##### 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 June 30, 2006
 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)
  
   þ o
  o o þ
  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 June 30, 2006 and December 31, 2005
    
    
    2Consolidated Statements of Income for the Three and Six Months Ended June 30, 2006 and 2005
    
    
    3Consolidated Statements of Changes in Shareholders Equity and Comprehensive Income for the Six Months Ended June 30, 2006 and 2005
    
    
    4Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2006 and 2005
    
    
    5Notes to Unaudited Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of OperationsResults of Operations
    
    
    17Financial Condition
    
    
    23Asset Quality
    
    
    24Liquidity and Capital Resources
    
    
    26Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    29Item 4. Controls and Procedures
    
    
    30PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    31Item 1A. Risk Factors
    
    
    31Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    31Item 3. Defaults upon Senior Securities
    
    
    31Item 4. Submission of Matters to Vote of Security Holders
    
    
    31Item 5. Other Information
    
    
    31Item 6. Exhibits
    
    
    31SIGNATURES
    
    
    32Certification of Chief Executive OfficerCertification of Sr. VP and Chief Financial OfficerSection 1350 CEO and CFO
  1




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##### Table of Contents



PART I. Financial Information
 
 Item 1.  Financial Statements
 
 Consolidated Balance Sheets
 (unaudited)June 30,
    
    
    December 31,2006
    
    
    2005(In Thousands, Except Share Data)AssetsCash and due from banks
    
    $
    11,982
    
    
    $
    16,568Short-term investments
    
    
    96
    
    
    
    139Cash and cash equivalents
    
    
    12,078
    
    
    
    16,707Securities available-for-sale, at fair value
    
    
    96,205
    
    
    
    92,055Loans and leases receivable, net
    
    
    542,004
    
    
    
    532,716Leasehold improvements and equipment, net
    
    
    1,118
    
    
    
    1,155Cash surrender value of bank-owned life insurance
    
    
    13,153
    
    
    
    12,856Investment in Federal Home Loan Bank stock, at cost
    
    
    2,127
    
    
    
    2,898Goodwill and other intangibles
    
    
    2,832
    
    
    
    2,852Accrued interest receivable and other assets
    
    
    8,540
    
    
    
    8,010Total assets
    
    $
    678,057
    
    
    $
    669,249Liabilities and Stockholders EquityDeposits
    
    $
    574,773
    
    
    $
    567,464Securities sold under agreement to repurchase
    
    
    796
    
    
    
    713Federal Home Loan Bank and other borrowings
    
    
    41,665
    
    
    
    39,045Junior subordinated debentures
    
    
    10,310
    
    
    
    10,310Other liabilities
    
    
    7,494
    
    
    
    9,874Total liabilities
    
    
    635,038
    
    
    
    627,406Commitments and contingencies
    
    
    
    
    
    
    Stockholders Equity:Preferred stock, $10 par value, 10,000 Series A
shares and 10,000 Series B shares authorized, none
issued and outstanding
    
    
    
    
    
    
    Common stock, $.01 par value, 8,000,000 shares
authorized,
2,495,634 and 2,456,754 shares issued, 2,473,176
and 2,435,008 outstanding in 2006 and 2005, respectively
    
    
    25
    
    
    
    24Additional paid-in capital
    
    
    22,873
    
    
    
    22,712Retained earnings
    
    
    22,725
    
    
    
    21,085Accumulated other comprehensive loss
    
    
    (2,078
    )
    
    
    (1,469
    )Treasury stock (22,458 and 21,746 shares in 2006 and
2005,
respectively), at cost
    
    
    (526
    )
    
    
    (509
    )Total stockholders equity
    
    
    43,019
    
    
    
    41,843Total liabilities and stockholders equity
    
    $
    678,057
    
    
    $
    669,249
  2




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##### Table of Contents



Unaudited Consolidated Statements of Income
 Three Months Ended,
    
    
    Six Months Ended,June 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(In Thousands, Except Share Data)Interest income:Loans and leases
    
    $
    10,509
    
    
    $
    8,043
    
    
    $
    20,318
    
    
    $
    15,254Securities income:Taxable
    
    
    982
    
    
    
    772
    
    
    
    1,948
    
    
    
    1,463Short-term investments
    
    
    45
    
    
    
    48
    
    
    
    81
    
    
    
    102Total interest income
    
    
    11,536
    
    
    
    8,863
    
    
    
    22,347
    
    
    
    16,819Interest expense:Deposits
    
    
    5,950
    
    
    
    3,875
    
    
    
    11,516
    
    
    
    7,162Notes payable and other borrowings
    
    
    526
    
    
    
    256
    
    
    
    999
    
    
    
    434Junior subordinated debentures
    
    
    254
    
    
    
    234
    
    
    
    502
    
    
    
    462Total interest expense
    
    
    6,730
    
    
    
    4,365
    
    
    
    13,017
    
    
    
    8,058Net interest income
    
    
    4,806
    
    
    
    4,498
    
    
    
    9,330
    
    
    
    8,761Provision for loan and lease losses
    
    
    71
    
    
    
    
    
    
    
    71
    
    
    
    65Net interest income after provision for
loan and lease losses
    
    
    4,735
    
    
    
    4,498
    
    
    
    9,259
    
    
    
    8,696Non-interest income:Service charges on deposits
    
    
    181
    
    
    
    214
    
    
    
    377
    
    
    
    428Credit, merchant and debit card fees
    
    
    41
    
    
    
    43
    
    
    
    78
    
    
    
    81Loan fees
    
    
    143
    
    
    
    133
    
    
    
    291
    
    
    
    278Gain on sale of 50% owned joint venture
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    973Increase in cash surrender value of
bank-owned life insurance
    
    
    146
    
    
    
    93
    
    
    
    298
    
    
    
    181Trust and investment services fee income
    
    
    359
    
    
    
    244
    
    
    
    661
    
    
    
    526Change in fair value of interest rate swaps
    
    
    (12
    )
    
    
    336
    
    
    
    (171
    )
    
    
    272Net cash settlement of interest rate swaps
    
    
    44
    
    
    
    (21
    )
    
    
    18
    
    
    
    (52
    )Other
    
    
    34
    
    
    
    78
    
    
    
    118
    
    
    
    142Total non-interest income
    
    
    936
    
    
    
    1,120
    
    
    
    1,670
    
    
    
    2,829Non-interest expense:Compensation
    
    
    2,483
    
    
    
    2,148
    
    
    
    5,016
    
    
    
    4,355Occupancy
    
    
    257
    
    
    
    264
    
    
    
