##### 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, 2005
 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)
  
   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, 2005 and December 31, 2004
    
    
    2Consolidated Statements of Income for the Three and Six Months Ended June 30, 2005 and 2004
    
    
    3Consolidated Statements of Changes in Shareholder Equity for the Six Months Ended June 30, 2005 and 2004
    
    
    4Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2005 and 2004
    
    
    5Notes to Unaudited Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of OperationsResults of Operations
    
    
    19Financial Condition
    
    
    25Asset Quality
    
    
    26Liquidity and Capital Resources
    
    
    28Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    33Item 4. Controls and Procedures
    
    
    33PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    34Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    34Item 3. Defaults upon Senior Securities
    
    
    34Item 4. Submission of Matters to Vote of Security Holders
    
    
    34Item 5. Other Information
    
    
    35Item 6. Exhibits
    
    
    35SIGNATURES
    
    
    36CertificationCertificationCertifications
  1




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##### Table of Contents



PART I. Financial Information
 
 Item 1.  Financial Statements
 
 Consolidated Balance Sheets
 (Unaudited)June 30,
    
    December 31,2005
    
    2004(In Thousands, Except Share Data)AssetsCash and due from banks
    
    $
    12,146
    
    
    $
    8,644Interest-bearing deposits
    
    
    13
    
    
    
    27Cash and cash equivalents
    
    
    12,159
    
    
    
    8,671Securities available-for-sale, at fair value
    
    
    89,871
    
    
    
    66,445Loans and leases receivable, net:Held for sale
    
    
    
    
    
    
    137Held for investment
    
    
    485,742
    
    
    
    469,801Leasehold improvements and equipment, net
    
    
    1,148
    
    
    
    1,247Foreclosed properties
    
    
    650
    
    
    
    665Cash surrender value of life insurance
    
    
    7,622
    
    
    
    7,441Goodwill and other intangibles
    
    
    2,872
    
    
    
    2,896Accrued interest receivable and other assets
    
    
    4,775
    
    
    
    5,648Total assets
    
    $
    604,839
    
    
    $
    562,951Liabilities and Stockholders EquityDeposits
    
    $
    510,572
    
    
    $
    474,677Securities sold under agreement to repurchase
    
    
    588
    
    
    
    678Federal Home Loan Bank and other borrowings
    
    
    33,149
    
    
    
    29,303Junior subordinated debentures
    
    
    10,310
    
    
    
    10,310Other liabilities
    
    
    9,706
    
    
    
    9,806564,325
    
    
    
    524,774Commitments 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,
2,435,462 and 2,429,182 shares issued, 2,418,539
and 2,412,409 outstanding in 2005 and 2004, respectively
    
    
    24
    
    
    
    24Additional paid-in capital
    
    
    22,529
    
    
    
    22,426Retained earnings
    
    
    19,598
    
    
    
    17,229Accumulated other comprehensive loss
    
    
    (1,250
    )
    
    
    (1,118
    )Treasury stock (16,923 and 16,773 shares in 2005 and 2004,
respectively), at cost
    
    
    (387
    )
    
    
    (384
    )Total stockholders equity
    
    
    40,514
    
    
    
    38,177Total liabilities and stockholders equity
    
    $
    604,839
    
    
    $
    562,951
  2




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##### Table of Contents



Consolidated Statements of Income
 (Unaudited)Three Months Ended,
    
    Six Months Ended,June 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004(In Thousands, Except Share Data)Interest income:Loans and leases
    
    $
    8,043
    
    
    $
    6,217
    
    
    $
    15,254
    
    
    $
    12,222Securities income:Taxable
    
    
    772
    
    
    
    543
    
    
    
    1,463
    
    
    
    1,067Fed funds sold and other
    
    
    48
    
    
    
    34
    
    
    
    102
    
    
    
    73Total interest income
    
    
    8,863
    
    
    
    6,794
    
    
    
    16,819
    
    
    
    13,362Interest expense:Deposits
    
    
    3,824
    
    
    
    2,282
    
    
    
    7,062
    
    
    
    4,675Notes payable and other borrowings
    
    
    256
    
    
    
    179
    
    
    
    434
    
    
    
    369Guaranteed trust preferred securities
    
    
    223
    
    
    
    223
    
    
    
    444
    
    
    
    444Total interest expense
    
    
    4,303
    
    
    
    2,684
    
    
    
    7,940
    
    
    
    5,488Net interest income
    
    
    4,560
    
    
    
    4,110
    
    
    
    8,879
    
    
    
    7,874Provision for loan and lease losses
    
    
    
    
    
    
    
    
    
    
    65
    
    
    
    Net interest income after provision for loan and lease losses
    
    
    4,560
    
    
    
    4,110
    
    
    
    8,814
    
    
    
    7,874Non-interest income:Service charges on deposits
    
    
    214
    
    
    
    250
    
    
    
    428
    
    
    
    500Credit, merchant and debit card fees
    
    
    43
    
    
    
    38
    
    
    
    81
    
    
    
    71Loan fees
    
    
    133
    
    
    
    125
    
    
    
    278
    
    
    
    255Gain on sale of 50% owned joint venture
    
    
    
    
    
    
    
    
    
    
    973
    
    
    
    Increase in cash surrender value of bank-owned life insurance
    
    
    93
    
    
    
    40
    
    
    
    181
    
    
    
    84Trust and investment services fee income
    
    
    244
    
    
    
    179
    
    
    
    526
    
    
    
    342Written option income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7Other
    
    
    53
    
    
    
    148
    
    
    
    96
    
    
    
    211Total non-interest income
    
    
    780
    
    
    
    780
    
    
    
    2,563
    
    
    
    1,470Non-interest expense:Compensation
    
    
    2,148
    
    
    
    1,948
    
    
    
    4,355
    
    
    
    3,934Occupancy
    
    
    264
    
    
    
    216
    
    
    
    489
    
    
    
    463Equipment
    
    
    117
    
    
    
    132
    
    
    
    238
    
    
    
    251Data processing
    
    
    276
    
    
    
    188
    
    
    
    476
    
    
    
    367Marketing
    
    
    231
    
    
    
    170
    
    
    
    394
    
    
    
    272Professional fees
    
    
    411
    
    
    
    139
    
    
    
    626
    
    
    
    449Other
    
    
    299
    
    
    
    322
    
    
    
    743
    
    
    
    640Total non-interest expense
    
    
    3,746
    
    
    
    3,115
    
    
    
    7,321
    
    
    
    6,376Minority interest in net (income) loss of consolidated subsidiary
    
    
    
    
    
    
    (3
    )
    
    
    
    
    
    
    (9
    )Income before income tax expense
    
    
    1,594
    
    
    
