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  **UNITED STATES SECURITIES AND EXCHANGE COMMISSION****Washington , D.C. 20549****FORM 10-Q/A**   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.**(Exact name of registrant as specified in its charter)   **Wisconsin** **39-1576570** (State or jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)   **401 Charmany Drive Madison, WI** **53719** (Address of Principal Executive Offices) (Zip Code)(608) 238-8008 Telephone numberIndicate by check mark whether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (orfor such shorter period that the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.Yes þ            No oIndicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 ofthe Act).Yes o            No þIndicate by check mark whether the registrant is a shell company(as defined in Rule 12b-2 of the ExchangeAct). Yes o No þThe number of shares outstanding of the registrant’s sole class of common stock, par value $0.01per share, on December 20, 2005 was 2,435,008 shares.  
 

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**FIRST BUSINESS FINANCIAL SERVICES, INC.****INDEX – FORM 10-Q/A**       **Page** **PART I. – FINANCIAL INFORMATION**         **Item 1. Financial Statements (Unaudited)**         Consolidated Balance Sheets as of June 30, 2005 and December 31, 2004 (as restated)  4      Consolidated Statements of Income for the Three and Six Months Ended June 30, 2005 and 2004 (as restated)  5      Consolidated Statements of Changes in Stockholders’ Equity and Comprehensive Income for the Six Months Ended June 30, 2005 and 2004 (as restated)  6      Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2005 and 2004 (as restated)  7      Notes to Unaudited Consolidated Financial Statements  8      **Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (as restated)**         Results of Operations  23      Financial Condition  29      Asset Quality  30      Liquidity and Capital Resources  32      **Item 3. Quantitative and Qualitative Disclosures about Market Risk**  37      **Item 4. Controls and Procedures**  38      **PART II. OTHER INFORMATION**         **Item 1. Legal Proceedings**  39      **Item 2. Unregistered Sales of Equity Securities and Use of Proceeds**  39      **Item 3. Defaults upon Senior Securities**  39 
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       **Page** **Item 4. Submission of Matters to Vote of Security Holders**  39      **Item 5. Other Information**  40      **Item 6. Exhibits**  40      **SIGNATURES**  41  Certification of Chief Executive Officer Certification of Senior VP and Chief Financial Officer Section 1350 CertificationsThis Quarterly Report on Form 10-Q/A for the quarter ended June 30, 2005 has been amended dueto the restatement of consolidated financial statements related to hedge accounting. See **Note 2**tothe unaudited consolidated financial statements for more information.
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**PART I. Financial Information**     **Item 1. – Financial Statements**
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**Consolidated Balance Sheets**           (Unaudited)      **June 30,**  **December 31,**   **2005**  **2004**   **(as restated)**  **(as restated)**   (In Thousands, Except Share Data) **Assets**        Cash and due from banks $12,146  $8,644 Interest-bearing deposits  13   27        Cash and cash equivalents  12,159   8,671 Securities available-for-sale, at fair value  89,871   66,445 Loans and leases receivable, net:        Held for sale  —   137 Held for investment  485,742   469,801 Leasehold improvements and equipment, net  1,148   1,247 Foreclosed properties  650   665 Cash surrender value of life insurance  7,622   7,441 Goodwill and other intangibles  2,872   2,896 Accrued interest receivable and other assets  4,775   5,648        Total assets $604,839  $562,951                 **Liabilities and Stockholders’ Equity**        Deposits $510,572  $474,677 Securities sold under agreement to repurchase  588   678 Federal Home Loan Bank and other borrowings  33,149   29,303 Junior subordinated debentures  10,310   10,310 Other liabilities  9,802   9,842           564,421   524,810                 Commitments and contingencies  —   —          Stockholders’ Equity:                 Preferred stock, $10 par value, 10,000 Series Ashares and 10,000 Series B shares authorized, noneissued and outstanding  —   — Common stock, $.01 parvalue, 8,000,000 shares authorized,2,435,462 and 2,429,182 shares issued, 2,418,539and 2,412,409 outstanding in 2005 and 2004,respectively  24   24 Additional paid-in capital  22,529   22,426 Retained earnings  19,222   16,752 Accumulated other comprehensive loss  (970)  (677)Treasury stock (16,923 and16,773 shares in 2005 and 2004,respectively), at cost  (387)  (384)       Total stockholders’ equity  40,418   38,141        Total liabilities and stockholders’ equity $604,839  $562,951        See accompanying Notes to Unaudited Consolidated Financial Statements.
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**Unaudited Consolidated Statements of Income**                   **Three Months Ended,**  **Six Months Ended,**   **June 30,**  **June 30,**   **2005**  **2004**  **2005**  **2004**   **(as restated)**  **(as restated)**   (In Thousands, Except Per Share Data) **Interest income:**                Loans and leases $8,043  $6,217  $15,254  $12,222 Securities income:                Taxable  772   543   1,463   1,067 Fed funds sold and other  48   34   102   73              Total interest income  8,863   6,794   16,819   13,362 **Interest expense:**                Deposits  3,850   2,089   7,116   4,276 Notes payable and other borrowings  256   179   434   369 Guaranteed trust preferred securities  234   220   462   440              Total interest expense  4,340   2,488   8,012   5,085              Net interest income  4,523   4,306   8,807   8,277 Provision for loan and lease losses  —   —   65   —              Net interest income after provision forloan and lease losses  4,523   4,306   8,742   8,277                               **Non-interest income:**                Service charges on deposits  214   250   428   500 Credit, merchant and debit card fees  43   38   81   71 Loan fees  133   125   278   255 Gain on sale of 50% owned joint venture  —   —   973   — Increase in cash surrender value ofbank-owned life insurance  93   40   181   84 Trust and investment services fee income  244   179   526   342 Change in fair value of interest rate swaps  336   1,304   272   990 Net cash settlement of interest rate swaps  (21)  (289)  (52)  (589)Written option income  —   —   —   7 Other  53   148   96   211              Total non-interest income  1,095   1,795   2,783   1,871              **Non-interest expense:**                Compensation  2,148   1,948   4,355   3,934 Occupancy  264   216   489   463 Equipment  117   132   238   251 Data processing  276   188   476   367 Marketing  231   170   394   272 Professional fees  411   139   626   449 Other  299   322   743   640              Total non-interest expense  3,746   3,115   7,321   6,376                  Minority interest in net (income) loss ofconsolidated subsidiary  —   (3)  —   (9)                              Income before income tax expense  1,872   2,983   4,204   3,763 Income tax expense  649   1,060   1,456   1,365              Net income $1,223  $1,923  $2,748  $2,398                               Earnings per share:                Basic $0.51  $0.89  $1.14  $1.15 Diluted  0.50   0.85   1.12   1.09 Dividends declared per share  0.115   0.10   0.115   0.10 See accompanying Notes to Unaudited Consolidated Financial Statements.
