FBIZ — First Business Financial Services, Inc.

Summary of First Business Financial Services (FBIZ) Q4 2025 Earnings Call

1. Key Financial Results and Metrics

• Earnings Growth: EPS increased by 14% year-over-year, surpassing the long-term target of 10%. The 2025 EPS growth reflects a compound annual growth rate of 12% over the past decade.
• Profitability: Pretax pre-provision earnings rose nearly 15% compared to 2024, with a return on average tangible common equity exceeding 15% for the year.
• Tangible Book Value: Increased by 14% year-over-year.
• Net Interest Margin: Declined by 15 basis points to 3.53%, attributed to a nonaccrual interest reversal. The adjusted margin would have been 3.63%.
• Loan and Deposit Growth: Loans grew by $39 million (5% annualized) in Q4 and $261 million (8%) year-over-year. Core deposits increased by 12% from both linked and prior year quarters.

2. Strategic Updates and Business Highlights

• Private Wealth Business: Achieved record fee income of $3.8 million, up 11% year-over-year, contributing to diversified revenue streams.
• Operational Efficiency: Positive operating leverage was maintained for the fourth consecutive year, with operating revenue growth of 10% and expense growth of 6.5%.
• Talent Acquisition: New leadership in key markets (Kansas City, Northeast Wisconsin) has strengthened sales efforts and contributed to loan growth.
• Focus on C&I Loans: The bank is shifting its loan mix towards higher-yielding commercial and industrial (C&I) loans.

3. Forward Guidance and Outlook

• 2026 Expectations: The bank anticipates a rebound in loan growth to double-digit rates, driven by strong pipelines and favorable economic conditions. Core deposit growth is also expected to continue at double-digit rates.
• Fee Income Growth: Aiming for 10% growth in overall fee income, with higher growth anticipated in the SBIC segment due to recent investments.
• Net Interest Margin Guidance: Target range remains at 3.60% to 3.65%.

4. Bad News, Challenges, or Points of Concern

• Credit Quality Issue: A $20.4 million downgrade in commercial real estate (CRE) loans related to a single borrower, leading to increased nonperforming assets. However, the bank maintains that this is an isolated incident with adequate collateral coverage.
• Higher Payoff Activity: Elevated CRE payoff activity in 2025 exceeded previous levels, impacting loan growth. Total payoffs in 2025 were approximately $70 million higher than average.
• Competitive Deposit Pricing: While deposit pricing pressure has eased, competition remains fierce, impacting the cost of acquiring new deposits.

5. Notable Q&A Insights

• Credit Quality Clarification: Management emphasized that the charge-offs in Q4 were primarily from the equipment finance portfolio, not the downgraded CRE loans.
• Pipeline Strength: The bank's loan pipeline is robust, particularly in asset-based lending and C&I, which are expected to support margin stability.
• M&A Strategy: Management expressed a preference for organic growth over acquisitions, citing the uniqueness of their business model and the dilution risk associated with M&A.
• Resolution Timeline for Credit Issues: Management anticipates that while the resolution of the isolated credit issue may take time, progress could be made throughout the year.

This summary encapsulates the key points from the earnings call, providing a balanced view of First Business Financial Services' performance, strategic direction, and challenges faced.