    1,772
    
    
    
    4,056
    
    
    
    2,959Income tax expense
    
    
    517
    
    
    
    683
    
    
    
    1,409
    
    
    
    1,084Net income
    
    $
    1,077
    
    
    $
    1,089
    
    
    $
    2,647
    
    
    $
    1,875Earnings per share:Basic
    
    $
    0.45
    
    
    $
    0.51
    
    
    $
    1.10
    
    
    $
    0.90Diluted
    
    
    0.44
    
    
    
    0.48
    
    
    
    1.07
    
    
    
    0.85Dividends declared per share
    
    
    0.12
    
    
    
    0.10
    
    
    
    0.12
    
    
    
    0.10
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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, 2003, as restated
    
    $
    20
    
    
    $
    14,108
    
    
    $
    13,861
    
    
    $
    (1,978
    )
    
    $
    (35
    )
    
    $
    25,976Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    1,875
    
    
    
    
    
    
    
    
    
    
    
    1,875Unrealized securities losses arising during the year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    net of minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (709
    )
    
    
    
    
    
    
    (709
    )Unrealized derivatives gains arising during the year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    421
    
    
    
    
    
    
    
    421Reclassification adjustment for realized loss on
derivatives
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    732
    
    
    
    
    
    
    
    732Income tax effect
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (98
    )
    
    
    
    
    
    
    (98
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,221Cash dividends ($0.10 per share)
    
    
    
    
    
    
    
    
    
    
    (236
    )
    
    
    
    
    
    
    
    
    
    
    (236
    )Conversion of BBG shares (336,205 shares)
    
    
    3
    
    
    
    7,730
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,733Treasury stock purchased (14,973 shares)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (281
    )
    
    
    (281
    )Stock options exercised (62,010 shares)
    
    
    1
    
    
    
    332
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    333Balance at June 30, 2004
    
    $
    24
    
    
    $
    22,170
    
    
    $
    15,500
    
    
    $
    (1,632
    )
    
    $
    (316
    )
    
    $
    35,746
 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
    
    
    $
    17,229
    
    
    $
    (1,118
    )
    
    $
    (384
    )
    
    $
    38,177Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    2,647
    
    
    
    
    
    
    
    
    
    
    
    2,647Unrealized securities losses arising during the year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (650
    )
    
    
    
    
    
    
    (650
    )Unrealized derivatives gains arising during the year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    84
    
    
    
    
    
    
    
    84Reclassification adjustment for realized loss on
derivatives
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    300
    
    
    
    
    
    
    
    300Income tax effect
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    134
    
    
    
    
    
    
    
    134Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,515Cash dividends ($0.11 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
    
    
    $
    19,598
    
    
    $
    (1,250
    )
    
    $
    (387
    )
    
    $
    40,514
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Consolidated Statement of Cash Flows
 Six Months EndedJune 30,2005
    
    2004(In Thousands)Operating ActivitiesNet income
    
    $
    2,647
    
    
    $
    1,875Adjustments to reconcile net income to net cash
provided by operating activities:Deferred income taxes
    
    
    (1,823
    )
    
    
    1,347Provision for loan and lease losses
    
    
    65
    
    
    
    Depreciation, amortization and accretion, net
    
    
    413
    
    
    
    359Written option income
    
    
    
    
    
    
    (7
    )Sale of loans originated for sale
    
    
    137
    
    
    
    18Increase in cash surrender value of bank-owned life insurance
    
    
    (181
    )
    
    
    (84
    )Gain on sale of loans originated for sale
    
    
    (1
    )
    
    
    Gain on sale of 50% owned joint venture
    
    
    (973
    )
    
    
    Minority interest in net income of consolidated subsidiaries
    
    
    
    
    
    
    9(Increase) decrease in accrued interest receivable and other assets
    
    
    (967
    )
    
    
    762Increase in accrued expenses and other liabilities
    
    
    2,145
    
    
    
    789Net cash provided by operating activities
    
    
    1,462
    
    
    
    5,068Investing activitiesProceeds from maturities of available-for-sale securities
    
    
    13,700
    
    
    
    6,299Proceeds from sale of 50% owned joint venture
    
    
    2,100
    
    
    
    Purchases of available-for-sale securities
    
    
    (37,120
    )
    
    
    (9,122
    )Net increase in loans and leases
    
    
    (16,100
    )
    
    
    (15,955
    )Purchases of leasehold improvements and equipment
    
    
    (27
    )
    
    
    (213
    )Net cash used in investing activities
    
    
    (37,447
    )
    
    
    (18,991
    )Financing activitiesNet increase in deposits
    
    
    35,895
    
    
    
    17,979Net increase (decrease) in FHLB line of credit
    
    
    (11,154
    )
    
    
    5,696Net increase (decrease) in short-term borrowed funds
    
    
    14,910
    
    
    
    (4,284
    )Exercise of stock options
    
    
    103
    
    
    
    333Cash dividends
    
    
    (278
    )
    
    
    (236
    )Purchase of treasury stock
    
    
    (3
    )
    
    
    (281
    )Net cash provided by financing activities
    
    
    39,473
    
    
    
    19,207Net increase in cash and cash equivalents
    
    
    3,488
    
    
    
    5,284Cash and cash equivalents at beginning of period
    
    
    8,671
    
    
    
    12,465Cash and cash equivalents at end of period
    
    $
    12,159
    
    
    $
    17,749Supplementary cash flow informationCash paid or credited to accounts:Interest on deposits and borrowings
    
    $
    7,797
    
    
    $
    5,627Income taxes
    
    
    2,142
    
    
    
    607Non-cash transactions:Loans transferred to foreclosed properties
    
    
    650
    
    
    
    Deconsolidation of trust preferred securities
    
    
    
    
    
    
    10,310Acquisition of minority shares of BBG:Increase in common stock and paid-in capital
    
    
    
    
    
    
    7,733Elimination of minority interest
    
    
    
    
    
    
    (4,392
    )Settlement of written option liability
    
    
    
    
    
    
    (654
    )Increase in goodwill and other intangible assets
    
    
    
    
    
    
    (2,689
    )Other
    
    
    
    
    
    
    2
  5




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Note 1  Principles of Consolidation.
  Note 2  Basis of Presentation.
   Recent Accounting Changes.
 Changes in Accounting Principle. Accounting Changes and Error
Corrections  a replacement of APB Opinion No. 20 and FASB Statement No. 3.
 Stock Options. Accounting for Stock-based Compensation Accounting for Stock Issued to Employees Statement of Cash
Flows
  6




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##### Table of Contents



Proforma Stock Option Information.
 Six Months EndedJune 30,2005
    
    2004(Dollars in Thousands, Except Share Data)Net IncomeAs reported
    
    $
    2,647
    
    
    $
    1,875Compensation expense under the fair value method
    
    
    179
    
    
    