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**Unaudited Consolidated Statements of Changes in Stockholders’ Equity and Comprehensive Income**                                       **Accumulated**             **Additional**      **other**         **Common**  **paid-in**  **Retained**  **comprehensive**  **Treasury**      **stock**  **capital**  **earnings**  **loss**  **stock**  **Total**   (Dollars in thousands, except share data) Balance at December 31, 2003, asreported $20  $14,108  $13,861  $(1,978) $(35) $25,976 Restatement adjustments  —   —   (861)  875   —   14    Balance at December 31, 2003, asrestated $20  $14,108  $13,000  $(1,103) $(35) $25,990 Comprehensive income:                        Net income, as restated  —   —   2,398   —   —   2,398 Unrealized securities losses arisingduring the period                      net of minority interest  —   —   —   (709)      (709)Unrealized derivatives gains arisingduring the period  —   —   —   14   —   14 Reclassification adjustment forrealized loss on derivatives  —   —   —   328   —   328 Income tax effect  —   —   —   185   —   185                         Comprehensive income (as restated)                      2,216 Cash dividends ($0.10 per share)  —   —   (236)  —   —   (236)Treasury stock purchased (14,973 shares)  —   —   —   —   (281)  (281)Conversion of BBG shares (336,205shares)  3   7,730   —   —   —   7,733 Stock options exercised (62,010 shares)  1   332   —   —   —   333    Balance at June 30, 2004, as restated $24  $22,170  $15,162  $(1,285) $(316) $35,755                                           **Accumulated**             **Additional**      **other**         **Common**  **paid-in**  **Retained**  **comprehensive**  **Treasury**      **stock**  **capital**  **earnings**  **loss**  **stock**  **Total**   (Dollars in thousands, except share data) Balance at December 31, 2004, asreported $24  $22,426  $17,229  $(1,118) $(384) $38,177 Restatement adjustments  —   —   (477)  441   —   (36)   Balance at December 31, 2004, asrestated $24  $22,426  $16,752  $(677) $(384) $38,141 Comprehensive income:                        Net income, as restated  —   —   2,748   —   —   2,748 Unrealized securities losses arisingduring the period  —   —   —   (650)  —   (650)Unrealized derivatives gains arisingduring the period  —   —   —   2   —   2 Reclassification adjustment forrealized loss on derivatives  —   —   —   135   —   135 Income tax effect  —   —   —   220   —   220                         Comprehensive income (as restated)                      2,455 Cash dividends ($0.115 per share)  —   —   (278)  —   —   (278)Treasury stock purchased (150 shares)  —   —   —   —   (3)  (3)Stock options exercised (6,280 shares)  —   103   —   —   —   103    Balance at June 30, 2005, as restated $24  $22,529  $19,222  $(970) $(387) $40,418    See accompanying Notes to Unaudited Consolidated Financial Statements.
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**Unaudited Consolidated Statements of Cash Flows**           **Six Months Ended June 30,**   **2005**  **2004**   **(as restated)**  **(as restated)**   (In Thousands) **Operating Activities**        Net income $2,748  $2,398 Adjustments to reconcile net income to net cashprovided by operating activities:        Deferred income taxes  (1,776)  1,629 Provision for loan and lease losses  65   — Depreciation, amortization and accretion, net  537   544 Change in fair value of interest rate swaps  (272)  (990)Written option income  —   (7)Sale of loans originated for sale  137   18 Increase 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)  762 Increase in accrued expenses and other liabilities  2,145   789        Net cash provided by operating activities  1,462   5,068                 **Investing activities**        Proceeds from maturities of available-for-sale securities  13,700   6,299 Proceeds 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 activities**        Net increase in deposits  35,895   17,979 Net increase (decrease) in FHLB line of credit  (11,154)  5,696 Net increase (decrease) in short-term borrowed funds  14,910   (4,284)Exercise of stock options  103   333 Cash dividends  (278)  (236)Purchase of treasury stock  (3)  (281)       Net cash provided by financing activities  39,473   19,207        Net increase in cash and cash equivalents  3,488   5,284 Cash and cash equivalents at beginning of period  8,671   12,465        Cash and cash equivalents at end of period $12,159  $17,749                 **Supplementary cash flow information**        Cash paid or credited to accounts:        Interest on deposits and borrowings $7,797  $5,627 Income taxes  2,142   607          Non-cash transactions:        Loans transferred to foreclosed properties  650   — Deconsolidation of trust preferred securities  —   10,310 Acquisition of minority shares of BBG:        Increase in common stock and paid-in capital  —   7,733 Elimination of minority interest  —   (4,392)Settlement of written option liability  —   (654)Increase in goodwill and other intangible assets  —   (2,689)Other  —   2 See accompanying Notes to Unaudited Consolidated Financial Statements.
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**NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS****Note 1 – Principles of Consolidation.**The unaudited consolidated financial statements include the accounts and results of First BusinessFinancial Services, Inc. (“FBFS” or “the Corporation”), and its wholly-owned subsidiaries, FirstBusiness Bank (“FBB”), and First Business Bank – Milwaukee. All significant intercompanybalances and transactions have been eliminated in consolidation.**Note 2 – Restatement of Consolidated Financial Statements.**On November 8, 2005, FBFS determined that it would restate its previously issued consolidatedfinancial statements for the first two quarters of 2005 and for the years ended December 31, 2004,2003, 2002, as a result of accounting treatment related to its interest rate swaps associated withmoney market deposit accounts (“MMDAs”), variable rate loans (“Loans”), trust preferred securities(“TPSs”) and brokered certificates of deposit (“CDs”).Since 2001, FBFS has entered into various interest rate swaps to hedge the interest rate riskinherent in its MMDAs and Loans. Since inception of the hedging program, FBFS has applied the“short-cut” method of cash flow hedge accounting under Statement of Financial Accounting StandardsNo. 133 (“SFAS 133”) to account for the interest rate swaps. Subsequent to June 30, 2005, FBFSdetermined that these hedging relationships did not qualify for the “short-cut” method because thehedged items consisted of a pool of MMDAs and a pool of loans that were not the same recognizedliabilities and assets over the life of the respective swaps.In December 2001, FBFS Statutory Trust I (the “Trust”), a business trust wholly owned by FBFS, soldpreferred securities and FBFS simultaneously entered into an interest rate swap to hedge theinterest rate risk. Since inception of the swap, FBFS has applied the “short-cut” method of cashflow hedge accounting under SFAS No. 133 to account for the swap. Effective in the year beginningJanuary 1, 2004, in accordance with the application of the Financial Accounting Standards BoardInterpretation No. 46 (revised) (“FIN 46R”) FBFS deconsolidated the Trust. Subsequent to June 30,2005 FBFS determined that this hedging relationship no longer qualifies for hedge accountingbecause upon adoption of FIN 46R, FBFS did not dedesignate the existing hedge relationship andredesignate a new hedging relationship.Additionally, since the third quarter of 2004, FBFS has entered into various interest rate swaps tohedge the interest rate risk inherent in certain of its brokered CDs. Since inception of thehedging program, FBFS has applied the “short-cut” method offair value hedge accounting under SFAS No. 133 to account for the swaps. Subsequent to June 30, 2005 FBFS determined that these swaps did notqualify for the “short-cut” method because the form of payment of the broker fee incurred toacquire the related CD was determined to have caused the swaps not to have a zero value atinception.It is not known what the effect on the consolidated financial statements would have been had theCorporation applied the “long-haul” method of documenting the hedges for the MMDA, Loan and CDinterest rate swaps rather than the “short-cut” method. However, management believes theseinterest rate swaps would have been effective as economic hedges.Hedge accounting under SFAS No. 133is not allowed for the affected periods because the hedge documentation required for the“long-haul” method was not in place at the inception of the hedge. Similarly the TPS swap remainedeconomically effective but under SFAS No. 133 hedge accounting is not allowed for the affected periodsbecause the required documentation was not in place on the date FIN 46R was adopted.At December 31, 2003 and 2004, the consolidated financial statements reflect an adjustment todecrease retained earnings of $861,000 and $477,000, respectively, and an increase in accumulatedother comprehensive income of $875,000 and $441,000, respectively.As a result the financial statements for all affected periods through March 31, 2005 reflect acumulative charge of $522,000, net of income taxes, to account for the interest rate swaps referredto above as if hedge
