First Business Financial Services: Higher Target Price After Great Q2

| About: First Business (FBIZ)

By Ann Heffron, CFA

First Business Financial Services, Inc. (NASDAQ:FBIZ) knocked it out of the park in the second quarter, posting diluted operating EPS of $0.68, excluding one-time tax benefits of $0.29 per share. This was $0.16 better than our $0.52 estimate and up 47% from the prior-year quarter.

The second quarter also included $0.4 million of one-time net interest income as CPKF recognized previously forgone interest income on nonaccrual loans that were paid off during the quarter. We estimate this added another $0.10 to diluted EPS.

Excluding both items, EPS was $0.58 per share, $0.06 above our $0.52 estimate and 26% ahead of last year’s $0.46.

Second quarter operating results (excluding the one-time tax benefit, but including the one-time benefit from foregone interest income) were boosted by growth in net interest income from a higher net interest margin, reduced noninterest expense, and a lower effective tax rate, partially offset by increased compensation from bonus accruals and a hike in the loan loss provision.

Asset quality showed strong improvement in the second quarter, following a somewhat disappointing first quarter. Nonaccrual loans fell $4.6 million, or 12%, sequentially to $34.6 million, while foreclosed assets dropped $0.9 million, or 39%, to $1.4 million.

We are raising our diluted EPS estimates to $2.35 from $1.90 for 2011 and to $2.60 from $2.10 for 2012. This translates into year-over-year gains of 65% in 2011 and 11% in 2012.

We are maintaining our neutral recommendation on FBIZ, but increasing our target price to $18.25 from $14.25, following the 20% surge in FBIZ’s share price over the past few days.

First Business Financial Services, Inc. is a bank holding company headquartered in Madison, Wisconsin, with $1.1 billion in total assets at June 30, 2011. 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.