    106Pro forma
    
    
    2,468
    
    
    
    1,769Earnings Per Share  BasicAs reported
    
    
    1.10
    
    
    
    0.90Compensation expense under the fair value method
    
    
    0.08
    
    
    
    0.05Pro forma
    
    
    1.02
    
    
    
    0.85Earnings Per Share  DilutedAs reported
    
    
    1.07
    
    
    
    0.85Compensation expense under the fair value method
    
    
    0.05
    
    
    
    0.03Pro forma
    
    
    1.02
    
    
    
    0.82
 Three Months EndedJune 30,2005
    
    2004(Dollars in Thousands, Except Share Data)Net IncomeAs reported
    
    $
    1,077
    
    
    $
    1,089Compensation expense under the fair value method
    
    
    90
    
    
    
    53Pro forma
    
    
    987
    
    
    
    1,036Earnings Per Share  BasicAs reported
    
    
    0.45
    
    
    
    0.51Compensation expense under the fair value method
    
    
    0.04
    
    
    
    0.03Pro forma
    
    
    0.41
    
    
    
    0.48Earnings Per Share  DilutedAs reported
    
    
    0.44
    
    
    
    0.48Compensation expense under the fair value method
    
    
    0.04
    
    
    
    0.03Pro forma
    
    
    0.40
    
    
    
    0.45
 7




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##### Table of Contents



Six Months EndedJune 30,2005
    
    2004Expected dividend yield
    
    0.92%
    
    n/aRisk free interest rate
    
    4.13-4.21%
    
    4.38%Expected lives
    
    10 years
    
    10 years
 Note 3  Sale of 50% Owned Joint Venture
  Note 4  Goodwill and Other Intangible Assets.
  8




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Three and Six Months EndedJune 30,2005
    
    2004(In Thousands)Balance at beginning of period
    
    $
    2,689
    
    
    $
    Goodwill acquired
    
    
    
    
    
    
    2,689Balance at end of period
    
    $
    2,689
    
    
    $
    2,689
   Six Months EndedJune 30,2005
    
    2004(In Thousands)Core deposit intangibles:Gross carrying amount
    
    $
    145
    
    
    $
    145Accumulated amortization
    
    
    (40
    )
    
    
    (22
    )Net book value
    
    $
    105
    
    
    $
    123Additions during the year
    
    $
    
    
    
    $
    Amortization during the period
    
    
    (18
    )
    
    
    (19
    )Other intangibles:Gross carrying amount
    
    $
    120
    
    
    $
    120Accumulated amortization
    
    
    (42
    )
    
    
    (30
    )Net book value
    
    $
    78
    
    
    $
    90Additions during the year
    
    $
    
    
    
    $
    Amortization during the year
    
    
    (6
    )
    
    
    (6
    )
 9




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##### Table of Contents



Three Months EndedJune 30,2005
    
    2004(In Thousands)Core deposit intangibles:Gross carrying amount
    
    $
    145
    
    
    $
    145Accumulated amortization
    
    
    (40
    )
    
    
    (22
    )Net book value
    
    $
    105
    
    
    $
    123Additions during the year
    
    $
    
    
    
    $
    Amortization during the period
    
    
    (9
    )
    
    
    (9
    )Other intangibles:Gross carrying amount
    
    $
    120
    
    
    $
    120Accumulated amortization
    
    
    (42
    )
    
    
    (30
    )Net book value
    
    $
    78
    
    
    $
    90Additions during the year
    
    $
    
    
    
    $
    Amortization during the year
    
    
    (3
    )
    
    
    (3
    )
  CoreDeposit
    
    OtherIntangibles
    
    Intangibles
    
    TotalSix months ended June 30, 2005
    
    $
    18
    
    
    $
    6
    
    
    $
    24Estimate for the six months ended December 31, 2005
    
    
    14
    
    
    
    6
    
    
    
    20Estimate for the year ended December 31,2006
    
    
    24
    
    
    
    12
    
    
    
    362007
    
    
    18
    
    
    
    12
    
    
    
    302008
    
    
    13
    
    
    
    12
    
    
    
    252009
    
    
    10
    
    
    
    12
    
    
    
    22$
    65
    
    
    $
    48
    
    
    $
    113
 Note 5  Securities.
  10




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##### Table of Contents



As of June 30, 2005Gross
    
    Grossunrealized
    
    unrealizedAmortized
    
    holding
    
    holding
    
    EstimatedSecurities available-for-sale
    
    cost
    
    gains
    
    losses
    
    fair value(In Thousands)FHLB stock and other
    
    $
    2,857
    
    
    $
    
    
    
    $
    
    
    
    $
    2,857U.S. Government agencies
    
    
    4,198
    
    
    
    
    
    
    
    (54
    )
    
    
    4,144Collateralized mortgage obligations
    
    
    84,020
    
    
    
    8
    
    
    
    (1,158
    )
    
    
    82,870$
    91,075
    
    
    $
    8
    
    
    $
    (1,212
    )
    
    $
    89,871
 As of December 31, 2004Gross
    
    Grossunrealized
    
    unrealizedAmortized
    
    holding
    
    holding
    
    EstimatedSecurities available-for-sale
    
    cost
    
    gains
    
    losses
    
    fair value(In Thousands)FHLB stock and other
    
    $
    2,811
    
    
    $
    
    
    
    $
    
    
    
    $
    2,811U.S. Government agencies
    
    
    3,275
    
    
    
    
    
    
    
    (22
    )
    
    
    3,253Collateralized mortgage obligations
    
    
    60,873
    
    
    
    41
    
    
    
    (533
    )
    
    
    60,381$
    66,959
    
    
    $
    41
    
    
    $
    (555
    )
    
    $
    66,445
   As of June 30, 2005Less than 12 months
    
    12 months or longer
    
    TotalFair Value
    
    Unrealized loss
    
    Fair Value
    
    Unrealized loss
    
    Fair Value
    
    Unrealized loss(In Thousands)U.S. Government agencies
    
    $
    3,216
    
    
    $
    54
    
    
    $
    
    
    
    $
    
    
    
    $
    3,216
    
    
    $
    54Collateralized mortgage obligations
    
    
    51,825
    
    
    
    608
    
    
    
    28,446
    
    
    
    550
    
    
    
    80,271
    
    
    
    1,158$
    55,041
    
    
    $
    662
    
    
    $
    28,446
    
    
    $
    550
    
    
    $
    83,487
    
    
    $
    1,212
  11




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##### Table of Contents



Note 6  Loans and Allowance for Loan and Lease Losses
  As of June 30,
    
    As of December 31,2005
    
    2004(In thousands)First mortgage loans:Commercial real estate
    
    $
    234,567
    
    
    $
    215,605Construction
    
    
    44,130
    
    
    