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accounting was never applied to them. In addition, for the quarter ended June30, 2005, a benefit of approximately $146,000, net of income taxes was recorded, to reflect thesame treatment.Cash flow hedge accounting allows a company to record the net settlement of interest paymentsrelated to the swap contracts in net interest income and the changes in fair value on the relatedinterest rate swaps in shareholders’ equity as part of accumulated other comprehensive income.Eliminating the application of cash flow hedge accounting causes the changes in fair value of therelated interest rate swaps to be included in non-interest income (instead of accumulated othercomprehensive income in shareholders’ equity). Additionally, the net settlement of interestpayments related to the swap contracts was reclassified from net interest income to non-interestincome.Fair value hedge accounting allows a company to record the change in fair value of the hedged item,in this case, brokered CDs, as an adjustment to income as an offset to the fair value adjustment onthe related interest rate swap. Eliminating the application of fair value hedge accountingreverses the fair value adjustments that have been made to the brokered CDs. Additionally, the netcash settlement payments during each of the above periods for these interest rate swaps werereclassified from net interest income to non-interest income.The Registration Statement on Form 10/A including financial statements for the years ended December31, 2004, 2003 and 2002 and interim financial statements for the quarter ended March 31, 2005 wasamended to reflect the proper accounting treatment. This Quarterly Report on Form 10-Q/A for thequarter ended June 30, 2005 has been amended to reflect the proper accounting treatment. A Form8–K was filed on November 21, 2005 which disclosed a summary of the changes to the consolidatedbalance sheet and consolidated statement of income line items for the periods included in thesereports.Effects of the restatement by line item follow for the periods presented in this Form 10–Q. Thetax effect of the adjustments approximates the Corporation’s marginal rate of 39.2%.                           Impact to Consolidated Balance Sheets          (In thousands)          (Unaudited)    June 30, 2005 December 31, 2004  As         As      Previously Restatement As Previously Restatement As  Reported Adjustment Restated Reported Adjustment Restated     Other liabilities $9,706  $96  $9,802  $9,806  $36  $9,842 Total liabilities  564,325   96   564,421   524,774   36   524,810 Retained earnings  19,598   (376)  19,222   17,229   (477)  16,752 Accumulated othercomprehensive loss, netof tax  (1,250)  280   (970)  (1,118)  441   (677)Total shareholders’ equity  40,514   (96)  40,418   38,177   (36)  38,141 
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                           Impact to Consolidated Statements of Income  (In thousands, except per share data) (Unaudited)  Three Months Ended June 30,  2005 2004  As         As      Previously Restatement As Previously Restatement As  Reported Adjustment Restated Reported Adjustment Restated     Interest expense on deposits $3,824  $26  $3,850  $2,282  $(193) $2,089 Interest expense on juniorsubordinated debentures  223   11   234   223   (3)  220 Total interest expense  4,303   37   4,340   2,684   (196)  2,488 Net interest income  4,560   (37)  4,523   4,110   196   4,306 Net interest income afterprovision for loan and leaselosses  4,560   (37)  4,523   4,110   196   4,306 Change in fair value ofinterest rate swaps  —   336   336   —   1,304   1,304 Net cash settlement of interestrate swaps  —   (21)  (21)  —   (289)  (289)Total non interest income  780   315   1,095   775   1,015   1,790 Income before income tax expense  1,594   278   1,872   1,772   1,211   2,983 Income tax expense  517   132   649   683   377   1,060 Net income  1,077   146   1,223   1,089   834   1,923                          **Earnings per share:**                        Basic $0.45  $0.06  $0.51  $0.51  $0.38  $0.89 Diluted $0.44  $0.06  $0.50  $0.48  $0.37  $0.85                            Impact to Consolidated Statements of Income  (In thousands, except per share data) (Unaudited)  Six Months Ended June 30,  2005 2004  As         As      Previously Restatement As Previously Restatement As  Reported Adjustment Restated Reported Adjustment RestatedInterest expense on deposits $7,062  $54  $7,116  $4,675  $(399) $4,276 Interest expense on juniorsubordinated debentures  444   18   462   444   (4)  440 Total interest expense  7,940   72   8,012   5,488   (403)  5,085 Net interest income  8,879   (72)  8,807   7,874   403   8,277 Net interest income afterprovision for loan and leaselosses  8,814   (72)  8,742   7,874   403   8,277 Change in fair value ofinterest rate swaps  —   272   272   —   990   990 Net cash settlement of interestrate swaps  —   (52)  (52)  —   (589)  (589)Total non interest income  2,563   220   2,783   1,465   401   1,866 Income before income tax expense  4,056   148   4,204   2,959   804   3,763 Income tax expense  1,409   47   1,456   1,084   281   1,365 Net income  2,647   101   2,748   1,875   523   2,398                          **Earnings per share:**                        Basic $1.10  $0.04  $1.14  $0.90  $0.25  $1.15 Diluted $1.07  $0.05  $1.12  $0.85  $0.24  $1.09 The restatement had no effect on cash flows from operating, investing or financing activities.
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**Note 3 – Basis of Presentation.**The accompanying unaudited consolidated financial statements have been prepared in accordance withaccounting principles generally accepted in the United States of America (GAAP) and with theinstructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include allof the information and footnotes required by GAAP for complete financial statements. In theopinion of management, all adjustments (consisting of normal recurring accruals) necessary for afair presentation of the unaudited consolidated financial statements have been included.In conformity with GAAP, management of the Corporation is required to make estimates andassumptions that affect the reported amounts of assets and liabilities and disclosure of contingentassets and liabilities at the date of the financial statements as well as reported amounts ofrevenues and expenses during the reporting period. Actual results could differ significantly fromthose estimates. Material estimates that could experience significant changes in the near-terminclude the allowance for loan and lease losses, the value of foreclosed property, lease residuals,the value of property under operating leases, derivative financial instruments, hedging activitiesand accrued and deferred income taxes. The results of operations for the three-month and six-monthperiods ended June 30, 2005 are not necessarily indicative of results that may be expected for anyother interim period or the entire fiscal year ending December 31, 2005. The unauditedconsolidated financial statements presented herein should be read in conjunction with the auditedconsolidated financial statements and related notes thereto included in the Corporation’s Report onForm 10/A for the year ended December 31, 2004.**Recent Accounting Changes.****Changes in Accounting Principle.**On May 5, 2005, the Financial Accounting Standards Board (“FASB”)issued Statement of Financial Accounting Standard (“SFAS”) No. 154 *Accounting Changes and ErrorCorrections – a replacement of APB Opinion No. 20 and FASB Statement No. 3.*SFAS No. 154, which iseffective for accounting changes made in fiscal years beginning after December 15, 2005, requiresretrospective application for voluntary changes in accounting principle unless it is impracticableto do so. It also applies to changes required by an accounting pronouncement in the unusualinstance that the pronouncement does not include specific transition provisions. The adoption ofSFAS No. 154 is not expected to impact the Corporation’s consolidated financial statements.**Stock Options.**On December 16, 2004, the FASB issued SFAS No. 123 (revised 2004), which is arevision of the SFAS 123, *Accounting for Stock-based Compensation*. SFAS No. 123(R) supersedes APBOpinion No. 25, *Accounting for Stock Issued to Employees*, and amends SFAS No. 95, *Statement of CashFlows*. SFAS No. 123(R), which is effective for FBFS beginning January 1, 2006, requires a publicentity to measure the cost of employee services received in exchange for an award of equityinstruments based on the fair value at the grant date. The cost is then recognized over the periodduring which an employee is required to provide service in exchange for the award – the requisiteservice period (usually the vesting period). This statement eliminates the alternative to APBOpinion No. 25’s intrinsic value method of accounting that was provided in Statement 123 asoriginally issued.Accordingly, the adoption of SFAS No. 123(R)’s fair value method could have an impact on theresults of operations, although it will have no impact on the overall financial position. Thefuture impact of unvested options issued prior to adoption of SFAS No. 123(R) will approximate thepro forma calculation below.**Proforma Stock Option Information.**The following table illustrates what the Corporation’s netincome and earnings per share would have been had compensation cost for the Corporation’s stockoption plans been determined based on the fair value at the date of grant for awards under thestock option plans. As allowed under SFAS No. 123, “Accounting for Stock-Based Compensation”(“SFAS 123”) and SFAS No. 148, “Accounting for Stock-Based Compensation— Transition and Disclosure—an amendment of SFAS 123,” the Corporation accounts for stock-based compensation cost under theintrinsic value method of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issuedto Employees” (APB Opinion 25), and related Interpretations, under which no compensation cost hasbeen recognized for any periods presented, except with respect to restricted stock awards. Compensation expense foremployee stock options is not recognized if the exercise price of the option equals or exceeds thefair value of the stock on the date of grant as such options would have no intrinsic value at thedate of grant.
