##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
 For the quarterly period ended March 31, 2007
 Commission file number 000-51028
 FIRST BUSINESS FINANCIAL SERVICES, INC.
  Wisconsin
    
    39-1576570(State or jurisdiction of incorporation or organization)
    
    (I.R.S. Employer Identification No.)401 Charmany Drive Madison, WI
    
    53719(Address of Principal Executive Offices)
    
    (Zip Code)(608) 238-8008Telephone number
  þ o
  o o þ
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FIRST BUSINESS FINANCIAL SERVICES, INC.
INDEX  FORM 10-Q
 PagePART I. FINANCIAL INFORMATIONItem 1. Financial Statements (Unaudited)Consolidated Balance Sheets as of March 31, 2007
and December 31, 2006
    
    
    2Consolidated Statements of Income for the Three
Months Ended March 31, 2007 and 2006
    
    
    3Consolidated Statements of Changes in Stockholders
Equity and Comprehensive Income for the Three
Months Ended March 31, 2007 and 2006
    
    
    4Consolidated Statements of Cash Flows for the Three
Months ended March 31, 2007 and 2006
    
    
    5Notes to Unaudited Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations
    
    
    12Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    23Item 4. Controls and Procedures
    
    
    23PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    24Item 1A. Risk Factors
    
    
    24Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    24Item 3. Defaults upon Senior Securities
    
    
    24Item 4. Submission of Matters to Vote of Security Holders
    
    
    24Item 5. Other information
    
    
    24Item 6. Exhibits
    
    
    24SIGNATURES
    
    
    25Certification of the Chief Exexcutive OfficerCertification of the Senior Vice President and Chief Financial OfficerSection 1350 Certifications
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##### Table of Contents



PART I. Financial Information
 
 Item 1. Financial Statements
 First Business Financial Services, Inc.
 
 Consolidated Balance Sheets
 March 31,
    
    
    December 31,2007
    
    
    2006(In Thousands, Except Share Data)(Unaudited)AssetsCash and due from banks
    
    $
    16,311
    
    
    $
    19,215Short-term investments
    
    
    1,647
    
    
    
    246Cash and cash equivalents
    
    
    17,958
    
    
    
    19,461Securities available-for-sale, at fair value
    
    
    95,730
    
    
    
    100,008Loans and
leases receivable, net of allowance for loan and lease losses of $8,896 and
$8,296, respectively
    
    
    656,760
    
    
    
    639,867Loans held for sale
    
    
    308
    
    
    
    Leasehold improvements and equipment, net
    
    
    1,094
    
    
    
    1,051Cash surrender value of bank-owned life insurance
    
    
    13,632
    
    
    
    13,469Investment in Federal Home Loan Bank stock, at cost
    
    
    2,024
    
    
    
    2,024Goodwill and other intangibles
    
    
    2,808
    
    
    
    2,817Accrued interest receivable and other assets
    
    
    10,648
    
    
    
    9,626Total assets
    
    $
    800,962
    
    
    $
    788,323Liabilities and Stockholders EquityDeposits
    
    $
    693,123
    
    
    
    640,266Securities sold under agreement to repurchase
    
    
    144
    
    
    
    451Federal Home Loan Bank and other borrowings
    
    
    49,863
    
    
    
    92,519Accrued interest payable and other liabilities
    
    
    11,194
    
    
    
    9,331Total liabilities
    
    
    754,324
    
    
    
    742,567Commitments and contingenciesStockholders equity:Preferred stock, $10 par value, 10,000 Series A shares and 10,000 Series B shares
authorized, none issued and outstanding
    
    
    
    
    
    
    Common stock, $0.01 par value, 8,000,000 shares authorized, 2,521,203 and 2,516,193
shares issued, 2,498,171 and 2,493,578 outstanding in 2007 and 2006, respectively
    
    
    25
    
    
    
    25Additional paid-in capital
    
    
    23,098
    
    
    
    23,029Retained earnings
    
    
    24,674
    
    
    
    24,237Accumulated other comprehensive loss
    
    
    (620
    )
    
    
    (1,005
    )Treasury stock (23,032 and 22,615 shares in 2007 and 2006, respectively), at cost
    
    
    (539
    )
    
    
    (530
    )Total stockholders equity
    
    
    46,638
    
    
    
    45,756Total liabilities and stockholders equity
    
    $
    800,962
    
    
    $
    788,323
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First Business Financial Services, Inc.
 
 Consolidated Statements of Income (Unaudited)
 Three Months EndedMarch 31,2007
    
    
    2006(In Thousands, Except Per Share Data)Interest income:Loans and leases
    
    $
    12,693
    
    
    $
    9,809Securities income, taxable
    
    
    1,086
    
    
    
    966Short-term investments
    
    
    37
    
    
    
    36Total interest income
    
    
    13,816
    
    
    
    10,811Interest expense:Deposits
    
    
    7,584
    
    
    
    5,566Notes payable and other borrowings
    
    
    851
    
    
    
    473Junior subordinated debentures
    
    
    
    
    
    
    248Total interest expense
    
    
    8,435
    
    
    
    6,287Net interest income
    
    
    5,381
    
    
    
    4,524Provision for loan and lease losses
    
    
    576
    
    
    
    Net interest income after
provision for loan and
lease losses
    
    
    4,805
    
    
    