    41,910Multi-family
    
    
    23,947
    
    
    
    17,7861-4 family
    
    
    23,965
    
    
    
    22,814326,609
    
    
    
    298,115Commercial business loans
    
    
    124,648
    
    
    
    136,482Direct financing leases
    
    
    21,305
    
    
    
    25,583Second mortgage loans
    
    
    7,485
    
    
    
    5,563Credit card and other
    
    
    12,380
    
    
    
    10,743492,426
    
    
    
    476,486Less:Allowance for loan and lease losses
    
    
    6,437
    
    
    
    6,375Deferred loan fees
    
    
    247
    
    
    
    310$
    485,742
    
    
    $
    469,801
  12




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##### Table of Contents



Three Months Ended June 30,
    
    Six Months Ended June 30,2005
    
    2004
    
    2005
    
    2004(Dollars in Thousands)Allowance at beginning of period
    
    $
    6,444
    
    
    $
    6,812
    
    
    $
    6,375
    
    
    $
    6,811Charge-offs:MortgageCommercial
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3
    )Lease
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Consumer
    
    
    (9
    )
    
    
    
    
    
    
    (9
    )
    
    
    Total charge-offs
    
    
    (9
    )
    
    
    
    
    
    
    (9
    )
    
    
    (3
    )Recoveries:Mortgage
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    Commercial
    
    
    2
    
    
    
    1
    
    
    
    5
    
    
    
    5Lease
    
    
    
    
    
    
    113
    
    
    
    
    
    
    
    113Consumer
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total recoveries
    
    
    2
    
    
    
    114
    
    
    
    6
    
    
    
    118Net recoveries (charge-offs)
    
    
    (7
    )
    
    
    114
    
    
    
    (3
    )
    
    
    115Provision
    
    
    
    
    
    
    
    
    
    
    65
    
    
    
    Allowance at end of period
    
    $
    6,437
    
    
    $
    6,926
    
    
    $
    6,437
    
    
    $
    6,926Allowance to
gross loans and leases
    
    
    1.31
    %
    
    
    1.49
    %
    
    
    1.31
    %
    
    
    1.49
    %
 Note 7
 Deposits
 As of June 30,
    
    As of December 31,2005
    

    2004Weighted
    
    
    
    
    
    WeightedBalance
    
    Average Rate
    
    Balance
    
    Average Rate(Dollars in Thousands)Transaction accounts:Demand deposits
    
    $
    36,393
    
    
    
    0.00
    %
    
    $
    40,835
    
    
    
    0.00
    %Negotiable order of withdrawal (NOW) accounts
    
    
    47,117
    
    
    
    2.97
    
    
    
    38,017
    
    
    
    1.1683,510
    
    
    
    
    
    
    
    78,852Money market accounts
    
    
    107,210
    
    
    
    3.14
    
    
    
    88,324
    
    
    
    2.27Certificates of deposit:0.00% to 1.99%
    
    
    8,793
    
    
    
    1.58
    
    
    
    100,385
    
    
    
    1.682.00% to 2.99%
    
    
    91,748
    
    
    
    2.55
    
    
    
    96,882
    
    
    
    2.313.00% to 3.99%
    
    
    107,928
    
    
    
    3.42
    
    
    
    34,854
    
    
    
    3.374.00% and greater
    
    
    111,383
    
    
    
    4.41
    
    
    
    75,380
    
    
    
    4.58319,852
    
    
    
    
    
    
    
    307,501$
    510,572
    
    
    
    
    
    
    $
    474,677
 13




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##### Table of Contents



Note 8  Borrowings
 As of June 30,2005Weighted
    
    WeightedAverage
    
    AverageBalance
    
    Balance
    
    Rate(Dollars in Thousands)Fed funds purchased and
securities sold under agreement
to repurchase
    
    $
    13,588
    
    
    $
    7,536
    
    
    
    2.92
    %FHLB advances
    
    
    12,649
    
    
    
    11,672
    
    
    
    2.79Junior subordinated debentures/Trust preferred securities
    
    
    10,310
    
    
    
    10,310
    
    
    
    8.61Line of credit
    
    
    2,500
    
    
    
    1,403
    
    
    
    4.42Subordinated note payable
    
    
    5,000
    
    
    
    5,000
    
    
    
    5.20$
    44,047
    
    
    $
    35,921
    
    
    
    4.89
    %Short-term borrowings
    
    $
    27,192Long-term borrowings (due
beyond one year)
    
    
    16,855$
    44,047
 As of December 31,2004Weighted
    
    WeightedAverage
    
    AverageBalance
    
    Balance
    
    Rate(Dollars in Thousands)Fed funds purchased and
securities sold under agreement
to repurchase
    
    $
    678
    
    
    $
    2,231
    
    
    
    2.20
    %FHLB advances
    
    
    23,803
    
    
    
    22,807
    
    
    
    1.91Junior subordinated debentures/Trust preferred securities
    
    
    10,310
    
    
    
    10,310
    
    
    
    8.67Line of credit
    
    
    500
    
    
    
    665
    
    
    
    3.76Subordinated note payable
    
    
    5,000
    
    
    
    5,000
    
    
    
    4.62$
    40,291
    
    
    $
    41,013
    
    
    
    3.99
    %Short-term borrowings
    
    $
    23,434Long-term borrowings (due
beyond one year)
    
    
    16,857$
    40,291
 14




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##### Table of Contents



Note 9  Derivatives
 As of June 30,
    
    As of December 31,2005
    
    2004(In thousands)Notional
    
    Maturity
    
    Fixed
    
    Variable
    
    Notional
    
    Maturity
    
    Fixed
    
    VariableAmount
    
    Date
    
    Rate
    
    Rate
    
    Amount
    
    Date
    
    Rate
    
    RateFair Value Hedges:Callable receive-fixed interest rate swaps
    
    $
    10,000
    
    
    January, 2010
    
    
    4.25
    %
    
    
    3.38
    %
    
    $
    10,000
    
    
    January, 2010
    
    
    4.25
    %
    
    
    2.48
    %Callable receive-fixed interest rate swaps
    
    
    10,000
    
    
    February, 2010
    
    
    4.35
    
    
    
    3.24
    
    
    
    10,000
    
    
    February, 2010
    
    
    4.35
    
    
    
    2.42Callable receive-fixed interest rate swaps
    
    
    10,000
    
    
    February, 2011
    
    
    4.10
    
    
    
    3.31
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Callable receive-fixed interest rate swaps
    