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           **Six Months Ended**  **June 30,**  **2005** **2004**  **(as restated)** **(as restated)**  (Dollars in Thousands, Except Per Share Data)Net Income        As restated $2,748  $2,398 Compensation expense under the fair value method  179   106 Pro forma  2,569   2,292          Earnings Per Share — Basic        As restated  1.14   1.15 Compensation expense under the fair value method  0.08   0.05 Pro forma  1.06   1.10          Earnings Per Share — Diluted        As restated  1.12   1.09 Compensation expense under the fair value method  0.05   0.03 Pro forma  1.07   1.06            **Three Months Ended**  **June 30,**  **2005** **2004**  **(as restated)** **(as restated)**  (Dollars in Thousands, Except Per Share Data)Net Income        As restated $1,223  $1,923 Compensation expense under the fair value method  90   53 Pro forma  1,133   1,870          Earnings Per Share — Basic        As restated  0.51   0.89 Compensation expense under the fair value method  0.04   0.03 Pro forma  0.47   0.86          Earnings Per Share — Diluted        As restated  0.50   0.85 Compensation expense under the fair value method  0.04   0.03 Pro forma  0.46   0.82 The fair value of each option granted is estimated using the minimum value method on the grant dateusing the Black-Scholes option-pricing model which considers the risk free rate of return basedupon 10 year treasury obligations, a 10 year expected life and dividends, if any are declared, butdoes not consider expected volatility. Option holders have 10 years in which to exercise theiroptions and must exercise vested options upon employment termination. Compensation amounts areamortized over the vesting period of the options in accordance with the vesting terms of the stockoptions agreements. The per share weighted average fair value of stock options granted during 2005and 2004 was $8.18 and $7.56, respectively.
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For purposes of providing the pro forma disclosures required under SFAS 123, the fair value ofstock options granted as of June 30, 2005 and December 31, 2004 was estimated at the date of grantusing a Black-Scholes option pricing model, which was originally developed for use in estimatingthe fair value of traded options that have different characteristics from the Corporation’semployee stock options. The model is also sensitive to changes in the subjective assumptions thatcan materially affect the fair valueestimate. As a result, management believes the Black-Scholes model may not necessarily provide areliable single measure of the fair value of employee stock.12,000 stock options were granted in February 2005 and 3,750 stock options were granted in May2005. No options have been granted since May 2005. The estimated fair value of any optionsgranted in the future will be determined pursuant to SFAS 123R and will consider expectedvolatility.The table below discusses the weighted average fair values for options granted as of June 30, 2005and 2004.           **Six Months Ended**  **June 30,**  **2005** **2004**   Expected dividend yield  0.92%  n/a Risk free interest rate  4.13-4.21%  4.38%Expected lives 10 years 10 years**Note 4 – Sale of 50% Owned Joint Venture**     On January 4, 2005, FBB sold its 50% interest in m2 Lease Funds, LLC (“m2”), in a cash sale tothe owner of the other 50% interest. In this individually negotiated transaction, cash proceedsfrom the sale were $2.1 million and resulted in an approximate before tax gain of $973,000. OnJanuary 18, 2005, all secured loans from FBB to m2 were paid in full. FBB no longer holds anyequity interest in m2 and has no continuing involvement with m2.**Note 5 – Goodwill and Other Intangible Assets.**Goodwill is not amortized but is subject to impairment tests on at least an annual basis. Noimpairment loss was necessary in 2004 or through June 30, 2005. At June 30, 2005, goodwill was$2,689,000. There was no change in the carrying amount of goodwill for the six months ended June30, 2005, as shown below:           **Three and Six Months Ended**   **June 30,**   **2005**  **2004**   (In Thousands) Balance at beginning of period $2,689  $— Goodwill acquired  —   2,689        Balance at end of period $2,689  $2,689        The Corporation has other intangible assets that are amortized consisting of core depositintangibles and other intangibles, consisting of a purchased client list from a purchased trustbusiness.
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Changes in the gross carrying amount, accumulated amortization and net book value of core depositsand other intangibles were as follows:           **Six Months Ended**   **June 30,**   **2005**  **2004**   (In Thousands) Core deposit intangibles:                 Gross carrying amount $145  $145 Accumulated amortization  (40)  (22)                Net book value $105  $123                 Additions during the year $—  $— Amortization during the period  (18)  (19)         Other intangibles:                 Gross carrying amount $120  $120 Accumulated amortization  (42)  (30)                Net book value $78  $90                 Additions during the year $—  $—        Amortization during the year  (6)  (6)The following table shows the current period and estimated future amortization expense foramortized intangible assets:
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               **Core**         **Deposit**  **Other**      **Intangibles**  **Intangibles**  **Total** Six months ended June 30, 2005 $18  $6  $24              Estimate for the six months endedDecember 31, 2005  14   6   20              Estimate for the year ended December 31,            2006  24   12   36 2007  18   12   30 2008  13   12   25 2009  10   12   22             $65  $48  $113           **Note 6 – Securities.**The amortized cost and estimated fair values of securities available-for-sale are as follows (inthousands):                   **As of June 30, 2005**      **Gross** **Gross**        **unrealized** **unrealized**    **Amortized** **holding** **holding** **Estimated****Securities available-for-sale** **cost** **gains** **losses** **fair value**     (In Thousands)FHLB stock and other $2,857  $—  $—  $2,857 U.S. Government agencies  4,198   —   (54)  4,144 Collateralized mortgageobligations  83,980   8   (1,118)  82,870      $91,035  $8  $(1,172) $89,871       **As of December 31, 2004**              **Gross** **Gross**                **unrealized** **unrealized**            **Amortized** **holding** **holding** **Estimated**        **Securities available-for-sale** **cost** **gains** **losses** **fair value**          (In Thousands)        FHLB stock and other $2,811  $—  $—  $2,811 U.S. Government agencies  3,275   —   (22)  3,253 Collateralized mortgageobligations  60,873   41   (533)  60,381      $66,959  $41  $(555) $66,445    The table below shows the Corporation’s gross unrealized losses and fair value of investments,aggregated by investment category and length of time that individual investments have been in acontinuous unrealized loss position at June 30, 2005. Such securities have declined in value dueto current interest rate environments and not credit quality and do not presently representrealized losses. The Corporation has the ability to and anticipates that these securities, whichhave been in a continuous loss position but are not
