Executive Summary / Key Takeaways

• Consistent Double-Digit Growth Trajectory: First Business Financial Services (FBIZ) is executing a well-defined five-year strategic plan aimed at achieving double-digit annual growth in loans, deposits, and total revenue, consistently delivering positive operating leverage and strong tangible book value per share growth.
• Differentiated Business Model & Technological Edge: FBIZ's business-only banking model, focused on deep client relationships and specialized niche lending, is augmented by strategic investments in operational technology like Robotic Process Automation (RPA) and AI training, enhancing efficiency and scalability.
• Stable Margin Amidst Competition: Despite a competitive deposit environment, FBIZ maintains a strong and stable net interest margin (NIM) within its 3.60%-3.65% target range, driven by disciplined loan pricing, robust core deposit gathering, and a match-funding strategy.
• Robust Asset Quality & Diversified Revenue: The loan portfolio exhibits strong asset quality, with targeted management of specific challenged sectors, while diversified fee income streams, particularly from Private Wealth Management and anticipated improvements in SBA and SBIC income, provide resilience.
• Leadership Continuity & Shareholder Returns: A planned CEO succession ensures continuity, and the company's strong earnings generation supports organic growth, consistent dividend increases, and opportunistic share buybacks, reinforcing its commitment to superior shareholder returns.

The Foundation of Growth: A Relationship-Driven Model with a Technological Edge

First Business Financial Services, Inc. (FBIZ), established in 1909 and headquartered in Madison, Wisconsin, has cultivated a distinct identity in the financial services landscape. Operating primarily through its wholly-owned subsidiary, First Business Bank (FBB), the company has eschewed the traditional retail branch network in favor of a specialized focus on small and medium-sized businesses (SMBs), business owners, executives, professionals, and high-net-worth individuals. This business-only banking model is predicated on fostering deep client relationships, leveraging financial expertise, and maintaining an efficient, centralized administration to deliver exceptional client satisfaction. This foundational approach has been the bedrock of its consistent performance and strategic expansion across Wisconsin and into the greater Kansas City metropolitan area.

FBIZ's strategic blueprint, formalized in its 2024-2028 five-year plan, is explicitly designed to drive double-digit annual growth and deliver superior shareholder returns. This overarching strategy is rooted in a "control the controllable" philosophy, emphasizing a relationship-based model that cultivates sticky core deposits and enables consistent financial performance regardless of broader economic conditions. The company's commitment to this model is evident in its Net Promoter Score (NPS) of 70-78, significantly above the industry average, and the impressive 15-year average tenure of its 50 largest depositors. This deep client engagement extends beyond traditional banking services, as demonstrated by the successful $20 million subordinated debt placement in Q3 2024, fully funded by its own private wealth clients, which not only saved transaction costs but also underscored the strength of these "entrepreneurial partnerships."

A critical, albeit often understated, differentiator for FBIZ lies in its strategic embrace of technology to enhance operational efficiency and client experience. While not a fintech firm in the traditional sense, the company is actively investing in digital transformation. Key initiatives include the adoption of Robotic Process Automation (RPA) and automated financial statement spreading software. RPA is viewed by management as a "game changer" for "efficiently scaling for future growth," allowing the company to expand its operations without a proportional increase in headcount. The internal RPA team, now staffed with a manager and two developers, has already implemented three bots across different areas, with numerous additional use cases identified by staff. Furthermore, automated financial statement spreading software is improving credit analysis efficiency, streamlining core banking processes. FBIZ also invests in AI training for its employees, recognizing it as a "competitive advantage" that enhances productivity and prepares the workforce for future demands. These technological advancements are not merely cost-cutting measures; they are foundational to FBIZ's ability to maintain positive operating leverage, continuously improve its efficiency ratio, and scale its specialized services effectively.

Competitive Landscape and Strategic Positioning

In the highly competitive regional banking sector, FBIZ differentiates itself by focusing on a niche market segment and delivering specialized expertise. Direct competitors like Wintrust Financial Corporation (WTFC), MidwestOne Financial Group, Inc. (MOFG), Peoples Bancorp Inc. (PEBO), and Old National Bancorp (ONB) also vie for commercial clients in the Midwest. FBIZ's market share, estimated at 0.2-0.4% of the regional commercial banking market, reflects its focused approach rather than broad market dominance. Its annual growth trajectory of 4-5% has historically lagged the broader industry's 6-8%, as seen in WTFC's 7% revenue growth in Q2 2025.

