##### 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, 2008
 OR
 o
    
    Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 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 o þ
   o þ




---



##### 



FIRST BUSINESS FINANCIAL SERVICES, INC.
INDEX  FORM 10-Q
  
 PagePART I. FINANCIALItem 1. Financial Statements (Unaudited)Consolidated Balance Sheets as of March 31, 2008 and December 31, 2007
    
    
    1Consolidated Statements of Income for the Three Months Ended March
31, 2008 and 2007
    
    
    2Consolidated Statements of Changes in Stockholders Equity and
Comprehensive Income for the Three Months Ended March 31, 2008 and
2007
    
    
    3Consolidated Statements of Cash Flows for the Three Months Ended
March 31, 2008 and 2007
    
    
    4Notes to Unaudited Consolidated Financial Statements
    
    
    5Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    13Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    24Item 4T. Controls and Procedures
    
    
    24PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    25Item 1A. Risk Factors
    
    
    25Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    25Item 3. Defaults upon Senior Securities
    
    
    25Item 4. Submission of Matters to a Vote of Security Holders
    
    
    25Item 5. Other information
    
    
    25Item 6. Exhibits
    
    
    25SIGNATURES
    
    
    26Certification of the CEOCertification of the Senior Vice President and Chief Financial OfficerSection 1350 Certifications




---



##### Table of Contents



PART I. Financial Information
 
 Item 1. Financial Statements
 First Business Financial Services, Inc.
 
 Consolidated Balance Sheets
 (Unaudited)March 31,
    
    
    December 31,2008
    
    
    2007(In Thousands, Except Share Data)AssetsCash and due from banks
    
    $
    15,734
    
    
    $
    17,421Short-term investments
    
    
    170
    
    
    
    203Cash and
cash equivalents
    
    
    15,904
    
    
    
    17,624Securities available-for-sale, at fair value
    
    
    100,071
    
    
    
    97,378Loans and leases receivable, net of allowance for loan and lease losses of $10,188 and
$9,854, respectively
    
    
    811,747
    
    
    
    771,633Leasehold improvements and equipment, net
    
    
    1,561
    
    
    
    1,546Cash surrender value of bank-owned life insurance
    
    
    14,934
    
    
    
    14,757Investment in Federal Home Loan Bank stock, at cost
    
    
    2,367
    
    
    
    2,367Goodwill and other intangibles
    
    
    2,780
    
    
    
    2,787Accrued interest receivable and other assets
    
    
    9,095
    
    
    
    10,346Total assets
    
    $
    958,459
    
    
    $
    918,438Liabilities and Stockholders EquityDeposits
    
    $
    829,375
    
    
    $
    776,060Federal Home Loan Bank and other borrowings
    
    
    65,209
    
    
    
    81,986Accrued interest payable and other liabilities
    
    
    13,072
    
    
    
    11,840Total liabilities
    
    
    907,656
    
    
    
    869,886Commitments and contingenciesStockholders equity:Preferred stock, $10 par value, 10,000 Series A shares and 10,000 Series B shares
authorized, none issued or outstanding
Common stock, $0.01 par value, 8,000,000 shares authorized, 2,580,349 and 2,576,849
shares issued, 2,512,157 and 2,509,213 outstanding in 2008 and 2007, respectively
    
    
    26
    
    
    
    26Additional paid-in capital
    
    
    23,604
    
    
    
    23,462Retained earnings
    
    
    27,430
    
    
    
    26,836Accumulated other comprehensive income (loss)
    
    
    1,126
    
    
    
    (399
    )Treasury stock (68,192 and 67,636 shares in 2008 and 2007, respectively), at cost
    
    
    (1,383
    )
    
    
    (1,373
    )Total stockholders equity
    
    
    50,803
    
    
    
    48,552Total liabilities and stockholders equity
    
    $
    958,459
    
    
    $
    918,438
  1




---



##### Table of Contents



First Business Financial Services, Inc.
 
 Consolidated Statements of Income (Unaudited)
 For the Three Months Ended,March 31,2008
    
    
    2007(In Thousands, Except Share Data)Interest income:Loans and leases
    
    $
    13,995
    
    
    $
    12,693Securities income, taxable
    
    
    1,116
    
    
    
    1,086Short-term investments
    
    
    42
    
    
    
    37Total interest income
    
    
    15,153
    
    
    
    13,816Interest expense:Deposits
    
    
    8,026
    
    
    
    7,584Notes payable and other borrowings
    
    
    1,065
    
    
    
    851Total interest expense
    
    
    9,091
    
    
    
    8,435Net interest income
    
    
    6,062
    
    
    
    5,381Provision for loan and lease losses
    
    
    553
    
    
    
    576Net interest income after
provision for loan and
lease losses
    
    
    5,509
    
    
    
    4,805Non-interest income:Trust and investment services fee income
    
    
    482
    
    
    
    391Service charges on deposits
    
    
    210
    
    
    
    180Increase in cash surrender value of bank-owned life
insurance
    
    
    177
    
    
    
    163Loan fees
    
    
    136
    
    
    
    143Credit, merchant and debit card fees
    
    
    45
    
    
    
    51Other
    
    
    37
    
    
    
