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FBIZ: Fourth Quarter Preview - Outperform

Ann Heffron, CFA

First Business Financial Services, Inc. (FBIZ - Snapshot Report) is expected to report fourth quarter and full-year results in mid-March, as it typically does. We are maintaining our revised diluted EPS estimates of $2.90 for 2011 and $3.40 for 2012. In addition, we are continuing our Outperform recommendation on FBIZ, with our twelve-month target price at $19.00, which compares to the Company’s current stock price of $15.88.

Relative to our prior estimates, our revised projections incorporate a higher net interest margin, partially offset by reduced loan growth, a significant reduction in the loan loss provision, and a slight increase in the effective tax rate.

We note that 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.

In other news, FBIZ declared its regular quarterly $0.07 cash dividend, paid on January 15, 2012 to shareholders of record at the close of business on January 1, 2012.

In addition, Gerald L. Kilcoyne replaced Leland C. Bruce on the Board of Directors in early November, following his retirement. Mr. Kilcoyne, a private equity investor in businesses and an owner of commercial real estate in the Madison area, has been involved in mergers and acquisitions throughout the United States, Canada, and Europe since 1980. Mr. Kilcoyne is currently Chair of the Board of First Business Bank, a subsidiary of First Business Financial Services, Inc. and the Managing Partner at Pinnacle Enterprises, LLC.

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.

To view a free copy of our most recent research report on FBIZ or to subscribe to our daily morning email alert, visit

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