    4,524Non-interest income:Service charges on deposits
    
    
    180
    
    
    
    196Credit, merchant and debit card fees
    
    
    51
    
    
    
    37Loan fees
    
    
    143
    
    
    
    148Increase in cash surrender value of bank-owned life
insurance
    
    
    163
    
    
    
    152Trust and investment services fee income
    
    
    391
    
    
    
    302Change in fair value of interest rate swaps
    
    
    
    
    
    
    (159
    )Net cash settlement of interest rate swaps
    
    
    
    
    
    
    (26
    )Other
    
    
    74
    
    
    
    84Total non-interest income
    
    
    1,002
    
    
    
    734Non-interest expense:Compensation
    
    
    2,910
    
    
    
    2,533Occupancy
    
    
    262
    
    
    
    239Equipment
    
    
    122
    
    
    
    122Data processing
    
    
    244
    
    
    
    216Marketing
    
    
    280
    
    
    
    207Professional fees
    
    
    455
    
    
    
    248Other
    
    
    603
    
    
    
    425Total non-interest expense
    
    
    4,876
    
    
    
    3,990Income before income tax expense
    
    
    931
    
    
    
    1,268Income tax expense
    
    
    332
    
    
    
    411Net income
    
    $
    599
    
    
    $
    857Earnings per share:Basic
    
    $
    0.24
    
    
    $
    0.35Diluted
    
    $
    0.24
    
    
    $
    0.35Dividends declared per share
    
    $
    0.065
    
    
    $
    0.06
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First Business Financial Services, Inc.
 
 Consolidated Statements of Changes in Stockholders Equity and Comprehensive Income (Unaudited)
 AccumulatedAdditional
    
    
    
    
    
    
    otherCommon
    
    
    paid-in
    
    
    Retained
    
    
    comprehensive
    
    
    TreasuryStock
    
    
    capital
    
    
    earnings
    
    
    loss
    
    
    stock
    
    
    Total(In Thousands, Except Share Data)Balance at December 31, 2005
    
    $
    24
    
    
    $
    22,712
    
    
    
    21,085
    
    
    
    (1,469
    )
    
    $
    (509
    )
    
    $
    41,843Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    857
    
    
    
    
    
    
    
    
    
    
    
    857Unrealized
securities losses
arising during the
period
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (331
    )
    
    
    
    
    
    
    (331
    )Unrealized
derivatives gains
arising during the
period
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6
    
    
    
    
    
    
    
    6Reclassification
adjustment for
realized loss on
derivatives
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    36
    
    
    
    
    
    
    
    36Income tax effect
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    111
    
    
    
    
    
    
    
    111Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    679Share based compensation  restricted
shares
    
    
    
    
    
    
    31
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    31Cash dividends ($0.06 per share)
    
    
    
    
    
    
    
    
    
    
    (148
    )
    
    
    
    
    
    
    
    
    
    
    (148
    )Treasury stock purchased (712 shares)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (17
    )
    
    
    (17
    )Stock options exercised (9,280 shares)
    
    
    1
    
    
    
    90
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    91Balance at March 31, 2006
    
    $
    25
    
    
    $
    22,833
    
    
    
    21,794
    
    
    
    (1,647
    )
    
    $
    (526
    )
    
    $
    42,479
 AccumulatedAdditional
    
    
    
    
    
    
    otherCommon
    
    
    paid-in
    
    
    Retained
    
    
    comprehensive
    
    
    TreasuryStock
    
    
    capital
    
    
    earnings
    
    
    loss
    
    
    stock
    
    
    Total(In Thousands, Except Share Data)Balance at December 31, 2006
    
    $
    25
    
    
    $
    23,029
    
    
    $
    24,237
    
    
    
    (1,005
    )
    
    $
    (530
    )
    
    $
    45,756Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    599
    
    
    
    
    
    
    
    
    
    
    
    599Unrealized
securities gains arising during
the period
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    589
    
    
    
    
    
    
    
    589Income tax effect
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (204
    )
    
    
    
    
    
    
    (204
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    984Share based compensation  restricted shares
    
    
    
    
    
    
    69
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    69Cash dividends ($0.065 per share)
    
    
    
    
    
    
    
    
    
    
    (162
    )
    
    
    
    
    
    
    
    
    
    
    (162
    )Treasury stock purchased (417 shares)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9
    )
    
    
    (9
    )Balance at March 31, 2007
    
    $
    25
    
    
    $
    23,098
    
    
    $
    24,674
    
    
    $
    (620
    )
    
    $
    (539
    )
    
    $
    46,638
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First Business Financial Services, Inc.
 