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other-than-temporarily impaired, will be keptin the portfolio until maturity. If held until maturity, it is anticipated that the investmentswill be realized with no loss. If the Corporation determines that any of the above securities aredeemed other-than-temporarily impaired, the impairment loss will be recognized in the consolidatedstatement of income.A summary of unrealized loss information for investment securities, categorized by security typefollows (in thousands):                           **As of June 30, 2005**   **Less than 12 months**  **12 months or longer**  **Total**   **Fair Value**  **Unrealized loss**  **Fair Value**  **Unrealized loss**  **Fair Value**  **Unrealized loss**   (In Thousands) U.S. Governmentagencies $3,216  $54  $—  $—  $3,216  $54 Collateralizedmortgageobligations  51,825   608   28,446   510   80,271   1,118          $55,041  $662  $28,446  $510  $83,487  $1,172        The Corporation has not sold any available-for-sale securities for any of the periods shown and hastherefore not realized any gains or losses on such transactions.At June 30, 2005 and December 31, 2004, securities with a fair value of approximately $34,499,000and $39,895,000, respectively, were pledged to secure public deposits, securities underarrangements to repurchase, and borrowings.Unrealized holding gains and losses, net of tax effect, included in accumulated other comprehensiveincome at June 30, 2005 and 2004 was $763,000 and $758,000, respectively.**Note 7 – Loans and Allowance for Loan and Lease Losses**Loan and lease receivables consist of the following (in thousands):           **As of June 30,**  **As of December 31,**   **2005**  **2004**   (In thousands)First mortgage loans:        Commercial real estate $234,567  $215,605 Construction  44,130   41,910 Multi-family  23,947   17,786 1-4 family  23,965   22,814           326,609   298,115          Commercial business loans  124,648   136,482 Direct financing leases  21,305   25,583 Second mortgage loans  7,485   5,563 Credit card and other  12,380   10,743           492,426   476,486          Less:        Allowance for loan and lease losses  6,437   6,375 Deferred loan fees  247   310          $485,742  $469,801        
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     An analysis of the allowance for loan and lease losses is presented below (in thousands):                   **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  $6,811 Charge-offs:                Mortgage           Commercial  —   —   —   (3)Lease  —   —   —   — Consumer  (9)  —   (9)  —              Total charge-offs  (9)  —   (9)  (3)Recoveries:                Mortgage  —   —   1   — Commercial  2   1   5   5 Lease  —   113   —   113 Consumer  —   —   —   —              Total recoveries  2   114   6   118 Net recoveries (charge-offs)  (7)  114   (3)  115 Provision  —   —   65   —              Allowance at end of period $6,437  $6,926  $6,437  $6,926                               Allowance to gross loans and leases  1.31%  1.49%  1.31%  1.49%**Note 8 – Deposits**                   **As of June 30,**  **As of December 31,**   **2005**  **2004**   **(as restated)**  **(as restated)**       **Weighted**      **Weighted**   **Balance**  **Average Rate**  **Balance**  **Average Rate**   (Dollars in Thousands) Transaction accounts:                Demand deposits $36,393   0.00% $40,835   0.00%Negotiable order ofwithdrawal (“NOW”)accounts  47,117   2.45   38,017   1.16                   83,510       78,852                      Money market accounts  107,210   2.60   88,324   1.34 Certificates of deposit:                0.00% to 1.99%  8,793   1.58   100,385   1.68 2.00% to 2.99%  91,748   2.55   96,882   2.31 3.00% to 3.99%  107,928   3.42   34,854   3.37 4.00% and greater  111,383   4.41   75,380   4.58                   319,852       307,501                                       $510,572      $474,677                    
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**Note 9 – Borrowings**               **As of June 30,**   **2005**   **(as restated)**       **Weighted**  **Weighted**       **Average**  **Average**   **Balance**  **Balance**  **Rate**   (Dollars in Thousands) Fed funds purchased andsecurities sold under agreementto repurchase $13,588  $7,536   2.92%FHLB advances  12,649   11,672   2.79 Junior subordinated debentures  10,310   10,310   8.96 Line of credit  2,500   1,403   4.42 Subordinated note payable  5,000   5,000   5.20      $44,047  $35,921   4.99%                Short-term borrowings $27,192         Long-term borrowings (duebeyond one year)  16,855                       $44,047                                    **As of December 31,**   **2004**   **(as restated)**       **Weighted**  **Weighted**       **Average**  **Average**   **Balance**  **Balance**  **Rate**   (Dollars in Thousands) Fed funds purchased andsecurities sold under agreementto repurchase $678  $2,231   2.20%FHLB advances  23,803   22,807   1.91 Junior subordinated debentures  10,310   10,310   8.66 Line of credit  500   665   3.76 Subordinated note payable  5,000   5,000   4.62      $40,291  $41,013   3.99%                Short-term borrowings $23,434         Long-term borrowings (duebeyond one year)  16,857                       $40,291                     
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**Note 10 – Derivatives (as restated)**The Corporation uses derivatives to manage the risk of earnings fluctuations caused by interestrate volatility. The effect of interest rate movements on hedged assets or liabilities willgenerally be offset by the derivative instrument where hedge accounting is permitted. Derivativesused for interest risk management include interest rate swaps. The Corporation currently uses cashflow hedges to hedge interest rate risk associated with variable rate deposits.A list of the outstanding derivatives is shown in the table below                                   **As of June 30,** **As of December 31,**  **2005** **2004**  **(as restated)** **(as restated)**  (In thousands)  **Notional** **Maturity** **Fixed** **Variable** **Notional** **Maturity** **Fixed** **Variable**  **Amount** **Date** **Rate** **Rate** **Amount** **Date** **Rate** **Rate****Cash Flow Hedge:**                                Pay-fixed interestrate swap $874  April, 2009  5.24%  2.98% $960  April, 2009  5.24%  2.25%                                 **Other Derivatives:**                                Pay-fixed interestrate swap  10,000  October, 2006  3.94   3.04   10,000  October, 2006  3.94   2.25 Pay-fixed interestrate swap  10,000  November, 2006  3.75   3.14   10,000  November, 2006  3.75   2.25 Pay-fixed interestrate swap  10,000  December, 2006  4.94   3.43   10,000  December, 2006  4.94   2.51 Callablereceive-fixedinterest rate swap  10,000  January, 2010  4.25   3.38   10,000  January, 2010  4.25   2.48 Callablereceive-fixedinterest rate swap  10,000  February, 2010  4.35   3.24   10,000  February, 2010  4.35   2.42 Callablereceive-fixedinterest rate swap  10,000  February, 2010  4.10   3.31   —       —   — Callablereceive-fixedinterest rate swap  10,000  November, 2010  4.00   3.24   10,000  November, 2010  4.00   2.42 Pay-fixed interestrate swap  4,763  June, 2011  5.49   3.01   4,823  June, 2011  5.49   2.26                                                                     $75,637              $65,783                                              The fair value of cash flow hedges represented an unrealized loss of $31,000 at June 30, 2005 and$45,000 at December 31, 2004. The fair value of other derivatives included in other liabilitiestotaled $830,000 at June 30, 2005 and $1,102,000 at December 31, 2004.As required by SFAS No. 133, the Corporation is amortizing over the remaining life of the swap themarket loss of the interest rate swap that no longer qualifies for cash flow hedge accountingbecause upon adoptionof FIN46R, the Corporation did not dedesignate the existing hedge relationship and redesignate anew hedging relationship. At June 30, 2005 and December 31, 2004, the balance of the unamortizedmarket loss on the interest rate swap included in accumulated other comprehensive income was$189,000 and $312,000, respectively.
