Can First Business Financial Double?

| About: First Business (FBIZ)
This article is now exclusive for PRO subscribers.

Since 2011, First Business Financial Services (NASDAQ:FBIZ) has tripled as the company's performance has been improving impressively. In fact, the company's market cap increased by 400% during the same period. If the company continues its performance, its share price can keep moving upwards and reward the patient investors.

FBIZ Market Cap Chart

While the company is headquartered in Wisconsin, it has branches and offices in multiple states. As the company has stayed away from acquisitions for the most part, all of its growth has been organic. The company's first bank branch was found in 1990 under First Business Bank name. At the moment, the company has offices and branches in 8 states and 10 cities and there is plenty of room for growth.

Compared to the other banking companies operating in Wisconsin, First Business enjoys a lower efficiency ratio. In fact, the company's efficiency ratio has been falling even further in the recent quarters. For those that are not familiar with the metric, efficiency ratio refers to the ratio of expenses to revenue. Basically, it shows how much money a company spends in order to earn x amount of revenue. In this metric, lower numbers are more desirable because it means the company spends less money to earn more money. An efficiency ratio of 59% indicates that the company spent 59 cents for every dollar it earned last quarter. First Business Financial has a small number of branches, highly leverages technology and offers products and services addressing small businesses. This is why the company has healthy margins.

Since 2008, the bank's revenues have been increasing every year consistently. The compound annual growth rate for the company has been 10.4%. In 2008, the company generated $31.36 million in revenues whereas in 2012, it was able to generate $46.58 million. In the first quarter of this year, the bank generated $12.18 million in revenues which is up 13% compared to the first quarter of last year. This year, the company's annual revenue is expected to pass $50 million.

Interestingly enough, First Business Financial's earnings have been growing at an even faster rate than its revenues have. Since 2008, the compound annual growth rate for the company's earnings was 15.2%. Last year, the company earned $18.50 million, which gives it a P/E ratio of 6. This is very low for a company that continues to grow at a double-digit rate. In the first quarter of this year, the bank earned $4.97 million, up 21% from $4.12 million in the same quarter last year.

As I mentioned before, the bank has an impressive efficiency ratio. In the chart below, we are looking at the company's efficiency ratio compared to its FTE (Full time Equivalent). FTE metric shows us the number of full-time employees a company had in a given year. Keep in mind that this is not exactly a headcount. For example, if a company had 100 full-time employees and 100 half-time employees, its FTE at the end of the year would be 150. By the end of the last quarter, First Business had 155 employees which resulted in a FTE value of 143 (which implies that a small number of the employees were part-time workers). Over the years, the company has raised its number of employees by very little even though the revenues and earnings increased dramatically.

Next, we are going to look at the company's deposit composition. Since 2008, most deposit types increased dramatically for First Business Financial. The only exception was the brokered deposits. Excluding the brokered deposits, the bank is looking at a compound annual growth rate of 18% between 2008 and 2012. During the same time period, the cost of deposits fell from 3.55% to 0.96%. This is partly because of strong execution and partly because of historically low interest rates.

The bank's asset quality has also been on the increase recently. In 2009, non-performing assets made up 2.64% of the bank's assets and this percentage rose to 3.63% in 2010. Currently, only 1.03% of the company's assets are in the non-performing assets classification, which is a huge improvement. Texas ratio, a metric that measures credit-health of a bank has also been on the decline. In 2010, the bank's Texas ratio was 56.1% whereas it is at 10.7% today. When a bank's Texas ratio nears 100%, its failure is said to be imminent.

Since 2008, the bank's cumulative charge-offs as a percentage of loans and leases were far below its peers both in and outside of Wisconsin. Financially, the banks, its assets and loans are at very healthy levels.

Furthermore, the company's return on assets has also been on the increase. In fact, this year marks a peak for the bank as its return on assets passed 1%. If this trend continues, the bank will result in great returns for the investors.

A significant portion of the bank's loans are backed by commercial real estate. This is in line with the bank's goal of serving local small businesses. When economies emerge from recessions, the fastest growing segments are small businesses. This is why, as the economy improves further, the bank's business will get significantly more profitable.

The bank's tangible book value per share has been increasing consistently every year. While this value is below the company's market value of $112 million, it is important to note that the company enjoys high margins and strong earnings to justify its market value.

The bank recently doubled its quarterly dividend payments from 7 cents per share to 14 cents per share. The company's annual yield is at 1.94% and its annual payout ratio is just below 20%. This indicates that the dividend rate is secure and that it still has plenty of room to improve.

Overall, the company has been performing strongly, and there is a lot of room for growth. Despite tripling in the last 2 years, the stock price is still cheap considering the company's current earnings and growth rate. In the future, I expect this bank to continue outperforming.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.