 Consolidated Statements of Cash Flows (Unaudited)
 For the Three Months EndedMarch 31,2007
    
    
    2006(In Thousands)Operating activitiesNet income
    
    $
    599
    
    
    $
    857Adjustments to reconcile net income to net cash provided by
operating activities:Deferred income taxes, net
    
    
    (569
    )
    
    
    313Provision for loan and lease losses
    
    
    576
    
    
    
    Depreciation, amortization and accretion, net
    
    
    120
    
    
    
    171Share-based compensation
    
    
    69
    
    
    
    31Change in fair value of interest rate swaps
    
    
    
    
    
    
    159Increase in cash surrender value of bank-owned life insurance
    
    
    (163
    )
    
    
    (152
    )Origination of loans originated for sale
    
    
    (308
    )
    
    
    Increase in accrued interest receivable and other assets
    
    
    (650
    )
    
    
    (62
    )Increase (decrease) in accrued expenses and other liabilities
    
    
    1,863
    
    
    
    (1,081
    )Net cash provided by operating activities
    
    
    1,537
    
    
    
    236Investing activitiesProceeds from maturities of available-for-sale securities
    
    
    4,850
    
    
    
    4,591Purchases of available-for-sale securities
    
    
    
    
    
    
    (7,926
    )Net increase in loans and leases
    
    
    (17,469
    )
    
    
    (1,016
    )Purchases of leasehold improvements and equipment, net
    
    
    (144
    )
    
    
    (90
    )Net cash used in investing activities
    
    
    (12,763
    )
    
    
    (4,441
    )Financing activitiesNet increase in deposits
    
    
    52,857
    
    
    
    10,613Net decrease in FHLB line of credit
    
    
    (17,049
    )
    
    
    Repayment of FHLB advances
    
    
    (2
    )
    
    
    (2
    )Proceeds from FHLB advances
    
    
    
    
    
    
    7,000Net decrease in short-term borrowed funds
    
    
    (25,912
    )
    
    
    (14,336
    )Termination of interest rate swaps
    
    
    
    
    
    
    (1,088
    )Exercise of stock options
    
    
    
    
    
    
    91Cash dividends
    
    
    (162
    )
    
    
    (148
    )Purchase of treasury stock
    
    
    (9
    )
    
    
    (17
    )Net cash provided by financing activities
    
    
    9,723
    
    
    
    2,113Net decrease in cash and cash equivalents
    
    
    (1,503
    )
    
    
    (2,092
    )Cash and cash equivalents at the beginning of the period
    
    
    19,461
    
    
    
    16,707Cash and cash equivalents at the end of the period
    
    $
    17,958
    
    
    $
    14,615Supplementary cash flow informationInterest paid on deposits and borrowings
    
    $
    7,455
    
    
    $
    5,910Income taxes paid
    
    
    5
    
    
    
    416Transfer to other real estate owned
    
    
    664
    
    
    
    
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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 Note 1  Principles of Consolidation.
  Note 2  Basis of Presentation.
 Accounting for Uncertainty in Income Taxes.
  Recent Accounting Changes.
 Accounting for Uncertainty in Income Taxes
 Fair Value Option for Financial Assets and Financial Liabilities. The Fair Value Option for
Financial Assets and Liabilities  Including and Amendment of SFAS No. 115 Accounting for Certain Investments in Debt and Equity Securities,
  6




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Fair Value
Measurements
 Note 3  Share-Based Compensation.
  Equity Incentive Plans.
  Stock Options
  WeightedAverageRemainingWeighted
    
    ContractualOptions
    
    Average Price
    
    Life (Years)Outstanding at December 31, 2006
    
    
    166,168
    
    
    $
    21.97
    
    
    
    6.68Granted
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    Forfeited
    
    
    (1,875
    )
    
    
    25.00Outstanding at end of period
    
    
    164,293
    
    
    $
    21.93
    
    
    
    6.34Options exercisable at March 31, 2007
    
    
    129,925
    
    
    $
    21.51
    
    
    
    6.03
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Restricted Shares
  WeightedNumber of
    
    AverageRestricted
    
    Grant-DateShares
    
    Fair ValueNonvested balance as of December 31, 2006
    
    
    45,125
    
    
    $
    23.08Granted
    
    
    5,010
    
    
    
    21.81Vested
    
    
    (7,058
    )
    
    
    23.13Forfeited
    
    
    
    
    
    
    Nonvested balance as of March 31, 2007
    
    
    43,077
    
    
    $
    22.92
  Note 4  Earnings Per Share.
  For the Three MonthsEnded March 31,2007
    
    
    2006Income available to common stockholders
    
    $
    598,632
    
    
    $
    856,653Basic average shares
    
    
    2,453,068
    
    
    
    2,438,344Dilutive effect of share-based awards
    
    
    8,354
    
    
    
    15,411Dilutive average shares
    
    
    2,461,422
    
    
    
    2,453,755Earnings per share:Basic
    
    $
    0.24
    
    
    $
    0.35Diluted
    
    $
    0.24
    
    
    $
    0.35
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Note 5  Securities.
  As of March 31, 2007Gross
    
    
    GrossAmortized
    
    
    unrealized
    
    
    unrealized
    
    
    EstimatedSecurities available-for-sale
    
    cost
    
    
    holding gains
    
    
    holding losses
    
    
    fair value(In Thousands)U.S. Government corporations
and agencies
    
    $
    1,498
    
    
    $
    
    
    
    $
    (22
    )
    
    $
    1,476Municipals
    
    
    185
    
    
    
    
    
    
    
    (2
    )
    
    
    183Collateralized mortgage obligations
    
    
    94,987
    
    
    
    185
    
    
    
    (1,101
    )
    
    
    94,071$
    96,670
    
    
    $
    185
    
    
    $
    (1,125
    )
    