    496
    
    
    
    489Equipment
    
    
    125
    
    
    
    117
    
    
    
    247
    
    
    
    238Data processing
    
    
    229
    
    
    
    235
    
    
    
    445
    
    
    
    395Marketing
    
    
    213
    
    
    
    231
    
    
    
    420
    
    
    
    394Professional fees
    
    
    334
    
    
    
    411
    
    
    
    582
    
    
    
    626Other
    
    
    419
    
    
    
    340
    
    
    
    844
    
    
    
    824Total non-interest expense
    
    
    4,060
    
    
    
    3,746
    
    
    
    8,050
    
    
    
    7,321Income before income tax expense
    
    
    1,611
    
    
    
    1,872
    
    
    
    2,879
    
    
    
    4,204Income tax expense
    
    
    532
    
    
    
    649
    
    
    
    943
    
    
    
    1,456Net income
    
    $
    1,079
    
    
    $
    1,223
    
    
    $
    1,936
    
    
    $
    2,748Earnings per share:Basic
    
    $
    0.44
    
    
    $
    0.51
    
    
    $
    0.78
    
    
    $
    1.14Diluted
    
    
    0.43
    
    
    
    0.50
    
    
    
    0.78
    
    
    
    1.12Dividends declared per share
    
    
    0.06
    
    
    
    0.115
    
    
    
    0.12
    
    
    
    0.115
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##### Table of Contents



Unaudited Consolidated Statements of Changes in Stockholders Equity and Comprehensive Income
 AccumulatedAdditional
    
    
    
    
    
    otherCommon
    
    paid-in
    
    Retained
    
    comprehensive
    
    Treasurystock
    
    capital
    
    earnings
    
    loss
    
    stock
    
    Total(Dollars in thousands, except share data)Balance at December
31, 2004
    
    $
    24
    
    
    $
    22,426
    
    
    $
    16,752
    
    
    $
    (677
    )
    
    $
    (384
    )
    
    $
    38,141Comprehensive
income:Net income
    
    
    
    
    
    
    
    
    
    
    2,748
    
    
    
    
    
    
    
    
    
    
    
    2,748Unrealized
securities losses
arising during the
period
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (650
    )
    
    
    
    
    
    
    (650
    )Unrealized
derivatives gains
arising during the
period
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    2Reclassification
adjustment for
realized loss on
derivatives
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    135
    
    
    
    
    
    
    
    135Income tax effect
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    220
    
    
    
    
    
    
    
    220Comprehensive
income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,455Cash dividends
($0.115 per share)
    
    
    
    
    
    
    
    
    
    
    (278
    )
    
    
    
    
    
    
    
    
    
    
    (278
    )Treasury stock
purchased (150
shares)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3
    )
    
    
    (3
    )Stock options
exercised (6,280
shares)
    
    
    
    
    
    
    103
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    103Balance at June 30,
2005
    
    $
    24
    
    
    $
    22,529
    
    
    $
    19,222
    
    
    $
    (970
    )
    
    $
    (387
    )
    
    $
    40,418
 AccumulatedAdditional
    
    
    
    
    
    otherCommon
    
    paid-in
    
    Retained
    
    comprehensive
    
    Treasurystock
    
    capital
    
    earnings
    
    loss
    
    stock
    
    Total(Dollars in thousands, except share data)Balance at December
31, 2005
    
    $
    24
    
    
    $
    22,712
    
    
    $
    21,085
    
    
    $
    (1,469
    )
    
    $
    (509
    )
    
    $
    41,843Comprehensive
income:Net income
    
    
    
    
    
    
    
    
    
    
    1,936
    
    
    
    
    
    
    
    
    
    
    
    1,936Unrealized
securities losses
arising during the
period
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,036
    )
    
    
    
    
    
    
    (1,036
    )Unrealized
derivatives gains
arising during the
period
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10
    
    
    
    
    
    
    
    10Reclassification
adjustment for
realized loss on
derivatives
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    65
    
    
    
    
    
    
    
    65Income tax effect
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    352
    
    
    
    
    
    
    
    352Comprehensive
income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,327Expense from
issuance of
restricted shares
(31,600 shares)
    
    
    
    
    
    
    71
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    71Cash dividends
($0.12 per share)
    
    
    
    
    
    
    
    
    
    
    (296
    )
    
    
    
    
    
    
    
    
    
    
    (296
    )Treasury stock
purchased (712
shares)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (17
    )
    
    
    (17
    )Stock options
exercised (9,280
shares)
    
    
    1
    
    
    
    90
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    91Balance at June 30,
2006
    
    $
    25
    
    
    $
    22,873
    
    
    $
    22,725
    
    
    $
    (2,078
    )
    
    $
    (526
    )
    
    $
    43,019
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##### Table of Contents



Unaudited Consolidated Statements of Cash Flows
 Six Months Ended June 30,2006
    
    
    2005(In Thousands)Operating ActivitiesNet income
    
    $
    1,936
    
    
    $
    2,748Adjustments to reconcile net income to net cash
provided by operating activities:Deferred income taxes, net
    
    
    (180
    )
    
    
    (1,776
    )Provision for loan and lease losses
    
    
    71
    
    
    
    65Depreciation, amortization and accretion, net
    
    
    346
    
    
    
    537Expense from
issuance of restricted shares
    
    
    71
    
    
    
    Change in fair value of interest rate swaps
    
    
    171
    
    
    
    (272
    )Increase in cash surrender value of bank-owned life insurance
    
    
    (298
    )
    
    
    (181
    )Origination of loans originated for sale
    
    
    (457
    )
    
    
    Sale of loans originated for sale
    
    
    457
    
    
    
    137Gain on sale of loans originated for sale
    
    
    (4
    )
    
    
    (1
    )Gain on sale of 50% owned joint venture
    
    
    
    
    
    
    (973
    )Increase (decrease) in accrued interest receivable and other
assets
    
    
    92
    
    
    
    (967
    )Increase (decrease) in accrued expenses and other liabilities
    
    
    (1,234
    )
    
    
    2,145Net cash provided by operating activities
    
    
    972
    
    
    
    1,462Investing activitiesProceeds from maturities of available-for-sale securities
    
    
    9,660
    
    
    
    13,747Proceeds from sale of 50% owned joint venture
    
    
    
    
    
    
    2,100Purchases of available-for-sale securities
    
    
    (14,936
    )
    
    
    (37,120
    )Decrease (increase) in investment in FHLB stock
    
    
    771
    
    
    
    (75
    )Net increase in loans and leases
    
    
    (9,355
    )
    
