If I told you about a company with a solid balance sheet that has earned $3.56 in the last 4 quarters, is trading at a multiple of 5x current earnings, and is currently selling at 74% of tangible book value, would you believe it? This is how ridiculous the valuations have gotten in banks stocks.
The bank is First Business Financial (NASDAQ:FBIZ), based in Madison, WI. It is business focused and has 9 branches with total assets of $1.2 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. FBIZ also has an under the radar venture investment business.
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 deposits. By selectively hiring unhappy bankers whose only alternative was to work for a large bank, FBIZ has built business relationships that have and may continue to, double 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 15% year over year and assets under management and administration has increased by 18% year over year. Interest income has increased by about 14% 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 27% 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 $1.00 of core earnings a share every quarter. With the stock trading around $20 this is a very inexpensive opportunity for multiple expansion from a tremendous discount to book.
My fund owns it primarily for an acquisition by a larger bank. It is my opinion that FBIZ may be bought 2x tangible book value or $56 per share. 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 plus institution that pays a solid dividend. With the bank producing earnings at a $3.50 annual rate, and priced at about 74% of tangible book value with less then 2% NPAs, I think the downside is minimal.
Disclosure: I am long FBIZ.
Additional disclosure: My Fund can and will trade this stock without notice at any time