    $
    95,730
 As of December 31, 2006Gross
    
    
    GrossAmortized
    
    
    unrealized
    
    
    unrealized
    
    
    EstimatedSecurities available-for-sale
    
    cost
    
    
    holding gains
    
    
    holding losses
    
    
    fair value(In Thousands)U.S. Government corporations
and agencies
    
    $
    1,497
    
    
    $
    
    
    
    $
    (30
    )
    
    $
    1,467Municipals
    
    
    185
    
    
    
    
    
    
    
    (3
    )
    
    
    182Collateralized mortgage obligations
    
    
    99,855
    
    
    
    85
    
    
    
    (1,581
    )
    
    
    98,359$
    101,537
    
    
    $
    85
    
    
    $
    (1,614
    )
    
    $
    100,008
   As of March 31, 2007Less than 12 months
    
    
    12 months or longer
    
    
    TotalUnrealized
    
    
    
    
    
    
    Unrealized
    
    
    
    
    
    
    UnrealizedFair Value
    
    

losses
    
    
    Fair Value
    
    

losses
    
    
    Fair value
    
    

losses(In Thousands)U.S.
Government
corporations and
agencies
    
    $
    
    
    
    
    
    
    
    $
    1,476
    
    
    $
    (22
    )
    
    $
    1,476
    
    
    $
    (22
    )Municipals
    
    
    
    
    
    
    
    
    
    
    183
    
    
    
    (2
    )
    
    
    183
    
    
    
    (2
    )Collateralized
mortgage
obligations
    
    
    6,373
    
    
    
    (31
    )
    
    
    63,778
    
    
    
    (1,070
    )
    
    
    70,151
    
    
    
    (1,101
    )$
    6,373
    
    
    
    (31
    )
    
    $
    65,437
    
    
    $
    (1,094
    )
    
    $
    71,810
    
    
    $
    (1,125
    )
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As of December 31, 2006Less than 12 months
    
    
    12 months or longer
    
    
    TotalUnrealized
    
    
    
    
    
    
    Unrealized
    
    
    
    
    
    
    UnrealizedFair Value
    
    
    loss
    
    
    Fair Value
    
    
    loss
    
    
    Fair value
    
    
    loss(In Thousands)U.S. Government corporations
and agencies
    
    $
    
    
    
    $
    
    
    
    $
    1,467
    
    
    $
    (30
    )
    
    $
    1,467
    
    
    $
    (30
    )Municipals
    
    
    
    
    
    
    
    
    
    
    182
    
    
    
    (3
    )
    
    
    182
    
    
    
    (3
    )Collateralized mortgage obligations
    
    
    14,451
    
    
    
    (107
    )
    
    
    69,021
    
    
    
    (1,474
    )
    
    
    83,472
    
    
    
    (1,581
    )$
    14,451
    
    
    $
    (107
    )
    
    $
    70,670
    
    
    $
    (1,507
    )
    
    $
    85,121
    
    
    $
    (1,614
    )
   Note 6  Loans and Allowance for Loan and Lease Losses.
  March 31,
    
    
    December 31,2007
    
    
    2006(In Thousands)First mortgage loans:Commercial real estate
    
    $
    293,128
    
    
    $
    274,262Construction
    
    
    80,478
    
    
    
    78,257Multi-family
    
    
    34,188
    
    
    
    34,6351-4 family
    
    
    33,817
    
    
    
    35,721441,611
    
    
    
    422,875Commercial business loans
    
    
    174,825
    
    
    
    176,701Direct financing leases, net
    
    
    23,335
    
    
    
    23,203Home equity loans
    
    
    9,899
    
    
    
    8,859Credit card and other
    
    
    16,169
    
    
    
    16,712665,839
    
    
    
    648,350Less:Allowance for loan and lease losses
    
    
    8,896
    
    
    
    8,296Deferred loan fees
    
    
    183
    
    
    
    187Loans and lease receivables, net
    
    $
    656,760
    
    
    $
    639,867
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##### Table of Contents



ThreeMonths Ended
    
    
    Year EndedMarch 31,
    
    
    December 31,2007
    
    
    2006(In Thousands)Allowance at beginning of period
    
    $
    8,296
    
    
    $
    6,773Charge-offs:Mortgage
    
    
    
    
    
    
    Commercial
    
    
    
    
    
    
    Lease
    
    
    
    
    
    
    Consumer
    
    
    
    
    
    
    Total charge-offs
    
    
    
    
    
    
    Recoveries:Mortgage
    
    
    1
    
    
    
    4Commercial
    
    
    23
    
    
    
    Lease
    
    
    
    
    
    
    Consumer
    
    
    
    
    
    
    Total recoveries
    
    
    24
    
    
    
    4Net recoveries (charge-offs)
    
    
    24
    
    
    
    4Provision for loan and lease losses
    
    
    576
    
    
    
    1,519Allowance at end of period
    
    $
    8,896
    
    
    $
    8,296Allowance to gross loans and leases
    
    
    1.34
    %
    
    
    1.28
    %
 Note 7  Deposits.
  March 31, 2007
    
    
    December 31, 2006Weighted
    
    
    
    
    
    
    WeightedBalance
    
    
    Average Rate
    
    
    Balance
    
    
    Average Rate(In Thousands)Transaction accounts:Demand deposits
    
    $
    41,411
    
    
    
    0.00
    %
    
    $
    45,171
    
    
    
    0.00
    %Negotiable order of
withdrawal (NOW) accounts
    
    
    74,071
    
    
    
