First Business Financial Services Signals Confident Growth Path

First Business Financial Services ((FBIZ)) has held its Q4 earnings call. Read on for the main highlights of the call.

First Business Financial Services Projects Confidence After Strong Year Despite Isolated Credit Noise

The latest earnings call from First Business Financial Services struck a distinctly positive tone, with management emphasizing that 2025 delivered on — and in several areas exceeded — long-term strategic goals. Double-digit revenue and net interest income growth, a 14% increase in EPS, and a return on average tangible common equity above 15% framed the year as one of solid execution. While a single commercial real estate (CRE) downgrade, elevated loan payoffs, and some fee line volatility created short-term noise, management repeatedly characterized these as isolated or timing-related issues rather than signs of broader weakness, reinforcing a constructive outlook.

Strong Profitability and Shareholder Returns

First Business highlighted 2025 as a year of robust profitability that surpassed its own long-term targets. EPS rose 14% compared with 2024, beating the company’s 10% long-term earnings growth goal and extending a 10-year EPS compound annual growth rate of roughly 12%. Pretax, pre-provision earnings climbed nearly 15% year-over-year, underlining the strength of the underlying franchise before credit costs. Return on average tangible common equity topped 15% for the year, a level many peers strive for but do not consistently reach. Tangible book value per share also advanced 14% year-over-year, signaling that growth is not only showing up in the income statement but also building balance sheet value. Together, these metrics underline a story of sustained, high-quality earnings and capital accretion, which management presents as a key differentiator for shareholders.

Revenue and Net Interest Income Growth

Top-line performance remained a central theme, with management reiterating its focus on double-digit growth. Full-year net interest income increased 10%, driven by a mix of loan and deposit growth and disciplined pricing in a still-competitive rate environment. Overall operating revenue likewise rose 10%, allowing the company to meet its stated double-digit revenue growth target. This growth was achieved even as the rate cycle and deposit competition pressured many banks, suggesting that First Business is leveraging its niche lending and relationship-driven model to defend spreads and expand its revenue base.

Deposit and Balance Sheet Strength

The company underscored balance sheet resilience, particularly on the funding side. Core deposits jumped 12% in the fourth quarter, both on a linked-quarter and year-over-year basis, led by interest-bearing and money market accounts. This expansion in core funding supports the firm’s net interest margin and reduces reliance on higher-cost wholesale funding sources. On the asset side, loans grew $261 million, or 8%, year-over-year, and increased $39 million in the quarter, equating to 5% annualized growth. Management framed this as healthy, broad-based loan demand that, combined with strong deposits, positions the bank well for continued growth without compromising funding stability.

Loan Growth Outlook and Normalization Effects

While headline loan growth in 2025 appeared somewhat moderate, management attributed much of the softness to elevated loan payoffs rather than weak originations. Payoffs were roughly $60–$70 million above normal levels, holding back reported growth late in the year. Adjusting for this, management estimates full-year loan growth would have been closer to 11%, in line with its double-digit ambition. Pipelines across commercial real estate and commercial & industrial lending — especially in asset-based lending — are characterized as strong entering 2026. The message to investors: underlying demand and production remain solid, and reported growth should better reflect this once payoff levels normalize.

Fee Income and Business Diversification

First Business continued to emphasize the importance of diversified fee income, both as a buffer against interest rate swings and as a growth engine. Its Private Wealth business delivered a record $3.8 million in fee income, up 11% year-over-year, showing traction in higher-value advisory services. Service charges increased nearly 20% over the prior year, providing another durable fee stream. These steady gains help offset volatility in more variable fee lines and illustrate the company’s strategy of building multiple revenue levers beyond traditional spread income. Management pointed to this diversification as a key factor in smoothing earnings despite short-term noise in certain segments.