    74Total non-interest income
    
    
    1,087
    
    
    
    1,002Non-interest expense:Compensation
    
    
    3,359
    
    
    
    2,910Occupancy
    
    
    330
    
    
    
    262Equipment
    
    
    156
    
    
    
    122Data processing
    
    
    274
    
    
    
    244Marketing
    
    
    263
    
    
    
    280Professional fees
    
    
    375
    
    
    
    455Other
    
    
    584
    
    
    
    603Total non-interest expense
    
    
    5,341
    
    
    
    4,876Income before income tax expense
    
    
    1,255
    
    
    
    931Income tax expense
    
    
    485
    
    
    
    332Net income
    
    $
    770
    
    
    $
    599Earnings per share:Basic
    
    $
    0.32
    
    
    $
    0.24Diluted
    
    
    0.32
    
    
    
    0.24Dividends declared per share
    
    
    0.07
    
    
    
    0.065
  2




---



##### Table of Contents



First
Business Financial Services, Inc.
 
 Consolidated Statements of Changes in Stockholders Equity and Comprehensive Income (Unaudited)
 AccumulatedAdditional
    
    
    
    
    
    
    otherpaid-in
    
    
    Retained
    
    
    comprehensive
    
    
    TreasuryCommon stock
    
    
    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
 AccumulatedAdditional
    
    
    
    
    
    
    otherCommon
    
    
    paid-in
    
    
    Retained
    
    
    comprehensive
    
    
    Treasurystock
    
    
    capital
    
    
    earnings
    
    
    income (loss)
    
    
    stock
    
    
    Total(In Thousands, Except Share Data)Balance at December 31, 2007
    
    $
    26
    
    
    $
    23,462
    
    
    $
    26,836
    
    
    $
    (399
    )
    
    $
    (1,373
    )
    
    $
    48,552Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    770
    
    
    
    
    
    
    
    
    
    
    
    770Unrealized securities
gains arising during
the period
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,329
    
    
    
    
    
    
    
    2,329Unrealized derivative
losses arising during
the period
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5
    )
    
    
    
    
    
    
    (5
    )Reclassification
adjustment for
realized losses on
derivatives
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3
    
    
    
    
    
    
    
    3Income tax effect
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (802
    )
    
    
    
    
    
    
    (802
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,295Share-based compensation  restricted shares
    
    
    
    
    
    
    142
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    142Cash dividends ($0.07 per share)
    
    
    
    
    
    
    
    
    
    
    (176
    )
    
    
    
    
    
    
    
    
    
    
    (176
    )Treasury stock purchased (556 shares)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10
    )
    
    
    (10
    )Balance at March 31, 2008
    
    $
    26
    
    
    $
    23,604
    
    
    $
    27,430
    
    
    $
    1,126
    
    
    $
    (1,383
    )
    
    $
    50,803
  3




---



##### Table of Contents



First Business Financial Services, Inc.
 
 Consolidated Statements of Cash Flows (Unaudited)
 For the Three Months EndedMarch 31,2008
    
    
    2007(In Thousands)Operating activitiesNet income
    
    $
    770
    
    
    $
    599Adjustments to reconcile net income to net cash provided by
operating activities:Deferred income taxes, net
    
    
    (222
    )
    
    
    (569
    )Provision for loan and lease losses
    
    
    553
    
    
    
    576Depreciation, amortization and accretion, net
    
    
    131
    
    
    
    120Share-based compensation
    
    
    142
    
    
    
    69Increase in cash surrender value of bank-owned life insurance
    
    
    (177
    )
    
    
    (163
    )Origination of loans originated for sale
    
    
    (501
    )
    
    
    (308
    )Sale of loans originated for sale
    
    
    502
    
    
    
    Gain on sale of loans originated for sale
    
    
    (1
    )
    
    
    Loss on sale of foreclosed property
    
    
    5
    
    
    
    Decrease (increase) in accrued interest receivable and other assets
    
    
    95
    
    
    
    (650
    )Increase in accrued interest payable and other liabilities
    
    
    1,218
    
    
    
    1,863Net cash provided by operating activities
    
    
    2,515
    
    
    
    1,537Investing activitiesProceeds from maturities of available-for-sale securities
    
    
    7,600
    
    
    
    4,850Purchases of available-for-sale securities
    
    
    (7,961
    )
    
    
    Proceeds from sale of foreclosed property
    
    
    655
    
    
    
    Net increase in loans and leases
    
    
    (40,667
    )
    
    
    (17,469
    )Purchases of leasehold improvements and equipment, net
    
    
    (227
    )
    
    
    (144
    )Net cash used in investing activities
    
    
    (40,600
    )
    
    
    (12,763
    )Financing activitiesNet increase in deposits
    
    
    53,315
    
    
    
    52,857Net decrease in FHLB line of credit
    
    
    
    
    
    
    (17,049
    )Repayment of FHLB advances
    
    
    (6,002
    )
    
    
    (2
    )Net decrease in short-term borrowed funds
    
    
    (10,775
    )
    
    
    (25,912
    )Cash dividends paid
    
    
    (163
    )
    
    
    (162
    )Purchase of treasury stock
    
    
    (10
    )
    