FBIZ's competitive advantages are rooted in its relationship-based model and specialized product offerings. Its strong regional network translates into higher customer loyalty and recurring revenue, providing a counter to larger competitors' broader digital reach. While WTFC boasts 15-20% faster transaction processing due to advanced fintech integrations, FBIZ's strength lies in its personalized wealth services, which lead to higher customer retention rates (e.g., 5% higher retention in high-net-worth segments). In commercial lending, FBIZ offers more customized loan products, such as SBA loans with faster approval times, giving it an edge over competitors like PEBO. Its niche lending areas, including asset-based lending (ABL), accounts receivable financing (ARF), and floorplan financing, provide attractive yields and often come with higher collateralization, offering a strategic buffer in varying economic conditions.

However, FBIZ faces competitive disadvantages, particularly in digital efficiency and scale. Its systems are more traditional compared to some rivals, resulting in higher operating costs per transaction. For instance, while FBIZ's advanced treasury management offers 10-15% better service efficiency in areas like accounts receivable financing processing (20% quicker due to automated tools), its overall operating costs per unit can be 5-10% higher than more cost-efficient players like MOFG. Additionally, FBIZ's scale limitations lead to a lower return on invested capital (ROIC) compared to larger, acquisitive banks like ONB, which can expand market presence 20% faster through M&A. Indirect competitors, including fintech firms like Square (Block, Inc.) (SQ) and LendingClub (LC), pose a threat by offering alternative lending solutions that are 20-30% cheaper due to lower overheads, potentially eroding FBIZ's market share in SMB lending. Robo-advisors like Betterment also challenge its wealth management segment by providing faster, lower-cost portfolio management.

Despite these challenges, regulatory compliance acts as a significant barrier to entry, favoring established banks like FBIZ. The company's strategic response involves leveraging its deep client relationships and specialized expertise to maintain its competitive edge. By focusing on high-value, relationship-driven services and continuously investing in operational technology, FBIZ aims to mitigate its digital gaps and scale limitations, positioning itself for sustained growth within its chosen market segments. The company's ability to attract and retain engaged employees, as evidenced by its high employee engagement metrics, further reinforces its capacity to deliver superior service and outperform competitors.

Financial Performance and Operational Excellence

FBIZ's financial performance in the first half of 2025 underscores the effectiveness of its strategic plan. Net income available to common shareholders reached $11.2 million for Q2 2025, contributing to $22.2 million for the first six months of 2025, representing a robust 17% growth over the same period in 2024. Diluted earnings per share (EPS) stood at $1.35 for Q2 and $2.66 for H1 2025, up 10% and 17.7% respectively year-over-year. This strong bottom-line performance translated into an annualized return on average assets (ROAA) of 1.14% and a return on average tangible common equity (ROATCE) of 14.15% for H1 2025, demonstrating efficient asset deployment and capital utilization.

The company's top-line revenue, comprising net interest income and non-interest income, increased by 10.3% to $81.9 million for the first six months of 2025 compared to the prior year. This growth was supported by a 10.6% increase in net interest income for Q2 2025, driven by an increase in average loans and leases outstanding. The net interest margin (NIM) remained strong at 3.67% for Q2 2025 and 3.68% for H1 2025. The adjusted net interest margin, which excludes volatile "fees in lieu of interest" (FILOI), was a stable 3.47% for both periods, reflecting disciplined pricing and effective balance sheet management.

Loan growth continues to be a primary driver of performance. Period-end gross loans and leases receivable increased by $138.3 million, or 8.9% annualized, to $3.25 billion as of June 30, 2025. This expansion was primarily fueled by commercial loan growth, with Commercial & Industrial (C&I) loans expanding $107.5 million, or 18.7% annualized, to $1.26 billion. Niche C&I segments showed particular strength, with asset-based lending up $13 million, Floorplan financing up $10 million, and equipment finance up $7 million in Q2 2025. This strategic shift towards higher-yielding C&I loans is crucial for maintaining margin stability in a competitive environment.

Deposit growth has been equally impressive, supporting loan expansion. Core deposits increased $70 million, or 11% annualized, from Q1 2025, and were up 10% from Q2 2024. Average core deposits grew 0.8% for H1 2025, reflecting the success of the company's deposit-centric sales strategy, led by treasury management efforts. Service charges on deposits, an indicator of new and expanded core deposit relationships, grew 16% in Q2 2025 year-over-year. While wholesale deposits are strategically utilized for match-funding and liquidity, the company aims for a long-term mix of approximately 75% in-market deposits.

Non-interest income, a key component of FBIZ's diversified revenue strategy, saw mixed results but strong overall growth. Private Wealth Management service fees increased 8.3% in Q2 2025 year-over-year, driven by a remarkable 36% annualized growth in assets under management and administration (AUM/A) to $3.73 billion. Gains on sale of SBA loans, while volatile quarter-to-quarter due to construction components and funding timelines, increased 150% for H1 2025 compared to the prior year. Income from SBIC fund investments saw a decrease in Q2 2025 but is expected to improve in the second half of the year as existing funds mature.

