First Business Financial Services, Inc. Q4 FY2025 Earnings Call

Good afternoon. Welcome to the First Business Financial Services Fourth Quarter 2025 Earnings Conference Call. 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 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 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 fee income. 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 grew 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 a 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.

Thank you, Corey. 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 two or more ways out of a 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 consist of four 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 that continued 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 can be highly variable and decline 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 by 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 to 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.

Thanks, Dave. Fourth quarter net interest margin declined by 15 basis points to 3.53%, reflecting 10 basis points of compression from the 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 or 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 change of note during the quarter. We have historically recorded revenue earned from our equity 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 these investments to net against the related revenue and other fee income. This now presents the net 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 investments. 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 2026 with the expectation of 10% growth for the full year. Recall also that our third quarter results included $770,000 in nonrecurring fee income items. These include a $537,000 fee related to an exit of an accounts 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 401(k) 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 achieving the annual positive operating leverage. That is annual expense growth at some level modestly below our targeted 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 investment in 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 boosts 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 shareholders well. I want to thank you for taking time to join us today. We're happy to take your questions now.

And the first question comes from Daniel Tamayo of Raymond James.

Maybe just starting on the commercial real estate relationship that led to the increase in non-performing assets. I appreciate the details you provided in the prepared remarks. However, I would like to explore further regarding the timing of the appraisal you mentioned. When was that conducted? Also, do you have the current loan-to-value ratio and service coverage for the relationship as a whole?

Okay. A couple of questions in there. Let me see how much I can address for you, Danny. Most of the appraisals we just received at the end of the year, with a couple being a bit older. It's mainly land for development, as Dave mentioned. Those are the appraisals we have that are particularly significant in size. This pertains to seven properties, for which we have recent appraisals on the larger sites. Regarding your question about the loan-to-value, all the properties are cross-collateralized, resulting in an overall loan-to-value of 72% across those seven properties. I don't have a cash flow at the moment since a significant portion is land—approximately two-thirds to three-quarters of it—as there are a few already developed properties, mainly for multifamily use, along with a couple of other multifamily properties included.

As it pertains to credit cost and expectations for the upcoming year, your performance has been strong. There were some charge-offs associated with this loan in the fourth quarter. However, how should we approach the necessary adjustments now regarding charge-offs and their impact on non-performing loans as we progress through the year?

Sure. Just to clarify, the charge-offs we reported for the quarter were not associated with this. Based on the appraisals, we didn't need to set aside any reserves for this. So there were no specific reserves or charge-offs related to it. The charge-offs we experienced for the quarter and the year were mostly linked to the small ticket equipment finance sector, particularly the transportation portfolio we have been managing. Many of those were already accounted for. The methodology we use to evaluate this small ticket portfolio is time-based on delinquency. Charge-offs in that portfolio are reserved in advance as they become overdue, and as time progresses, we proceed to charge them off. Therefore, all the charge-offs this quarter came from that sector. Currently, there are no credit costs associated with this. We believe we're in a good position based on the appraisals we have. Since it involves real estate, it does require some time to resolve, but the process is quite straightforward. We are still exploring multiple options with the borrower for this situation. Ultimately, if the real estate aspects do not pan out, there’s a foreclosure process that, while it takes time, is also quite straightforward.

Could you clarify your guidance on fee income, Brian? You mentioned a 10% growth for overall fees. Are we excluding the $537,000 reclass and the $234,000 BOLI claim, and then calculating growth from that adjusted number, possibly by annualizing it or comparing fourth quarter to fourth quarter? Is that the correct way to approach it?

And when you're excluding those two items, you're talking about full year, right? So full year '25, excluding those two items and that 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 much more meaningful?

Correct.

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

Maybe just to clear on the last one. So like a $33 million base, is that fair on fee income?

For '26?

The base to grow off of 10%.

That's a good start for fee income.

Got it. 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 that 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 a good point. We might observe some smaller successes. It's not a complete recovery, but we could see sales and other factors that reduce the NPAs over the year.

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.

Could you remind us of the balance in equipment finance at the year-end, what it was the prior year, and your expectations for whether you plan to keep that stable or continue to reduce it?

Right. So that's the transportation segment of that equipment finance portfolio. I believe we were 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 million. 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 this far are much more likely to make it going forward.

