##### 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, 2006
 Commission file number 000-51028
 FIRST BUSINESS FINANCIAL SERVICES, INC.
 
  Wisconsin
    
    39-1576570(State or jurisdiction of incorporation or organization)
    
    (I.R.S. Employer Identification No.)
 401 Charmany Drive Madison, WI
    
    53719(Address of Principal Executive Offices)
    
    (Zip Code)
  
   þ o
  o o þ
  o þ




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##### 



FIRST BUSINESS FINANCIAL SERVICES, INC.
INDEX  FORM 10-Q
 PagePART
I.  FINANCIAL INFORMATIONItem 1. Financial Statements (Unaudited)Consolidated Balance Sheets as of March 31, 2006 and
December 31, 2005
    
    
    3Consolidated Statements of Income for the Three Months Ended
March 31, 2006 and 2005
    
    
    4Consolidated Statements of Changes in Shareholders Equity and
Comprehensive Income for the Three Months Ended
March 31, 2006 and 2005
    
    
    5Consolidated Statements of Cash Flows for the Three Months Ended
March 31, 2006 and 2005
    
    
    6Notes to Unaudited Consolidated Financial Statements
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition
and Results of OperationsResults of Operations
    
    
    17Financial Condition
    
    
    22Asset Quality
    
    
    23Liquidity and Capital Resources
    
    
    25Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    27Item 4. Controls and Procedures
    
    
    27PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    29Item 1A. Risk Factors
    
    
    29Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    29Certification of Chief Executive OfficerCertification of Sr. VP and CFOCertification of CEO and Sr. VP and CFO
  1




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##### Table of Contents



PageItem 3. Defaults upon Senior Securities
    
    
    29Item 4. Submission of Matters to Vote of Security Holders
    
    
    29Item 5. Other Information
    
    
    30Item 6. Exhibits
    
    
    30SIGNATURES
    
    
    31
 2




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##### Table of Contents



PART I. Financial Information
 
 Item 1.
 Financial Statements
 
 Consolidated Balance Sheets
 (unaudited)March 31,
    
    
    December 31,2006
    
    
    2005(In Thousands, Except Share Data)AssetsCash and due from banks
    
    $
    12,447
    
    
    $
    16,568Interest-bearing deposits
    
    
    14
    
    
    
    8Cash and cash equivalents
    
    
    12,461
    
    
    
    16,576Securities available-for-sale, at fair value
    
    
    100,056
    
    
    
    95,070Loans and leases receivable, net
    
    
    533,732
    
    
    
    532,716Leasehold improvements and equipment, net
    
    
    1,182
    
    
    
    1,155Cash surrender value of bank-owned life insurance
    
    
    13,008
    
    
    
    12,856Goodwill and other intangibles
    
    
    2,842
    
    
    
    2,852Accrued interest receivable and other assets
    
    
    7,810
    
    
    
    8,010Total assets
    
    $
    671,091
    
    
    $
    669,235Liabilities and Stockholders EquityDeposits
    
    $
    578,077
    
    
    $
    567,464Securities sold under agreement to repurchase
    
    
    661
    
    
    
    713Federal Home Loan Bank and other borrowings
    
    
    31,758
    
    
    
    39,045Junior subordinated debentures
    
    
    10,310
    
    
    
    10,310Other liabilities
    
    
    7,806
    
    
    
    9,860628,612
    
    
    
    627,392Commitments 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,
2,497,134 and 2,456,754 shares issued, 2,474,676
and 2,435,008 outstanding in 2006 and 2005, respectively
    
    
    25
    
    
    
    24Additional paid-in capital
    
    
    23,521
    
    
    
    22,712Retained earnings
    
    
    21,794
    
    
    
    21,085Accumulated other comprehensive loss
    
    
    (1,647
    )
    
    
    (1,469
    )Treasury stock (22,458 and 21,746 shares in 2006 and 2005,
respectively), at cost
    
    
    (526
    )
    
    
    (509
    )Unvested restricted shares
    
    
    (688
    )
    
    
    Total stockholders equity
    
    
    42,479
    
    
    
    41,843Total liabilities and stockholders equity
    
    $
    671,091
    
    
    $
    669,235
  3




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##### Table of Contents



Unaudited Consolidated Statements of Income
 Three Months Ended,March 31,2006
    
    
    2005(In Thousands, Except Share Data)Interest income:Loans and leases
    
    $
    9,809
    
    
    $
    7,211Securities income:Taxable
    
    
    966
    
    
    
    691Fed funds sold and other
    
    
    36
    
    
    
    54Total interest income
    
    
    10,811
    
    
    
    7,956Interest expense:Deposits
    
    
    5,566
    
    
    
    3,287Notes payable and other borrowings
    
    
    473
    
    
    
    178Junior subordinated debentures
    
    
    248
    
    
    
    228Total interest expense
    
    
    6,287
    
    
    
    3,693Net interest income
    
    
    4,524
    
    
    
    4,263Provision for loan and lease losses
    
    
    
    
    
    
    65Net interest income after provision for loan and lease losses
    
    
    4,524
    
    
    
    4,198Non-interest income:Service charges on deposits
    
    
    196
    
    
    
    214Credit, merchant and debit card fees
    
    
    37
    
    
    
    38Loan fees
    
    
    148
    
    
    
    145Gain on sale of 50% owned joint venture
    
    
    
    
    
    
    973Increase in cash surrender value of bank-owned life insurance
    
    
    152
    
    
    