Operating Leverage and Expense Discipline

Cost management continues to be a bright spot. Operating expenses grew roughly 6.5% in 2025, well below the 10% increase in operating revenue, marking the fourth consecutive year of positive operating leverage. This helped improve efficiency, with the full-year efficiency ratio falling below 60%, a level often viewed as a benchmark for well-run commercial banks. The ability to grow faster than costs, even while investing in people and capabilities, is critical to sustaining double-digit earnings growth, and management clearly sees continued operating leverage as a core part of the long-term story.

Capital Management and Dividend Growth

The company’s strong earnings profile translated into growing capital resources and room to reward shareholders. Management reported that 2025 performance generated excess capital, enabling the Board to approve a 17% increase in the quarterly cash dividend. This move signals confidence in the sustainability of earnings and the balance sheet. The effective tax rate for the year came in at 16.8%, comfortably within the expected 16%–18% range, and provides additional clarity for investors modeling future net income. Taken together, the capital build and dividend increase support a narrative of prudent capital deployment and shareholder-friendly policies.

Net Interest Margin Resilience Amid One-Time Pressure

Despite some fourth-quarter compression, the company portrayed its net interest margin (NIM) as fundamentally resilient. Reported Q4 NIM declined to 3.53%, down 15 basis points from the prior quarter. However, management noted that roughly 10 basis points of this drop came from a one-time nonaccrual interest reversal related to a single borrower. Excluding that impact, Q4 NIM would have been 3.63%. For the full year, NIM dipped only 2 basis points, from 3.66% to 3.64%, suggesting that underlying spreads have held up reasonably well despite intense pricing pressure for deposits. Management’s commentary aimed to reassure investors that the fourth-quarter margin decline was more optical than structural.

Specialty Lending Rebuild and Margin Tailwinds

Looking ahead, the bank is actively shifting its lending mix to support both growth and profitability. Management highlighted plans to lean further into higher-yielding commercial and industrial and asset-based lending niches, which not only carry better loan yields but also typically attract lower-cost deposits. The asset-based lending pipeline, in particular, is expected to be a meaningful contributor to both loan growth and margin expansion. These specialty areas are designed to differentiate First Business from more commoditized lenders, broaden its client base, and provide structural tailwinds to NIM over time.

Isolated CRE Nonaccrual and Interest Reversal

The primary credit headline in the quarter came from a concentrated CRE issue. The company downgraded $20.4 million of CRE loans tied to a single Wisconsin borrower, with total outstanding exposure of $29.7 million. While the loans were moved to nonaccrual status, management emphasized that no specific reserve was required given current appraised collateral values. The move did, however, trigger an $892,000 reversal of previously accrued interest, which directly reduced fourth-quarter net interest income and compressed NIM by about 10 basis points. Management characterized this as an isolated, contained situation rather than a sign of broader CRE stress, but it does highlight how single-name risk can impact quarter-to-quarter results.

Elevated Loan Payoffs and Timing Effects on Growth

Beyond the overall loan growth outlook, management spent time explaining how unusually high payoff activity affected reported numbers. Payoffs in 2025 were nearly $70 million higher than in 2024 and roughly $60–$70 million above what management considers a normal level. This dynamic muted the headline growth rate, particularly late in the year, even as new originations remained healthy. For investors, the key takeaway is that the growth engine appears intact; the timing of payoffs versus new fundings created a drag that management believes should ease, supporting more visible loan expansion going forward.

Partnership and Other Income Volatility

The call also addressed variability in partnership-related income and other noninterest lines. A change in accounting classification shifted about $904,000 from noninterest expense to other noninterest income, effectively netting certain partnership costs against revenue. Stripping out this reclassification, income from partnership investments actually declined by $383,000 to $477,000 in the fourth quarter, underscoring the inherent volatility of that business. Management acknowledged this variability but suggested that diversified fee streams elsewhere help absorb such swings, reinforcing the importance of not over-weighting any single fee line in the overall earnings picture.

