First Business Stays at Outperform

We are maintaining our Outperform on First Business Financial Services, Inc. (FBIZ). Our target price is now $11.50 (down from $12.00 previously), generating a total return of almost 27%.

FBIZ posted excellent second quarter diluted EPS of $0.46 (before a $2.7 million writedown of goodwill), up 349% from the $0.10 earned last year. This far exceeded our $0.30 estimate, largely due to favorable variances on the loan loss provision and noninterest expense, as well as a lower-than-expected tax rate (34% versus our 43% estimate).

As a result of the second quarter overage and other changes to our estimates (mainly a lower loan loss provision and reductions in compensation expense and professional fees), we are sharply increasing our diluted EPS estimates going forward. For 2010, our new estimate is $1.40 versus $0.90 previously and for 2011, we have raised our estimate to $1.70 from $1.25.

Near-term risks include a halt in the US economic recovery, greater-than-expected asset quality deterioration, 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 should loans grow excessively.

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

FIRST BUS FINL (FBIZ): Free Stock Analysis Report

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