    
    (16,100
    )Purchases of leasehold improvements and equipment, net
    
    
    (148
    )
    
    
    (27
    )Net cash used in investing activities
    
    
    (14,008
    )
    
    
    (37,475
    )Financing activitiesNet increase in deposits
    
    
    7,309
    
    
    
    35,895Net increase (decrease) in FHLB line of credit
    
    
    6,996
    
    
    
    (11,154
    )Net increase (decrease) in short-term borrowed funds
    
    
    (4,291
    )
    
    
    14,910Termination of interest rate swaps
    
    
    (1,384
    )
    
    
    Exercise of stock options
    
    
    91
    
    
    
    103Cash dividends
    
    
    (296
    )
    
    
    (278
    )Purchase of treasury stock
    
    
    (17
    )
    
    
    (3
    )Net cash provided by financing activities
    
    
    8,408
    
    
    
    39,473Net increase (decrease) in cash and cash equivalents
    
    
    (4,629
    )
    
    
    3,460Cash and cash equivalents at beginning of period
    
    
    16,707
    
    
    
    8,721Cash and cash equivalents at end of period
    
    $
    12,078
    
    
    $
    12,181Supplementary cash flow informationCash paid or credited to accounts:Interest on deposits and borrowings
    
    $
    12,885
    
    
    $
    7,797Income taxes
    
    
    1,616
    
    
    
    2,142Non-cash transactions:Loans transferred to foreclosed properties
    
    
    
    
    
    
    650
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##### Table of Contents



NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 Note 1  Principles of Consolidation.
  Note 2  Basis of Presentation.
   Recent Accounting Changes.
 Accounting for Uncertainty in Income Taxes. Accounting for Uncertainty in Income
Taxes Accounting for Income Taxes
 Note 3  Share Based Compensation.
 Share-Based Payment Accounting for Stock-based
Compensation Accounting for Stock Issued to
Employees Statement
of Cash Flows
 6




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##### Table of Contents



Equity Incentive Plans
    Stock Options
   For the six months endedJune 30,2006WeightedAverageWeighted
    
    RemainingAverage
    
    ContractualOptions
    
    Price
    
    Life (Years)Outstanding at January 1, 2006
    
    
    201,532
    
    
    $
    21.05Granted
    
    
    
    
    
    
    Exercised
    
    
    (9,280
    )
    
    
    9.73Forfeited
    
    
    (9,345
    )
    
    
    22.40Outstanding at end of period
    
    
    182,907
    
    
    $
    21.55
    
    
    
    6.9Options exercisable at June 30, 2006
    
    
    113,375
    
    
    $
    19.46
    
    
    
    6.2
 7




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##### Table of Contents



Restricted Shares
  Number of
    
    Weighted AverageRestricted
    
    Grant-DateShares
    
    Fair ValueNonvested balance as of January 1, 2006
    
    $
    
    
    
    $
    Granted
    
    
    31,600
    
    
    
    23.13Vested
    
    
    
    
    
    
    Forfeited
    
    
    (2,000
    )
    
    
    23.03Nonvested balance as of June 30, 2006
    
    
    29,600
    
    
    $
    23.13
  Note 4  Goodwill and Other Intangible Assets.
  Six Months EndedJune 30,2006
    
    
    2005(In Thousands)Balance at beginning of period
    
    $
    2,689
    
    
    $
    2,689Goodwill acquired
    
    
    
    
    
    
    Balance at end of period
    
    $
    2,689
    
    
    $
    2,689
  8




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##### Table of Contents



Six Months EndedJune 30,2006
    
    
    2005(In Thousands)Core deposit intangibles:Gross carrying amount
    
    $
    145
    
    
    $
    145Accumulated amortization
    
    
    (67
    )
    
    
    (40
    )Net book value
    
    $
    78
    
    
    $
    105Additions during the year
    
    $
    
    
    
    $
    Amortization during the period
    
    
    (14
    )
    
    
    (18
    )Other intangibles:Gross carrying amount
    
    $
    120
    
    
    $
    120Accumulated amortization
    
    
    (54
    )
    
    
    (42
    )Net book value
    
    $
    66
    
    
    $
    78Additions during the year
    
    $
    
    
    
    $
    Amortization during the period
    
    
    (6
    )
    
    
    (6
    )
  CoreDeposit
    
    
    OtherIntangibles
    
    
    Intangibles
    
    
    Total(In Thousands)Six months ended
June 30, 2006
    
    $
    14
    
    
    $
    6
    
    
    $
    20Estimate for the
six months ended
December 31, 2006
    
    
    10
    
    
    
    6
    
    
    
    16Estimate for the
year ended December
31,2007
    
    
    18
    
    
    
    12
    
    
    
    302008
    
    
    13
    
    
    
    12
    
    
    
    252009
    
    
    10
    
    
    
    12
    
    
    
    222010
    
    
    7
    
    
    
    12
    
    
    
    19$
    48
    
    
    $
    48
    
    
    $
    96
 9




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##### Table of Contents



Note 5  Securities
  As of June 30, 2006Gross
    
    Grossunrealized
    
    unrealizedAmortized
    
    holding
    
    holding
    
    EstimatedSecurities available-for-sale
    
    cost
    
    gains
    
    losses
    
    fair value(In Thousands)U.S. Government
corporations and
agencies
    
    $
    5,157
    
    
    $
    
    
    
    $
    (80
    )
    
    $
    5,077Municipals
    
    
    185
    
    
    
    
    
    
    
    (5
    )
    
    
    180Collateralized
mortgage
obligations
    
    
    93,984
    
    
    
    
    
    
    
    (3,036
    )
    
    
    90,948$
    99,326
    
    
    $
    
    
    
    $
    (3,121
    )
    
    $
    96,205
 As of December 31, 2005Gross
    
    Grossunrealized
    
    unrealizedAmortized
    
    holding
    
    holding
    
    EstimatedSecurities available-for-sale
    
    cost
    
    gains
    
    losses
    
    fair value(In Thousands)U.S. Government
corporations and
agencies
    
    $
    3,264
    
    
    $
    
    
    
    $
    (80
    )
    
    $
    3,184Municipals
    
    
    275
    
    
    
    
    
    
    
    (3
    )
    
    
    272Collateralized
mortgage
obligations
    
    
    90,601
    
    
    
    2
    
    
    
    (2,004
    )
    
    
    88,599$
    94,140
    
    
    $
    2
    
    
    $
    (2,087
    )
    