    88Trust and investment services fee income
    
    
    302
    
    
    
    282Change in fair value of interest rate swaps
    
    
    (159
    )
    
    
    (64
    )Net cash settlement of interest rate swaps
    
    
    (26
    )
    
    
    (31
    )Other
    
    
    84
    
    
    
    64Total non-interest income
    
    
    734
    
    
    
    1,709Non-interest expense:Compensation
    
    
    2,533
    
    
    
    2,207Occupancy
    
    
    239
    
    
    
    225Equipment
    
    
    122
    
    
    
    121Data processing
    
    
    216
    
    
    
    160Marketing
    
    
    207
    
    
    
    163Professional fees
    
    
    248
    
    
    
    215Other
    
    
    425
    
    
    
    484Total non-interest expense
    
    
    3,990
    
    
    
    3,575Income before income tax expense
    
    
    1,268
    
    
    
    2,332Income tax expense
    
    
    411
    
    
    
    807Net income
    
    $
    857
    
    
    $
    1,525Earnings per share:Basic
    
    $
    0.35
    
    
    $
    0.63Diluted
    
    
    0.35
    
    
    
    0.62Dividends declared per share
    
    
    0.06
    
    
    
    
  4




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##### Table of Contents



Unaudited Consolidated Statements of Changes in Stockholders Equity and Comprehensive Income
 AccumulatedAdditional
    
    
    
    
    
    
    otherCommon
    
    
    paid-in
    
    
    Retained
    
    
    comprehensive
    
    
    Treasurystock
    
    
    capital
    
    
    earnings
    
    
    loss
    
    
    stock
    
    
    Total(Dollars in thousands, except share data)Balance at December 31, 2004
    
    $
    24
    
    
    $
    22,426
    
    
    $
    16,752
    
    
    $
    (677
    )
    
    $
    (384
    )
    
    $
    38,141Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    1,525
    
    
    
    
    
    
    
    
    
    
    
    1,525Unrealized securities
losses arising during the
period net of minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,175
    )
    
    
    
    
    
    
    (1,175
    )Unrealized derivatives
gains arising during the
period
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13
    
    
    
    
    
    
    
    13Reclassification
adjustment for realized
loss on derivatives
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    72
    
    
    
    
    
    
    
    72Income tax effect
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    396
    
    
    
    
    
    
    
    396Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    831Treasury stock purchased
(150 shares)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3
    )
    
    
    (3
    )Stock options exercised
(4,205 shares)
    
    
    
    
    
    
    62
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    62Balance at March 31, 2005
    
    $
    24
    
    
    $
    22,488
    
    
    $
    18,277
    
    
    $
    (1,371
    )
    
    $
    (387
    )
    
    $
    39,031
 AccumulatedAdditional
    
    
    
    
    
    
    other
    
    
    
    
    
    
    UnvestedCommon
    
    
    paid-in
    
    
    Retained
    
    
    comprehensive
    
    
    Treasury
    
    
    restrictedstock
    
    
    capital
    
    
    earnings
    
    
    loss
    
    
    stock
    
    
    shares
    
    
    Total(Dollars in thousands, except share data)Balance at December 31, 2005
    
    $
    24
    
    
    $
    22,712
    
    
    $
    21,085
    
    
    $
    (1,469
    )
    
    $
    (509
    )
    
    $
    
    
    
    $
    41,843Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    857
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    857Unrealized securities
losses arising during the
period
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (331
    )
    
    
    
    
    
    
    
    
    
    
    (331
    )Unrealized derivatives
gains arising during the
period
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6
    
    
    
    
    
    
    
    
    
    
    
    6Reclassification
adjustment for realized
loss on derivatives
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    36
    
    
    
    
    
    
    
    
    
    
    
    36Income tax effect
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    111
    
    
    
    
    
    
    
    
    
    
    
    111Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    679Issuance of restricted
shares (31,100 shares)
    
    
    
    
    
    
    719
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (688
    )
    
    
    31Cash dividends ($0.06 per
share)
    
    
    
    
    
    
    
    
    
    
    (148
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (148
    )Treasury stock purchased
(712 shares)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (17
    )
    
    
    
    
    
    
    (17
    )Stock options exercised
(9,280 shares)
    
    
    1
    
    
    
    90
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    91Balance at March 31, 2006
    
    $
    25
    
    
    $
    23,521
    
    
    $
    21,794
    
    
    $
    (1,647
    )
    
    $
    (526
    )
    
    $
    (688
    )
    
    $
    42,479
  5




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##### Table of Contents



Unaudited Consolidated Statements of Cash Flows
 Three Months Ended March 31,2006
    
    
    2005(In Thousands)Operating ActivitiesNet income
    
    $
    857
    
    
    $
    1,525Adjustments to reconcile net income to net cash
provided by operating activities:Deferred income taxes, net
    
    
    313
    
    
    
    (67
    )Provision for loan and lease losses
    
    
    
    
    
    
    65Depreciation, amortization and accretion, net
    
    
    171
    
    
    
    268Change in fair value of interest rate swaps
    
    
    159
    
    
    
    64Increase in cash surrender value of bank-owned life insurance
    
    
    (152
    )
    
    
    (88
    )Gain on sale of loans originated for sale
    
    
    
    
    
    
    1Sale of loans originated for sale
    
    
    
    
    
    
    137Gain on sale of 50% owned joint venture
    
    
    
