Ann Heffron, CFA
FBIZ: Maintain Neutral on Fourth Quarter Results
We are continuing our Neutral on First Business Financial Services, Inc. (FBIZ), as well as our $12.75 target price.
FBIZ posted fourth quarter diluted EPS of $0.24, up from the $0.14 loss per share reported last year, but $0.06 short of our $0.30 estimate. The shortfall was principally due to a larger-than-expected increase in the loan loss provision. At the same time, nonperforming assets jumped 25% sequentially to $40.2 million, and as a percentage of loans and related assets, climbed 91 basis points to 4.56%. Both of these developments disappointed and surprised us, but appear to be an aberration related to a single construction & land development loan. We expect asset quality measures to improve modestly going forward.
For the year, FBIZ earned $3.6 million before goodwill impairment charges, or $1.42 per diluted share, up 248% from the $1.0 million, or $0.41 per diluted share, posted in 2009. This year-over-year gain primarily stemmed from a 14% rise in net interest income to $32.0 million on a 27 basis-point increase in the net interest margin (average loans were flat), a 14% decline in the loan loss provision to $7.0 million, and modest 5% growth in noninterest expense, largely due to lower credit costs from collateral liquidations and foreclosures, which combined fell about one-third to $1.4 million. This was partly offset by a 45% increase in FDIC insurance premiums to $3.2 million.
While the outlook for loan demand for owner-occupied commercial real estate and commercial & industrial is improving, investor-owned commercial real estate and construction & land development remain weak. As a result, we are reducing our estimate for 2011 loan growth to 4% from 6% (vs 3% loan growth in 2010), with this offset by a slightly higher estimate for the net interest margin. Given these and a few other offsetting tweaks in our model, we are maintaining our 2011 diluted EPS at $1.80.
Near-term risks include greater-than-expected asset quality deterioration, a halt in the US economic recovery, and increased political risk, with longer term risks including reliance on the confidence-sensitive brokered deposit market and potential dilution from sale of additional common stock.
First Business Financial Services, Inc. (FBIZ or the Company) is a bank holding company headquartered in Madison, Wisconsin, with $1.1 billion in total assets at December 31, 2010. FBIZ specializes in business lending for small-medium-sized companies with sales ranging from $2-50 million. As an adjunct to these services, FBIZ also offers banking services to business owners, executives, professionals, and high net worth individuals, though this is a less significant part of its business.
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