First Business Financial Services: Higher Target Price After Great Q2

By Ann Heffron, CFA

First Business Financial Services, Inc. (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.