    
    
    
    973Increase (decrease) in accrued interest receivable and other
assets
    
    
    (62
    )
    
    
    851Increase (decrease) in accrued expenses and other liabilities
    
    
    (1,080
    )
    
    
    1,390Net cash provided by operating activities
    
    
    206
    
    
    
    5,119Investing activitiesProceeds from maturities of available-for-sale securities
    
    
    4,591
    
    
    
    5,782Proceeds from sale of 50% owned joint venture
    
    
    
    
    
    
    2,082Purchases of available-for-sale securities
    
    
    (7,926
    )
    
    
    (29,723
    )Net increase in loans and leases
    
    
    (1,016
    )
    
    
    (14,811
    )Increase in other investments
    
    
    (2,024
    )
    
    
    (48
    )Purchases of leasehold improvements and equipment, net
    
    
    (90
    )
    
    
    (45
    )Net cash used in investing activities
    
    
    (6,465
    )
    
    
    (36,763
    )Financing activitiesNet increase in deposits
    
    
    10,613
    
    
    
    54,037Net increase (decrease) in FHLB line of credit
    
    
    6,998
    
    
    
    (21,752
    )Net increase (decrease) in short-term borrowed funds
    
    
    (14,336
    )
    
    
    455Termination of interest rate swaps
    
    
    (1,088
    )
    
    
    Exercise of stock options
    
    
    91
    
    
    
    62Cash dividends
    
    
    (148
    )
    
    
    Share-based compensation expense
    
    
    31
    
    
    
    Purchase of treasury stock
    
    
    (17
    )
    
    
    (3
    )Net cash provided by financing activities
    
    
    2,144
    
    
    
    32,799Net increase (decrease) in cash and cash equivalents
    
    
    (4,115
    )
    
    
    1,155Cash and cash equivalents at beginning of period
    
    
    16,576
    
    
    
    8,671Cash and cash equivalents at end of period
    
    $
    12,461
    
    
    $
    9,826Supplementary cash flow informationCash paid to accounts:Interest on deposits and borrowings
    
    $
    5,910
    
    
    $
    3,511Income taxes
    
    
    416
    
    
    
    42
  6




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##### Table of Contents



NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 Note 1
 Principles of Consolidation.
  Note 2
 Basis of Presentation.
   Recent Accounting Changes.
 Accounting for Changes and Error Corrections. Accounting Changes and Error Corrections Accounting Changes, Reporting
Changes in Interim Financial Statements.
 Note 3
 Share Based Compensation.
 Share-Based Payment Accounting for Stock-based
Compensation Accounting for Stock Issued to Employees Statement of Cash Flows
  7




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##### Table of Contents



Equity Incentive Plans
   Stock Options
   WeightedAverageWeighted
    
    RemainingAverage
    
    ContractualOptions
    
    Price
    
    Life (Years)Outstanding at January 1, 2006
    
    
    201,532
    
    
    $
    21.05Granted
    
    
    
    
    
    
    Exercised
    
    
    (9,280
    )
    
    
    9.73Forfeited
    
    
    
    
    
    
    Outstanding at end of period
    
    
    192,252
    
    
    $
    21.60
    
    
    
    7.2Options exercisable at March 31, 2006
    
    
    108,916
    
    
    $
    20.17
    
    
    
    7.7
  8




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##### Table of Contents



Restricted Shares
  WeightedNumber of
    
    AverageRestricted
    
    Grant-DateShares
    
    Fair ValueNonvested balance as of January 1, 2006
    
    $
    
    
    
    $
    Granted
    
    
    31,100
    
    
    
    23.12Vested
    
    
    
    
    
    
    Forfeited
    
    
    
    
    
    
    Nonvested balance as of March 31, 2006
    
    $
    31,100
    
    
    $
    23.12
  Note 4  Goodwill and Other Intangible Assets.
  Three Months EndedMarch 31,2006
    
    
    2005(In Thousands)Balance at beginning of period
    
    $
    2,689
    
    
    $
    2,689Goodwill acquired
    
    
    
    
    
    
    Balance at end of period
    
    $
    2,689
    
    
    $
    2,689
   9




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##### Table of Contents



Three Months EndedMarch 31,2006
    
    
    2005(In Thousands)Core deposit intangibles:Gross carrying amount
    
    $
    145
    
    
    $
    145Accumulated amortization
    
    
    (61
    )
    
    
    (40
    )Net book value
    
    $
    84
    
    
    $
    105Additions during the year
    
    $
    
    
    
    $
    Amortization during the period
    
    
    (7
    )
    
    
    (9
    )Other intangibles:Gross carrying amount
    
    $
    120
    
    
    $
    120Accumulated amortization
    
    
    (51
    )
    
    
    (42
    )Net book value
    
    $
    69
    
    
    $
    78Additions during the year
    
    $
    
    
    
    $
    Amortization during the year
    
    
    (3
    )
    
    
    (3
    )
  CoreDeposit
    
    
    OtherIntangibles
    
    
    Intangibles
    
    
    Total(In Thousands)Three months ended March 31, 2006
    
    $
    7
    
    
    $
    3
    
    
    $
    10Estimate for the nine months ended
December 31, 2006
    
    
    17
    
    
    
    9
    
    
    
    26Estimate for the year ended December 31,2007
    
    
    18
    
    
    
    12
    
    
    
    302008
    
    
    13
    
    
    
    12
    
    
    