    
    10,000
    
    
    November, 2010
    
    
    4.00
    
    
    
    3.24
    
    
    
    10,000
    
    
    November, 2010
    
    
    4.00
    
    
    
    2.42Cash Flow Hedges:Pay-fixed interest rate swaps
    
    
    10,000
    
    
    October, 2006
    
    
    3.94
    
    
    
    3.04
    
    
    
    10,000
    
    
    October, 2006
    
    
    3.94
    
    
    
    2.25Pay-fixed interest rate swaps
    
    
    10,000
    
    
    November, 2006
    
    
    3.75
    
    
    
    3.14
    
    
    
    10,000
    
    
    November, 2006
    
    
    3.75
    
    
    
    2.25Pay-fixed interest rate swaps
    
    
    10,000
    
    
    December, 2006
    
    
    4.94
    
    
    
    3.43
    
    
    
    10,000
    
    
    December, 2006
    
    
    4.94
    
    
    
    2.51Pay-fixed interest rate swaps
    
    
    874
    
    
    April, 2009
    
    
    5.24
    
    
    
    2.98
    
    
    
    960
    
    
    April, 2009
    
    
    5.24
    
    
    
    2.25Pay-fixed interest rate swaps
    
    
    4,783
    
    
    June, 2011
    
    
    5.49
    
    
    
    3.01
    
    
    
    4,823
    
    
    June, 2011
    
    
    5.49
    
    
    
    2.26Total derivatives used for interest rate
risk management and designated in SFAS 133
relationships
    
    $
    75,657
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    65,783
  Note
10  Earnings Per Share
  15




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##### Table of Contents



Three Months Ended June 30,2005
    
    2004Numerator:Net income
    
    $
    1,076,970
    
    
    $
    1,089,276Numerator for basic earnings per share
income available to common stockholders
    
    
    1,076,970
    
    
    
    1,089,276Numerator
for diluted earnings per share
income available to common
stockholders
    
    
    1,076,970
    
    
    
    1,089,276Denominator:Denominator for basic earnings per
shareweighted-average common
shares outstanding
    
    
    2,418,220
    
    
    
    2,149,079Effect of dilutive securities:Employee stock options
    
    
    44,900
    
    
    
    74,639BBG employee stock options
    
    
    
    
    
    
    4,753Option liability
    
    
    
    
    
    
    30,003Denominator for diluted earnings per
shareadjusted weighted-average
common shares and assumed conversions
    
    
    2,463,120
    
    
    
    2,258,474Basic earnings per share
    
    $
    0.45
    
    
    $
    0.51Diluted earnings per share
    
    
    0.44
    
    
    
    0.48
 16




---



##### Table of Contents



Six Months Ended June 30,2005
    
    2004Numerator:Net income
    
    $
    2,646,916
    
    
    $
    1,875,474Numerator for basic earnings per share
income available to common stockholders
    
    
    2,646,916
    
    
    
    1,875,474(Income) expense option liability
    
    
    
    
    
    
    (7,000
    )Numerator for diluted earnings per share
income available to common
stockholders
    
    
    2,646,916
    
    
    
    1,868,474Denominator:Denominator for basic earnings per
shareweighted-average common
shares outstanding
    
    
    2,416,052
    
    
    
    2,085,407Effect of dilutive securities:Employee stock options
    
    
    46,836
    
    
    
    71,543BBG employee stock options
    
    
    
    
    
    
    3,777Option liability
    
    
    
    
    
    
    30,003Denominator for diluted earnings per
shareadjusted weighted-average
common shares and assumed conversions
    
    
    2,462,888
    
    
    
    2,190,730Basic earnings per share
    
    $
    1.10
    
    
    $
    0.90Diluted earnings per share
    
    
    1.07
    
    
    
    0.85
 17




---



##### Table of Contents



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"
 Overview
  18




---



##### Table of Contents



Results of Operations
 Comparison of Three and Six Months Ended June 30, 2005 and 2004
 General.
 Net Interest Income.
   19




---



##### Table of Contents



Provision for Loan and Lease Losses.
 20




---



##### Table of Contents



Non-Interest Income.
 Non-Interest Expense.
 Minority Interest.
 21




---



##### Table of Contents



Income Taxes.
 Average Interest-Earning Assets, Average Interest-Bearing Liabilities and Interest Rate
Spread.
 22




---



##### Table of Contents



Three Months Ended June 30,2005
    
    2004Average
    
    
    
    
    
    
    
    
    
    AverageAverage
    
    
    
    
    
    Yield/
    
    Average
    
    
    
    
    
    Yield/Balance
    
    Interest
    
    Cost
    
    Balance
    
    Interest
    
    Cost(Dollars in Thousands)InterestEarning AssetsMortgage loans
    
    $
    326,868
    
    
    $
    4,867
    
    
    
    5.96
    %
    
    $
    294,709
    
    
    $
    4,085
    
    
    
    5.54
    %Commercial loans
    
    
    139,433
    
    
    
    2,831
    
    
    
    8.12
    
    
    
    122,932
    
    
    
    1,719
    
    
    
    5.59Leases
    
    
    22,756
    
    

    
    295
    
    
    
    5.18
    
    
    
    24,375
    
    
    
    374
    
    
    
    6.14Consumer loans
    
    
    3,731
    
    
    
    50
    
    
    
    5.40
    
    
    
    3,671
    
    
    
    39
    
    
    
    4.29Total loans receivable
    
    
    492,788
    
    
    
    8,043
    
    
    
    6.53
    
    
    
    445,687
    
    
    
    6,217
    
    
    
    5.58Mortgage-related securities
    
    
    82,092
    
    
    
    751
    
    
    
    3.66
    
    
    
    56,872
    
    
    
    491
    
    
    
    3.45Investment securities
    
    
    4,155
    
    
    
    30
    
    
    
    2.86
    
    
    
    5,856
    
    
    
    52
    
    
    
    3.55Federal Home Loan Bank stock
    
    
    2,816
    
    
    
    38
    
    
    
    5.40
    
    
    
    2,352
    
    
    
    34
    
    
    
    5.70Fed funds sold and other
    
    
    142
    
    
    
    1
    
    
    
    2.82
    
    
    
    74
    
    
    
    0
    
    
    
    1.02Interest bearing deposits
    
    
    16
    
    
    
    
    
    
    
    0.00
    
    
    
    50
    
    
    
    0
    
    
    
    1.94Total interest-earning assets
    
    
    582,009
    
    
    
    8,863
    
    
    
    6.09
    
    
    
    510,891
    
    
    
    6,794
    
    
    
    5.32Non-interest-earning assets
    
    
    21,614
    
    
    
    
    
    
    
    
    
    
    