    4.50
    
    
    
    58,927
    
    
    
    4.26115,482
    
    
    
    
    
    
    
    104,098Money market accounts
    
    
    180,907
    
    
    
    4.76
    
    
    
    171,996
    
    
    
    4.57Certificates of deposit
    
    
    396,734
    
    
    
    4.85
    
    
    
    364,172
    
    
    
    4.63$
    693,123
    
    
    
    
    
    
    $
    640,266
 11




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##### Table of Contents



Note 8  Borrowings.
  March 31, 2007
    
    
    December 31, 2006Weighted
    
    
    Weighted
    
    
    
    
    
    
    Weighted
    
    
    WeightedAverage
    
    
    Average
    
    
    
    
    
    
    Average
    
    
    AverageBalance
    
    
    Balance
    
    
    Rate
    
    
    Balance
    
    
    Balance
    
    
    Rate(In Thousands)Fed funds purchased and
securities sold under
agreements to repurchase
    
    $
    6,994
    
    
    $
    11,254
    
    
    
    5.40
    %
    
    $
    33,751
    
    
    $
    13,875
    
    
    
    5.12
    %FHLB advances
    
    
    19,534
    
    
    
    21,394
    
    
    
    4.81
    
    
    
    36,584
    
    
    
    19,059
    
    
    
    4.83Junior subordinated debentures
    
    
    
    
    
    
    
    
    
    
    0.00
    
    
    
    
    
    
    
    9,915
    
    
    
    12.52Line of credit
    
    
    2,205
    
    
    
    1,906
    
    
    
    7.14
    
    
    
    1,635
    
    
    
    3,167
    
    
    
    6.82Subordinated notes payable
    
    
    21,000
    
    
    
    21,000
    
    
    
    7.77
    
    
    
    21,000
    
    
    
    6,929
    
    
    
    7.58Other
    
    
    274
    
    
    
    6
    
    
    
    7.00
    
    
    
    
    
    
    
    
    
    
    
    0.00$
    50,007
    
    
    $
    55,560
    
    
    
    6.13
    
    
    $
    92,970
    
    
    $
    52,945
    
    
    
    6.82Short-term borrowings
    
    $
    15,209
    
    
    
    
    
    
    
    
    
    
    $
    52,443Long-term borrowings
    
    
    34,798
    
    
    
    
    
    
    
    
    
    
    
    40,527$
    50,007
    
    
    
    
    
    
    
    
    
    
    $
    92,970
  
 Item 2.  Managements Discussion and Analysis of Financial Condition and Results of Operations
 General
   12




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##### Table of Contents



Cautionary Factors
 Item 1a. Risk Factors
 Overview
  Recent Developments/Financial Highlights
 
    
    Net income for the three months ended March 31, 2007 decreased $258,000 over the
comparable prior year period. The decrease in net income is primarily driven by an
increase in the provision for loan and lease losses and an increase in compensation
expenses, partially offset by increased net interest income.
    
    Net loans and leases receivable increased $16.9 million or 2.6% from $639.9 million at
December 31, 2006 to $656.8 million at March 31, 2007.
    
    Deposits increased $52.9 million or 8.3% from $640.3 million at December 31, 2006 to
$693.1 million at March 31, 2007. Of the $52.9 million increase, $26.5 million was due to
growth of local deposits.
    
    On March 15, 2007, the Board of Directors approved a cash dividend on its common stock
of $0.065 per share. The cash dividend is payable on April 16, 2007 to shareholders of
record at the close of business on April 1, 2007.
 Results of Operations
 Comparison of Three Months Ended March 31, 2007 and 2006
 General.
  13




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##### Table of Contents



Top Line Revenue
  For the Three Months Ended March 31,2007
    
    
    2006
    
    
    ChangeNet interest income
    
    $
    5,381
    
    
    $
    4,524
    
    
    
    18.9
    %Non-interest income
    
    
    1,002
    
    
    
    734
    
    
    
    36.5Total top line revenue
    
    $
    6,383
    
    
    $
    5,258
    
    
    
    21.4
 Net Interest Income.
 For the Three Months Ended March 31, 2007Rate
    
    
    Volume
    
    
    Rate/Volume
    
    
    Net(In Thousands)Interest-Earning AssetsMortgage loans
    
    $
    448
    
    
    $
    1,440
    
    
    $
    108
    
    
    $
    1,996Commercial loans
    
    
    159
    
    
    
    572
    
    
    
    26
    
    
    
    757Leases
    
    
    44
    
    
    
    68
    
    
    
    12
    
    
    
    124Consumer loans
    
    
    
    
    
    
    7
    
    
    
    
    
    
    
    7Total loans and leases receivable
    
    
    651
    
    
    
    2,087
    
    
    
    146
    
    
    
    2,884Mortgage-related securities
    
    
    85
    
    
    
    44
    
    
    
    4
    
    
    
    133Investment securities
    
    
    5
    
    
    
    (15
    )
    
    
    (3
    )
    
    
    (13
    )Other investments
    
    
    
    
    
    
    (7
    )
    
    
    1
    
    
    
    (6
    )Fed funds sold and other
    
    
    
    
    
    
    
    
    
    
    7
    
    
    
    7Short-term investments
    
    
    2
    
    
    
    (2
    )
    
    
    