    252009
    
    
    10
    
    
    
    12
    
    
    
    222010
    
    
    7
    
    
    
    12
    
    
    
    19$
    49
    
    
    $
    48
    
    
    $
    97
 10




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##### Table of Contents



Note 5
 Securities
  As of March 31, 2006Gross
    
    Grossunrealized
    
    unrealizedAmortized
    
    holding
    
    holding
    
    Estimatedcost
    
    gains
    
    losses
    
    fair valueSecurities available-for-sale
    
    (In Thousands)FHLB stock
    
    $
    2,898
    
    
    $
    
    
    
    $
    
    
    
    $
    2,898U.S. Government corporations and agencies
    
    
    3,261
    
    
    
    
    
    
    
    (79
    )
    
    
    3,182Municipals
    
    
    275
    
    
    
    
    
    
    
    (4
    )
    
    
    271Collateralized mortgage obligations
    
    
    93,896
    
    
    
    1
    
    
    
    (2,334
    )
    
    
    91,563Other
    
    
    2,142
    
    
    
    
    
    
    
    
    
    
    
    2,142$
    102,472
    
    
    $
    1
    
    
    $
    (2,417
    )
    
    $
    100,056
 As of December 31, 2005Gross
    
    Grossunrealized
    
    unrealizedAmortized
    
    holding
    
    holding
    
    Estimatedcost
    
    gains
    
    losses
    
    fair valueSecurities available-for-sale
    
    (In Thousands)FHLB stock
    
    $
    2,898
    
    
    $
    
    
    
    $
    
    
    
    $
    2,898U.S. Government corporations and agencies
    
    
    3,264
    
    
    
    
    
    
    
    (80
    )
    
    
    3,184Municipals
    
    
    275
    
    
    
    
    
    
    
    (3
    )
    
    
    272Collateralized mortgage obligations
    
    
    90,601
    
    
    
    2
    
    
    
    (2,004
    )
    
    
    88,599Other
    
    
    117
    
    
    
    
    
    
    
    
    
    
    
    117$
    97,155
    
    
    $
    2
    
    
    $
    (2,087
    )
    
    $
    95,070
  11




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##### Table of Contents



As of March 31, 2006Less than 12 months
    
    12 months or longer
    
    TotalFair Value
    
    Unrealized loss
    
    Fair Value
    
    Unrealized loss
    
    Fair Value
    
    Unrealized loss(In Thousands)U.S. Government corporations and agencies
    
    $
    
    
    
    $
    
    
    
    $
    3,182
    
    
    $
    79
    
    
    $
    3,182
    
    
    $
    79Municipals
    
    
    271
    
    
    
    4
    
    
    
    
    
    
    
    
    
    
    
    271
    
    
    
    4Collateralized mortgage obligations
    
    
    31,257
    
    
    
    568
    
    
    
    60,088
    
    
    
    1,766
    
    
    
    91,345
    
    
    
    2,334$
    31,528
    
    
    $
    572
    
    
    $
    63,270
    
    
    $
    1,845
    
    
    $
    94,798
    
    
    $
    2,417
   Note 6  Loans and Allowance for Loan and Lease Losses
  As of March 31,
    
    
    As of December 31,2006
    
    
    2005(In thousands)First mortgage loans:Commercial real estate
    
    $
    243,324
    
    
    $
    249,133Construction
    
    
    49,857
    
    
    
    50,619Multi-family
    
    
    25,847
    
    
    
    22,1151-4 family
    
    
    31,093
    
    
    
    26,513350,121
    
    
    
    348,380Commercial business loans
    
    
    149,764
    
    
    
    151,688Direct financing leases, net
    
    
    18,899
    
    
    
    17,852Second mortgage loans
    
    
    7,412
    
    
    
    8,231Credit card and other
    
    
    14,518
    
    
    
    13,579Gross loans
and lease receivables
    
    
    540,714
    
    
    
    539,730Less:Allowance for loan and lease losses
    
    
    6,774
    
    
    
    6,773Deferred loan fees
    
    
    208
    
    
    
    241Net loans
and lease receivables
    
    $
    533,732
    
    
    $
    532,716
 12




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##### Table of Contents



Three Months EndedMarch 31,2006
    
    
    2005(Dollars in Thousands)Allowance at beginning of period
    
    $
    6,773
    
    
    $
    6,375Charge-offs:MortgageTotal charge-offs
    
    
    
    
    
    
    Recoveries:Mortgage
    
    
    1
    
    
    
    1Commercial
    
    
    
    
    
    
    3Total recoveries
    
    
    1
    
    
    
    4Net recoveries (charge-offs)
    
    
    1
    
    
    
    4Provision for loan and lease losses
    
    
    
    
    
    
    65Allowance at end of period
    
    $
    6,774
    
    
    $
    6,444Allowance to gross loans and leases
    
    
    1.25
    %
    
    
    1.31
    %
 Note 7  Deposits
 March 31,
    
    
    December 31,2006
    
    
    2005Weighted
    
    
    
    
    
    
    WeightedBalance
    
    
    Average Rate
    
    
    Balance
    
    
    Average Rate(Dollars in Thousands)Transaction accounts:Demand deposits
    
    $
    37,601
    
    
    
    0.00
    %
    
    $
    46,766
    
    
    
    0.00
    %Negotiable order of
withdrawal (NOW)
accounts
    
    
    50,342
    
    
    
    3.93
    
    
    
    46,962
    
    
    
