FBIZ: Large Loan Loss Provision Mars an Otherwise Strong Quarter
Ann Heffron, CFA
First Business Financial Services, Inc. posted second quarter diluted EPS of $0.60, down 12% from the $0.68 EPS (before a $0.29 per diluted share one-time tax benefit related to a change in regulation for net operating loss carryforwards by the state of Wisconsin) posted last year, and $0.21 below our $0.81 estimate.
Relative to our estimate, this largely reflected a $1.4 million higher-than-expected loan loss provision primarily related to the write-off of loans related to a single commercial and industrial client. On the positive side, growth in net interest income was much better than we had anticipated as FBIZ posted a record 3.49% net interest margin and added a $31 million chunk of loans toward the end of the second quarter, marking the first quarterly increase in loans outstanding since 2010’s third quarter.
Compared to the year-ago quarter, second quarter results were boosted by a gain in net interest income from 4% growth in average interest-earning assets and a 10 basis-point jump in the net interest margin and solid 9% growth in noninterest income. This was partly offset by a 7% increase in total noninterest expense, largely due to higher compensation costs, a 39% surge in the loan loss provision, and an effective tax rate that was almost 2 points higher than that posted in the prior-year quarter.
The Company continued to reduce problem assets. Nonaccrual loans fell $4.7 million, or 24%, sequentially to $15.5 million, while foreclosed assets declined $0.7 million, or 25%, to $1.9 million. As a percentage of total loans and OREO, nonperforming assets fell 72 basis points sequentially to 2.01% from 2.73% at the end of the first quarter and 218 basis points year over year from the 4.18% at the end of 2011’s June quarter.
We note that the ABA Banking Journal recently ranked FBIZ 15th among all publicly traded banks with $1-10 billion in total assets (of which there are about 250 companies in the US), based upon ROE in 2011, which was 12.8% for FBIZ. It is the first time FBIZ has made this list, and speaks to the tremendous improvement in operating performance the Company has made over the last few years.
First Business Financial Services, Inc. (FBIZ or the Company) is a bank holding company headquartered in Madison, Wisconsin, with $1.2 billion in total assets at June 30, 2012. 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.
To view a free copy of our most recent research report on FBIZ, visit Ann Heffron's page at Zacks Small-Cap Research.