    $
    92,055
  10




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##### Table of Contents



As of June 30, 2006Less than 12 months
    
    12 months or longer
    
    TotalFair Value
    
    Unrealized loss
    
    Fair Value
    
    Unrealized loss
    
    Fair Value
    
    Unrealized loss(In Thousands)U.S. Government
corporations and
agencies
    
    $
    
    
    
    $
    
    
    
    $
    3,178
    
    
    $
    80
    
    
    $
    3,178
    
    
    $
    80Municipals
    
    
    180
    
    
    
    5
    
    
    
    
    
    
    
    
    
    
    
    180
    
    
    
    5Collateralized
mortgage
obligations
    
    
    27,926
    
    
    
    685
    
    
    
    61,876
    
    
    
    2,351
    
    
    
    89,802
    
    
    
    3,036$
    28,106
    
    
    $
    690
    
    
    $
    65,054
    
    
    $
    2,431
    
    
    $
    93,160
    
    
    $
    3,121
   Note 6  Loans and Allowance for Loan and Lease Losses
  As of June 30,
    
    
    As of December 31,2006
    
    
    2005(In thousands)First mortgage loans:Commercial real estate
    
    $
    244,719
    
    
    $
    249,133Construction
    
    
    55,735
    
    
    
    50,619Multi-family
    
    
    26,885
    
    
    
    22,1151-4 family
    
    
    32,882
    
    
    
    26,513360,221
    
    
    
    348,380Commercial business loans
    
    
    148,306
    
    
    
    151,688Direct financing leases, net
    
    
    18,350
    
    
    
    17,852Second mortgage loans
    
    
    7,241
    
    
    
    8,231Other loans
    
    
    14,900
    
    
    
    13,579Gross loans and lease receivables
    
    
    549,018
    
    
    
    539,730Less:Allowance for loan and lease losses
    
    
    6,846
    
    
    
    6,773Deferred loan fees
    
    
    168
    
    
    
    241Net loans and lease receivables
    
    $
    542,004
    
    
    $
    532,716
 11




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##### Table of Contents



Six Months Ended
    
    
    Year EndedJune 30,
    
    
    December 31,2006
    
    
    2005(In Thousands)Allowance at beginning of period
    
    $
    6,773
    
    
    $
    6,375Charge-offs:MortgageCommercial
    
    
    
    
    
    
    Lease
    
    
    
    
    
    
    Consumer
    
    
    
    
    
    
    (10
    )Total charge-offs
    
    
    
    
    
    
    (10
    )Recoveries:Mortgage
    
    
    
    
    
    
    4Commercial
    
    
    2
    
    
    
    4Lease
    
    
    
    
    
    
    Consumer
    
    
    
    
    
    
    Total recoveries
    
    
    2
    
    
    
    8Net recoveries (charge-offs)
    
    
    2
    
    
    
    (2
    )Provision
    
    
    71
    
    
    
    400Allowance at end of period
    
    $
    6,846
    
    
    $
    6,773Allowance to gross loans and leases
    
    
    1.25
    %
    
    
    1.25
    %
 Note 7  Deposits
 June 30,
    
    
    December 31,2006
    
    
    2005Weighted
    
    
    
    
    
    
    WeightedBalance
    
    
    Average Rate
    
    
    Balance
    
    
    Average Rate(Dollars in Thousands)Transaction accounts:Demand deposits
    
    $
    41,145
    
    
    
    0.00
    %
    
    $
    46,766
    
    
    
    0.00
    %Negotiable order of
withdrawal (NOW)
accounts
    
    
    51,362
    
    
    
    4.07
    
    
    
    46,962
    
    
    
    2.8592,507
    
    
    
    
    
    
    
    93,728Money market accounts
    
    
    155,315
    
    
    
    4.32
    
    
    
    138,442
    
    
    
    3.10Certificates of deposit
    
    
    326,951
    
    
    
    4.39
    
    
    
    335,294
    
    
    
    3.95$
    574,773
    
    
    
    
    
    
    $
    567,464
 12




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##### Table of Contents



Note 8  Borrowings
 As of June 30,2006Weighted
    
    
    WeightedAverage
    
    
    AverageBalance
    
    
    Balance
    
    
    Rate(Dollars in Thousands)Fed funds purchased and
securities sold under agreement
to repurchase
    
    $
    13,271
    
    
    $
    12,412
    
    
    
    4.74
    %FHLB advances
    
    
    19,541
    
    
    
    17,156
    
    
    
    4.74Junior subordinated debentures
    
    
    10,310
    
    
    
    10,310
    
    
    
    9.74Line of credit
    
    
    4,650
    
    
    
    3,656
    
    
    
    6.56Subordinated note payable
    
    
    5,000
    
    
    
    5,000
    
    
    
    7.16$
    52,771
    
    
    $
    48,534
    
    
    
    6.19
    %Short-term borrowings
    
    $
    17,930Long-term borrowings (due
beyond one year)
    
    
    34,841$
    52,771
 As of December 31,2005Weighted
    
    
    WeightedAverage
    
    
    AverageBalance
    
    
    Balance
    
    
    Rate(Dollars in Thousands)Fed funds purchased and
securities sold under agreement
to repurchase
    
    $
    19,463
    
    
    $
    9,021
    
    
    
    3.45
    %FHLB advances
    
    
    12,545
    
    
    
    11,427
    
    
    
    3.67Junior subordinated debentures
    
    
    10,310
    
    
    
    10,310
    
    
    
    9.18Line of credit
    
    
    2,750
    
    
    
    2,338
    
    
    
    5.39Subordinated note payable
    
    
    5,000
    
    
    
    5,000
    
    
    
    5.75$
    50,068
    
    
    $
    38,096
    
    
    
    5.49
    %Short-term borrowings
    
    $
    22,222Long-term borrowings (due
beyond one year)
    
    
    27,846$
    50,068
 Note 9  Derivative and Hedging Activities
  13




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As of June 30,
    
    
    As of December 31,2006
    
    
    2005(In thousands)Notional
    
    
    Maturity
    
    Fixed
    
    
    Variable
    
    
    Notional
    
    
    Maturity
    
    Fixed
    
    
    VariableAmount
    
    
    Date
    
    Rate
    
    
    Rate
    
    
    Amount
    
    
    Date
    
    Rate
    
    
    RateCash Flow Hedge:Pay-fixed interest
rate swap
    
    $
    703
    
    
    April, 2009
    
    
    5.24
    %
    
    
    4.86
    %
    
    $
    789
    
    
    April, 2009
    
    
    5.24
    %
    
    
    3.97
    %Other Derivatives:Pay-fixed interest
rate swap
    
    
    10,000
    
    
    October, 2006
    
    
    3.94
    
    
    
