Executive Summary / Key Takeaways

• First Business Financial Services (FBIZ) demonstrates a compelling investment thesis rooted in its specialized commercial banking model, targeting small to medium-sized businesses and high-net-worth individuals, which consistently drives double-digit growth and superior shareholder returns.
• The company's strategic focus on niche C&I lending (Asset-Based Lending, Accounts Receivable Financing, Floorplan Financing) and Private Wealth Management provides revenue diversification and higher-yielding assets, contributing to a robust net interest margin and strong fee income.
• FBIZ's commitment to operational efficiency, driven by continuous investment in technology and process improvements, has resulted in sustained positive operating leverage and an improving efficiency ratio, nearing its long-term target.
• Recent financial performance highlights include a 16% year-over-year growth in tangible book value per share, a 1.23% year-to-date return on average assets, and a 15% return on average tangible common equity for the nine months ended September 30, 2025.
• Management's guidance points to continued 10% annual revenue growth, a stable net interest margin between 3.60% and 3.65%, and an effective tax rate of 16% to 18%, supported by disciplined capital deployment and a strong credit profile.

A Specialized Approach in a Dynamic Banking Landscape

First Business Financial Services, Inc. (FBIZ), founded in 1909 and headquartered in Madison, Wisconsin, has cultivated a distinct position within the regional banking sector. Operating primarily through its wholly-owned subsidiary, First Business Bank (FBB), the company eschews a traditional retail branch network, instead focusing intently on serving small and medium-sized businesses, business owners, executives, professionals, and high-net-worth individuals across Wisconsin and the greater Kansas City metropolitan area. This specialized, relationship-driven model, emphasizing financial expertise and efficient, centralized administration, forms the bedrock of its long-standing strategy.

The company's historical journey underscores its adaptive and growth-oriented mindset. A pivotal moment occurred around 1995 with its entry into asset-based lending, diversifying its offerings and laying the groundwork for its current suite of niche commercial and industrial (C&I) products. More recently, FBIZ has strategically refined its operations, including a significant move in the first quarter of 2023 to cease new lending to the transportation sector within its equipment finance portfolio, allowing this segment to run off. This decision was a targeted adjustment to its risk appetite, demonstrating a proactive approach to portfolio management. Such strategic shifts, coupled with continuous investment in talent and technology, have enabled FBIZ to consistently pursue its "5-year strategic plan" (2024-2028), which targets double-digit annual growth and superior shareholder returns.

Technological Acuity Driving Efficiency and Client Experience

While FBIZ does not boast a singular, proprietary product technology akin to a specialized manufacturing firm, its technological differentiation lies in its strategic application of technology to enhance operational efficiency, improve the client experience, and support growth initiatives. The company consistently invests in "innovative technology to support growth initiatives, enhance productivity, and improve the client experience." This commitment is evident in its financial reporting, with computer software expense increasing by 11% to $5.08 million for the nine months ended September 30, 2025, compared to the same period in 2024.

These investments translate into tangible benefits. The company's operating model is "predicated on deep client relationships, financial expertise, and an efficient, centralized administration function delivering best in class client satisfaction." Technology and process improvements are integral to its specialized lending businesses, such as asset-based lending and accounts receivable financing, which are designed to perform well even during economic downturns. The "so what" for investors is clear: these technological enhancements contribute directly to FBIZ's competitive moat by fostering a highly efficient operating structure. This efficiency is a key driver of its "positive operating leverage" and its improving efficiency ratio, which reached 57.40% for the three months ended September 30, 2025, compared to 59.40% in the prior year period. For the full year 2024, the efficiency ratio was 60.61%, nearing its long-term target of less than 60% by 2028. This continuous improvement in efficiency, fueled by technology, underpins the company's ability to generate strong financial performance and shareholder value.

Competitive Landscape and Strategic Positioning

FBIZ operates in a competitive regional banking environment, vying with larger regional players like Associated Banc-Corp (ASB), Wintrust Financial Corporation (WTFC), Huntington Bancshares Incorporated (HBAN), and Old National Bancshares (ONB). While these competitors offer similar commercial banking, wealth management, and lending services, FBIZ distinguishes itself through its specialized focus and relationship-centric model.

FBIZ's strength lies in its personalized services for small to medium-sized businesses and high-net-worth individuals, which often leads to deeper client relationships and higher customer loyalty compared to the broader, more diversified approaches of some larger rivals. For instance, FBIZ's emphasis on bespoke services for executives and professionals potentially offers greater efficiency in client interactions than ASB's broader community banking approach. Similarly, against HBAN's technology-driven, scalable model, FBIZ's personalized service and historical expertise appeal to clients who value human expertise over digital speed for complex financial needs.

The company's niche C&I lending segments, including asset-based lending, accounts receivable financing, and floorplan financing, provide higher-yielding assets and are often countercyclical, offering a strategic advantage. These specialized areas allow FBIZ to maintain competitive pricing for deposits while still achieving attractive spreads on its loans. This contrasts with the more expansive growth strategies of WTFC, which often relies on acquisitions, or HBAN's focus on digital initiatives and national expansion. While FBIZ may not lead in sheer scale or broad market share, its focused expertise and strong regional relationships position it as a formidable competitor in its chosen segments.