    
    
    
    Total net change in income on
interest-earning assets
    
    
    743
    
    
    
    2,107
    
    
    
    155
    
    
    
    3,005Interest-bearing liabilitiesNOW accounts
    
    
    73
    
    
    
    167
    
    
    
    24
    
    
    
    264Money market
    
    
    223
    
    
    
    366
    
    
    
    56
    
    
    
    645Certificates  regular
    
    
    399
    
    
    
    645
    
    
    
    83
    
    
    
    1,127Certificates  large
    
    
    105
    
    
    
    (102
    )
    
    
    (21
    )
    
    
    (18
    )Total deposits
    
    
    800
    
    
    
    1,076
    
    
    
    142
    
    
    
    2,018Junior subordinated debentures
    
    
    
    
    
    
    (248
    )
    
    
    
    
    
    
    (248
    )FHLB advances
    
    
    5
    
    
    
    79
    
    
    
    1
    
    
    
    85Other borrowings
    
    
    96
    
    
    
    149
    
    
    
    48
    
    
    
    293Total net change in expense on
interest-bearing liabilities
    
    
    901
    
    
    
    1,056
    
    
    
    191
    
    
    
    2,148Net change in net interest income
    
    $
    (158
    )
    
    $
    1,051
    
    
    $
    (36
    )
    
    $
    857
  14




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15




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##### Table of Contents



Average Interest-Earning Assets, Average Interest-Bearing Liabilities and Interest Rate Spread.
 For the Three Months Ended March 31,2007
    
    
    2006Average
    
    
    
    
    
    
    Average
    
    
    Average
    
    
    
    
    
    
    AverageBalance
    
    
    Interest
    
    
    Yield/Cost
    
    
    Balance
    
    
    Interest
    
    
    Yield/Cost(In Thousands)Interest-Earning AssetsMortgage loans
    
    $
    440,127
    
    
    $
    8,032
    
    
    
    7.30
    %
    
    $
    355,337
    
    
    $
    6,036
    
    
    
    6.80
    %Commercial loans
    
    
    187,758
    
    
    
    4,223
    
    
    
    9.00
    
    
    
    161,150
    
    
    
    3,466
    
    
    
    8.60Leases
    
    
    22,900
    
    
    
    385
    
    
    
    6.72
    
    
    
    18,154
    
    
    
    261
    
    
    
    5.75Consumer loans
    
    
    3,234
    
    
    
    53
    
    
    
    6.56
    
    
    
    2,809
    
    
    
    46
    
    
    
    6.51Total loans and leases
receivable(1)
    
    
    654,019
    
    
    
    12,693
    
    
    
    7.76
    
    
    
    537,450
    
    
    
    9,809
    
    
    
    7.30Mortgage-related securities(2)
    
    
    95,963
    
    
    
    1,070
    
    
    
    4.46
    
    
    
    91,667
    
    
    
    937
    
    
    
    4.09Investment securities(2)
    
    
    1,651
    
    
    
    16
    
    
    
    3.88
    
    
    
    3,457
    
    
    
    29
    
    
    
    3.36Federal Home Loan Bank stock
    
    
    2,024
    
    
    
    16
    
    
    
    3.16
    
    
    
    2,898
    
    
    
    22
    
    
    
    3.04Fed funds sold and other
    
    
    519
    
    
    
    7
    
    
    
    5.39
    
    
    
    19
    
    
    
    
    
    
    
    4.71Short-term investments
    
    
    1,266
    
    
    
    14
    
    
    
    4.42
    
    
    
    1,463
    
    
    
    14
    
    
    
    3.83Total interest-earning assets
    
    
    755,442
    
    
    $
    13,816
    
    
    
    7.32
    
    
    
    636,954
    
    
    $
    10,811
    
    
    
    6.79Non-interest-earning assets
    
    
    31,675
    
    
    
    
    
    
    
    
    
    
    
    32,074Total assets
    
    $
    787,117
    
    
    
    
    
    
    
    
    
    
    $
    669,028Interest-Bearing LiabilitiesNOW accounts
    
    $
    68,632
    
    
    $
    772
    
    
    
    4.50
    
    
    $
    51,678
    
    
    $
    508
    
    
    
    3.93Money market
    
    
    176,905
    
    
    
    2,105
    
    
    
    4.76
    
    
    
    141,442
    
    
    
    1,460
    
    
    
    4.13Certificates  regular
    
    
    350,631
    
    
    
    4,229
    
    
    
    4.82
    
    
    
    290,310
    
    
    
    3,102
    
    
    
    4.27Certificates  large
    
    
    37,832
    
    
    
    478
    
    
    
    5.05
    
    
    
    47,588
    
    
    
    496
    
    
    
    4.17Total deposits
    
    
    634,000
    
    
    
    7,584
    
    
    
    4.78
    
    
    
    531,018
    
    
    
    5,566
    
    
    
    4.19Junior subordinated debentures
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,310
    
    
    
    248
    
    
    
    9.62FHLB advances
    
    
    21,394
    
    
    
    257
    
    
    
    4.81
    
    
    
    14,732
    
    
    
    172
    
    
    
    4.67Other borrowings
    
    
    34,166
    
    
    
    594
    
    
    
    6.95
    
    
    
    22,858
    
    
    
    301
    
    
    