    
    (9
    )Net cash provided by financing activities
    
    
    36,365
    
    
    
    9,723Net decrease in cash and cash equivalents
    
    
    (1,720
    )
    
    
    (1,503
    )Cash and cash equivalents at the beginning of the period
    
    
    17,624
    
    
    
    19,461Cash and cash equivalents at the end of the period
    
    $
    15,904
    
    
    $
    17,958Supplementary cash flow informationInterest paid on deposits and borrowings
    
    $
    7,563
    
    
    $
    7,455Income taxes paid
    
    
    10
    
    
    
    5Transfer to other real estate owned
    
    
    
    
    
    
    664
  4




---



##### Table of Contents



NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 Note 1  Principles of Consolidation.
  Note 2  Basis of Presentation.
 Fair Value Measurements . Note 3  Recent Accounting Pronouncements
  Note 3  Recent Accounting Pronouncements.
 Fair Value Disclosures. Accounting
for the Impairment or Disposal of Long-Lived Assets
 Note 10  Fair Value Disclosure (SFAS 157 Disclosure)
 Fair Value Option for Financial Assets and Financial Liabilities. The Fair Value Option for Financial Assets and Liabilities 
Including an Amendment of SFAS No. 115 Accounting for
Certain Investments in Debt and Equity Securities,
  5




---



##### Table of Contents



Derivative Instruments and Hedging Activities. Disclosures about Derivative Instruments and Hedging Activities  an
Amendment of Statement No. 133
 Note 4  Share-Based Compensation.
  Stock Options
  WeightedAverageRemainingWeighted
    
    
    ContractualOptions
    
    
    Average Price
    
    
    Life (Years)Outstanding at December 31, 2007
    
    
    159,540
    
    
    $
    22.10
    
    
    
    5.65Granted
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    Forfeited
    
    
    (1,625
    )
    
    
    25.00Outstanding at March 31, 2008
    
    
    157,915
    
    
    
    22.08
    
    
    
    5.40Options exercisable at March 31, 2008
    
    
    142,637
 6




---



##### Table of Contents



Restricted Shares
  WeightedNumber of
    
    AverageRestricted
    
    Grant-DateShares
    
    Fair ValueNonvested balance as of December 31, 2007
    
    
    91,379
    
    
    $
    21.16Granted
    
    
    3,500
    
    
    
    17.42Vested
    
    
    (8,323
    )
    
    
    22.78Forfeited
    
    
    
    
    
    
    Nonvested balance as of March 31, 2008
    
    
    86,556
    
    
    
    20.85
  Note 5  Earnings Per Share.
  For the Three MonthsEnded March 31,2008
    
    
    2007Income available to common stockholders
    
    $
    769,627
    
    
    $
    598,632Basic average shares
    
    
    2,423,005
    
    
    
    2,453,068Dilutive effect of share-based awards
    
    
    648
    
    
    
    8,354Dilutive average shares
    
    
    2,423,653
    
    
    
    2,461,422Earnings per share:Basic
    
    $
    0.32
    
    
    $
    0.24Diluted
    
    $
    0.32
    
    
    $
    0.24
 7




---



##### Table of Contents



Note 6  Securities.
  As of March 31, 2008Gross
    
    
    GrossAmortized
    
    
    unrealized
    
    
    unrealized
    
    
    Estimatedcost
    
    
    holding gains
    
    
    holding losses
    
    
    fair value(In Thousands)Securities available-for-saleMunicipals
    
    $
    85
    
    
    $
    
    
    
    $
    
    
    
    $
    85Collateralized mortgage
obligations  government
agencies
    
    
    59,108
    
    
    
    1,342
    
    
    
    
    
    
    
    60,450Collateralized mortgage
obligations   government
sponsored agencies
    
    
    39,142
    
    
    
    399
    
    
    
    (5
    )
    
    
    39,536$
    98,335
    
    
    $
    1,741
    
    
    $
    (5
    )
    
    $
    100,071
 As of December 31, 2007Gross
    
    
    GrossAmortized
    
    
    unrealized
    
    
    unrealized
    
    
    Estimatedcost
    
    
    holding gains
    
    
    holding losses
    
    
    fair value(In Thousands)U.S. Government
corporations and
agencies
    
    $
    1,500
    
    
    $
    
    
    
    $
    (3
    )
    
    $
    1,497Municipals
    
    
    85
    
    
    
    
    
    
    
    
    
    
    
    85Collateralized
mortgage
obligations 
government agencies
    
    
    52,755
    
    
    
    282
    
    
    
    (379
    )
    
    
    52,658Collateralized
mortgage
obligations - government
sponsored agencies
    
    
    43,631
    
    
    
    2
    
    
    
    (495
    )
    
    
    43,138$
    97,971
    
    
    $
    284
    
    
    $
    (877
    )
    
    $
    97,378
   As of March 31, 2008Less than 12 months
    
    
    12 months or longer
    
    
    TotalUnrealized
    
    
    
    
    
    
    Unrealized
    
    
    
    
    
    
    UnrealizedFair value
    
    
    losses
    
    
    Fair value
    
    
    losses
    
    
    Fair value
    
    
    losses(In Thousands)Collateralized
mortgage
obligations 
government
sponsored agencies
    
