing for new clients, new deposit acquisition is coming down a little bit. So we are seeing some relief there. It is -- for our highest rates for these ones we're really trying to track, we were over SOFR for a bit. Now we're at SOFR. We have had ones that are now below SOFR again for those new, new money relationships. So we're seeing better rates across the board for new money.

Got you. Okay. That's helpful. And then just in terms of -- just one question back to those open positions. I mean, the majority of those open positions are -- are they more operational or back office? Or are they more revenue producing in terms of where the talent is you're looking for today?

Yes. Brian, I think they're really across the board. I don't think there's a concentration in business development folks or other positions throughout the company.

Okay. All right. And just in terms of the specialty businesses, can you just talk about where maybe over the next 12 to 15 months, where is the greatest opportunity? Where are you seeing the best opportunity today to grow that book of business? And then it sounds as though the expectation would be that, that book in aggregate would outgrow the traditional book is how you're thinking about things today and that seems accurate.

Yes. I would say the places where we see the strongest pipelines right now and activity level, asset-based lending would be one of those. That kind of was slow for quite a while for us, and that's picked up. We've had more new deal activity there. Our accounts receivable finance business has strong pipelines and really good activity and floor plan, and that's been really consistent. Our floor plan business has been really strong and steady.

Okay. And in terms of credit risk, in those businesses, remind us where the greatest risk is there? Is there a concern out there as you grow these businesses a little bit quicker, especially given kind of the market conditions there or just the fears out there, I guess?

No, I don't think so in those business lines. We've -- any of those businesses that we've built, we've built with real specialists. I think one place banks can get into trouble is even like when we got into asset-based lending back in 1995, I mean, I knew what an asset-based deal was, and so did Jerry Smith, but we also knew we didn't know how to monitor them correctly. But we knew they needed to be monitored. So we brought in somebody at that time from Bank One's asset-based group. We built out the full team with a field examiner, collateral analysts, et cetera. So we've always done that. So the -- and again, we play in that kind of top quartile piece of each of those businesses. So what we've seen is there's less credit risk and credit costs in those businesses than even in our conventional book over time.

And a lot of the reason is while, some of those -- let's take asset-based lending compared to a conventional C&I loan, the asset-based loan, that company's balance sheet is going to be weaker. The earnings history is going to be sketchier, but we're all over the collateral. We're out there examining it. Before we go into the deal, we already know what -- at what price we think we could liquidate out of it if we had to liquidate the inventory. Whereas a conventional C&I deal where you may have the same kind of collateral receivables and inventory, you don't do that kind of monitoring on it.

And when things go south on one of those deals, suddenly, you don't have what you think you had in terms of collateral. It's just kind of how those end up turning out. And you don't have the real-time information like you do on asset-based lending or factoring where you've got daily information coming in. And so in the absence of fraud, if you act quickly, you should be able to get out of those deals whole, and that's our expectation on those kinds of business lines.

Got you. No, that's helpful. And just, I guess, in terms of just the SBA, I know Brian mentioned it, I guess bottom line is, if the shutdown persists, is it just your expectation would be that the business that would normally flow through this quarter will just fall into 1Q? And just until we see more clarity on that, that's kind of where it's at?

Right. I think to a certain extent, it would be pushed out depending upon when the government opens back up. But where we're really impacted is after we have a credit that goes through underwriting and is accepted -- approved and accepted by the client, that's when we have to go out and get the e-tran from the SBA. And that's what we can't do today. So we can talk with clients, we can structure deals, we can get deals approved. We just can't really start the closing process without that e-tran number. And then the other thing we can't do is sell a loan once it's closed and funded. And both of those 2 things will open up when the government opens up.

But the e-tran numbers, we anticipated the closing.

Right. We did anticipate the closing and we were able to get a few deals or a good chunk of deals kind of far enough along in our pipeline where we could get the e-tran numbers in anticipation of the government shutdown.

There are no further questions at this time. I will now turn the call over to Corey Chambas. Please continue.

Thank you for joining us today. We appreciate your time and interest in First Business Bank, and we look forward to sharing our progress next quarter once again. Again, appreciate it, and have a great weekend.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.