Expense management remains a core focus, with the company consistently achieving positive operating leverage. The efficiency ratio measured 61.0% in Q2 2025 and 60.6% for H1 2025, demonstrating that the percentage increase in top-line revenue exceeded the percentage increase in operating expenses. Compensation expenses, while up modestly due to increased full-time equivalent employees and merit increases, are managed to grow at a rate below revenue growth. Investments in computer software and marketing also increased, reflecting the company's commitment to technology and growth initiatives.

Asset quality remains robust. Non-performing assets (NPAs) totaled $28.6 million, or 0.72% of total assets, as of June 30, 2025, a slight increase primarily due to a single credit in the transportation and logistics sector of the conventional C&I portfolio. However, this exposure is well collateralized, and the company ceased new lending to the transportation sector in its small ticket equipment finance business in Q1 2023. The allowance for credit losses (ACL) to gross loans stood at 1.18%, deemed appropriate by management for expected credit losses. The provision for credit losses was $2.7 million for Q2 2025 and $5.36 million for H1 2025, reflecting loan growth and modest adjustments to the economic outlook in their CECL model. The office commercial real estate portfolio remains a non-concern, with no non-performing loans and high recourse levels.

From a liquidity and capital perspective, FBIZ maintains a strong position. Readily accessible liquidity was $1.31 billion as of June 30, 2025, providing ample capacity to meet obligations. Federal Home Loan Bank (FHLB) advances and other borrowings decreased, reflecting increased deposit balances. The company's capital levels consistently exceed regulatory minimums, and it remains "well capitalized" under the regulatory framework, with strong earnings generating sufficient capital to facilitate expected organic growth.

Outlook and Risks

FBIZ's management provides clear guidance, underpinned by its strategic plan and "control the controllable" philosophy. The company expects to maintain its long-term loan growth target of 10% annually, with C&I lending anticipated to be a primary driver. The net interest margin is projected to remain within the 3.60% to 3.65% long-term target range, supported by disciplined pricing and the strategic use of wholesale funding to match fixed-rate assets. Total fee income is targeted to grow at a 10% annual rate, with management anticipating improvements in SBA loan sale gains and SBIC fee income in the second half of 2025 as pipelines mature and new investments are made. The effective tax rate for 2025 is expected to be between 16% and 18%, benefiting from tax credit investments. Expense growth is managed to be below revenue growth, ensuring continued positive operating leverage and an improving efficiency ratio. The provision for credit losses is anticipated to run at a rate of $2.5 million to $2.7 million per quarter, supporting loan growth and maintaining reserve levels.

Despite this optimistic outlook, several risks warrant investor attention. The broader economic environment, particularly changes in U.S. trade policy, introduces uncertainty that could impact client activity and loan demand. While FBIZ's balance sheet is designed to be relatively neutral to interest rate fluctuations, prolonged periods of high rates or rapid cuts could still create pressure on margins. Competition for deposits remains intense, requiring the company to pay competitive rates, which could impact funding costs. Specific credit risks, particularly the ongoing liquidation of the $6.1 million ABL loan and the remaining exposure in the transportation sector, require continued monitoring, although management expects full repayment on the ABL credit and has ceased new lending in the challenged transportation segment. Regulatory changes and increased supervision in the banking sector could also impact operations and profitability.

A key leadership transition is also on the horizon, with CEO Corey A. Chambas planning to retire in May 2026, to be succeeded by current President and COO David R. Seiler. While this transition is planned and internal, ensuring continuity, any leadership change carries inherent execution risks.

Conclusion

First Business Financial Services presents a compelling investment thesis built on a proven, relationship-driven commercial banking model. The company's consistent delivery of double-digit growth in key financial metrics, coupled with its disciplined approach to asset quality and expense management, demonstrates the effectiveness of its strategic plan. FBIZ's commitment to technological innovation, particularly in RPA and AI, provides a crucial operational advantage, enabling scalable growth and enhancing efficiency in a competitive landscape.

While facing challenges from intense competition and broader economic uncertainties, FBIZ's differentiated strategy, strong client relationships, and specialized lending expertise position it for continued outperformance. The company's ability to maintain a stable net interest margin, grow core deposits, and diversify its revenue streams underscores its resilience. With a clear strategic roadmap, a focus on operational excellence, and a planned leadership transition designed for continuity, FBIZ is well-positioned to continue generating superior shareholder returns through sustained organic growth and prudent capital allocation.