First Business(FBIZ) - 2025 Q4 - Earnings Call Transcript

Financial Data and Key Metrics Changes - First Business Bank reported a nearly 15% increase in pre-tax, pre-provision earnings over 2024, with a return on average tangible common equity exceeding 15% for the year [5][6] - Tangible book value per share grew 14% year-over-year, and earnings per share (EPS) increased by 14% over 2024, surpassing the long-term goal of 10% annual growth [5][6] - The net interest margin (NIM) declined by 15 basis points to 3.53%, primarily due to a non-accrual interest reversal, but remained stable at 3.64% for the full year [16][17] Business Line Data and Key Metrics Changes - The private wealth business generated a record $3.8 million in fee income, up 11% year-over-year, while service charges increased nearly 20% year-over-year [9] - Net interest income grew 10% for the full year, meeting the double-digit growth goal, attributed to robust loan and deposit growth [9][10] - Non-interest income was affected by lower SBA gains and a reclassification of partnership investment income, which was adjusted to reflect net benefits [18][19] Market Data and Key Metrics Changes - Loan balances grew by approximately $39 million, or 5% annualized during the fourth quarter, and $261 million, or 8% year-over-year [11] - Core deposit balances increased by 12% from both the linked and prior year quarters, primarily from interest-bearing and money market accounts [14] - The company expects loan growth to rebound to typical double-digit rates in 2026, driven by strong regional economic conditions in Southern Wisconsin [12][13] Company Strategy and Development Direction - The company aims to achieve double-digit growth by investing in talent, technology, and maintaining prudent underwriting practices [24] - Management emphasized the importance of organic growth over acquisitions, believing it provides better value for shareholders [72][73] - The focus remains on maintaining a strong and stable net interest margin while shifting the loan mix towards higher-yielding commercial and industrial (C&I) relationships [17][18] Management's Comments on Operating Environment and Future Outlook - Management expressed optimism about future growth, citing strong pipelines in commercial real estate and C&I lending, as well as potential benefits from changes in federal tax policy [13][72] - The company anticipates continued competitive pressure on deposit pricing but believes it can maintain margins due to a balanced interest rate strategy [17][70] - Management acknowledged isolated credit challenges but indicated overall asset quality remains strong, with no significant concerns outside of specific loans [14][33] Other Important Information - The company recorded net charge-offs of $2.5 million, primarily from previously reserved equipment finance loans [14] - The effective tax rate for 2025 was 16.8%, within the expected range, and the company plans to continue evaluating capital management tools to maximize shareholder returns [22] Q&A Session Summary Question: Details on the CRE relationship affecting MPAs - Management provided insights on appraisals and the loan-to-value ratio, indicating a 72% LTV across seven properties [30][31] Question: Expectations for credit costs in the coming year - Management clarified that recent charge-offs were primarily related to equipment finance, with no specific reserves needed for the CRE relationship [32][33] Question: Fee income growth guidance - Management confirmed a 10% growth expectation for overall fees, excluding certain non-recurring items [35][36] Question: Timeline for resolution of larger problem loans - Management indicated that resolution could take time but expects progress throughout the year [48][49] Question: Equipment finance portfolio balance and expectations - The equipment finance portfolio was reported at $20 million, down from $61 million, with expectations for stability moving forward [55][56] Question: Strategic goals and potential adjustments - Management discussed the achievement of strategic goals and the focus on maintaining or improving efficiency ratios [57][58] Question: Outlook for loan growth in 2026 - Management expressed confidence in achieving double-digit loan growth, supported by strong pipelines and improved team performance [80][82]