FBIZ First Business Financial Services Inc

FBIZ: Raising to Outperform on Excellent Third Quarter

Ann Heffron, CFA

We are raising our recommendation on First Business Financial Services, Inc. (FBIZ) to Outperform from Neutral following third quarter results. FBIZ had an exceptional third quarter, beating our estimate by $0.26 and posting diluted EPS of $0.83. This was more than double the prior-year quarter’s $0.38 and well above our $0.57 EPS estimate.

Third quarter results were boosted by a gain in net interest income from a higher net interest margin, strong growth in trust and investment services income and loan fees, a significantly reduced loan loss provision, and lower FDIC premium expense and collateral liquidation costs, partially offset by increased compensation from bonus accruals, higher marketing costs, and an increased effective tax rate.

The Company made excellent progress in reducing problem assets and believes indications are that it has turned the corner regarding asset quality. Nonaccrual loans fell $7.6 million, or 22%, sequentially to $27.0 million, while foreclosed assets jumped $0.6 million, or 46%, to $2.0 million. As a percentage of total loans and OREO, nonperforming assets fell 81 basis points sequentially to 3.37% from 4.18% at the end of the second quarter and 140 basis points from the 4.77% at the end of the first quarter.

We are sharply increasing our EPS estimates to $2.90 from $2.35 for 2011 and to $3.40 from $2.60 for 2012. This translates into year-over-year gains of 104% in 2011 and 17% in 2012. Changes in both years primarily reflect higher net interest margin estimates and lower estimates for the provision for loan losses, due to improved asset quality. In addition, our 2011 estimate incorporates the third quarter overage of $0.26 relative to our estimate.

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

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