Got you. And one 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, every 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 significant progress because some of these goals, like the employee engagement score and our Net Promoter Score, have always been priorities. However, we also have longer-term goals, such as achieving the ROE target by 2028 and reaching our efficiency ratio goal. We reached our ROE goal of over 15% in 2024 and 2025, and we are below 60% on the efficiency ratio for 2025. Now, looking ahead, we don't plan to change those targets, but since we've achieved our ROE goal, we aim to maintain it. If we stay around that level over the next three years, we would consider that a success. For the efficiency ratio, it's similar to a golf handicap; we want to keep improving it. Improving becomes more challenging as you lower the ratio, but we expect to make ongoing improvements. We won't change our goal of getting the efficiency ratio below 60% by 2028, but we intend to focus on making annual improvements from this point forward. Our approach differs from traditional banks, as we prioritize operating leverage. This year, we saw strong positive operating leverage, with expenses growing significantly slower than revenue. We intend to maintain positive operating leverage each year, which is crucial for our goal setting and budgeting, as well as for evaluating our various business units. We expect to continue making progress on the efficiency ratio.

Next question comes from Nathan Race at Piper Sandler.

Brian, 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 could 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.

Going into Q1 for this year. Yes, So I mean, we're really seeing right now our pipelines across 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 mix, but I can tell you that our asset-based lending pipeline is particularly good, and those are higher-margin deals.

And so I would just add to that with the comment on ABL with our 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 that mix that we're seeing in the pipelines, 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, but we feel like we have the ability to maintain that.

Okay. Great. Really helpful. And then I'd 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 more kind of rational deposit pricing competition, particularly as some of the larger competitors in Wisconsin are expanding via M&A 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.

Okay. Great. Maybe one last one 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 zone 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 had to give you a one word answer, I'd say no, but I'll elaborate. Our model is quite unique, and there aren’t many companies like us. We don’t place value on branch networks, while most others do. This presents a challenge. Furthermore, although it may go against the industry trend in mergers and acquisitions, we believe that the best way to enhance value for our current shareholders is through organic growth. This approach prevents dilution by not issuing shares to acquire someone else's franchise, which implies that you might perceive their franchise as less valuable than yours if you're the acquirer. However, in doing so, you are still giving their shareholders your valuable shares. Therefore, we strongly advocate for organic growth as the most effective means to create value for our existing shareholders.

The next question comes from Damon DelMonte at KBW.

First question, I just wanted to, Brian, clarify on the comments on the margin. I think you said 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% 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 the 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've reversed. So from that resetting, you're going to have a higher run rate closer to 3.63% right away in Q1. And then from there, the strong pipelines predominantly in C&I, I mentioned asset-based lending 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.

Got it. Okay. That's helpful. 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 a 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.

Got it. Okay. Great. 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 with 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, our goal is to achieve 10% growth over the course of the year, specifically over 12 months. We base this on the pipelines we are observing. Additionally, we are considering the potential for rate cuts, although that likelihood seems to be diminishing. We also believe that the new tax policy could encourage more investment from our clients and generate loan opportunities, especially in areas like equipment finance.

And I would add to that, Damon. If you look back at our compound annual growth rate for loans and lease growth from 2020 to 2025, it's 10%. We have achieved that. There has been some softness recently, but I remember a time about ten years ago when I made excuses for slow loan growth, attributing it to economic factors. Over time, I realized it was mainly due to some of our teams not being as strong at that moment. For us, it's about our people and our teams. If we have the right teams in place, we will achieve our 10%. I'm very confident about this, and currently, we feel optimistic. We mentioned ABL and how we've rebuilt that area. We have a new leader who has assembled a business development team twice the size of the previous one. In the Northeast and Kansas City markets, we saw impressive growth in the fourth quarter, potentially the best growth from these two smaller bank markets ever. Moreover, our Madison bank operates smoothly, and our Milwaukee area bank is similar. Now that we have new leaders in Kansas City and the Northeast, they have been working on rebuilding their teams over the past 18 months. Since we are in the people business, the best team wins, and we believe we have the strongest team we've ever assembled. This gives me confidence that we can maintain that 10% growth pace.

Yes. I would like to add that this is not an issue of new business volume for us. Instead, it was higher than usual payoff levels, especially in the second half of the year, that affected the growth number you mentioned.

