First Business Financial Services, Inc. Q3 FY2025 earnings call

Key Points

• Strong quarterly performance with high-quality loan and deposit growth from core clients.
• Pretax pre-provision earnings grew, and provision for credit losses was better than expected, leading to earnings per share growth.
• Noninterest income was record level, driven by swap fees, SBIC funds, and nonrecurring items.
• Loan balances increased, core deposits grew, and asset quality was stable with nonperforming assets decreasing.
• Government shutdown not expected to cause negative credit exposure but may affect SBA loan closings.
• Expenses were well contained, with compensation expense having a bonus accrual update, and expecting 2026 compensation to grow more. Effective tax rate was within expected range.

Loan balances grew about $85 million or 10% annualized during the quarter, and core deposits were up 9% from both the linked and prior year quarters. The net interest margin grew 1 basis point to 3.68% in Q3. Noninterest income reached record levels, with fee income comprising 19% of operating revenue for year-to-date 2025. Loan and deposit growth was sourced from core client relationships, and private wealth assets continued to expand.

Guidance

• Expect annual fee income growth to approximate 10%, with Q4 operating fee income in line with recent 4-quarter average.
• Net interest margin target range of 3.60% to 3.65%.
• Anticipate 2026 compensation levels to grow more than 2025's 7% growth.
• Strong earnings generating enough capital for organic growth, with consideration of capital management tools.

Risks

• Federal government shutdown may affect timing of SBA loan sale premiums.
• Fees in lieu of interest are variable and can fluctuate with market conditions.
• Open positions and benefit cost increases may impact compensation expenses.

Q: Clarification on fee income guide.

A: Brian Spielmann explains that the 10% annual fee income growth is adjusted for nonrecurring items, using a 4-quarter average excluding those items.

Q: Refine margin discussion on fees in lieu.

A: Brian and Corey Chambas discuss the historical variability of fees in lieu of interest and their limited impact from rate cuts, noting asset-based lending fees are from contractual deals.

Q: Update on asset-based lending litigation.

A: David Seiler states the asset-based lending loan in litigation is still locked up, with no change in belief of full recovery.

Q: Margin outlook with rate cuts.

A: Brian Spielmann discusses the adjusted margin range of 3.4% to 3.45% and deposit relationships, noting relief in new deposit acquisition premiums with rate cuts.

Q: Investment and wealth management revenue.

A: Corey Chambas says the revenue from investment and wealth management is a mix of new accounts and market appreciation.

Q: Talent hires for growth.

A: Corey Chambas talks about relationship-building for business development officers, emphasizing cultivating relationships with prospective clients and talent.

Q: Funding pressure and open positions.

A: Brian Spielmann and David Seiler discuss drivers of funding pressure related to CD relationships and open positions across operational and revenue-producing roles.

Q: Specialty business growth and credit risk.

A: Corey Chambas talks about strong pipelines in asset-based lending and accounts receivable financing, noting lower credit risk in these niche businesses due to real-time collateral monitoring.

Q: SBA impact of government shutdown.

A: David Seiler explains delay in SBA loan closings and sales due to the government shutdown, with e-tran numbers needed for closing processes.