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**Note 11 – Earnings Per Share**Basic earnings per share for the three and six months ended June 30, 2005 and 2004 have beendetermined by dividing net income for the respective periods by the weighted average number ofshares of common stock outstanding. Diluted earnings per share is computed by dividing net incomeby the weighted average number of common shares outstanding plus the effect of dilutive securities.The effect of dilutive securities is computed using the treasury stock method.           **Three Months Ended June 30,**   **2005**  **2004**   **(as restated)**  **(as restated)** Numerator:        Net income $1,223,007  $1,923,300                 Numerator for basic earnings per share—income available to common stockholders  1,223,007   1,923,300                 Numerator for diluted earnings per share—income available to commonstockholders  1,223,007   1,923,300                 Denominator:        Denominator for basic earnings pershare—weighted-average commonshares outstanding  2,418,220   2,149,079          Effect of dilutive securities:        Employee stock options  44,900   74,639 BBG employee stock options  —   4,753 Option liability  —   30,003                 Denominator for diluted earnings pershare—adjusted weighted-averagecommon shares and assumed conversions  2,463,120   2,258,474                 Basic earnings per share $0.51  $0.89 Diluted earnings per share  0.50   0.85 
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           **Six Months Ended June 30,**   **2005**  **2004**   **(as restated)**  **(as restated)** Numerator: $2,748,135  $2,398,400        Net income                 Numerator for basic earnings per share—income available to common stockholders  2,748,135   2,398,400                 (Income) expense option liability  —   (7,000)         Numerator for diluted earnings per share—income available to commonstockholders  2,748,135   2,391,400                 Denominator:        Denominator for basic earnings pershare—weighted-average commonshares outstanding  2,416,052   2,085,407                 Effect of dilutive securities:        Employee stock options  46,836   71,543 BBG employee stock options  —   3,777 Option liability  —   30,003                 Denominator for diluted earnings pershare—adjusted weighted-averagecommon shares and assumed conversions  2,462,888   2,190,730                 Basic earnings per share $1.14  $1.15 Diluted earnings per share  1.12   1.09 
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**Item 2.****Management’s Discussion and Analysis of Financial Condition and Results of Operations****Cautionary Factors**     This quarterly report (Form 10-Q) contains or incorporates by reference variousforward-looking statements concerning the Corporation’s prospects that are based on the currentexpectations or beliefs of management. Forward-looking statements may also be made by theCorporation from time to time in other reports and documents as well as oral presentations. Whenused in written documents or oral statements, the words “anticipate,” “believe,” “estimate,”“expect,” “objective” and similar expressions and verbs in the future tense, are intended toidentify forward-looking statements. The statements contained herein and such future statementsinvolve or may involve certain assumptions, risks, and uncertainties, many of which are beyond theCorporation’s control that could cause the Corporation’s actual results and performance to differmaterially from what is expected. In addition to the assumptions and other factors referencedspecifically in connection with such statements, the following factors could impact the businessand financial prospects of the Corporation: general economic conditions; legislative and regulatoryinitiatives; increased competition and other effects of deregulation and consolidation of thefinancial services industry; monetary and fiscal policies of the federal government; deposit flows;disintermediation; the cost of funds; general market rates of interest; interest rates orinvestment returns on competing investments; demand for loan products; demand for financialservices; changes in accounting policies or guidelines; general economic developments; acts ofterrorism and developments in the war on terrorism; and changes in the quality or composition ofloan and investment portfolios. See also the factors regarding future operations discussed in**“Management’s Discussion and Analysis of Financial Condition and Results of Operations”**, below.**Overview**     The following discussion and analysis is presented to assist in the understanding andevaluation of the Corporation’s financial condition and results of operations. It is intended tocomplement the unaudited consolidated financial statements, footnotes, and supplemental financialdata appearing elsewhere in this Form 10-Q and should be read in conjunction with the Form 10-Q.The presentation focuses on the three and six months ended June 30, 2005 and the comparable periodsin 2004.
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**Results of Operations***Comparison of Three and Six Months Ended June 30, 2005 and 2004*     **General.**Net income for the three months ended June 30, 2005 decreased $700,000 andincreased $350,000 for the six months ended June 30, 2005 from $1.9 million and $2.4 million,respectively, in the same periods in 2004 to $1.2 million and $2.7 million. The three months endedJune 30, 2005 included an increase of $2.1 million in interest income, a decrease in the net cashsettlement expense of interest rate swaps of $268,000 and a decrease in income tax expense of$411,000. These increases were offset by increases of $1.9 million in interest expense, a decreasein the gain recognized for the change in fair value of interest rate swaps of $968,000 and $635,000in non-interest expense as compared to the same period in the prior year. The six months ended June30, 2005 included a gain on the sale of the 50% equity investment in a leasing joint venture, m2Lease Funds, LLC (“m2”), of $973,000. In addition to the gain on sale of the equity investment,interest income increased $3.5 million, net cash settlement expense of interest rate swapsdecreased $537,000 and trust and investment services fee income increased $184,000. Thesecomponents that caused an increase in net income for the six month period were partially offset byincreases in interest expense of $2.9 million, an increase in non-interest expense of $949,000 anda decrease in the gain recognized for the change in fair value of interest rate swaps of $718,000.Diluted earnings per share for the three months ended June 30, 2005 decreased to $0.50 from $0.85for the same period in 2004. This was attributable to the decrease in net income as well as theincrease in weighted average shares outstanding resulting from the exercise of the written optionby BBG shareholders in 2004. Diluted earnings per share for the six months ended June 30, 2005increased to $1.12 from $1.09 as a result of an increase in net income partially offset by theincrease in weighted average shares outstanding. The annualized return on average assets for thethree and six months ended June 30, 2005 was 0.81% and 0.93%, respectively, as compared to 1.47%and 0.92%, respectively, for the same periods in 2004. The annualized return on averagestockholders’ equity for the three and six months ended June 30, 2005 was 12.30% and 14.02%,respectively, as compared to 24.52% and 15.54%, respectively for the same periods in 2004.     **Net Interest Income.**Net interest income increased $216,000, or 5.0%, and $529,000, or 6.4%to $4.5 million and $8.9 million for the three and sixmonths ended June 30, 2005 from $4.3 millionand $8.3 million for the same periods in 2004. The improvements in net interest income for thethree and six months ended June 30, 2005 were due to increases in average earning assets offset bydecreases in net interest margin as compared to the same period in 2004. The net interest margindecreased from 3.37% for the three months ended June 30, 2004 to 3.11% for the same period in 2005.This was also reflected in the decrease in the interest rate spread from 3.09% from the threemonths ended June 30, 2004 to 2.71% for the same three month period in 2005. The net interestmargin decreased from 3.26% for the six months ended June 30, 2004 to 3.09% for the six monthsended June 30, 2005. The interest rate spread decreased to 2.71% from 2.98% for the six monthsended June 30, 2005 as compared to the same period in 2004. The decreases in the net interestmargin were the result of the increases in yields paid on interest-bearing liabilities outpacingthe increases in yields earned on interest-earning assets.     Interest income on interest-earning assets increased $2.1 million and $3.5 million to $8.9million and $16.8 million for the respective three and six months ended June 30, 2005 from $6.8million and $13.4 million for the same periods in 2004. In particular, interest income on loansand leases increased $1.8 million to $8.0 million and $3.0 million to $15.3 million for therespective three and six months ended June 30, 2005 from $6.2 million and $12.2 million for thesame periods in 2004. For both three and six month periods ended June 30, 2005, this was due to anincrease in average loans and leases outstanding of $40.7 million and $34.9 million, or 9.1% and7.9%, respectively, accompanied by an increase in average yields earned on loans and leases to6.53% and 6.31% from 5.58% and 5.53%, respectively, caused by a rise in market rates. Alsocontributing to the increase in income on interest earning assets was an increase in income onmortgage related securities of $260,000 and $467,000 from $491,000 and $943,000 for the respectivethree and six months ended June 30, 2004 to $751,000 and $1.4 million for the same periods in 2005.This increase was due to an increase in the average balance of mortgage related securities of$25.2