    14,152Total assets
    
    $
    603,623
    
    
    
    
    
    
    
    
    
    
    $
    525,043InterestBearing LiabilitiesNOW accounts
    
    $
    52,197
    
    
    $
    346
    
    
    
    2.65
    
    
    $
    46,256
    
    
    $
    112
    
    
    
    0.97Money market
    
    
    107,396
    
    
    
    823
    
    
    
    3.07
    
    
    
    71,728
    
    
    
    450
    
    
    
    2.51Certificates  regular
    
    
    274,600
    
    
    
    2,262
    
    
    
    3.29
    
    
    
    244,896
    
    
    
    1,541
    
    
    
    2.52Certificates  large
    
    
    42,607
    
    
    
    393
    
    
    
    3.69
    
    
    
    41,115
    
    
    
    179
    
    
    
    1.74Total deposits
    
    
    476,800
    
    
    
    3,824
    
    
    
    3.21
    
    
    
    403,995
    
    
    
    2,282
    
    
    
    2.26Junior subordinated debentures
    
    
    10,310
    
    
    
    223
    
    
    
    8.65
    
    
    
    10,310
    
    
    
    223
    
    
    
    8.65FHLB advances
    
    
    7,364
    
    
    
    72
    
    
    
    3.89
    
    
    
    24,720
    
    
    
    110
    
    
    
    1.78Other borrowings
    
    
    19,051
    
    
    
    185
    
    
    
    3.88
    
    
    
    7,460
    
    
    
    69
    
    
    
    3.70Total interest-bearing liabilities
    
    
    513,525
    
    
    
    4,303
    
    
    
    3.35
    
    
    
    446,485
    
    
    
    2,684
    
    
    
    2.40Non-interest-bearing liabilities
    
    
    50,276
    
    
    
    
    
    
    
    
    
    
    
    43,237Total liabilities
    
    
    563,801
    
    
    
    
    
    
    
    
    
    
    
    489,722Minority interest in 51% owned
subsidiary
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,962Stockholders equity
    
    
    39,822
    
    
    
    
    
    
    
    
    
    
    
    31,360Total liabilities and
Stockholders equity
    
    $
    603,623
    
    
    
    
    
    
    
    
    
    
    $
    525,043Net interest income/interest
rate spread
    
    
    
    
    
    $
    4,560
    
    
    
    2.74
    %
    
    
    
    
    
    $
    4,110
    
    
    
    2.92
    %Net interest-earning assets
    
    $
    68,484
    
    
    
    
    
    
    
    
    
    
    $
    64,406Net interest margin
    
    
    
    
    
    
    
    
    
    
    3.13
    %
    
    
    
    
    
    
    
    
    
    
    3.22
    %Ratio of average interest-earning
assets to average interest-
earning liabilities
    
    
    1.13
    
    
    
    
    
    
    
    
    
    
    
    1.14Return on average assets
    
    
    0.71
    %
    
    
    
    
    
    
    
    
    
    
    0.83
    %Return on average equity
    
    
    10.82
    %
    
    
    
    
    
    
    
    
    
    
    13.89
    %Average equity to average assets
    
    
    6.60
    %
    
    
    
    
    
    
    
    
    
    
    5.97
    %Non-interest expense to average
assets
    
    
    2.48
    %
    
    
    
    
    
    
    
    
    
    
    2.37
    %
 
 (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. 23




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##### Table of Contents



Six Months Ended June 30,2005
    
    2004Average
    
    
    
    
    
    
    
    
    
    AverageAverage
    
    
    
    
    
    Yield/
    
    Average
    
    
    
    
    
    Yield/Balance
    
    Interest
    
    Cost
    
    Balance
    
    Interest
    
    Cost(Dollars in Thousands)InterestEarning AssetsMortgage loans
    
    $
    318,500
    
    
    $
    9,114
    
    
    
    5.72
    %
    
    $
    292,970
    
    
    $
    7,649
    
    
    
    5.22
    %Commercial loans
    
    
    138,386
    
    
    
    5,435
    
    
    
    7.85
    
    
    
    121,699
    
    
    
    3,756
    
    
    
    6.17Leases
    
    
    23,988
    
    
    
    630
    
    
    
    5.25
    
    
    
    23,972
    
    
    
    738
    
    
    
    6.16Consumer loans
    
    
    2,696
    
    
    
    75
    
    
    
    5.56
    
    
    
    3,652
    
    
    
    79
    
    
    
    4.33Total loans receivable
    
    
    483,569
    
    
    
    15,254
    
    
    
    6.31
    
    
    
    442,293
    
    
    
    12,222
    
    
    
    5.53Mortgage-related securities
    
    
    78,427
    
    
    
    1,410
    
    
    
    3.60
    
    
    
    55,388
    
    
    
    943
    
    
    
    3.41Investment securities
    
    
    4,373
    
    
    
    62
    
    
    
    2.84
    
    
    
    6,983
    
    
    
    124
    
    
    
    3.55Federal Home Loan Bank stock
    
    
    2,795
    
    
    
    76
    
    
    
    5.44
    
    
    
    2,334
    
    
    
    73
    
    
    
    6.21Fed funds sold and other
    
    
    1,580
    
    
    
    16
    
    
    
    2.03
    
    
    
    60
    
    
    
    0
    
    
    
    0.96Interest bearing deposits
    
    
    62
    
    
    
    1
    
    
    
    2.51
    
    
    
    52
    
    
    
    0
    
    
    
    1.32Total interest-earning assets
    
    
    570,806
    
    
    
    16,819
    
    
    
    5.89
    
    
    
    507,110
    
    
    
    13,362
    
    
    
    5.27Non-interest-earning assets
    
    
    22,460
    
    
    
    
    
    
    
    
    
    
    
    13,903Total assets
    
    $
    593,266
    
    
    
    
    
    
    
    
    
    
    $
    521,013InterestBearing LiabilitiesNOW accounts
    
    $
    51,612
    
    
    $
    632
    
    
    
    2.45
    
    
    $
    46,224
    
    
    $
    210
    
    
    
    0.91Money market
    
    
    100,843
    
    
    
    1,495
    
    
    
    2.97
    
    
    
    71,041
    
    
    
    896
    
    
    
    2.52Certificates  regular
    
    
    273,133
    
    
    
    4,287
    
    
    
    3.14
    
    
    
    242,538
    
    
    
    3,198
    
    
    
    2.64Certificates  large
    
    
    41,619
    
    
    
    648
    
    
    
    3.11
    
    
    
    41,761
    
    
    
    371
    
    
    
    1.78Total deposits
    
    
    467,207
    
    
    
    7,062
    
    
    
    3.02
    
    
    
    401,564
    
    
    