    4.95
    
    
    
    10,000
    
    
    October, 2006
    
    
    3.94
    
    
    
    4.08Pay-fixed interest
rate swap
    
    
    10,000
    
    
    November, 2006
    
    
    3.75
    
    
    
    4.76
    
    
    
    10,000
    
    
    November, 2006
    
    
    3.75
    
    
    
    4.12Pay-fixed interest
rate swap
    
    
    10,000
    
    
    December, 2006
    
    
    4.94
    
    
    
    5.40
    
    
    
    10,000
    
    
    December, 2006
    
    
    4.94
    
    
    
    4.50Callable
receive-fixed
interest rate swap
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,000
    
    
    January, 2010
    
    
    4.25
    
    
    
    4.44Callable
receive-fixed
interest rate swap
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,000
    
    
    February, 2010
    
    
    4.35
    
    
    
    4.39Callable
receive-fixed
interest rate swap
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,000
    
    
    February, 2010
    
    
    4.10
    
    
    
    4.42Callable
receive-fixed
interest rate swap
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,000
    
    
    November, 2010
    
    
    4.00
    
    
    
    4.41Pay-fixed interest
rate swap
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,742
    
    
    June, 2011
    
    
    5.49
    
    
    
    4.20$
    30,703
    
    
    
    
    
    
    
    
    
    
    
    
    $
    75,531
  14




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##### Table of Contents



Note 10  Earnings Per Share
  Three Months Ended June 30,2006
    
    
    2005Numerator:Net income
    
    $
    1,079,025
    
    
    $
    1,223,007Numerator for basic and diluted earnings
per share
income available to common stockholders
    
    
    1,079,025
    
    
    
    1,223,007Denominator:Denominator for basic earnings per
shareweighted-average common
shares outstanding
    
    
    2,474,676
    
    
    
    2,418,239Effect of dilutive securities:Employee stock options
    
    
    16,722
    
    
    
    46,786Denominator for diluted earnings per
shareadjusted weighted-average
common shares and assumed conversions
    
    
    2,491,398
    
    
    
    2,465,025Basic earnings per share
    
    $
    0.44
    
    
    $
    0.51Diluted earnings per share
    
    
    0.43
    
    
    
    0.50
 15




---



##### Table of Contents



Six Months Ended June 30,2006
    
    
    2005Numerator:Net income
    
    $
    1,935,678
    
    
    $
    2,748,135Numerator for basic and diluted earnings
per share
income available to common stockholders
    
    
    1,935,678
    
    
    
    2,748,135Denominator:Denominator for basic earnings per
shareweighted-average common
shares outstanding
    
    
    2,467,710
    
    
    
    2,416,071Effect of dilutive securities:Employee stock options
    
    
    16,710
    
    
    
    47,626Denominator for diluted earnings per
shareadjusted weighted-average
common shares and assumed conversions
    
    
    2,484,420
    
    
    
    2,463,697Basic earnings per share
    
    $
    0.78
    
    
    $
    1.14Diluted earnings per share
    
    
    0.78
    
    
    
    1.12
 
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Cautionary Factors
 Managements Discussion and Analysis of Financial
Condition and Results of Operations
 16




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##### Table of Contents



Overview
  
 Results of Operations
 Comparison of Three and Six Months Ended June 30, 2006 and 2005
 General.
 Net Interest Income.
  17




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##### Table of Contents



18




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##### Table of Contents



Provision for Loan and Lease Losses.
 Non-Interest Income.
 Non-Interest Expense.
 19




---



##### Table of Contents



Income Taxes.
 Average Interest-Earning Assets, Average Interest-Bearing Liabilities and Interest Rate
Spread.
 20




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##### Table of Contents



Three Months Ended June 30,2006
    
    
    2005Average
    
    
    
    
    
    
    
    
    
    
    AverageAverage
    
    
    
    
    
    
    Yield/
    
    
    Average
    
    
    
    
    
    
    Yield/Balance
    
    
    Interest
    
    
    Cost
    
    
    Balance
    
    
    Interest
    
    
    Cost(Dollars in Thousands)Interest-Earning
AssetsMortgage loans
(1)
    
    $
    360,951
    
    
    $
    6,425
    
    
    
    7.12
    %
    
    $
    326,868
    
    
    $
    4,867
    
    
    
    5.96
    %Commercial loans
    
    
    158,210
    
    
    
    3,632
    
    
    
    9.18
    
    
    
    139,433
    
    
    
    2,831
    
    
    
    8.12Leases
    
    
    18,721
    
    
    
    404
    
    
    
    8.63
    
    
    
    22,756
    
    
    
    295
    
    
    
    5.19Consumer loans
    
    
    2,831
    
    
    
    48
    
    
    
    6.78
    
    
    
    3,731
    
    
    
    50
    
    
    
    5.36Total loans and
leases receivable
(1)
    
    
    540,713
    
    
    
    10,509
    
    
    
    7.77
    
    
    
    492,788
    
    
    
    8,043
    
    
    
    6.53Mortgage-related
securities (2)
    
    
    91,083
    
    
    
    954
    
    
    
    4.19
    
    
    
    82,092
    
    
    
    751
    
    
    
    3.66Investment
securities (2)
    
    
    3,454
    
    
    
    28
    
    
    
    3.24
    
    
    
    3,356
    
    
    
    25
    
    
    
    2.98Federal Home Loan
Bank stock
    
    
    2,804
    
    
    
    22
    
    
    
    3.14
    
    
    
    2,816
    
    
    
    38
    
    
    
    5.40Fed funds sold and
other
    
    
    113
    
    
    
    2
    
    
    
    7.08
    
    
    
    142
    
    
    
    1
    
    
    
    2.82Short-term
investments
    
    
    1,864
    
    
    
    21
    
    
    
    4.51
    
    
    
    815
    
    
    
    5
    
    
    
    2.45Total
interest-earning
assets
    
    
    640,031
    
    
    
    11,536
    
    
    
    7.21
    
    
    
    582,009
    
    
    
    8,863
    
    
    
    6.09Non-interest-earning
assets
    
    
    30,263
    
    
    
    
    
    
    
    
    
    
    
    21,614Total assets
    
    $
    670,294
    
    
    
    
    
    
    
    
    
    
    $
    603,623Interest-Bearing
LiabilitiesNOW accounts
    
    $
    50,926
    
    
    $
    535
    
    
    
    4.20
    
    
    $
    52,197
    
    
    $
    346
    
    
    