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million and $23.0 million from $56.9 million and $55.4 million for the respective three andsix months ended June 30, 2004 to $82.1 million and $78.4 million for the same periods in 2005accompanied by an increase in average yields on such securities from the same respective periods of3.45% and 3.41% in 2004 to 3.66% and 3.60% in 2005.     The average balance of loans increased in all but the consumer loan categories as of the threeand six months ended June 30, 2005. Total average loan growth amounted to $47.1 million and $41.3million, or 10.6% and 9.3%, for the respective three and six month periods, which was drivenlargely by growth in mortgage loans which includes commercial real estate, construction andmulti-family loans. For the three and six months ended June 30, 2005, the average balance ofmortgage loans grew $32.2 million, or 10.9%, and $25.5 million, or 8.9%, from $294.7 million and$293.0 million to $326.9 million and $318.5 million. The weighted average yield in commercialloans experienced a 253 basis point increase for the three months ended June 30, 2005 from the sameperiod in 2004 principally due to two factors. The first component of this increase was additionalinterest income of $110,000 from borrowers who had broken loan covenants which contractuallyincreased their interest yield as provided for in the loan document. The second factor for thisincrease in commercial loan interest income was an increase of approximately 200 basis points inthe average prime rate for the three months ended June 30, 2005 to 5.9% from 4.0% for the sameperiod in 2004. The growth in commercial real estate, construction and multi-family loans haslargely been the result of attracting new clients in both of the Banks’ two principal markets.Management expects that commercial real estate and commercial loan markets will experience loangrowth in the mid to high single digits in 2005 based on expectations of continued success inattracting new clients in the Banks’ markets and modest economic growth that should strengthen overthe next few quarters in those markets.     The growth in the average balance of mortgage-related securities as of the three and sixmonths ended June 30, 2005, from the same periods in 2004 of $25.2 million and $23.0 million,respectively, stemmed from a purchase of roughly $20.0 million of such securities, as interestrates have become more attractive in those securities resulting from rising mortgage rates. It isthe Corporation’s policy to diversify assets and part of that diversification includes aninvestment portfolio that is approximately 10.0% of total assets. This contributed to an increasedyield in mortgage-related securities for the three and six months ended June 30, 2005 as comparedto the same periods in 2004 from 3.45% to 3.66% and 3.41% to 3.60%, respectively.     Interest expense increased $1.8 million and $2.9 million to $4.3 million and $8.0 million,respectively, for the three and six months ended June 30, 2005 from $2.5 million and $5.1 millionfor the same periods in 2004. These increases were primarily due to respective $1.8 million and$2.8 million increases in interest expense on deposits for the three and six months ended June 30,2005 with the weighted average rate increasing, respectively, from 2.07% and 2.13% to 3.23%and3.05% from the same periods in 2004. The increases in interest expense were largely due to risingrates on deposits accompanied by increases in average interest-bearing deposits of $72.8 millionand $65.6 million for the three and six month periods or 18.0% and 16.3% for the respective periodsfrom $404.0 million and $401.6 million for the three and six months ended June 30, 2004 to $476.8million and $467.2 million for the same periods in 2005. These increases were largely a result ofgrowth in average certificates of deposit of $31.2 million and $30.5 million from $286.0 millionand $284.3 million for the three and six months ended June 30, 2004 to $317.2 million and $314.8million for the same periods in 2005, primarily acquired through deposit brokers. These increaseswere partially offset by decreases in the average balance of Federal Home Loan Bank (“FHLB”)advances, used as another source of funding, of $17.4 million and $11.1 million from $24.7 millionand $22.7 million for the respective three and six months ended June, 2004 to $7.4 million and$11.7 million for the same periods in 2005, or (70.2)% and (48.6)%, respectively, with the averagecost of such advances of 3.89% and 2.79% in 2005 as compared to 1.78% and 2.01% for the sameperiods in 2004. The overall weighted average cost of borrowings increased from 3.76% and 3.99%for the three and six months ended June 30, 2004 to 5.34% and 4.99% for the same periods in 2005.This was a result of increases in other categories of funding as well as increases in interestrates from both periods in 2004.     The Banks’ strategies continue to focus on developing deeper relationships through the sale ofproducts and services that meet clients’ needs accompanied by incentive programs that encourage thegrowth of deposits. Specific deposit initiatives include service and retention calling programs,increased
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advertising and identification of high growth potential individuals and businesses.Additionally, the Banks’ use of wholesale funding in the form of deposits generated through distribution channels otherthan the Corporation’s own bank locations allows the Banks to gather funds across a widergeographic base at pricing levels considered attractive.     **Provision for Loan and Lease Losses.**The provision for loan and lease losses increased$65,000 from $0 for the six months ended June 30, 2004 to $65,000 for the same period in 2005 andwas unchanged at $0 for both respective three month periods. The primary reason for the increasefor the six month period in 2005 is due to the growth in the loan and lease portfolio and anincrease in assets classified substandard of $219,000 from $5.5 million at December 31, 2004 to$5.8 million at June 30, 2005 as compared to a decrease of $321,000 in assets classifiedsubstandard from $5.0 million at December 31, 2003 to $4.6 million at June 30, 2004. The increasein assets classified substandard at June 30, 2005 was offset by a decrease in non-performing assetsof $1.1 million from December 31, 2004 while the decrease in assets classified substandard at June30, 2004 was accompanied by a decrease in non-performing assets of $1.2 million from December 31,2003. In order to establish the levels of the allowance for loan and lease losses, managementregularly reviews its historical charge-off migration analysis and an analysis of the current leveland trend of several factors that management believes provides an indication of losses in the loanand lease portfolio. These factors include delinquencies, volume, average size, average riskrating, technical defaults, geographic concentrations, industry concentrations, loans and leases onthe management attention list, experience in the credit granting functions and changes inunderwriting standards. The charge-off activity for these periods is inconsequential.     **Non-Interest Income.**Non-interest income, consisting primarily of deposit and loan relatedfees, interest rate swaps changes in fair value and net cash settlements as well as fees earned fortrust and investment services, decreased $695,000, to $1.1 million for the three months ended June30, 2005 as compared to $1.8 million for the same period in 2004 and increased $917,000, or 49.1%,to $2.8 million for the six months ended June 30, 2005 from $1.9 million for the same period in2004. The primary contributor to the decrease for the three months ended June 30, 2005 was thedecrease in the gain recognized for the change in fair value of interest rate swaps of $968,000partially offset by a decrease in the net cash settlement expense of interest rate swaps of$268,000. The primary contributors to the increase for the six months ended June 30, 2005 were thegain on sale of $973,000 from the Corporation’s 50% owned joint venture, m2 and a $184,000 increasein trust and investment services fee income from FBB’s trust and investment services area due tosuccessful efforts to increase trust assets under management. Money transferred in from new andexisting clients as well as market appreciation contributed to the increase in trust assetsmanaged. In addition to this, there was an increase of $97,000 in the cash surrender value ofbank-owned life insurance for the six months ended June 30, 2005 as compared to the same period in2004 due to the purchase of additional bank-owned life insurance. These increases were partiallyoffset by decreases in other income of $115,000 which represents income from the equity earnings ofthe 50% owned joint venture for the six months ended June 30, 2004 which was sold January 4, 2005.Also contributing to the decrease was a decrease in service charges on demand deposit accounts of$72,000.     **Non-Interest Expense.**Non-interest expense increased $631,000 and $945,000, or 20.3% and14.8%, to $3.7 million and $7.3 million for the three and six months ended June 30, 2005 from $3.1million and $6.4 million in the same periods for 2004. A significant portion of these increasesfor the three and six month periods ended June 30, 2005 as compared to the same periods in 2004 wasdue to increases of $200,000 and $421,000 in employee salaries and benefits reflecting additions tostaff. Professional and consulting fees increased $272,000 and $177,000 for the three and sixmonths ended June 30, 2005 due to additional fees associated with the Corporation’s process toregister its common stock with the Securities and Exchange Commission. Marketing increased $61,000and $121,000 for the three and six month periods as a result of loan, deposit, and generalmarketing campaigns. Data processing increased $88,000 and $109,000 for the three and six monthperiods largely to keep pace with internal growth as well as overall technology in the industry.Other expenses increased $103,000 for the six months ended June 30, 2005 from $640,000 for the sameperiod in 2004 to $743,000 largely due to an impairment of $98,000 in an investment in a communityhousing project. Occupancy increased $48,000 and $26,000 for the three and six months ended June30, 2005 as compared to the same periods in 2004. These increases were offset by
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decreases of$15,000 and $13,000 in equipment for the three and six month periods as compared to the sameperiods in the prior year.     **Minority Interest.**The consolidated financial statements for the three and six months endedJune 30, 2004 included the accounts of FBFS, its wholly-owned subsidiaries and its 51% share of BBGprior to the acquisition of all of the minority interests in BBG shares effective June 1, 2004.Minority interest in net income of consolidated subsidiary represents the 49% minority ownershipinterest in BBG. Minority interest in net income for the respective periods in 2004 was $3,000 and$9,000.     **Income Taxes.**Income tax expense was $649,000 and $1.5 million for the three and six monthsended June 30, 2005, with effective rates of 34.7% and 34.6%, compared to $1.1 million and $1.4million for the same periods in 2004, with effective rates of 35.5% and 36.3%. The effective taxrates for both periods of 2005 have declined from the same periods in 2004 primarily due to certaincosts which are not tax deductible related to the acquisition of the remaining shares of BBG inJune 2004. Also contributing to the reduction was an increase in the amount of non-taxable incomefrom bank-owned life insurance in 2005.     **Average Interest-Earning Assets, Average Interest-Bearing Liabilities and Interest RateSpread.**The tables on the following pages show the Corporation’s average balances, interest,average rates, net interest margin and the spread between the combined average rates earned oninterest-earning assets and average cost of interest-bearing liabilities for the periods indicated.The average balances are derived from average daily balances.