    4,675
    
    
    
    2.33Junior subordinated debentures
    
    
    10,310
    
    
    
    444
    
    
    
    8.61
    
    
    
    10,310
    
    
    
    444
    
    
    
    8.61FHLB advances
    
    
    11,672
    
    
    
    163
    
    
    
    2.79
    
    
    
    22,724
    
    
    
    228
    
    
    
    2.01Other borrowings
    
    
    13,939
    
    
    
    271
    
    
    
    3.89
    
    
    
    9,032
    
    
    
    141
    
    
    
    3.12Total interest-bearing liabilities
    
    
    503,128
    
    
    
    7,940
    
    
    
    3.16
    
    
    
    443,630
    
    
    
    5,488
    
    
    
    2.47Non-interest-bearing liabilities
    
    
    50,822
    
    
    
    
    
    
    
    
    
    
    
    42,967Total liabilities
    
    
    553,950
    
    
    
    
    
    
    
    
    
    
    
    486,597Minority interest in 51% owned
subsidiary
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,555Stockholders equity
    
    
    39,316
    
    
    
    
    
    
    
    
    
    
    
    30,861Total liabilities and
Stockholders equity
    
    $
    593,266
    
    
    
    
    
    
    
    
    
    
    $
    521,013Net interest income/interest
rate spread
    
    
    
    
    
    $
    8,879
    
    
    
    2.73
    %
    
    
    
    
    
    $
    7,874
    
    
    
    2.80
    %Net interest-earning assets
    
    $
    67,678
    
    
    
    
    
    
    
    
    
    
    $
    63,480Net interest margin
    
    
    
    
    
    
    
    
    
    
    3.11
    %
    
    
    
    
    
    
    
    
    
    
    3.11
    %Ratio of average interest-earning
assets to average interest-
earning liabilities
    
    
    1.13
    
    
    
    
    
    
    
    
    
    
    
    1.14Return on average assets
    
    
    0.89
    %
    
    
    
    
    
    
    
    
    
    
    0.72
    %Return on average equity
    
    
    13.47
    %
    
    
    
    
    
    
    
    
    
    
    12.15
    %Average equity to average assets
    
    
    6.63
    %
    
    
    
    
    
    
    
    
    
    
    5.92
    %Non-interest expense to average
assets
    
    
    2.47
    %
    
    
    
    
    
    
    
    
    
    
    2.45
    %
 
 (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. 24




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##### Table of Contents



Financial Condition
 General.
 Securities.
 Loans and Leases Receivable.
 Deposits.
 Borrowings.
 Stockholders Equity.
  25




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##### Table of Contents



Asset Quality
 Non-performing Assets.
  As of June 30,
    
    As of December 31,2005
    
    2004(Dollars in Thousands)Non-accrual loans
    
    $
    711
    
    
    $
    696Non-accrual leases
    
    
    507
    
    
    
    1,566Total non-accrual loans and leases
    
    
    1,218
    
    
    
    2,262Foreclosed properties and repossessed
assets, net
    
    
    650
    
    
    
    665Total non-performing assets
    
    $
    1,868
    
    
    $
    2,927Performing troubled debt restructurings
    
    $
    
    
    
    $
    Total non-accrual loans and leases to total
loans and leases
    
    
    0.25
    %
    
    
    0.47
    %Total non-performing assets to total assets
    
    
    0.31
    
    
    
    0.52Allowance for loan and lease losses to
total loans and leases
    
    
    1.31
    
    
    
    1.34Allowance for loan and lease losses to
non-accrual loans and leases
    
    
    528.49
    
    
    
    281.83
   26




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##### Table of Contents



As of June 30,
    
    As of December 31,2005
    
    2004(In Thousands)Impaired loans and leases with impairment
reserves required
    
    $
    1,184
    
    
    $
    2,262Less:Impairment reserve(included in allowance for loan and lease losses)
    
    
    378
    
    
    
    470Net impaired loans and leases
    
    $
    806
    
    
    $
    1,792Average impaired loans and leases
    
    $
    1,739
    
    
    $
    2,112Interest income attibutable to impaired loans and leases
    
    
    80
    
    
    
    177Interest income recognized on
impaired loans and leases
    
    
    13
    
    
    
    85
   27




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##### Table of Contents



Three Months Ended June 30,
    
    Six Months Ended June 30,2005
    
    2004
    
    2005
    
    2004(Dollars in Thousands)Allowance at beginning of period
    
    $
    6,444
    
    
    $
    6,812
    
    
    $
    6,375
    
    
    $
    6,811Charge-offs:Mortgage
Commercial
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3
    )Lease
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Consumer
    
    
    (9
    )
    
    
    
    
    
    
    (9
    )
    
    
    Total charge-offs
    
    
    (9
    )
    
    
    
    
    
    
    (9
    )
    
    
    (3
    )Recoveries:Mortgage
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    Commercial
    
    
    2
    
    
    
    1
    
    
    
    5
    
    
    
    5Lease
    
    
    
    
    
    
    113
    
    
    
    
    
    
    
    113Consumer
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total recoveries
    
    
    2
    
    
    
    114
    
    
    
    6
    
    
    
    118Net recoveries (charge-offs)
    
    
    (7
    )
    
    
    114
    
    
    
    (3
    )
    
    
    115Provision
    
    
    
    
    
    
    
    
    
    
    65
    
    
    
    Allowance at end of period
    
    $
    6,437
    
    
    $
    6,926
    
    
    $
    6,437
    
    
    $
    6,926Allowance to gross loans and leases
    
    
    1.31
    %
    
    
    1.49
    %
    
    
    1.31
    %
    
    
    1.49
    %
 
 Liquidity and Capital Resources
     28




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##### Table of Contents



29




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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, 2005:Total capital(to risk-weighted assets)Consolidated
    
    $
    60,172
    
    
    
    11.25
    %
    
    $
    42,787
    
    
    
    8.00
    %
    
    
    N/A
    
    
    
    N/AFirst Business Bank
    
    
    52,565
    
    
    
    11.33
    
    
    
    37,116
    
    
    
    8.00
    
    
    $
    46,395
    
    
    
    10.00
    %First Business Bank  Milwaukee
    
    
    8,507
    
    
    
    11.65
    
    
    
    5,839
    
    
    
    8.00
    
    
    
    7,299
    
    
    
    10.00Tier 1 capital(to risk-weighted assets)Consolidated
    
    $
    48,735
    
    
    
    9.11
    %
    
    $
    21,393
    
    
    
    4.00
    %
    
    
    N/A
    
    
    
    N/AFirst Business Bank
    
    
    47,281
    
    
    
    10.19
    
    
    
    18,558
    
    
    