    2.8587,943
    
    
    
    
    
    
    
    93,728Money market accounts
    
    
    153,449
    
    
    
    4.13
    
    
    
    138,442
    
    
    
    3.10Certificates of deposit
    
    
    336,685
    
    
    
    4.26
    
    
    
    335,294
    
    
    
    3.95$
    578,077
    
    
    
    
    
    
    $
    567,464
 13




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##### Table of Contents



Note 8  Borrowings
 As of March 31,2006Weighted
    
    
    WeightedAverage
    
    
    AverageBalance
    
    
    Balance
    
    
    Rate(Dollars in Thousands)Fed funds purchased and
securities sold under agreement
to repurchase
    
    $
    4,361
    
    
    $
    14,795
    
    
    
    4.52
    %FHLB advances
    
    
    19,543
    
    
    
    14,732
    
    
    
    4.67Junior subordinated debentures
    
    
    10,310
    
    
    
    10,310
    
    
    
    9.62Line of credit
    
    
    3,515
    
    
    
    3,063
    
    
    
    6.27Subordinated note payable
    
    
    5,000
    
    
    
    5,000
    
    
    
    6.88$
    42,729
    
    
    $
    47,900
    
    
    
    6.02
    %Short-term borrowings
    
    $
    7,886Long-term borrowings (due
beyond one year)
    
    
    34,843$
    42,729
  As of December 31,2005Weighted
    
    
    WeightedAverage
    
    
    AverageBalance
    
    
    Balance
    
    
    Rate(Dollars in Thousands)Fed funds purchased and
securities sold under agreement
to repurchase
    
    $
    19,463
    
    
    $
    9,021
    
    
    
    3.45
    %FHLB advances
    
    
    12,545
    
    
    
    11,427
    
    
    
    3.67Junior subordinated debentures
    
    
    10,310
    
    
    
    10,310
    
    
    
    9.18Line of credit
    
    
    2,750
    
    
    
    2,338
    
    
    
    5.39Subordinated note payable
    
    
    5,000
    
    
    
    5,000
    
    
    
    5.75$
    50,068
    
    
    $
    38,096
    
    
    
    5.49
    %Short-term borrowings
    
    $
    22,222Long-term borrowings (due
beyond one year)
    
    
    27,846$
    50,068
 14




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##### Table of Contents



Note 9  Derivative and Hedging Activities
     As of March 31,
    
    
    As of December 31,2006
    
    
    2005(In thousands)Notional
    
    
    Maturity
    
    
    Fixed
    
    
    Variable
    
    
    Notional
    
    
    Maturity
    
    
    Fixed
    
    
    VariableAmount
    
    
    Date
    
    
    Rate
    
    
    Rate
    
    
    Amount
    
    
    Date
    
    
    Rate
    
    
    RateCash Flow Hedge:Pay-fixed interest rate swap
    
    $
    746
    
    
    April, 2009
    
    
    5.24
    %
    
    
    4.53
    %
    
    $
    789
    
    
    April, 2009
    
    
    5.24
    %
    
    
    3.97
    %Other Derivatives:Pay-fixed interest rate swap
    
    
    10,000
    
    
    October, 2006
    
    
    3.94
    
    
    
    4.62
    
    
    
    10,000
    
    
    October, 2006
    
    
    3.94
    
    
    
    4.08Pay-fixed interest rate swap
    
    
    10,000
    
    
    November, 2006
    
    
    3.75
    
    
    
    4.63
    
    
    
    10,000
    
    
    November, 2006
    
    
    3.75
    
    
    
    4.12Pay-fixed interest rate swap
    
    
    10,000
    
    
    December, 2006
    
    
    4.94
    
    
    
    4.93
    
    
    
    10,000
    
    
    December, 2006
    
    
    4.94
    
    
    
    4.50Callable receive-fixed interest rate swap
    
    
    
    
    
    
    
    
    
    
    4.94
    
    
    
    
    
    
    
    10,000
    
    
    January, 2010
    
    
    4.25
    
    
    
    4.44Callable receive-fixed interest rate swap
    
    
    
    
    
    
    
    
    
    
    4.94
    
    
    
    
    
    
    
    10,000
    
    
    February, 2010
    
    
    4.35
    
    
    
    4.39Callable receive-fixed interest rate swap
    
    
    
    
    
    
    
    
    
    
    4.94
    
    
    
    
    
    
    
    10,000
    
    
    February, 2010
    
    
    4.10
    
    
    
    4.42Callable receive-fixed interest rate swap
    
    
    
    
    
    
    
    
    
    
    4.94
    
    
    
    
    
    
    
    10,000
    
    
    November, 2010
    
    
    4.00
    
    
    
    4.41Pay-fixed interest rate swap
    
    
    4,719
    
    
    June, 2011
    
    
    4.94
    
    
    
    4.61
    
    
    
    4,742
    
    
    June, 2011
    
    
    5.49
    
    
    
    4.204.944.94$
    35,465
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    75,531
   15




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##### Table of Contents



Note 10  Earnings Per Share
  Three Months Ended March 31,2006
    
    
    2005Numerator:Net income
    
    $
    856,653
    
    
    $
    1,525,128Numerator for basic earnings per share
income available to common stockholders
    
    
    856,653
    
    
    
    1,525,128Numerator for diluted earnings per share
income available to common
stockholders
    
    
    856,653
    
    
    