    5.27Total interest-bearing liabilities
    
    
    689,560
    
    
    $
    8,435
    
    
    
    4.89
    
    
    
    578,918
    
    
    $
    6,287
    
    
    
    4.34Non-interest-bearing liabilities
    
    
    51,303
    
    
    
    
    
    
    
    
    
    
    
    48,081Total liabilities
    
    
    740,863
    
    
    
    
    
    
    
    
    
    
    
    626,999Stockholders equity
    
    
    46,254
    
    
    
    
    
    
    
    
    
    
    
    42,029Total liabilities and stockholders
equity
    
    $
    787,117
    
    
    
    
    
    
    
    
    
    
    $
    669,028Net interest income/interest rate spread
    
    
    
    
    
    $
    5,381
    
    
    
    2.43
    %
    
    
    
    
    
    $
    4,524
    
    
    
    2.45
    %Net interest-earning assets
    
    $
    65,882
    
    
    
    
    
    
    
    
    
    
    $
    58,036Net interest margin
    
    
    
    
    
    
    
    
    
    
    2.85
    %
    
    
    
    
    
    
    
    
    
    
    2.84
    %Ratio of average interest-earning assets
to average interest-earning liabilities
    
    
    109.55
    %
    
    
    
    
    
    
    
    
    
    
    110.02
    %Return on average assets
    
    
    0.30
    %
    
    
    
    
    
    
    
    
    
    
    0.51
    %Return on average equity
    
    
    5.18
    %
    
    
    
    
    
    
    
    
    
    
    8.16
    %Average equity to average assets
    
    
    5.88
    %
    
    
    
    
    
    
    
    
    
    
    6.28
    %Non-interest expense to average assets
    
    
    2.41
    %
    
    
    
    
    
    
    
    
    
    
    2.39
    %
 
 (1)
    
    The average balances of loans and leases include non-performing loans and leases.
Interest income related to non-performing loans and leases is recognized when collected.(2)
    
    Includes amortized cost of basis of assets held and available for sale. 16




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Non-Interest Income.
   Provision for Loan and Lease Losses.
  Non-Interest Expense.
   17




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##### Table of Contents



Income Taxes.
 Financial Condition
 General.
 Securities.
  Loans and Leases Receivable.
  Deposits.
 18




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##### Table of Contents



Borrowings.
 Asset Quality
 Non-performing Assets.
   March 31,
    
    
    December 31,2007
    
    
    2006Non-accrual loans
    
    $
    3,151
    
    
    $
    1,109Non-accrual leases
    
    
    
    
    
    
    Total non-accrual loans and leases
    
    
    3,151
    
    
    
    1,109Foreclosed properties and repossessed assets
    
    
    664
    
    
    
    Total non-performing assets
    
    $
    3,815
    
    
    $
    1,109Performing troubled debt restructurings
    
    $
    
    
    
    $
    Total non-accrual loans and leases to total loans and leases
    
    
    0.47
    %
    
    
    0.17
    %Total non-performing assets to total assets
    
    
    0.48
    
    
    
    0.14Allowance for loan and lease losses to total loans and leases
    
    
    1.34
    
    
    
    1.28Allowance for loan and lease losses to non-accrual loans and leases
    
    
    282.32
    
    
    
    748.06
 19




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##### Table of Contents



As of and for
    
    
    As of and forthe Three
    
    
    the YearMonths ended
    
    
    EndedMarch 31,
    
    
    December 31,2007
    
    
    2006Impaired loans and leases with no impairment reserves required
    
    $
    1,839
    
    
    $
    683Impaired loans and leases with impairment reserves required
    
    
    1,377
    
    
    
    1,404Less:Impairment reserve (included in allowance for loan and lease
loss)
    
    
    829
    
    
    
    863Net impaired loans and leases
    
    $
    2,387
    
    
    $
    1,224Average impaired loans and leases
    
    $
    2,269
    
    
    $
    1,444Foregone interest income attributable to impaired loans and leases
    
    $
    94
    
    
    $
    210Interest income recognized on impaired loans and leases
    
    
    27
    
    
    
    217Net foregone interest income on impaired loans and leases
    
    $
    67
    
    
    $
    (7
    )
  For the Three MonthsEnded March 31,2007
    
    
    2006(In Thousands)Allowance at beginning of period
    
    $
    8,296
    
    
    $
    6,773Recoveries:Mortgage
    
    
    1
    
    
    
    1Commercial
    
    
    23
    
    
    
    Total recoveries
    
    
    24
    
    
    
    1Provision for loan and lease loss
    
    
    576
    
    
    
    Allowance at end of period
    
    $
    8,896
    
    
    $
    6,774Allowance to gross loans and leases
    
    
    1.34
    %
    
    
    1.25
    %
  Liquidity and Capital Resources
  20




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21




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##### Table of Contents



Minimum Required to beWell Capitalized UnderMinimum Required for
    
    Prompt Corrective ActionActual
    
    Capital Adequacy Purposes
    
    RequirementsAmount
    
    Ratio
    
    Amount
    
    Ratio
    
    Amount
    
    Ratio(In Thousands)As of March 31, 2007Total capital
(to risk-weighted assets)Consolidated
    
    $
    74,344
    
    
    
    10.31
    %
    
    $
    57,695
    
    
    
    8.00
    %
    
    
    N/A
    
    
    