The next question comes from Brian Martin at Janney.

I think it was Corey who mentioned it last, but I couldn't hear. Sorry about that. Or maybe it was Dave. Regarding the payoffs versus production this quarter, can you provide some context on what the payoffs and production will look like throughout 2025? Additionally, how do you feel about the decrease in payoffs as you move into 2026? It seemed like that was a bigger concern. I understand they're inconsistent, but any insights you could share would be appreciated.

Sure. Starting from the payoff perspective, we believe our payoffs are around $70 million higher than our average level over the past eight quarters. Out of that, $60 million occurred in the last two quarters of the year. When we factor in that $60 million to the $70 million, we find ourselves with an annualized growth rate of between 10% and 11%, which aligns more closely with our target. Many of these payoffs were from multifamily properties entering the secondary market, which tend to be larger and less frequent.

In response to Brian's comment regarding Dave's point about the secondary market, there appears to be some activity in commercial real estate. Consider deals completed five years ago with a five-year note. If we expect to receive payouts on the commercial real estate loans when moving to the secondary market, this will occur at the end of the term since there are prepayment options or swaps that would lead to a delay until that term concludes. Conversely, other banks have commercial real estate loans from five years ago that are maturing now. We are currently evaluating these opportunities, which is part of the pipeline Dave mentioned earlier. A key advantage of these commercial real estate deals is they are fully funded, unlike construction loans that can take 18 months to two years to fully finance. We anticipate some opportunities that may help mitigate penalties, depending on the quarter that you receive payoffs and the timing of new deals we can secure.

Got you. Were the payoffs $60 million to $70 million on an annual basis? Was it that much higher? Is that correct?

Right. We think we had an extra $60 million to $70 million of payoffs above what we consider normal payoff levels in this period.

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

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

Yes. Understood. Okay. Could you provide some comments on the specialty businesses, particularly regarding growth in the C&I sector throughout 2025? How significant was that to overall growth? Additionally, you've mentioned ABL; could you clarify the current percentage and your expectations for its trend moving forward?

We are relatively stable in those niche areas for 2024 compared to the overall balance sheet. We anticipate some improvement because our current level is lower than it was previously. We have seen solid growth in other segments that were not part of the mix in recent years, although that growth has been somewhat slow. In the past two years, asset-based lending (ABL) has lagged, and accounts receivable finance has experienced some payoffs and has been slightly down, resulting in slower growth than the average balance sheet. We expect that to start picking up. Our Floorplan Finance business has shown consistent growth and has performed well, and we believe it will continue to do so. The upcoming growth is expected to come from increased activity and strong pipelines in ABL, along with the booking of deals and business development opportunities. We also anticipate that the accounts receivable finance business will grow as we move forward. It's worth noting that these two business lines tend to perform countercyclically, so they might benefit from economic changes. Together with the SBA, we hope to see a larger contribution from these areas. We aim for that percentage to increase, as it has previously been as high as 25% of the total portfolio, and ideally, we want to return to that level.

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 just 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. At the end of the year, we're around 23% in the specialty niches, and our goal has been 25%. A couple of years ago, we exceeded that goal, and now we aim to return there quickly. This growth contributes positively to our margins, which we hope will continue to improve. Ideally, we would like to increase that percentage to 30% over time, which would be very beneficial for us.

Okay. Regarding fee income, could you share where you expect the most potential growth? Additionally, could you provide further details on the SBIC revenues and how they compare from 2025 to potential growth in 2026?

So I'd say the two areas that we probably look at first are 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 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 SBIC piece just because we've been investing. So there's a J curve on those businesses, those funds as they ramp up. And so we've been in 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.

Got you. Okay. And then just one last question regarding credit quality that you mentioned earlier, specifically about the one credit this quarter. There’s another credit that’s been taking some time to resolve. Can you update us on its status? It seems like there might be potential improvement with the one from this quarter based on its size, but what about the other credit? Are we looking at a resolution in the near term, or is that still some time away?

Right. That's the asset-based lending credit we have, which has been in place since 2023. It's currently in the court system, and things can change at any moment. However, the court date is scheduled for later in 2026, so we may be dealing with this for a while. We're being informed that this timeline is not particularly unusual for that state's court system, so unfortunately, the process is taking much longer than expected.

We have no further questions. I will turn the call back over to Corey Chambas 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.