    1,525,128Denominator:Denominator for basic earnings per
shareweighted-average common
shares outstanding
    
    
    2,460,666
    
    
    
    2,413,902Effect of dilutive securities:Employee stock options
    
    
    16,574
    
    
    
    48,482Denominator for diluted earnings per
shareadjusted weighted-average
common shares and assumed conversions
    
    
    2,477,240
    
    
    
    2,462,384Basic earnings per share
    
    $
    0.35
    
    
    $
    0.63Diluted earnings per share
    
    
    0.35
    
    
    
    0.62
 16




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##### 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
  
 Results of Operations
 Comparison of Three Months Ended March 31, 2006 and 2005
 General.
 Net Interest Income.
 17




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##### Table of Contents



18




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##### Table of Contents



Provision for Loan and Lease Losses.
 Non-Interest Income.
 Non-Interest Expense.
 Income Taxes.
 Average Interest-Earning Assets, Average Interest-Bearing Liabilities and Interest Rate
Spread.
 19




---



##### Table of Contents



Three Months Ended March 31,2006
    
    
    2005Average
    
    
    
    
    
    
    
    
    
    
    AverageAverage
    
    
    
    
    
    
    Yield/
    
    
    Average
    
    
    
    
    
    
    Yield/Balance
    
    
    Interest
    
    
    Cost
    
    
    Balance
    
    
    Interest
    
    
    Cost(Dollars in Thousands)Interest-Earning AssetsMortgage loans
    
    $
    355,337
    
    
    $
    6,036
    
    
    
    6.80
    %
    
    $
    310,959
    
    
    $
    4,247
    
    
    
    5.46
    %Commercial loans
    
    
    161,150
    
    
    
    3,466
    
    
    
    8.60
    
    
    
    136,543
    
    
    
    2,604
    
    
    
    7.63Leases
    
    
    18,154
    
    
    
    261
    
    
    
    5.76
    
    
    
    25,035
    
    
    
    335
    
    
    
    5.35Consumer loans
    
    
    2,809
    
    
    
    46
    
    
    
    6.45
    
    
    
    1,704
    
    
    
    25
    
    
    
    5.83Total loans and leases receivable (1)
    
    
    537,450
    
    
    
    9,809
    
    
    
    7.30
    
    
    
    474,241
    
    
    
    7,211
    
    
    
    6.08Mortgage-related securities (2)
    
    
    91,667
    
    
    
    937
    
    
    
    4.09
    
    
    
    74,719
    
    
    
    659
    
    
    
    3.53Investment securities (2)
    
    
    4,896
    
    
    
    43
    
    
    
    3.53
    
    
    
    4,595
    
    
    
    32
    
    
    
    2.79Federal Home Loan Bank stock
    
    
    2,898
    
    
    
    22
    
    
    
    3.04
    
    
    
    2,773
    
    
    
    38
    
    
    
    5.48Fed funds sold and other
    
    
    19
    
    
    
    
    
    
    
    0.00
    
    
    
    3,036
    
    
    
    15
    
    
    
    1.98Interest bearing deposits
    
    
    24
    
    
    
    
    
    
    
    0.00
    
    
    
    101
    
    
    
    1
    
    
    
    3.96Total interest-earning assets
    
    
    636,954
    
    
    
    10,811
    
    
    
    6.79
    
    
    
    559,465
    
    
    
    7,956
    
    
    
    5.69Non-interest-earning assets
    
    
    32,074
    
    
    
    
    
    
    
    
    
    
    
    24,556Total assets
    
    $
    669,028
    
    
    
    
    
    
    
    
    
    
    $
    584,021Interest-Bearing LiabilitiesNOW accounts
    
    $
    51,678
    
    
    $
    508
    
    
    
    3.93
    
    
    $
    51,021
    
    
    $
    286
    
    
    
    2.24Money market
    
    
    141,442
    
    
    
    1,460
    
    
    
    4.13
    
    
    
    94,712
    
    
    
    572
    
    
    
    2.42Certificates  regular
    
    
    290,310
    
    
    
    3,102
    
    
    
    4.27
    
    
    
    271,690
    
    
    
    2,174
    
    
    
    3.20Certificates  large
    
    
    47,588
    
    
    
    496
    
    
    
    4.17
    
    
    
    40,580
    
    
    
    255
    
    
    
    2.51Total deposits
    
    
    531,018
    
    
    
    5,566
    
    
    
    4.19
    
    
    
    458,003
    
    
    
    3,287
    
    
    
    2.87Junior subordinated debentures
    
    
    10,310
    
    
    
    248
    
    
    
    9.62
    
    
    
    10,310
    
    
    
    228
    
    
    
    8.85FHLB advances
    
    
    14,732
    
    
    
    172
    
    
    
    4.67
    
    
    
    16,026
    
    
    
    92
    
    
    
    2.30Other borrowings
    
    
    22,858
    
    
    
    301
    
    
    
    5.27
    
    
    
    8,771
    
    
    
    86
    
    
    
    3.92Total interest-bearing liabilities
    
    
    578,918
    
    
    
    6,287
    
    
    
    4.34
    
    
    
    493,110
    
    
    
    3,693
    
    
    
    3.00Non-interest-bearing liabilities
    
    
    48,081
    
    
    
    
    
    
    
    
    
    
    
    52,312Total liabilities
    
    
    626,999
    
    
    
    
    
    
    
    
    
    
    
    545,422Stockholders equity
    
    
    42,029
    
    
    