    N/AFirst Business Bank
    
    
    66,292
    
    
    
    10.57
    
    
    
    50,175
    
    
    
    8.00
    
    
    $
    62,719
    
    
    
    10.00
    %First Business Bank 
Milwaukee
    
    
    10,246
    
    
    
    10.92
    
    
    
    7,507
    
    
    
    8.00
    
    
    
    9,384
    
    
    
    10.00Tier 1 capital
(to risk-weighted assets)Consolidated
    
    $
    44,449
    
    
    
    6.17
    %
    
    $
    28,847
    
    
    
    4.00
    %
    
    
    N/A
    
    
    
    N/AFirst Business Bank
    
    
    59,191
    
    
    
    9.44
    
    
    
    25,088
    
    
    
    4.00
    
    
    $
    37,631
    
    
    
    6.00
    %First Business Bank 
Milwaukee
    
    
    9,065
    
    
    
    9.66
    
    
    
    3,754
    
    
    
    4.00
    
    
    
    5,630
    
    
    
    6.00Tier 1 capital
(to average assets)Consolidated
    
    $
    44,449
    
    
    
    5.66
    %
    
    $
    31,438
    
    
    
    4.00
    %
    
    
    N/A
    
    
    
    N/AFirst Business Bank
    
    
    59,191
    
    
    
    8.75
    
    
    
    27,052
    
    
    
    4.00
    
    
    $
    33,814
    
    
    
    5.00
    %First Business Bank 
Milwaukee
    
    
    9,065
    
    
    
    7.95
    
    
    
    4,562
    
    
    
    4.00
    
    
    
    5,703
    
    
    
    5.00
    %
 Minimum Required to beWell Capitalized UnderMinimum Required for
    
    Prompt Corrective ActionActual
    
    Capital Adequacy Purposes
    
    RequirementsAmount
    
    Ratio
    
    Amount
    
    Ratio
    
    Amount
    
    Ratio(In Thousands)As of December 31, 2006Total capital
(to risk-weighted assets)Consolidated
    
    $
    73,241
    
    
    
    10.40
    %
    
    $
    56,360
    
    
    
    8.00
    %
    
    
    N/A
    
    
    
    N/AFirst Business Bank
    
    
    64,443
    
    
    
    10.49
    
    
    
    49,144
    
    
    
    8.00
    
    
    $
    61,430
    
    
    
    10.00
    %First Business Bank 
Milwaukee
    
    
    10,205
    
    
    
    11.31
    
    
    
    7,218
    
    
    
    8.00
    
    
    
    9,022
    
    
    
    10.00Tier 1 capital
(to risk-weighted assets)Consolidated
    
    $
    43,944
    
    
    
    6.24
    %
    
    $
    28,180
    
    
    
    4.00
    %
    
    
    N/A
    
    
    
    N/AFirst Business Bank
    
    
    57,838
    
    
    
    9.42
    
    
    
    24,572
    
    
    
    4.00
    
    
    $
    36,858
    
    
    
    6.00
    %First Business Bank 
Milwaukee
    
    
    9,070
    
    
    
    10.05
    
    
    
    3,609
    
    
    
    4.00
    
    
    
    5,413
    
    
    
    6.00
    %Tier 1 capital
(to average assets)Consolidated
    
    $
    43,944
    
    
    
    5.99
    %
    
    $
    29,331
    
    
    
    4.00
    %
    
    
    N/A
    
    
    
    N/AFirst Business Bank
    
    
    57,838
    
    
    
    9.22
    
    
    
    25,086
    
    
    
    4.00
    
    
    $
    31,358
    
    
    
    5.00
    %First Business Bank 
Milwaukee
    
    
    9,070
    
    
    
    8.50
    
    
    
    4,269
    
    
    
    4.00
    
    
    
    5,336
    
    
    
    5.00
 22




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##### Table of Contents



Contractual Obligations and Off-balance Sheet Arrangements
 Accounting for Uncertainty in Income Taxes
 
 Item 3.  Quantitative and Qualitative Disclosures about Market Risk
     
 Item 4.  Controls and Procedures
  23




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##### Table of Contents



Part II. Other Information
 
 Item 1.  Legal Proceedings
  
 Item 1A. -Risk Factors
  
 Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds
 (a)
 (b)
 (c)
 Total Number of
    
    
    Maximum NumberShares Purchased
    
    
    that May Yet beas Part of Publicly
    
    
    Purchased UnderTotal Number of
    
    
    Average Price Paid
    
    
    Announced Plans
    
    
    the Plans orPeriod
    
    Shares Purchased
    
    
    Per Share
    
    
    or Programs
    
    
    ProgramsJanuary 1  31, 2007
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    N/AFebruary 1  28, 2007
    
    
    417
    
    
    $
    21.50
    
    
    
    
    
    
    
    N/AMarch 1  31, 2007
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    N/A
 
 Item 3.  Defaults Upon Senior Securities
  
 Item 4.  Submission of Matters to a Vote of Security Holders
  
 Item 5.  Other Information.
  
 Item 6.  Exhibits.
    24




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##### Table of Contents



Signatures
  FIRST BUSINESS FINANCIAL SERVICES, INC.By:
    /s/ Corey A. ChambasCorey A. ChambasDirector and Chief Executive Officer  25