    $
    998
    
    
    $
    4
    
    
    $
    260
    
    
    $
    1
    
    
    $
    1,258
    
    
    $
    5$
    998
    
    
    $
    4
    
    
    $
    260
    
    
    $
    1
    
    
    $
    1,258
    
    
    $
    5
 8




---



##### Table of Contents



As of December 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
    
    $
    
    
    
    $
    
    
    
    $
    1,497
    
    
    $
    3
    
    
    $
    1,497
    
    
    $
    3Collateralized
mortgage
obligations 
government agencies
    
    
    13,054
    
    
    
    374
    
    
    
    579
    
    
    
    5
    
    
    
    13,633
    
    
    
    379Collateralized
mortgage
obligations -
government
sponsored agencies
    
    
    6,463
    
    
    
    66
    
    
    
    35,317
    
    
    
    429
    
    
    
    41,780
    
    
    
    495$
    19,517
    
    
    $
    440
    
    
    $
    37,393
    
    
    $
    437
    
    
    $
    56,910
    
    
    $
    877
   Note 7  Loans, Leases and Allowance for Loan and Lease Losses.
  March 31,
    
    
    December 31,2008
    
    
    2007(In Thousands)First mortgage loans:Commercial real estate
    
    $
    366,715
    
    
    $
    336,153Construction
    
    
    89,871
    
    
    
    90,545Multi-family
    
    
    41,792
    
    
    
    41,8211-4 family
    
    
    50,575
    
    
    
    48,437548,953
    
    
    
    516,956Commercial and industrial loans
    
    
    222,421
    
    
    
    213,786Direct financing leases, net
    
    
    28,517
    
    
    
    29,383Home equity loans
    
    
    10,734
    
    
    
    9,784Credit card and other
    
    
    11,539
    
    
    
    11,725822,164
    
    
    
    781,634Less:Allowance for loan and lease losses
    
    
    10,188
    
    
    
    9,854Deferred loan fees
    
    
    229
    
    
    
    147Loans and lease receivables, net
    
    $
    811,747
    
    
    $
    771,633
 9




---



##### Table of Contents



Three
    
    
    ThreeMonths Ended
    
    
    Months Ended
    
    
    Year EndedMarch 31,
    
    
    March 31,
    
    
    December 31,2008
    
    
    2007
    
    
    2007(In Thousands)Allowance at beginning of period
    
    $
    9,854
    
    
    $
    8,296
    
    
    $
    8,296Charge-offs:Commercial real estate and other mortgage
    
    
    (222
    )
    
    
    
    
    
    
    (571
    )Commercial
    
    
    
    
    
    
    
    
    
    
    (778
    )Lease
    
    
    
    
    
    
    
    
    
    
    (25
    )Consumer
    
    
    
    
    
    
    
    
    
    
    Total charge-offs
    
    
    (222
    )
    
    
    
    
    
    
    (1,374
    )Recoveries:Commercial real estate and other mortgage
    
    
    3
    
    
    
    1
    
    
    
    5Commercial
    
    
    
    
    
    
    23
    
    
    
    23Lease
    
    
    
    
    
    
    
    
    
    
    Consumer
    
    
    
    
    
    
    
    
    
    
    Total recoveries
    
    
    3
    
    
    
    24
    
    
    
    28Net (charge-offs) recoveries
    
    
    (219
    )
    
    
    24
    
    
    
    (1,346
    )Provision for loan and lease losses
    
    
    553
    
    
    
    576
    
    
    
    2,904Allowance at end of period
    
    $
    10,188
    
    
    $
    8,896
    
    
    $
    9,854Allowance to gross loans and leases
    
    
    1.24
    %
    
    
    1.34
    %
    
    
    1.26
    %
 Note 8  Deposits.
  March 31, 2008
    
    
    December 31, 2007Weighted
    
    
    
    
    
    
    WeightedBalance
    
    
    average rate
    
    
    Balance
    
    
    average rate(In Thousands)Transaction accounts:Demand deposits
    
    $
    49,310
    
    
    
    0.00
    %
    
    $
    47,124
    
    
    
    0.00
    %Negotiable order of
withdrawal (NOW)
accounts
    
    
    71,184
    
    
    
    2.49
    
    
    
    65,035
    
    
    
    4.22120,494
    
    
    
    
    
    
    
    112,159Money market accounts
    
    
    157,779
    
    
    
    2.66
    
    
    
    162,585
    
    
    
    4.49Certificates of deposit
    
    
    551,102
    
    
    
    4.99
    
    
    
    501,316
    
    
    
    5.00$
    829,375
    
    
    
    
    
    
    $
    776,060
 10




---



##### Table of Contents



Note 9  Borrowings.
  March 31, 2008
    
    
    December 31, 2007Weighted
    
    
    Weighted
    
    
    
    
    
    
    Weighted
    
    
    Weightedaverage
    
    
    average
    
    
    
    
    
    
    average
    
    
    averageBalance
    
    
    balance
    
    
    rate
    
    
    Balance
    
    
    balance
    
    
    rate(In Thousands)Fed funds purchased
and securities sold
under agreements to
repurchase
    