    
    
    
    
    
    
    
    
    38,599Total liabilities and
Stockholders equity
    
    $
    669,028
    
    
    
    
    
    
    
    
    
    
    $
    584,021Net interest income/interest
rate spread
    
    
    
    
    
    $
    4,524
    
    
    
    2.45
    %
    
    
    
    
    
    $
    4,263
    
    
    
    2.69
    %Net interest-earning assets
    
    $
    58,036
    
    
    
    
    
    
    
    
    
    
    $
    66,355Net interest margin
    
    
    
    
    
    
    
    
    
    
    2.84
    %
    
    
    
    
    
    
    
    
    
    
    3.05
    %Ratio of
average interest-earning assets to average interest-earning liabilities
    
    
    1.10
    
    
    
    
    
    
    
    
    
    
    
    1.13Return on average assets
    
    
    0.51
    %
    
    
    
    
    
    
    
    
    
    
    1.04
    %Return on average equity
    
    
    8.16
    %
    
    
    
    
    
    
    
    
    
    
    15.80
    %Average equity to average assets
    
    
    6.28
    %
    
    
    
    
    
    
    
    
    
    
    6.61
    %Non-interest expense to average assets
    
    
    2.39
    %
    
    
    
    
    
    
    
    
    
    
    2.56
    %
 
 (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. 20




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##### Table of Contents



Financial Condition
 General.
 Securities.
 Loans and Leases Receivable.
 Deposits.
 Borrowings.
 Stockholders Equity. Share Based Payments. Note 1
  21




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##### Table of Contents



Asset Quality
 Non-performing Assets.
  At March 31,
    
    
    At December 31,2006
    
    
    2005(Dollars in Thousands)Non-accrual loans
    
    $
    1,408
    
    
    $
    1,454Non-accrual leases
    
    
    51
    
    
    
    90Total non-accrual loans and leases
    
    
    1,459
    
    
    
    1,544Foreclosed properties and repossessed
assets, net
    
    
    
    
    
    
    Total non-performing assets
    
    $
    1,459
    
    
    $
    1,544Performing troubled debt restructurings
    
    $
    
    
    
    $
    Total non-accrual loans and leases to total
loans and leases
    
    
    0.27
    %
    
    
    0.29
    %Total non-performing assets to total assets
    
    
    0.22
    
    
    
    0.23Allowance for loan and lease losses to
total loans and leases
    
    
    1.25
    
    
    
    1.25Allowance for loan and lease losses to
non-accrual loans and leases
    
    
    464.42
    
    
    
    438.64
 22




---



##### Table of Contents



March 31,
    
    
    December 31,2006
    
    
    2005(In Thousands)Impaired loans and leases with impairmentreserves required
    
    $
    1,459
    
    
    $
    1,544Less:Impairment reserve
(included in allowance for loan and lease losses)
    
    
    504
    
    
    
    399Net impaired loans and leases
    
    $
    955
    
    
    $
    1,145Average impaired loans and leases
    
    $
    1,628
    
    
    $
    2,192Interest income attibutable to impaired loans and leases
    
    
    37
    
    
    
    112Interest income recognized on
impaired loans and leases
    
    
    8
    
    
    
    65
   Three Months EndedMarch 31,2006
    
    
    2005(Dollars in Thousands)Allowance at beginning of period
    
    $
    6,773
    
    
    $
    6,375Charge-offs:MortgageTotal charge-offs
    
    
    
    
    
    
    Recoveries:Mortgage
    
    
    1
    
    
    
    1Commercial
    
    
    
    
    
    
    3Total recoveries
    
    
    1
    
    
    
    4Net recoveries (charge-offs)
    
    
    1
    
    
    
    4Provision for loan and lease losses
    
    
    
    
    
    
    65Allowance at end of period
    
    $
    6,774
    
    
    $
    6,444Allowance to gross loans
    
    
    1.25
    %
    
    
    1.31
    %
  23




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##### Table of Contents



Liquidity and Capital Resources
        24




---



##### 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 March 31, 2006:Total capital(to risk-weighted assets)Consolidated
    
    $
    63,057
    
    
    
    11.16
    %
    
    $
    45,184
    
    
    
    8.00
    %
    
    
    N/A
    
    
    
    N/AFirst Business Bank
    
    
    56,575
    
    
    
    11.18
    
    
    
    40,492
    
    
    
    8.00
    
    
    $
    50,615
    
    
    
    10.00
    %First
Business Bank 
Milwaukee
    
    
    9,275
    
    
    
    10.66
    
    
    
    6,963
    
    
    
    8.00
    
    
    
    8,704
    
    
    
    10.00Tier 1 capital(to risk-weighted assets)Consolidated
    
    $
    51,283
    
    
    
    9.08
    %
    
    $
    22,592
    
    
    
    4.00
    %
    
    
    N/A
    
    
    
    N/AFirst Business Bank
    
    
    51,047
    
    
    
    10.09
    
    
    
    20,246
    
    
    
    4.00
    
    
    $
    30,369
    
    
    
    6.00
    %First
Business Bank 
Milwaukee
    
    
    8,185
    
    
    
    9.40
    
    
    
    3,481
    
    
    
    4.00
    
    
    
    5,222
    
    
    
    6.00Tier 1 capital(to average assets)Consolidated
    
    $
    51,283
    
    
    
    7.67
    %
    
    $
    26,736
    
    
    