    2.65Money market
    
    
    146,573
    
    
    
    1,651
    
    
    
    4.51
    
    
    
    107,396
    
    
    
    741
    
    
    
    2.76Certificates

regular
    
    
    291,451
    
    
    
    3,283
    
    
    
    4.51
    
    
    
    274,600
    
    
    
    2,394
    
    
    
    3.49Certificates  large
    
    
    41,967
    
    
    
    481
    
    
    
    4.58
    
    
    
    42,607
    
    
    
    393
    
    
    
    3.69Total deposits
    
    
    530,917
    
    
    
    5,950
    
    
    
    4.48
    
    
    
    476,800
    
    
    
    3,874
    
    
    
    3.25Junior subordinated
debentures
    
    
    10,310
    
    
    
    254
    
    
    
    9.85
    
    
    
    10,310
    
    
    
    234
    
    
    
    9.08FHLB advances
    
    
    19,552
    
    
    
    235
    
    
    
    4.81
    
    
    
    7,364
    
    
    
    72
    
    
    
    3.89Other borrowings
    
    
    19,297
    
    
    
    291
    
    
    
    6.03
    
    
    
    19,051
    
    
    
    185
    
    
    
    3.88Total
interest-bearing
liabilities
    
    
    580,076
    
    
    
    6,730
    
    
    
    4.64
    
    
    
    513,525
    
    
    
    4,365
    
    
    
    3.40Non-interest-bearing
liabilities
    
    
    47,498
    
    
    
    
    
    
    
    
    
    
    
    50,324Total liabilities
    
    
    627,574
    
    
    
    
    
    
    
    
    
    
    
    563,849Stockholders equity
    
    
    42,720
    
    
    
    
    
    
    
    
    
    
    
    39,774Total liabilities
and
Stockholders
equity
    
    $
    670,294
    
    
    
    
    
    
    
    
    
    
    $
    603,623Net interest
income/interest
rate spread
    
    
    
    
    
    $
    4,806
    
    
    
    2.57
    %
    
    
    
    
    
    $
    4,498
    
    
    
    2.69
    %Net
interest-earning
assets
    
    $
    59,955
    
    
    
    
    
    
    
    
    
    
    $
    68,484Net interest margin
    
    
    
    
    
    
    
    
    
    
    3.00
    %
    
    
    
    
    
    
    
    
    
    
    3.09
    %Ratio of average
interest-earning
assets to average
interest-
earning liabilities
    
    
    1.10
    
    
    
    
    
    
    
    
    
    
    
    1.13Return on average
assets
    
    
    0.64
    %
    
    
    
    
    
    
    
    
    
    
    0.81
    %Return on average
equity
    
    
    10.10
    %
    
    
    
    
    
    
    
    
    
    
    12.30
    %Average equity to
average assets
    
    
    6.37
    %
    
    
    
    
    
    
    
    
    
    
    6.59
    %Non-interest
expense to average
assets
    
    
    2.42
    %
    
    
    
    
    
    
    
    
    
    
    2.57
    %
 
 (1)
    
    The average balances of loans and leases include non-performing loans and leases,
interest of which is generally recognized on a cash basis.(2)
    
    Includes amortized cost basis of assets held and available for sale. 21




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##### Table of Contents



Six Months Ended June 30,2006
    
    
    2005Average
    
    
    
    
    
    
    
    
    
    
    AverageAverage
    
    
    
    
    
    
    Yield/
    
    
    Average
    
    
    
    
    
    
    Yield/Balance
    
    
    Interest
    
    
    Cost
    
    
    Balance
    
    
    Interest
    
    
    Cost(Dollars in Thousands)Interest-Earning AssetsMortgage loans (1)
    
    $
    358,166
    
    
    $
    12,462
    
    
    
    6.96
    %
    
    $
    318,499
    
    
    $
    9,114
    
    
    
    5.72
    %Commercial loans
    
    
    159,666
    
    
    
    7,097
    
    
    
    8.89
    
    
    
    138,386
    
    
    
    5,435
    
    
    
    7.85Leases
    
    
    18,439
    
    
    
    665
    
    
    
    7.21
    
    
    
    23,988
    
    
    
    630
    
    
    
    5.25Consumer loans
    
    
    2,820
    
    
    
    94
    
    
    
    6.67
    
    
    
    2,696
    
    
    
    75
    
    
    
    5.56Total loans and leases receivable (1)
    
    
    539,091
    
    
    
    20,318
    
    
    
    7.54
    
    
    
    483,569
    
    
    
    15,254
    
    
    
    6.31Mortgage-related securities (2)
    
    
    91,373
    
    
    
    1,891
    
    
    
    4.14
    
    
    
    78,427
    
    
    
    1,410
    
    
    
    3.60Investment securities (2)
    
    
    3,455
    
    
    
    57
    
    
    
    3.30
    
    
    
    3,570
    
    
    
    53
    
    
    
    2.97Federal Home Loan Bank stock
    
    
    2,851
    
    
    
    44
    
    
    
    3.09
    
    
    
    2,795
    
    
    
    76
    
    
    
    5.44Fed funds sold and other
    
    
    66
    
    
    
    2
    
    
    
    6.06
    
    
    
    1,580
    
    
    
    16
    
    
    
    2.03Short-term investments
    
    
    1,665
    
    
    
    35
    
    
    
    4.20
    
    
    
    865
    
    
    
    10
    
    
    
    2.31Total interest-earning assets
    
    
    638,501
    
    
    
    22,347
    
    
    
    7.00
    
    
    
    570,806
    
    
    
    16,819
    
    
    
    5.89Non-interest-earning assets
    
    
    31,163
    
    
    
    
    
    
    
    
    
    
    
    22,460Total assets
    
    $
    669,664
    
    
    
    
    
    
    
    
    
    
    $
    593,266Interest-Bearing LiabilitiesNOW accounts
    
    $
    51,300
    
    
    $
    1,043
    
    
    
    4.07
    
    
    $
    51,612
    
    
    $
    632
    
    
    
    2.45Money market
    
    
    144,022
    
    
    
    3,111
    
    
    
    4.32
    
    
    
    100,843
    
    
    
    1,313
    
    
    
    2.60Certificates  regular
    
    
    290,884
    
    
    
    6,385
    
    
    
    4.39
    
    
    
    273,133
    
    
    
    4,332
    
    
    
    3.17Certificates  large
    
    
    44,762
    
    
    
    977
    
    
    
    4.37
    
    
    
    41,619
    
    
    
    884
    
    
    