    $
    1,925
    
    
    $
    11,778
    
    
    
    3.63
    %
    
    $
    14,250
    
    
    $
    10,394
    
    
    
    5.35
    %FHLB advances
    
    
    28,524
    
    
    
    36,793
    
    
    
    4.76
    
    
    
    34,526
    
    
    
    25,776
    
    
    
    4.87Line of credit
    
    
    3,760
    
    
    
    2,814
    
    
    
    5.40
    
    
    
    2,210
    
    
    
    2,556
    
    
    
    7.20Subordinated notes
payable
    
    
    31,000
    
    
    
    31,000
    
    
    
    6.22
    
    
    
    31,000
    
    
    
    23,630
    
    
    
    7.73Other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    25
    
    
    
    7.00$
    65,209
    
    
    $
    82,385
    
    
    
    5.17
    
    
    $
    81,986
    
    
    $
    62,381
    
    
    
    6.13Short-term borrowings
    
    $
    15,695
    
    
    
    
    
    
    
    
    
    
    $
    32,470Long-term borrowings
    
    
    49,514
    
    
    
    
    
    
    
    
    
    
    
    49,516$
    65,209
    
    
    
    
    
    
    
    
    
    
    $
    81,986
  Note 10  Fair Value Disclosures (SFAS 157 Disclosure)
   11




---



##### Table of Contents



Quoted Prices in
    
    SignificantActive Markets
    
    Other
    
    Significantfor Identical
    
    Observable
    
    UnobservableAssets
    
    Inputs
    
    Inputs(Level 1)
    
    (Level 2)
    
    (Level 3)

    
    Total(In Thousands)Assets:Securities available for sale
    
    $


    
    $
    100,071
    
    
    $

    
    $
    100,071Liabilities:Interest rate swap
    
    $



    
    $
    11
    
    
    $

    
    $
    11
  QuotedPrices inActive
    
    SignificantMarkets for
    
    Other
    
    SignificantBalance at
    
    Identical
    
    Observable
    
    Unobservable
    
    TotalMarch 31,
    
    Assets
    
    Inputs
    
    Inputs
    
    Gains2008
    
    (Level 1)
    
    (Level 2)
    
    (Level 3)
    
    (Losses)(In Thousands)Impaired loans
    
    $
    7,420
    
    
    $
    
    
    
    $
    6,593
    
    
    $
    827
    
    
    $
    
  12




---



##### Table of Contents



Item 2.
 Managements Discussion and Analysis of Financial Condition and Results of Operations
 General
  Item 1A. Risk Factors
  Overview
  Results of Operations
 General.
 13




---



##### Table of Contents



Top Line Revenue
  For the Three Months EndedMarch 31,2008
    
    
    2007
    
    
    Change(In Thousands)Net interest income
    
    $
    6,062
    
    
    $
    5,381
    
    
    
    12.7
    %Non-interest income
    
    
    1,087
    
    
    
    1,002
    
    
    
    8.4Total top line revenue
    
    $
    7,149
    
    
    $
    6,383
    
    
    
    12.0
    %
 Adjusted Net Income
  For the Three Months EndedMarch 31,2008
    
    
    2007
    
    
    Change(In Thousands)Net income, presented under US GAAP
    
    $
    770
    
    
    $
    599
    
    
    
    40.1
    %Add back:Provision
for loan and lease losses, after tax
    
    
    336
    
    
    
    350
    
    
    
    (24.0
    )Less:Net charge-offs (recoveries), after tax
    
    
    133
    
    
    
    (15
    )
    
    
    
    *Adjusted net income
    
    $
    973
    
    
    $
    964
    
    
    
    0.93
    %
 
 *

    Not meaningful 14




---



##### Table of Contents



Return on Equity
  Net Interest Income.
 Rate/Rate
    
    
    Volume
    
    
    Volume
    
    
    Net(In Thousands)Interest-Earning AssetsCommercial real estate and other mortgage loans
    
    $
    (652
    )
    
    $
    1,691
    
    
    $
    (137
    )
    
    $
    902Commercial and industrial loans
    
    
    (499
    )
    
    
    676
    
    
    
    (80
    )
    
    
    97Leases
    
    
    (22
    )
    
    
    98
    
    
    
    (5
    )
    
    
    71Consumer loans
    
    
    (11
    )
    
    
    304
    
    
    
    (61
    )
    
    
    232Total loans and leases receivable
    
    
    (1,184
    )
    
    
    2,769
    
    
    
    (283
    )
    
    
    1,302Mortgage-related securities
    
    
    34
    
    
    
    3
    
    
    
    
    
    
    
    37Investment securities
    
    
    (1
    )
    
    
    (6
    )
    
    
    
    
    
    
    (7
    )Other investments
    
    
    (16
    )
    
    
    3
    
    
    
    (3
    )
    
    
    (16
    )Fed funds sold and other
    
    
    (3
    )
    
    
    38
    
    
    
    (19
    )
    
    
    16Short-term investments
    
    
    (4
    )
    
    
    13
    
    
    
    (4
    )
    
    
    5Total net change in income on
interest-earning assets
    
    
    (1,174
    )
    
    
    2,820
    
    
    