Margin Pressure and Q4 NIM Compression

Quarterly results also reflected the reality that even well-managed banks are not immune to margin pressure. Net interest margin fell 15 basis points in Q4 to 3.53%, with roughly two-thirds of the move tied to the nonaccrual interest reversal and the remainder reflecting broader pressures. The full-year NIM decline of just 2 basis points to 3.64% from 3.66% suggests underlying stability, but the fourth-quarter dip highlights the sensitivity of NIM to one-off credit events. Management’s message to investors was that these pressures are manageable and largely episodic, not indicative of an underlying erosion in pricing discipline or funding costs.

Credit Costs and Reduced Equipment Finance Exposure

Credit quality remained generally solid, though the company did report higher net charge-offs in the quarter. Net charge-offs totaled $2.5 million in Q4, largely tied to previously reserved small-ticket equipment finance loans in the transportation sector. Importantly, management has been actively shrinking this higher-risk sub-portfolio, reducing the transportation exposure from around $61 million to $21 million. This run-off signals a deliberate move away from a more volatile, lower-return niche in favor of more strategic segments, even at the cost of some near-term charge-offs.

Legal and ABL Credit Uncertainty

One area of continued uncertainty is a specific asset-based lending credit currently working its way through the legal system. The case, which has been in court since 2023, now has a court date scheduled for later in 2026, extending the timeline for resolution. While management did not indicate that this exposure poses a systemic risk, the prolonged legal process introduces ongoing uncertainty and potentially uneven reserve or recovery outcomes. Investors will likely continue to monitor this situation as part of the broader assessment of ABL portfolio risk.

Competitive Deposit Pricing and Rising Compensation Costs

Management acknowledged that the operating environment remains challenging on costs. Deposit pricing competition, while modestly easing, is still intense as banks vie for sticky core funding. At the same time, the company expects compensation expenses to increase in 2026 due to both planned hiring and higher benefit costs. While management still targets positive operating leverage, these cost pressures mean the revenue growth plan must be executed effectively to protect margins and efficiency. The commentary underscores that even with solid fundamentals, the bank is not insulated from industry-wide cost and pricing dynamics.

External Events and Variable Fee Lines

The quarter’s fee performance also reflected the impact of external factors and prior one-off items. Lower SBA gains in the fourth quarter were tied to disruptions from the government shutdown, while swap-related and loan-related fee income saw typical volatility. Management also reminded investors that certain prior-period items — such as a sizable accounts receivable finance exit fee and a separate insurance-related gain — were nonrecurring, making year-over-year comparisons noisy. The net message was that while fee income overall is trending higher, individual categories can be choppy from quarter to quarter due to factors largely outside the company’s control.

Forward-Looking Guidance and Growth Outlook

Looking ahead, management reiterated a confident outlook built around sustained double-digit growth and stable margins. The company continues to target 10% annual growth in loans, deposits, revenue, and net interest income, underpinned by strong pipelines and core deposit momentum. Net interest margin is expected to remain in a range of 3.60%–3.65%, broadly consistent with recent levels after adjusting for one-time items. Core deposits, which grew 12% in the latest quarter, are expected to continue expanding at a double-digit pace, supporting balance sheet stability and funding costs. Management also aims to maintain positive operating leverage, with fee income guided to grow around 10% and the effective tax rate expected to stay in the 16%–18% band. Against this backdrop, the company is targeting continued double-digit top-line growth, a return on tangible common equity above 15%, and ongoing capital returns, including the recently approved 17% dividend increase.

The call ultimately painted a picture of a bank executing well on its growth plan while managing through isolated credit events and normal market volatility. Strong profitability, disciplined expense control, and robust deposit growth provided a sturdy foundation, even as elevated payoffs, a single CRE downgrade, and fee noise trimmed some headline metrics. For investors, the key takeaways are that First Business Financial Services remains on track with its long-term strategy, is committed to delivering double-digit growth and attractive returns, and appears confident in its ability to navigate the competitive and macroeconomic challenges that lie ahead.