First Business Bank's Rate-Hike Windfall Is Already Spending Itself

First Business Bank's Rate-Hike Windfall Is Already Spending Itself

First Business Financial Services did not have a merely good third quarter — it had a structurally loud one. Record pre-tax, pre-provision and bottom-line earnings. EPS up 15% year over year and 20% year-to-date. A 3.80% net interest margin, twelve basis points better than a year ago. Total loans up 10% annualized for a twentieth consecutive quarter. The pitch from CEO Dave Seiler was consistency: “We are a focused business bank executing at a high level, growing the right way” — Dave Seiler, CEO · 2026-10-30.

The interesting part is not the record. It is that almost everything in this report is a story about a number that is about to go down, and management knows it well enough to pre-announce the descent.

The regime flipped, and the tape already knows it

For two years this bank's margin narrative was built for a cutting cycle. In the October 2025 Q&A, CFO Brian Spielmann was asked how funding and loan betas would behave as we get rate cuts and answered that the two sides of the balance sheet had historically moved together, which was the whole basis for the 3.60%–3.65% long-term target (“Our betas on both sides of the balance sheet have historically been pretty consistent” — Brian Spielmann, Chief Financial Officer · 2025-10-31). A year later the question is the mirror image. Spielmann now describes the margin outlook in terms of “one or two days of the first rate hike, and with expectations of another hike in December” — Brian Spielmann, CFO · 2026-10-30 — a temporary benefit from the short end that will be given back through core funding growth.

That is a genuine regime change, and it is not company-specific: Fed rate hike is running as the second-strongest theme in the entire market keyword set this quarter. It shows up in the reported-today cohort too — FISI referenced the latest Fed hike in September, BANC and KB and AVBH all fielded rate hike questions, and deposit-repricing language is everywhere. What is company-specific is how much of First Business's current margin is a windfall rather than a spread. Fees in lieu of interest, mostly prepayment and asset-based-lending fees, contributed 31 basis points versus a 25-basis-point norm. Spielmann did the arithmetic out loud: “if you kind of use 25 instead of 31, that brings you down to 374” — Brian Spielmann, CFO · 2026-10-30. So the reported 380 is really a ~374 core, and the fourth quarter is guided lower from there on both the fee normalization and the funding side.

What management stopped saying

The most revealing thing in this quarter's keyword set is what vanished. Last quarter's top two company keywords were prepayment fees and fees in lieu of interest; the quarter before that was dominated by the exit from the out-of-footprint SBA loan business — loan sales, severance costs, eliminated gain-on-sale revenue. None of those appear in the current top thirty. The SBA divestiture is now fully baked into run rates (management confirmed as much when Jeff Rulis pressed on it), and the prepayment tailwind shrank $468,000 sequentially to $2.8 million.

What replaced them is the durable stuff, and it is genuinely more attractive: core deposits up $101 million, or 14% annualized, outpacing loan growth; non-interest-bearing balances up $57 million; core deposits at 76.7% of total funding against a >75% target. Treasury management fee income up 15.9% year-to-date is the tell that these are real operating accounts and not rate-shopped money. The private wealth engine — roughly half of quarterly fee income, $4.2 billion in AUM and administration, up 11% year-to-date — is the capital-light annuity that offsets the lumpy stuff. Balance-sheet momentum is visible in the long-run data: deposits reached $3.6 billion, up 9% year over year on a nine-year run of +128%.

Two credits that keep sliding right

The one place the consistency narrative frays is credit. Non-performing assets rose $2.2 million, driven by an additional $5.7 million on a Southeast Wisconsin multifamily relationship that now totals $22.7 million non-performing plus $3.3 million performing. The land parcels foreclosure timeline moved out of the fourth quarter and into the first quarter of 2027; the $6 million asset-based lending credit, in litigation since 2023, has a court date also pushed to 2027.

With respect to our two largest non-performing relationships, both are actively being worked through, but we do not expect resolution on either of these in 2026.

To be fair to management, this is a calendar slip, not a deterioration — and the commentary on the land itself is unusually candid, noting that land deals normally go bad when there is no demand for land, and that this is not what they are seeing. Several parties have expressed interest. But the phrase no resolution in 2026 is the third consecutive call in which full recovery has been deferred, and the allowance at 1.06% of loans is the thing to watch if it becomes a fourth.

Buying back stock at the top of a ten-year range

Here is the tension worth carrying away. First Business repurchased 12,000 shares for about $835,000 in the quarter, then another 29,058 shares through October 23rd — 41,058 shares for $2.9 million at roughly $69.70, consuming over half of a $5 million authorization. Management's stated rule is repurchasing “when our stock trades below our assessment of its long-term value” — Brian Spielmann, CFO · 2026-10-30. Yet the stock is up 19.8% in ninety days and trades at 1.4x book, within 4% of its 2015 peak valuation and far above the 0.6x–1.0x troughs of 2020-2023. On earnings it is cheaper — 9.5x, near the low end of its own history — so both sides can be argued, and that is exactly the debate.

None of this is a broken story. It is a bank whose every operating metric went the right way in a quarter when the rate backdrop finally turned in its favour, offset by a margin that management is publicly talking down, a pipeline Seiler admits is “a little bit softer” — Dave Seiler, CEO · 2026-10-30 entering the fourth quarter, and a pair of legacy credits that will not clear the books this year. The 10% loan growth target held for 2026 and 2027; the compounding is real. The stock, however, has already been paid for it.