    (309
    )
    
    
    1,337Interest-Bearing LiabilitiesNOW accounts
    
    
    (344
    )
    
    
    12
    
    
    
    (6
    )
    
    
    (338
    )Money market
    
    
    (929
    )
    
    
    (221
    )
    
    
    97
    
    
    
    (1,053
    )Certificates  regular
    
    
    203
    
    
    
    1,231
    
    
    
    59
    
    
    
    1,493Certificates  large
    
    
    (45
    )
    
    
    424
    
    
    
    (39
    )
    
    
    340Total deposits
    
    
    (1,115
    )
    
    
    1,446
    
    
    
    111
    
    
    
    442FHLB advances
    
    
    (2
    )
    
    
    185
    
    
    
    (2
    )
    
    
    181Other borrowings
    
    
    (124
    )
    
    
    199
    
    
    
    (42
    )
    
    
    33Total net change in expense on
interest-bearing liabilities
    
    
    (1,241
    )
    
    
    1,830
    
    
    
    67
    
    
    
    656Net change in net interest income
    
    $
    67
    
    
    $
    990
    
    
    $
    (376
    )
    
    $
    681
   15




---



##### Table of Contents



16




---



##### Table of Contents



Average Interest-Earning Assets, Average Interest-Bearing Liabilities and Interest Rate Spread.
 For the Three Months Ended March 31,2008
    
    
    2007Average
    
    
    
    
    
    
    Average
    
    
    Average
    
    
    
    
    
    
    Averagebalance
    
    
    Interest
    
    
    yield/cost
    
    
    balance
    
    
    Interest
    
    
    yield/cost(In Thousands)Interest-Earning AssetsCommercial real estate and other
mortgage loans(1)
    
    $
    532,771
    
    
    $
    8,934
    
    
    
    6.71
    %
    
    $
    440,127
    
    
    $
    8,032
    
    
    
    7.30
    %Commercial and industrial
loans(1)
    
    
    217,807
    
    
    
    4,320
    
    
    
    7.93
    
    
    
    187,758
    
    
    
    4,223
    
    
    
    9.00Leases
    
    
    28,740
    
    
    
    456
    
    
    
    6.36
    
    
    
    22,900
    
    
    
    385
    
    
    
    6.72Consumer loans
    
    
    21,764
    
    
    
    285
    
    
    
    5.24
    
    
    
    3,234
    
    
    
    53
    
    
    
    6.56Total loans and leases
receivable(1)
    
    
    801,082
    
    
    
    13,995
    
    
    
    6.99
    
    
    
    654,019
    
    
    
    12,693
    
    
    
    7.76Mortgage-related securities(2)
    
    
    96,255
    
    
    
    1,107
    
    
    
    4.60
    
    
    
    95,963
    
    
    
    1,070
    
    
    
    4.46Investment securities(2)
    
    
    991
    
    
    
    9
    
    
    
    3.63
    
    
    
    1,651
    
    
    
    16
    
    
    
    3.88Federal Home Loan Bank stock
    
    
    2,367
    
    
    
    
    
    
    
    
    
    
    
    2,024
    
    
    
    16
    
    
    
    3.16Fed funds sold and other
    
    
    3,302
    
    
    
    23
    
    
    
    2.79
    
    
    
    519
    
    
    
    7
    
    
    
    5.39Short-term investments
    
    
    2,480
    
    
    
    19
    
    
    
    3.06
    
    
    
    1,266
    
    
    
    14
    
    
    
    4.42Total interest-earning assets
    
    
    906,477
    
    
    
    15,153
    
    
    
    6.69
    
    
    
    755,442
    
    
    
    13,816
    
    
    
    7.32Non-interest-earning assets
    
    
    32,184
    
    
    
    
    
    
    
    
    
    
    
    31,675Total assets
    
    
    938,661
    
    
    
    
    
    
    
    
    
    
    
    787,117Interest-Bearing LiabilitiesNOW accounts
    
    
    69,668
    
    
    
    434
    
    
    
    2.49
    
    
    
    68,632
    
    
    
    772
    
    
    
    4.50Money market
    
    
    158,316
    
    
    
    1,052
    
    
    
    2.66
    
    
    
    176,905
    
    
    
    2,105
    
    
    
    4.76Certificates  regular
    
    
    452,707
    
    
    
    5,722
    
    
    
    5.06
    
    
    
    350,631
    
    
    
    4,229
    
    
    
    4.82Certificates  large
    
    
    71,420
    
    
    
    818
    
    
    
    4.58
    
    
    
    37,832
    
    
    
    478
    
    
    
    5.05Total deposits
    
    
    752,111
    
    
    
    8,026
    
    
    
    4.27
    
    
    
    634,000
    
    
    
    7,584
    
    
    
    4.78FHLB advances
    
    
    36,793
    
    
    
    438
    
    
    
    4.76
    
    
    
    21,394
    
    
    
    257
    
    
    
    4.81Other borrowings
    
    
    45,592
    
    
    
    627
    
    
    
    5.50
    
    
    
    34,166
    
    
    
    594
    
    
    
    6.95Total interest-bearing liabilities
    
    
    834,496
    
    
    
    9,091
    
    
    