Robust Financial Performance and Growth Trajectory

FBIZ has consistently demonstrated strong financial performance, reflecting the effectiveness of its specialized strategy and operational discipline. For the nine months ended September 30, 2025, net income available to common shareholders totaled $36.30 million, or diluted earnings per share of $4.37, a significant increase from $29.17 million, or $3.50 per share, in the same period of 2024. This robust profitability is further highlighted by a year-to-date return on average assets (ROAA) of 1.23% and a return on average tangible common equity (ROATCE) exceeding 15% for the nine months ended September 30, 2025.

Revenue diversification is a key pillar of FBIZ's financial strength. Total top-line revenue, comprising net interest income and non-interest income, reached $126.40 million for the nine months ended September 30, 2025, up 12.6% from $112.30 million in the prior year period. Net interest income increased by 11.9% to $101.93 million for the nine months ended September 30, 2025, driven by growth in average loans and leases and an increase in Fees in Lieu of Interest (FILOI). FILOI, which includes prepayment fees and asset-based loan fees, contributed 23 basis points to the net interest margin in Q3 2025. Non-interest income saw a substantial increase of 15.2% to $24.48 million for the nine months ended September 30, 2025, benefiting from higher private wealth management service fees, gains on SBA loan sales, and swap fees. Private wealth management service fees alone grew 11.1% to $10.93 million for the nine months ended September 30, 2025, with assets under management and administration expanding 12.2% year-over-year to $3.81 billion.

Loan and deposit growth remain central to FBIZ's strategy. Period-end gross loans and leases receivable increased by 9.5% annualized to $3.34 billion as of September 30, 2025, from $3.11 billion at December 31, 2024. Commercial and industrial (C&I) loans, a strategic focus, grew 13% annualized to $1.26 billion during the same period. On the funding side, period-end core deposits increased 10.9% annualized to $2.59 billion as of September 30, 2025. The company's net interest margin has remained strong and stable at 3.68% for both the three and nine months ended September 30, 2025. This stability is attributed to disciplined loan pricing, growth in core deposits, and a match-funding strategy that mitigates interest rate risk.

Outlook and Guidance

FBIZ's management maintains a confident outlook, reiterating its long-term target of 10% annual growth in loans, deposits, and revenue. The net interest margin is expected to remain stable within the 3.60% to 3.65% range. This guidance is underpinned by the expectation that deposit betas will align with asset betas during potential rate changes, preserving the margin. Annual fee income growth is projected to approximate 10%, with anticipated strength in SBIC realized gains as existing funds mature and a rebound in SBA gains following any government shutdown-related backlogs.

Expense growth is managed to achieve positive operating leverage, with 2026 compensation levels expected to grow slightly more than the 7% year-to-date growth in 2025 due to planned hires and benefit costs. The effective tax rate is anticipated to remain between 16% and 18%. The company's ability to attract and retain business development talent is a critical assumption for sustaining growth, as market opportunities are abundant.

Risk Assessment

While FBIZ's specialized model offers distinct advantages, it is not without risks. The company faces ongoing competition from both traditional banks and non-bank financial institutions, which could pressure loan yields and deposit costs. The concentration in commercial lending, particularly commercial real estate (CRE), while diversified within the portfolio, exposes the company to potential downturns in regional real estate markets. However, management notes that CRE markets in Wisconsin, where much of its exposure lies, remain strong with low vacancy rates.

Credit quality, while generally strong, requires continuous monitoring. Non-performing assets (NPAs) decreased to $23.50 million, or 0.58% of total assets, as of September 30, 2025. The allowance for credit losses (ACL) stood at 1.15% of gross loans and leases, with a robust coverage ratio of 163.24% to non-accrual loans. An ongoing challenge is a $6.1 million ABL credit in Chapter 7 bankruptcy, which continues to inflate NPAs, though full repayment is expected as the loan is fully collateralized. The company's strategic exit from the transportation sector within equipment finance was a proactive measure to mitigate isolated weakness, with the remaining portfolio expected to run off over the next 34 months. Broader economic uncertainties, including potential changes in U.S. trade policy and the risk of a recession, could impact client sentiment and loan demand.

Conclusion

First Business Financial Services presents a compelling investment case built on a foundation of specialized commercial banking, operational excellence, and a clear growth strategy. The company's disciplined focus on high-value client segments, coupled with its strategic investments in technology and talent, has consistently delivered strong financial results, including impressive tangible book value growth and robust profitability metrics. Its diversified revenue streams, particularly from niche C&I lending and private wealth management, provide resilience against market fluctuations and competitive pressures.

As FBIZ moves forward, its commitment to a match-funded balance sheet and positive operating leverage positions it well to sustain its net interest margin and efficiency gains. While the banking sector faces inherent risks and competitive dynamics, FBIZ's proactive risk management, particularly its targeted adjustments in lending portfolios and its emphasis on deep client relationships, underscores its ability to outperform peers. For investors seeking exposure to a regional bank with a proven track record of growth and a clear strategic roadmap, FBIZ offers a compelling opportunity, driven by its specialized model and continuous pursuit of efficiency and client satisfaction.