    4.00
    %
    
    
    N/A
    
    
    
    N/AFirst Business Bank
    
    
    51,047
    
    
    
    9.06
    
    
    
    22,547
    
    
    
    4.00
    
    
    $
    28,184
    
    
    
    5.00
    %First
Business Bank 
Milwaukee
    
    
    8,185
    
    
    
    7.83
    
    
    
    4,179
    
    
    
    4.00
    
    
    
    5,224
    
    
    
    5.00
 25




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##### Table of Contents



Minimum RequiredMinimum Required
    
    to be Wellfor Capital
    
    Capitalized UnderActual
    
    Adequacy Purposes
    
    FDIC RequirementsAmount
    
    Ratio
    
    Amount
    
    Ratio
    
    Amount
    
    Ratio(Dollars in Thousands)As of December 31, 2005:Total capital(to risk-weighted assets)Consolidated
    
    $
    62,234
    
    
    
    10.43
    %
    
    $
    47,748
    
    
    
    8.00
    %
    
    
    N/A
    
    
    
    N/AFirst Business Bank
    
    
    55,240
    
    
    
    10.88
    
    
    
    40,610
    
    
    
    8.00
    
    
    $
    50,763
    
    
    
    10.00
    %First Business Bank  Milwaukee
    
    
    9,009
    
    
    
    10.32
    
    
    
    6,981
    
    
    
    8.00
    
    
    
    8,727
    
    
    
    10.00Tier 1 capital(to risk-weighted assets)Consolidated
    
    $
    50,461
    
    
    
    8.45
    %
    
    $
    23,874
    
    
    
    4.00
    %
    
    
    N/A
    
    
    
    N/AFirst Business Bank
    
    
    49,713
    
    
    
    9.79
    
    
    
    20,305
    
    
    
    4.00
    
    
    $
    30,458
    
    
    
    6.00
    %First Business Bank  Milwaukee
    
    
    7,917
    
    
    
    9.07
    
    
    
    3,491
    
    
    
    4.00
    
    
    
    5,236
    
    
    
    6.00Tier 1 capital(to average assets)Consolidated
    
    $
    50,461
    
    
    
    7.92
    %
    
    $
    25,486
    
    
    
    4.00
    %
    
    
    N/A
    
    
    
    N/AFirst Business Bank
    
    
    49,713
    
    
    
    9.14
    
    
    
    21,746
    
    
    
    4.00
    
    
    $
    27,182
    
    
    
    5.00
    %First Business Bank  Milwaukee
    
    
    7,917
    
    
    
    8.21
    
    
    
    3,858
    
    
    
    4.00
    
    
    
    4,823
    
    
    
    5.00
 Contractual Obligations
  Payment Due by PeriodLess than
    
    
    
    
    
    
    
    
    
    
    More thanTotal
    
    
    1 Year
    
    
    1-3 Years
    
    
    4-5 Years
    
    
    5 YearsContractual Obligations
    
    (Dollars in Thousands)Operating lease obligations
    
    $
    5,232
    
    
    $
    581
    
    
    $
    1,159
    
    
    $
    1,159
    
    
    $
    2,333Fed funds purchased and securities
repurchase agreements
    
    
    4,361
    
    
    
    4,361
    
    
    
    
    
    
    
    
    
    
    
    Time deposits
    
    
    336,685
    
    
    
    134,634
    
    
    
    140,947
    
    
    
    61,104
    
    
    
    Line of Credit
    
    
    3,515
    
    
    
    3,515
    
    
    
    
    
    
    
    
    
    
    
    Subordinated debt
    
    
    5,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,000Junior subordinated debentures
    
    
    10,310
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,310FHLB advances
    
    
    17,543
    
    
    
    9
    
    
    
    6,017
    
    
    
    11,022
    
    
    
    494Total contractual obligations
    
    $
    382,646
    
    
    $
    143,099
    
    
    $
    148,124
    
    
    $
    73,286
    
    
    $
    18,137
 26




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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
  27




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##### Table of Contents



28




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##### Table of Contents



Part II. Other Information
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 (a)
    
    The following transactions occurred during the quarter ended March 31, 2006
pursuant to the 1993 Equity Incentive Plan. On January 13, 2006, 1,865 shares of FBFS
common stock were sold for $16,952.85. On February 22, 2006, 5,315 shares of common
stock were sold for $48,313.35. On March 28, 2006, 2,100 shares of FBFS common stock
were sold for $25,011.00. Those transactions were entered into pursuant to the
exemption provided in Rule 701.(b)
    
    None.(c)
    
    Issuer Purchases of Equity Securities
 Total Number
    
    MaximumOf Shares
    
    Number thatPurchased as
    
    May Yet BeTotal Number
    
    Average
    
    Part of Publicly
    
    PurchasedOf Shares
    
    Price Paid
    
    Announced
    
    Under thePeriod
    
    Purchased
    
    Per Share
    
    Plans or Programs
    
    Plans or ProgramsJanuary 1 - 31, 2006
    
    
    712
    
    
    $
    23.80
    
    
    None
    
    NoneFebruary 1 - 28, 2006
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    March 1 - 31, 2006
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
   
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
  29




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##### Table of Contents



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.
 30




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##### Table of Contents



Signatures
  FIRST BUSINESS FINANCIAL SERVICES, INC.By: /s/ Jerome J. SmithJerome J. SmithDirector and Chief Executive OfficerMay 2, 2006
 31