First Business Financial Services (NASDAQ:FBIZ) reported second-quarter 2026 earnings per share of $1.84, including a net $0.14-per-share benefit from two one-time items, as loan growth, margin expansion and fee income supported record pre-tax, pre-provision earnings.
CEO Dave Seiler said pre-tax, pre-provision earnings reached a record $19.8 million in the quarter and increased 15% in the first half of 2026. Excluding the one-time items, earnings per share rose 18% from the first quarter and 26% from the prior-year period, he said.
SBA Exit Intended to Improve Profitability
First Business ended its national SBA 7(a) lending activities at the end of May, though it will retain its SBA preferred lender status and continue to offer 7(a) and 504 loans to clients in its bank markets as needed.
Seiler said the company had invested for roughly a decade in expanding SBA talent and capabilities nationally but did not achieve the desired loan volume and profitability. He said the company concluded that industry standards for SBA underwriting and compliance did not align with First Business’ credit-quality 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,” Seiler said.
CFO Brian Spielmann said the former strategy involved selling 75% of SBA production and keeping 25% on the balance sheet. At June 30, the company moved all SBA loans previously held for sale onto its balance sheet. New SBA production is expected to be retained and serviced over the life of the loans.
The company has approximately $15 million of SBA loans in process that it expects to fund by year-end. Based on historical SBA spreads and the expected retention of those loans, Spielmann estimated that the company could generate about $140,000 in additional quarterly net interest income and $20,000 in quarterly servicing income by 2027.
Those gains would partly offset the loss of roughly $500,000 in average quarterly SBA gain-on-sale revenue. With quarterly salary and benefit savings of about $650,000 from eliminated positions, the company expects a net pre-tax income benefit of approximately $310,000 per quarter in 2027, or about $0.03 per share after tax. It also expects the change to improve its efficiency ratio by 30 to 50 basis points, all else equal.
Loan and Deposit Growth Continue
Loans grew at a 10% annualized rate during the second quarter, including the transfer of $23.7 million in SBA loans from held-for-sale to loans held for investment. Excluding that transfer, annualized loan growth was 7.2%.
Seiler said loan payoffs were unusually high, running about $50 million above the company’s quarterly average of the past two years. He attributed recent payoff activity primarily to client property sales, secondary-market refinancings and mergers and acquisitions involving commercial clients.
Conventional loan growth was broad across the company’s bank markets, with particular strength in Southeast Wisconsin and Kansas City. Multifamily and owner-occupied commercial real estate lending increased, while investor commercial real estate declined. Asset-based lending portfolio balances grew at a 19% annualized rate in the quarter and 48% annualized year to date.
For the first half, loans grew by $212 million, or 12.6% on an annualized basis including the SBA transfer. Management reiterated its goal of 10% annual loan growth for 2026 and said it expects a similar pace in the second half and into 2027.
Core deposits increased at a 12% annualized rate during the second quarter, following 18% annualized growth in the first quarter. Growth was led by the Kansas City market and the asset-based lending team. Management expects deposit growth to be approximately 10% on an annual basis.
Margin Expansion and Fee Income Support Results
Net interest margin increased 22 basis points sequentially to 3.78%. Spielmann noted that the first-quarter margin was affected by fewer accrual days, and on a comparable basis the margin rose 17 basis points from the first quarter.
The increase reflected the deployment of excess cash held at the Federal Reserve into loan growth, along with higher prepayment fees. Earning-asset yields rose 24 basis points, while the rate paid on average total bank funding increased 2 basis points.
Fees in lieu of interest contributed 37 basis points to net interest margin, compared with 26 basis points in the first quarter and a historical average of 20 basis points. Total fees in lieu of interest were $3.2 million, including $1.3 million in prepayment fees.
Management expects elevated prepayment activity to continue into the third quarter before slowing in the second half. The company maintained its full-year net interest margin target of 3.60% to 3.65%.
Fee income increased 18% year over year despite the absence of SBA gain-on-sale revenue. Private wealth generated record revenue, and the business added $508 million in assets under management and administration over the past year, approximately 70% of which represented new client dollars. Private wealth revenue rose $509,000, or nearly 14%, from a year earlier.
Income from limited partnership investments reached $796,000 in the second quarter and $1.1 million for the first half, compared with $1.2 million for all of 2025. The company said it expects returns from those investments to increase as the portfolio matures.
Expense, Tax and Capital Outlook
Operating noninterest expense declined $189,000 from the first quarter to $26.9 million. Excluding SBA severance costs and an impairment on historic tax credit investments, second-quarter expenses were largely in line with the prior quarter. The company expects the expense run rate to trend modestly lower through the remainder of 2026 as SBA-related personnel savings are realized, while it selectively reinvests in revenue-producing talent.
First Business reported operating leverage of 6.2% from the linked quarter and 6.4% from the prior-year quarter. Its first-half efficiency ratio was 59.31%, meeting its long-term target of less than 60%.
The second-quarter effective tax rate was 7.2%, or 15.9% excluding the deferred tax valuation allowance reversal. Management now expects a full-year 2026 effective tax rate of approximately 13% to 15%, followed by a normalized rate of about 15% to 17% in the second half of 2026 and in 2027.
The company said its common equity tier 1 ratio exceeded its 9.5% internal target at June 30, while its total capital ratio remained above its 12% internal target. Management said it continues to prioritize organic growth but may also consider dividends and its $5 million share repurchase authorization when growth opportunities do not fully use excess capital.
About First Business Financial Services (NASDAQ:FBIZ)
First Business Financial Services, Inc (NASDAQ:FBIZ) is a bank holding company headquartered in Madison, Wisconsin, offering a suite of commercial banking and financial services. Through its wholly owned subsidiary, First Business Bank, the company provides relationship-driven lending, deposit and treasury management solutions to small and mid-sized businesses, nonprofit organizations and high-net-worth individuals. Its core products include commercial real estate financing, equipment leasing, SBA-guaranteed lending, and cash management services.
In addition to lending and depository services, First Business Bank delivers investment advisory and wealth management through dedicated trust and private banking teams.