    4.36
    
    
    
    689,560
    
    
    
    8,435
    
    
    
    4.89Non-interest-bearing liabilities
    
    
    54,240
    
    
    
    
    
    
    
    
    
    
    
    51,303Total liabilities
    
    
    888,736
    
    
    
    
    
    
    
    
    
    
    
    740,863Stockholders equity
    
    
    49,925
    
    
    
    
    
    
    
    
    
    
    
    46,254Total
liabilities and stockholders equity
    
    $
    938,661
    
    
    
    
    
    
    
    
    
    
    $
    787,117Net interest income/interest rate spread
    
    
    
    
    
    $
    6,062
    
    
    
    2.33
    %
    
    
    
    
    
    $
    5,381
    
    
    
    2.43
    %Net interest-earning assets
    
    $
    71,981
    
    
    
    
    
    
    
    
    
    
    $
    65,882Net interest margin
    
    
    
    
    
    
    
    
    
    
    2.67
    %
    
    
    
    
    
    
    
    
    
    
    2.85
    %Average
interest-earning assets to average interest-bearing liabilities
    
    
    108.63
    %
    
    
    
    
    
    
    
    
    
    
    109.55
    %Return on average assets
    
    
    0.33
    
    
    
    
    
    
    
    
    
    
    
    0.30Return on average equity
    
    
    6.17
    
    
    
    
    
    
    
    
    
    
    
    5.18Average equity to average assets
    
    
    5.32
    
    
    
    
    
    
    
    
    
    
    
    5.88Non-interest expense to average assets
    
    
    2.28
    
    
    
    
    
    
    
    
    
    
    
    2.41
 
 (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 basis of assets available for sale. 17




---



##### Table of Contents



Provision for Loan and Lease Losses. Asset Quality
 Non-Interest Income.
 Non-Interest Expense.
 Income Taxes.
 18




---



##### Table of Contents



Financial Condition
 General.
 Securities.
  Loans and Leases Receivable.
 Asset Quality
 Deposits.
 19




---



##### Table of Contents



Borrowings.
 Asset Quality
 Non-performing Assets.
  March 31,
    
    
    December 31,2008
    
    
    2007(In Thousands)Non-accrual loans
    
    $
    8,547
    
    
    $
    8,805Non-accrual leases
    
    
    121
    
    
    
    59Total non-accrual loans and leases
    
    
    8,668
    
    
    
    8,864Foreclosed properties and repossessed assets
    
    
    
    
    
    
    660Total non-performing assets
    
    $
    8,668
    
    
    $
    9,524Performing troubled debt restructurings
    
    $
    
    
    
    $
    Total non-accrual loans and leases to total loans and leases
    
    1.05
    %
    

    
    1.13
    %Total non-performing assets to total assets
    
    
    0.90
    
    
    
    1.04Allowance for loan and lease losses to total loans and leases
    
    1.24
    
    
    
    1.26Allowance for loan and lease losses to non-accrual loans and leases
    
    117.54
    
    
    
    111.17
 20




---



##### Table of Contents



As of and for
    
    
    As of and forthe Three
    
    
    the YearMonths Ended
    
    
    EndedMarch 31,
    
    
    December 31,2008
    
    
    2007(In Thousands)Impaired loans and leases with no impairment reserves required
    
    $
    7,306
    
    
    $
    6,500Impaired loans and leases with impairment reserves required
    
    
    1,592
    
    
    
    2,617Total impaired loans and leases
    
    
    8,898
    
    
    
    9,117Less:Impairment reserve (included in allowance for loan and lease
losses)
    
    
    688
    
    
    
    834Net impaired loans and leases
    
    $
    8,210
    
    
    $
    8,283Average impaired loans and leases
    
    $
    8,904
    
    
    $
    3,439Foregone interest income attributable to impaired loans and leases
    
    $
    180
    
    
    $
    365Interest income recognized on impaired loans and leases
    
    
    13
    
    
    
    41Net foregone interest income on impaired loans and leases
    
    $
    167
    
    
    $
    324
   For the Three Months EndedMarch 31,2008
    
    
    2007(In Thousands)Allowance at beginning of period
    
    $
    9,854
    
    
    $
    8,296Charge-offs:Commercial real estate and other
mortgage
    
    
    (222
    )
    
    
    Total charge-offs
    
    
    (222
    )
    
    
    Recoveries:Commercial real estate and other
mortgage
    
    
    3
    
    
    
    1Commercial
    
    
    
    
    
    
    23Total recoveries
    
    
    3
    
    
    
    24Net (charge-offs) recoveries
    
    
    (219
    )
    
    
    24Provision for loan and lease losses
    
    
    553
    
    
    
    576Allowance at end of period
    
    $
    10,188
    
    
    $
    8,896Allowance to average loans and leases
    
    
    1.24
    %
    
    
    1.34
    %
 Liquidity and Capital Resources
  21




---



##### Table of Contents



22




---



##### Table of Contents



Minimum Required to be WellCapitalized Under PromptMinimum Required for Capital
    
    Corrective ActionActual
    
    Adequacy Purposes
    
    RequirementsAmount
    
    Ratio
    
    Amount
    
    Ratio
    
    Amount
    
    Ratio(In Thousands)As of March 31, 2008Total capital(to risk-weighted assets)Consolidated
    