    4.00
    
    
    $
    27,837
    
    
    
    6.00
    %First Business Bank  Milwaukee
    
    
    7,592
    
    
    
    10.40
    
    
    
    2,920
    
    
    
    4.00
    
    
    
    4,380
    
    
    
    6.00Tier 1 capital(to average assets)Consolidated
    
    $
    48,735
    
    
    
    8.11
    %
    
    $
    24,030
    
    
    
    4.00
    %
    
    
    N/A
    
    
    
    N/AFirst Business Bank
    
    
    47,281
    
    
    
    9.11
    
    
    
    20,770
    
    
    
    4.00
    
    
    $
    25,962
    
    
    
    5.00
    %First Business Bank  Milwaukee
    
    
    7,592
    
    
    
    9.09
    
    
    
    3,342
    
    
    
    4.00
    
    
    
    4,177
    
    
    
    5.00
 30




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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, 2004:Total capital(to risk-weighted assets)Consolidated
    
    $
    57,775
    
    
    
    11.12
    %
    
    $
    41,550
    
    
    
    8.00
    %
    
    
    N/A
    
    
    
    N/AFirst Business Bank
    
    
    49,089
    
    
    
    10.68
    
    
    
    36,164
    
    
    
    8.00
    
    
    $
    45,205
    
    
    
    10.00
    %First Business Bank  Milwaukee
    
    
    8,185
    
    
    
    12.45
    
    
    
    5,259
    
    
    
    8.00
    
    
    
    6,574
    
    
    
    10.00Tier 1 capital(to risk-weighted assets)Consolidated
    
    $
    46,400
    
    
    
    8.93
    %
    
    $
    20,775
    
    
    
    4.00
    %
    
    
    N/A
    
    
    
    N/AFirst Business Bank
    
    
    43,801
    
    
    
    9.50
    
    
    
    18,082
    
    
    
    4.00
    
    
    $
    27,123
    
    
    
    6.00
    %First Business Bank  Milwaukee
    
    
    7,360
    
    
    
    11.20
    
    
    
    2,629
    
    
    
    4.00
    
    
    
    3,944
    
    
    
    6.00Tier 1 capital(to average assets)Consolidated
    
    $
    46,400
    
    
    
    8.30
    %
    
    $
    22,365
    
    
    
    4.00
    %
    
    
    N/A
    
    
    
    N/AFirst Business Bank
    
    
    43,801
    
    
    
    9.18
    
    
    
    19,430
    
    
    
    4.00
    
    
    $
    24,287
    
    
    
    5.00
    %First Business Bank  Milwaukee
    
    
    7,360
    
    
    
    10.09
    
    
    
    2,918
    
    
    
    4.00
    
    
    
    3,648
    
    
    
    5.00
 31




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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, 2004:Total capital(to risk-weighted assets)Consolidated
    
    $
    54,623
    
    
    
    11.12
    %
    
    $
    39,293
    
    
    
    8.00
    %
    
    
    N/A
    
    
    
    N/AFirst Business Bank
    
    
    46,291
    
    
    
    10.74
    
    
    
    34,475
    
    
    
    8.00
    
    
    $
    43,094
    
    
    
    10.00
    %First Business Bank  Milwaukee
    
    
    8,334
    
    
    
    13.97
    
    
    
    4,772
    
    
    
    8.00
    
    
    
    5,965
    
    
    
    10.00Tier 1 capital(to risk-weighted assets)Consolidated
    
    $
    43,474
    
    
    
    8.85
    %
    
    $
    19,647
    
    
    
    4.00
    %
    
    
    N/A
    
    
    
    N/AFirst Business Bank
    
    
    40,895
    
    
    
    9.49
    
    
    
    17,238
    
    
    
    4.00
    
    
    $
    25,856
    
    
    
    6.00
    %First Business Bank  Milwaukee
    
    
    7,588
    
    
    
    12.72
    
    
    
    2,386
    
    
    
    4.00
    
    
    
    3,579
    
    
    
    6.00Tier 1 capital(to average assets)Consolidated
    
    $
    43,474
    
    
    
    8.30
    %
    
    $
    20,956
    
    
    
    4.00
    %
    
    
    N/A
    
    
    
    N/AFirst Business Bank
    
    
    40,895
    
    
    
    9.06
    
    
    
    18,046
    
    
    
    4.00
    
    
    $
    22,558
    
    
    
    5.00
    %First Business Bank  Milwaukee
    
    
    7,588
    
    
    
    10.69
    
    
    
    2,838
    
    
    
    4.00
    
    
    
    3,547
    
    
    
    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
    
    $
    5,494
    
    
    $
    534
    
    
    $
    1,066
    
    
    $
    1,066
    
    
    $
    2,829Fed funds purchased and securities
repurchase agreements
    
    
    13,588
    
    
    
    13,588
    
    
    
    
    
    
    
    
    
    
    
    Time deposits
    
    
    319,852
    
    
    
    182,478
    
    
    
    87,660
    
    
    
    39,517
    
    
    
    10,197Line of Credit
    
    
    2,500
    
    
    
    2,500
    
    
    
    
    
    
    
    
    
    
    
    Subordinated debt
    
    
    5,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,000Junior subordinated debentures
    
    
    10,310
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,310FHLB advances
    
    
    12,649
    
    
    
    11,104
    
    
    
    1,029
    
    
    
    11
    
    
    
    505Other long-term liabilities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total contractual obligations
    
    $
    369,393
    
    
    $
    210,204
    
    
    $
    89,755
    
    
    $
    40,593
    
    
    $
    28,841
 32




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##### Table of Contents



Off-balance Sheet Arrangements
 Note 9
 
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
      
 Item 4  Controls and Procedures
   33




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##### Table of Contents



Part II. Other Information
 
 Item 1. Legal Proceedings
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
  34




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##### Table of Contents



Number of SharesFor
    
    Against
    
    AbstainedElection of Directors for a three-year term expiring in 2008:Jerome J. Smith
    
    
    1,409,499
    
    
    
    
    
    
    
    4,279Leland C. Bruce
    
    
    1,406,811
    
    
    
    
    
    
    
    6,967Loren D. Mortenson
    
    
    1,406,127
    
    
    
    
    
    
    
    7,651Appointment of KPMG as independent auditors for the year
ending December 31, 2005
    
    
    1,374,903
    
    
    
    1,630
    
    
    
    37,245
 
 Item 5. Other Information.
  
 Item 6. Exhibits.
 
 35




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##### Table of Contents



Signatures
  FIRST BUSINESS FINANCIAL SERVICES, INC.By: /s/ Jerome J. SmithJerome J. SmithDirector and Chief Executive OfficerAugust 12, 2005
 36