    4.25Total deposits
    
    
    530,968
    
    
    
    11,516
    
    
    
    4.34
    
    
    
    467,207
    
    
    
    7,161
    
    
    
    3.07Junior subordinated debentures
    
    
    10,310
    
    
    
    502
    
    
    
    9.74
    
    
    
    10,310
    
    
    
    462
    
    
    
    8.96FHLB advances
    
    
    17,156
    
    
    
    407
    
    
    
    4.74
    
    
    
    11,672
    
    
    
    163
    
    
    
    2.79Other borrowings
    
    
    21,068
    
    
    
    592
    
    
    
    5.62
    
    
    
    13,939
    
    
    
    271
    
    
    
    3.89Total interest-bearing liabilities
    
    
    579,502
    
    
    
    13,017
    
    
    
    4.49
    
    
    
    503,128
    
    
    
    8,058
    
    
    
    3.20Non-interest-bearing liabilities
    
    
    47,786
    
    
    
    
    
    
    
    
    
    
    
    50,945Total liabilities
    
    
    627,288
    
    
    
    
    
    
    
    
    
    
    
    554,073Stockholders equity
    
    
    42,376
    
    
    
    
    
    
    
    
    
    
    
    39,193Total liabilities and
Stockholders equity
    
    $
    669,664
    
    
    
    
    
    
    
    
    
    
    $
    593,266Net interest income/interest
rate spread
    
    
    
    
    
    $
    9,330
    
    
    
    2.51
    %
    
    
    
    
    
    $
    8,761
    
    
    
    2.69
    %Net interest-earning assets
    
    $
    58,999
    
    
    
    
    
    
    
    
    
    
    $
    67,678Net interest margin
    
    
    
    
    
    
    
    
    
    
    2.92
    %
    
    
    
    
    
    
    
    
    
    
    3.07
    %Ratio of average interest-earningassets to average interest-earning liabilities
    
    
    1.10
    
    
    
    
    
    
    
    
    
    
    
    1.13Return on average assets
    
    
    0.58
    %
    
    
    
    
    
    
    
    
    
    
    0.93
    %Return on average equity
    
    
    9.14
    %
    
    
    
    
    
    
    
    
    
    
    14.02
    %Average equity to average assets
    
    
    6.33
    %
    
    
    
    
    
    
    
    
    
    
    6.61
    %Non-interest expense to average
assets
    
    
    2.40
    %
    
    
    
    
    
    
    
    
    
    
    2.57
    %
 
 (1)
    
    The average balances of loans and leases include non-performing loans and leases, interest of which is generally recognized on a cash basis.(2)
    
    Includes amortized cost basis of assets held and available for sale. 22




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##### Table of Contents



Financial Condition
 General.
 Securities.
 Loans and Leases Receivable.
 Investment in FHLB stock.
 Deposits.
 Borrowings.
 Stockholders Equity. . Note 1
  23




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##### Table of Contents



Asset Quality
 Non-performing Assets.
  At June 30,
    
    
    At December 31,2006
    
    
    2005(Dollars in Thousands)Non-accrual loans
    
    $
    1,360
    
    
    $
    1,454Non-accrual leases
    
    
    9
    
    
    
    90Total non-accrual loans and leases
    
    
    1,369
    
    
    
    1,544Foreclosed properties and repossessed
assets, net
    
    
    
    
    
    
    Total non-performing assets
    
    $
    1,369
    
    
    $
    1,544Performing troubled debt restructurings
    
    $
    
    
    
    $
    Total non-accrual loans and leases to total
loans and leases
    
    
    0.25
    %
    
    
    0.29
    %Total non-performing assets to total assets
    
    
    0.20
    
    
    
    0.23Allowance for loan and lease losses to
total loans and leases
    
    
    1.25
    
    
    
    1.25Allowance for loan and lease losses to
non-accrual loans and leases
    
    
    500.08
    
    
    
    438.64
 24




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##### Table of Contents



June 30,
    
    
    December 31,2006
    
    
    2005(In Thousands)Impaired loans and leases with impairment
reserves required
    
    $
    1,369
    
    
    $
    1,544Less:Impairment reserve
(included in allowance for loan and lease losses)
    
    
    487
    
    
    
    399Net impaired loans and leases
    
    $
    882
    
    
    $
    1,145Average impaired loans and leases
    
    $
    1,481
    
    
    $
    2,192Interest income attibutable to impaired loans and leases
    
    
    74
    
    
    
    112Interest income recognized on
impaired loans and leases
    
    
    12
    
    
    
    65
   Three Months Ended June 30,
    
    
    Six Months Ended June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(Dollars in Thousands)Allowance at beginning of period
    
    $
    6,774
    
    
    $
    6,444
    
    
    $
    6,773
    
    
    $
    6,375Charge-offs:MortgageCommercial
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Lease
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Consumer
    
    
    
    
    
    
    (9
    )
    
    
    
    
    
    
    (9
    )Total charge-offs
    
    
    
    
    
    
    (9
    )
    
    
    
    
    
    
    (9
    )Recoveries:Mortgage
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1Commercial
    
    
    1
    
    
    
    2
    
    
    
    2
    
    
    
    5Lease
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Consumer
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total recoveries
    
    
    1
    
    
    
    2
    
    
    
    2
    
    
    
    6Net recoveries (charge-offs)
    
    
    1
    
    
    
    (7
    )
    
    
    2
    
    
    
    (3
    )Provision
    
    
    71
    
    
    
    
    
    
    
    71
    
    
    
    65Allowance at end of period
    
    $
    6,846
    
    
    $
    6,437
    
    
    $
    6,846
    
    
    $
    6,437Allowance to average loans and leases
    
    
    1.27
    %
    
    
    1.31
    %
    
    
    1.27
    %
    
    
    1.33
    %
  25




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##### Table of Contents



Liquidity and Capital Resources
        26




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##### Table of Contents



Minimum RequiredMinimum Required
    
    
    to be Wellfor Capital
    
    
    Capitalized UnderActual
    
    
    Adequacy Purposes
    
    
    FDIC RequirementsAmount
    
    
    Ratio
    
    
    Amount
    
    
    Ratio
    
    
    Amount
    
    
    Ratio(Dollars in Thousands)As of June 30, 2006:Total capital(to risk-weighted assets)Consolidated
    
    $
    64,111
    
    
    
    10.69
    %
    
    $
    47,958
    
    
    
    8.00
    %
    
    
    N/A
    
    
    
    N/AFirst Business Bank
    
    
    58,315
    
    
    
    11.33
    
    
    
