Earnings Call Transcript - FBIZ Q1 2026

Operator, Operator

Good afternoon. Welcome to the First Business Financial Services First Quarter 2026 Earnings Conference Call. I would now like to turn the conference over to First Business Financial Services Inc. CEO, Corey Chambas. Please go ahead.

Corey Chambas, CEO

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, David Seiler; 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 four 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 David will discuss more now. David?

David Seiler, President & Chief Operating Officer

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. Corey is 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.

Brian Spillman, CFO

Well said, Dave, thanks. First quarter net interest margin increased 3 basis points to 3.56% and there are some noise items 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 3.61%, 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 Q1, 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 Q1. 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 Corey.

Corey Chambas, CEO

Thank you, Brian and David. David 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 David'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.

Operator, Operator

Thank you. The floor is now open for questions. Please follow the operator instructions to ask a question. Your first question comes from the line of Daniel Tamayo of Raymond James.

Daniel Tamayo, Analyst

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

David Seiler, President & Chief Operating Officer

Yes, good question. Our strategic plan is a five-year plan and we're a little over two years into it. We review all of these metrics every quarter or more often to evaluate whether they remain the right ones to focus on. For example, our efficiency ratio ticked up a little this quarter for reasons we've already discussed, so we expect it to return to our target over the balance of the year and in the upcoming quarters. At this point we still believe these are the right metrics to work on. We've identified five strategies in the plan, and teams of leaders are working on each one. We think these remain the right targets for us.

Daniel Tamayo, Analyst

All right. Good start, David.

David Seiler, President & Chief Operating Officer

I am not official yet, Danny.

Daniel Tamayo, Analyst

All right. Fair enough. And I think I understand what you guys are saying on the margin. I'm assuming this will be an annual thing. It's just the math of having fewer days in the first quarter. When modeling the margin, we should reduce it a bit in the first quarter going forward and then have it pop back up in the second quarter and remain in that targeted range, Brian?

Brian Spillman, CFO

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 funding 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 valid though in terms of the quarterly first quarter estimates that there's going to be that day basis impact for us all.

Daniel Tamayo, Analyst

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?

Brian Spillman, CFO

Yes.

Daniel Tamayo, Analyst

Okay. All right. I will step back. Appreciate it.

Operator, Operator

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

Jeff Rulis, Analyst

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?

Brian Spillman, CFO

Exactly, spot on.

Jeff Rulis, Analyst

Okay. While I have you, Brian, do you have the margin for the month of March, just to use as a jumping-off point?

Brian Spillman, CFO

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: the Q1 margin of 3.59%, sorry, 3.56%, is being impacted by that. So it's going to push us back into our range based on that March activity.

Jeff Rulis, Analyst

Okay. Fair enough. You were pretty clear about resuming back into that range, so I'll stick with that. Just was curious. Maybe one last question on growth. David, I think you alluded to geography, but do you have a breakout of the mix of that growth? Was it the mix of existing customers versus new customers? I think you mentioned it was about a 60-40 split last quarter, but I'm trying to get a sense of market share gains versus growth from existing customers.

Brian Spillman, CFO

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. One of the things you can look at that reinforces that is the growth in our service fee income. We've had very rapid growth in our service fee income, and you don't get that without adding new clients.

Jeff Rulis, Analyst

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

Brian Spillman, CFO

Thanks, Jeff. Thanks, Jeff.

Operator, Operator

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

Nathan Race, Analyst

Comments earlier. Congratulations, Corey, David. It's been great. I wanted to checking on just the fee income outlook, Brian, 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?

Brian Spillman, CFO

I can speak to the total broader fee income piece and then maybe David has a couple of comments on SBA. But the total fee income line, I think, is consistent with the prior messaging around 10% 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 2026. David?

David Seiler, President & Chief Operating Officer

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.

Nathan Race, Analyst

Okay. Got it. And David, I think you mentioned earlier, you're expecting some softer growth in the second 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 second quarter and then get back up to that kind of high single digit to low double-digit trajectory in the back half of the year?

David Seiler, President & Chief Operating Officer

Yes, I think that's probably reasonable for Q2, Nate. A little bit depends on payoffs, and some of those are in flux right now. So we can't predict them 100 percent, but I think that's a reasonable point, and we still expect to be at 10 percent for the year.

Nathan Race, Analyst

Okay. And then maybe one 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 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.

David Seiler, President & Chief Operating Officer

I can discuss the Southeast properties and our asset-based lending credit. Last quarter we described our plan to work these out over time, and we began with just over $3 million in payoffs with no losses in the past quarter. We are currently pursuing foreclosure on the remaining properties in that nonperforming portfolio, so we should not expect a resolution in Q2. A resolution is more likely in the back half of the year given how long proceedings take in Wisconsin. Regarding the asset-based lending credit, a resolution is most likely toward the end of the year. We have had no negative news; the matter is simply moving very slowly through the court system, and that's what we have been told to expect.

Nathan Race, Analyst

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

David Seiler, President & Chief Operating Officer

On the broader charge-off question, I would say for Q1 there was nothing unusual to report — a broad mix of charge-offs coming from SBA and C&I. The equipment finance portfolio improved from a charge-off perspective from Q4 to Q1, which is a good sign. We had about 25 basis points of charge-offs in the quarter, a little higher than we would expect; we tend to think around 20 basis points on average for the year. But it's nothing that's alarming to us by any means.

Corey Chambas, CEO

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.

Nathan Race, Analyst

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

Operator, Operator

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

Damon Del Monte, Analyst

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 David, I look forward to working with you in your new role. So congrats.

David Seiler, President & Chief Operating Officer

Thank you.

Damon Del Monte, Analyst

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?

Brian Spillman, CFO

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 reversal in Q4, so...

Damon Del Monte, Analyst

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?

Brian Spillman, CFO

Yes. That's all I think about it, Damon. I think the macro piece of this equation, particularly the geopolitical wildcard tied to Moody's, is the uncertainty. But all else equal, provisioning for growth off this reserve level with 20 basis points is appropriate. 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. As we discussed with Q2 growth coming back down, and given the uncertainty around the macro, no change is a reasonable place to be.

Damon Del Monte, Analyst

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

Operator, Operator

Your next question comes from the line of Brian Martin.

Brian Martin, Analyst

Just maybe can you talk about where you're optimistic going into the year and maybe areas that you're less optimistic about in terms of delivering the targeted growth this year?

Brian Spillman, CFO

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

Brian Martin, Analyst

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?

Brian Spillman, CFO

I don't think we'll have a lot more adds down there, Brian, but we could have another add. 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 add in Kansas City this year.

Brian Martin, Analyst

Got you. Okay. And then maybe just jumping to the fee income section. I appreciate the color you and Brian have already given. In terms of the lumpiness in this portfolio, do you still expect some lumpiness throughout the year? I know about the reclass and I'm trying to think about the quarterly movement or progression. Do you expect a little more consistency, or will it still be a bit lumpy as we go along?

Brian Spillman, CFO

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 and 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 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.

Brian Martin, Analyst

Yes. Okay. Okay. That covers it. Damon got the credit cards. Other than that, I'm good, and I have 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. David, it's been good to continue to know you and to continue working together going forward. So congratulations on everything, and thanks for taking the question.

Brian Spillman, CFO

Thanks, Brian. Thanks, Brian.

Operator, Operator

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

Corey Chambas, CEO

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.

Operator, Operator

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