    $
    88,084
    
    
    
    9.89
    %
    
    $
    71,256
    
    
    
    8.00
    %
    
    
    N/A
    
    
    
    N/AFirst Business Bank
    
    
    80,950
    
    
    
    10.22
    
    
    
    63,368
    
    
    
    8.00
    
    
    $
    79,211
    
    
    
    10.00
    %First Business Bank 
Milwaukee
    
    
    9,963
    
    
    
    10.15
    
    
    
    7,849
    
    
    
    8.00
    
    
    
    9,811
    
    
    
    10.00Tier 1 capital(to risk-weighted assets)Consolidated
    
    $
    46,896
    
    
    
    5.27
    %
    
    $
    35,628
    
    
    
    4.00
    %
    
    
    N/A
    
    
    
    N/AFirst Business Bank
    
    
    72,571
    
    
    
    9.16
    
    
    
    31,684
    
    
    
    4.00
    
    
    $
    47,526
    
    
    
    6.00
    %First Business Bank 
Milwaukee
    
    
    8,729
    
    
    
    8.90
    
    
    
    3,924
    
    
    
    4.00
    
    
    
    5,887
    
    
    
    6.00Tier 1 capital(to average assets)Consolidated
    
    $
    46,896
    
    
    
    5.01
    %
    
    $
    37,410
    
    
    
    4.00
    %
    
    
    N/A
    
    
    
    N/AFirst Business Bank
    
    
    72,571
    
    
    
    8.85
    
    
    
    32,814
    
    
    
    4.00
    
    
    $
    41,018
    
    
    
    5.00
    %First Business Bank 
Milwaukee
    
    
    8,729
    
    
    
    7.19
    
    
    
    4,855
    
    
    
    4.00
    
    
    
    6,069
    
    
    
    5.00
    %
 Minimum Required to be WellCapitalized Under PromptMinimum Required for Capital
    
    Corrective ActionActual
    
    Adequacy Purposes
    
    RequirementsAmount
    
    Ratio
    
    Amount
    
    Ratio
    
    Amount
    
    Ratio(In Thousands)As of December 31, 2007Total capital(to risk-weighted assets)Consolidated
    
    $
    87,018
    
    
    
    10.22
    %
    
    $
    68,119
    
    
    
    8.00
    %
    
    
    N/A
    
    
    
    N/AFirst Business Bank
    
    
    79,072
    
    
    
    10.45
    
    
    
    60,528
    
    
    
    8.00
    
    
    $
    75,660
    
    
    
    10.00
    %First Business Bank 
Milwaukee
    
    
    9,847
    
    
    
    10.26
    
    
    
    7,679
    
    
    
    8.00
    
    
    
    9,599
    
    
    
    10.00Tier 1 capital(to risk-weighted assets)Consolidated
    
    $
    46,164
    
    
    
    5.42
    %
    
    $
    34,060
    
    
    
    4.00
    %
    
    
    N/A
    
    
    
    N/AFirst Business Bank
    
    
    71,097
    
    
    
    9.40
    
    
    
    30,264
    
    
    
    4.00
    
    
    $
    45,396
    
    
    
    6.00
    %First Business Bank 
Milwaukee
    
    
    8,639
    
    
    
    9.00
    
    
    
    3,840
    
    
    
    4.00
    
    
    
    5,759
    
    
    
    6.00Tier 1 capital(to average assets)Consolidated
    
    $
    46,164
    
    
    
    5.12
    %
    
    $
    36,065
    
    
    
    4.00
    %
    
    
    N/A
    
    
    
    N/AFirst Business Bank
    
    
    71,097
    
    
    
    9.04
    
    
    
    31,459
    
    
    
    4.00
    
    
    $
    39,324
    
    
    
    5.00
    %First Business Bank 
Milwaukee
    
    
    8,639
    
    
    
    7.39
    
    
    
    4,678
    
    
    
    4.00
    
    
    
    5,848
    
    
    
    5.00
 23




---



##### Table of Contents



Contractual Obligations and Off-balance Sheet Arrangements
  
 Item 3.  Quantitative and Qualitative Disclosures about Market Risk
     
 Item 4T.  Controls and Procedures
   24




---



##### 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
    
    of Shares that Mayas Part of Publicly
    
    Yet be PurchasedTotal Number of
    
    Average Price Paid
    
    Announced Plans
    
    Under the Plans orPeriod
    
    Shares Purchased
    
    Per Share
    
    or Programs
    
    ProgramsJanuary 1  31, 2008
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,550February 1  29, 2008
    
    
    556
    
    
    $
    16.69
    
    
    
    
    
    
    
    10,122March 1  31, 2008
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,122
 
 Item 3.  Defaults Upon Senior Securities
  
 Item 4.  Submission of Matters to a Vote of Security Holders
  
 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.
 
 25




---



##### Table of Contents



Signatures
  FIRST BUSINESS FINANCIAL SERVICES, INC.By:
    
    /s/ Corey A. ChambasCorey A. Chambas
Chief Executive OfficerApril 24, 2008
 26