    41,160
    
    
    
    8.00
    
    
    $
    51,450
    
    
    
    10.00
    %First Business Bank  Milwaukee
    
    
    9,835
    
    
    
    11.61
    
    
    
    6,778
    
    
    
    8.00
    
    
    
    8,473
    
    
    
    10.00Tier 1 capital(to risk-weighted assets)Consolidated
    
    $
    52,264
    
    
    
    8.72
    %
    
    $
    23,979
    
    
    
    4.00
    %
    
    
    N/A
    
    
    
    N/AFirst Business Bank
    
    
    52,715
    
    
    
    10.25
    
    
    
    20,580
    
    
    
    4.00
    
    
    $
    30,870
    
    
    
    6.00
    %First Business Bank  Milwaukee
    
    
    8,774
    
    
    
    10.36
    
    
    
    3,389
    
    
    
    4.00
    
    
    
    5,084
    
    
    
    6.00Tier 1 capital(to average assets)Consolidated
    
    $
    52,264
    
    
    
    7.80
    %
    
    $
    26,806
    
    
    
    4.00
    %
    
    
    N/A
    
    
    
    N/AFirst Business Bank
    
    
    52,715
    
    
    
    9.27
    
    
    
    22,745
    
    
    
    4.00
    
    
    $
    28,431
    
    
    
    5.00
    %First Business Bank  Milwaukee
    
    
    8,774
    
    
    
    8.29
    
    
    
    4,236
    
    
    
    4.00
    
    
    
    5,295
    
    
    
    5.00
 27




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##### Table of Contents



Minimum RequiredMinimum Required
    
    to be Wellfor Capital
    
    Capitalized UnderActual
    
    Adequacy Purposes
    
    FDIC RequirementsAmount
    
    Ratio
    
    Amount
    
    Ratio
    
    Amount
    
    Ratio(Dollars in Thousands)As of December 31, 2005:Total capital(to risk-weighted assets)Consolidated
    
    $
    62,234
    
    
    
    10.43
    %
    
    $
    47,748
    
    
    
    8.00
    %
    
    
    N/A
    
    
    
    N/AFirst Business Bank
    
    
    55,240
    
    
    
    10.88
    
    
    
    40,610
    
    
    
    8.00
    
    
    $
    50,763
    
    
    
    10.00
    %First Business Bank  Milwaukee
    
    
    9,009
    
    
    
    10.32
    
    
    
    6,981
    
    
    
    8.00
    
    
    
    8,727
    
    
    
    10.00Tier 1 capital(to risk-weighted assets)Consolidated
    
    $
    50,461
    
    
    
    8.45
    %
    
    $
    23,874
    
    
    
    4.00
    %
    
    
    N/A
    
    
    
    N/AFirst Business Bank
    
    
    49,713
    
    
    
    9.79
    
    
    
    20,305
    
    
    
    4.00
    
    
    $
    30,458
    
    
    
    6.00
    %First Business Bank  Milwaukee
    
    
    7,917
    
    
    
    9.07
    
    
    
    3,491
    
    
    
    4.00
    
    
    
    5,236
    
    
    
    6.00Tier 1 capital(to average assets)Consolidated
    
    $
    50,461
    
    
    
    7.92
    %
    
    $
    25,486
    
    
    
    4.00
    %
    
    
    N/A
    
    
    
    N/AFirst Business Bank
    
    
    49,713
    
    
    
    9.14
    
    
    
    21,746
    
    
    
    4.00
    
    
    $
    27,182
    
    
    
    5.00
    %First Business Bank  Milwaukee
    
    
    7,917
    
    
    
    8.21
    
    
    
    3,858
    
    
    
    4.00
    
    
    
    4,823
    
    
    
    5.00
 Contractual Obligations
  Payment Due by PeriodLess than
    
    
    
    
    
    
    
    
    
    
    More thanContractual Obligations
    
    Total
    
    
    1 Year
    
    
    1-3 Years
    
    
    4-5 Years
    
    
    5 Years(Dollars in Thousands)Operating lease obligations
    
    $
    5,093
    
    
    $
    580
    
    
    $
    1,161
    
    
    $
    1,161
    
    
    $
    2,191Fed funds purchased and securities sold
under repurchase agreements
    
    
    13,271
    
    
    
    13,271
    
    
    
    
    
    
    
    
    
    
    
    Time deposits
    
    
    326,951
    
    
    
    118,507
    
    
    
    124,112
    
    
    
    78,405
    
    
    
    5,927Line of Credit
    
    
    4,650
    
    
    
    4,650
    
    
    
    
    
    
    
    
    
    
    
    Subordinated debt
    
    
    5,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,000Junior subordinated debentures
    
    
    10,310
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,310FHLB advances
    
    
    19,541
    
    
    
    9
    
    
    
    6,015
    
    
    
    13,022
    
    
    
    494Total contractual obligations
    
    $
    384,815
    
    
    $
    137,017
    
    
    $
    131,288
    
    
    $
    92,588
    
    
    $
    23,922
 28




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##### Table of Contents



Off-balance Sheet Arrangements
 Note 9
 
 Item 3. Quantitative and Qualitative Disclosures about Market Risk
      29




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##### Table of Contents



Item 4  Controls and Procedures
   30




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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)
 
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
  Number of SharesFor
    
    Against
    
    Abstained
    
    Withheld
    
    Non votesElection of Directors for a three-year
term expiring in 2009:Mark D. Bugher
    
    
    1,797,794
    
    
    
    
    
    
    
    
    
    
    
    38,381Corey A. Chambas
    
    
    1,825,962
    
    
    
    
    
    
    
    
    
    
    
    10,213Gary E. Zimmerman
    
    
    1,827,266
    
    
    
    
    
    
    
    
    
    
    
    8,909Approval of the 2006 Equity Incentive Plan
    
    
    1,193,011
    
    
    
    397,273
    
    
    
    40,668
    
    
    
    
    
    
    
    205,223
 
 Item 5. Other Information.
  
 Item 6. Exhibits.
 (31.1)
    
    Certification of the Chief Executive Officer.(31.2)
    
    Certification of the Senior Vice President and Chief Financial Officer.(32)
    
    Certification of the Chief Executive Officer and Senior Vice President and Chief
Financial Officer pursuant to 18 U.S.C. paragraph 1350.
 31




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##### Table of Contents



Signatures
  FIRST BUSINESS FINANCIAL SERVICES, INC.By:
    /s/ Jerome J. SmithJerome J. SmithDirector and Chief Executive OfficerAugust 9, 2006 32