First Business Financial: An Inexpensive Bank With Unrecognized Solid Earnings Growth

| About: First Business (FBIZ)

If I told you about a company with a solid balance sheet that has earned $2.57 in the last 5 quarters, is trading at a forward multiple of five times earnings and at $15.5 is currently selling at 69% of tangible book value, ould you believe it? This is how ridiculous the valuations have gotten in boring banks and thrifts.

The bank is First Business Financial (NASDAQ:FBIZ), based in Madison, WI. It is business focused and has 9 branches with total assets of $1.1 Billion.

FBIZ has continued to grow core earnings by controlling credit losses, increasing core deposits and reducing expenses. In my opinion, the bank continues to write solid new loans while keeping tight controls on risk.

The bank operates with a high efficiency operating model and does a fantastic job of lifting out other bankers from its competitors. The “Lift out” strategy is not often talked about in this environment of FDIC acquisitions. When a bank is closed by the FDIC and sold in receivership to a larger institution, the small local banks in the area have been known to poach out productive bankers. These lift outs have enabled FBIZ to hire some very productive local loan officers at limited expense. FBIZ has picked up entire books of business with high spreads and local low rate core deposts. By selectively hiring unhappy bankers whose only alternative was to work for a large bank, FBIZ has built business relationships that have doubled core earnings.

Growth has been the objective for FBIZ. The bank has moved the needle on assets up and deposit rates down. The bank’s trust and investment Services revenue is up 13.1% year over year and assets under management and administration has increased by 17.3% year over year. Interest income has increased by about 12% a year for the last five years, while the efficiency ratio has dropped dramatically.

Every bank today talks about C&I (commercial and Industrial) lending but this bank actually does it well. FBIZ has 25% of its loan portfolio in C&I loans. Larger banks crave C&I portfolios; this is the bank’s gem asset that a larger acquirer will seek to attain.

This sleepy bank may continue to earn about 72 cents of core earnings a share every quarter. With the stock trading around $16 this is a very inexpensive opportunity for multiple expansion from a tremendous discount to book. However, my fund owns it primarily for an acquisition by a larger bank. It is my opinion that FBIZ may be bought at a substantial premium to tangible book value. Likely acquirers may be Old National Bancorp (NYSE:ONB), which just bought Monroe Bank for 1.5X book, Associated Bank (ASBC), which is looking to add assets and deposits in Madison where university and government jobs are based, Wintrust (NASDAQ:WTFC) and Private Bank (NASDAQ:PVTB).

While I wait for one of these players to step up, FBIZ remains a billion dollar institution that pays a solid dividend. With the bank producing earnings at a $3 annual rate, and priced at about 69% of tangible book value with about 3% NPAs, I think the downside is minimal.

Disclosure: I am long FBIZ.

Additional disclosure: The fund is long FBIZ and the fund's consulting clients may have long positions. All fund clients and the fund are free to trade the stock at anytime.