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                           **Three Months Ended June 30,**   **2005**  **2004**   **(as restated)**  **(as restated)**           **Average**          **Average**   **Average**      **Yield/**  **Average**      **Yield/**   **Balance**  **Interest**  **Cost**  **Balance**  **Interest**  **Cost**   (Dollars in Thousands) **Interest-Earning Assets**                        Mortgage loans (2)  $326,868  $4,867   5.96% $294,709  $4,085   5.54%Commercial loans  139,433   2,831   8.12   122,932   1,719   5.59 Leases  22,756   295   5.19   24,375   374   6.14 Consumer loans  3,731   50   5.36   3,671   39   4.25                    Total loans and leases receivable (1)   492,788   8,043   6.53   445,687   6,217   5.58 Mortgage-related securities (2)   82,092   751   3.66   56,872   491   3.45 Investment securities (2)   4,155   30   2.89   5,856   52   3.55 Federal Home Loan Bank stock  2,816   38   5.40   2,352   34   5.78 Fed funds sold and other  142   1   2.82   74   0   1.02 Interest bearing deposits  16   —   0.00   50   0   1.94                    Total interest-earning assets  582,009   8,863   6.09   510,891   6,794   5.32 Non-interest-earning assets  21,614           14,152                                Total assets $603,623          $525,043                                                         **Interest-Bearing Liabilities**                        NOW accounts $52,197  $346   2.65  $46,256  $112   0.97 Money market  107,396   741   2.76   71,728   256   1.43 Certificates — regular  274,600   2,369   3.45   244,896   1,541   2.52 Certificates — large  42,607   393   3.69   41,115   179   1.74                    Total deposits  476,800   3,849   3.23   403,995   2,088   2.07 Junior subordinated debentures  10,310   234   9.08   10,310   220   8.54 FHLB advances  7,364   72   3.89   24,720   110   1.78 Other borrowings  19,051   185   3.88   7,460   69   3.70                    Total interest-bearing liabilities  513,525   4,340   3.38   446,485   2,487   2.23 Non-interest-bearing liabilities  50,324           43,231                                Total liabilities  563,849           489,716         Minority interest in 51% ownedsubsidiary  —           3,962         Stockholders’ equity  39,774           31,365                                Total liabilities andStockholders’ equity $603,623          $525,043                                                         Net interest income/interestrate spread     $4,523   2.71%     $4,307   3.09%                     Net interest-earning assets $68,484          $64,406                                                         Net interest margin          3.11%          3.37%                       Ratio of average interest-earningassets to average interest-earning liabilities  1.13           1.14                                                         Return on average assets  0.81%          1.47%                               Return on average equity  12.30%          24.52%                               Average equity to average assets  6.59%          5.97%                               Non-interest expense to average assets  2.57%          2.59%                                (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.
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                           **Six Months Ended June 30,**          **2005**  **2004**   **(as restated)**  **(as restated)**           **Average**          **Average**   **Average**      **Yield/**  **Average**      **Yield/**   **Balance**  **Interest**  **Cost**  **Balance**  **Interest**  **Cost**   (Dollars in Thousands) **Interest-Earning Assets**                        Mortgage loans (2)  $318,499  $9,114   5.72% $292,970  $7,649   5.22%Commercial loans  138,386   5,435   7.85   121,699   3,756   6.17 Leases  23,988   630   5.25   23,972   738   6.16 Consumer loans  2,696   75   5.56   3,652   79   4.33                    Total loans and leases receivable (1)  483,569   15,254   6.31   442,293   12,222   5.53 Mortgage-related securities (2)   78,427   1,410   3.60   55,388   943   3.41 Investment securities (2)   4,373   62   2.84   6,983   124   3.55 Federal Home Loan Bank stock  2,795   76   5.44   2,334   73   6.21 Fed funds sold and other  1,580   16   2.03   60   0   0.96 Interest bearing deposits  62   1   3.23   52   0   1.32                    Total interest-earning assets  570,806   16,819   5.89   507,110   13,362   5.27 Non-interest-earning assets  22,460           13,903                                Total assets $593,266          $521,013                                 **Interest-Bearing Liabilities**                        NOW accounts $51,612  $632   2.45  $46,224  $210   0.91 Money market  100,843   1,313   2.60   71,041   497   1.40 Certificates — regular  273,133   4,287   3.14   242,538   3,198   2.64 Certificates — large  41,619   884   4.25   41,761   371   1.78                    Total deposits  467,207   7,116   3.05   401,564   4,276   2.13 Junior subordinated debentures  10,310   462   8.96   10,310   440   8.54 FHLB advances  11,672   163   2.79   22,724   228   2.01 Other borrowings  13,939   271   3.89   9,032   141   3.12                    Total interest-bearing liabilities  503,128   8,012   3.18   443,630   5,085   2.29 Non-interest-bearing liabilities  50,945           42,961                                Total liabilities  554,073           486,591         Minority interest in 51% ownedsubsidiary  —           3,555         Stockholders’ equity  39,193           30,867                                Total liabilities andStockholders’ equity $593,266          $521,013                                 Net interest income/interestrate spread     $8,807   2.71%     $8,277   2.98%                     Net interest-earning assets $67,678          $63,480                                Net interest margin          3.09%          3.26%                       Ratio of average interest-earningassets to average interest-earning liabilities  1.13           1.14                                 Return on average assets  0.93%          0.92%                               Return on average equity  14.02%          15.54%                               Average equity to average assets  6.61%          5.92%                               Non-interest expense to averageassets  2.57%          2.67%                                (1)  The average balances of loans and leases include non-performing loans and leases,interest of which is generally recognized on a cash basis. (1)   Includes amortized cost basis of assets held and available for sale.
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**Financial Condition**     **General.**The total assets of FBFS increased $42.8 million, or 7.4%, to $604.8 million at June30, 2005 from $563.0 million at December 31, 2004. This increase was funded primarily by netincreases in deposits of $36.1 million. This growth is generally invested in securities and loansand leases receivable.     **Securities.**Securities available-for-sale increased $23.4 million at June 30, 2005 fromDecember 31, 2004 as a result of purchases of $37.1 million net of maturities of $13.7 millionduring the year. Mortgage-related securities consisted largely of agency-backedmortgage-derivative securities in the form of REMICSs.     **Loans and Leases Receivable.**Total net loans and leases increased $15.9 million to $485.7million at June 30, 2005 from $469.8 million at December 31, 2004. The activity in the loan andlease portfolio consisted of originations of $149.3 million and purchases of $6.4 million offset byprincipal repayments of $139.8 million and an increase in the allowance for loan and lease lossesof $62,000. Deferred loan fees declined $63,000 to $247,000 at June 30, 2005 from $310,000 atDecember 31, 2004. The primary reason for this decrease was a decrease in loans originated in theCorporation’s asset-based lending subsidiary from the prior year ended December 31, 2004 to the sixmonths ended June 30, 2005 accompanied by increased payoff activity in the prior period as comparedto the six months ended June 30, 2005. The increased payoff activity in the prior period resultedin accelerated deferred loan fee amortization for those loans that were paid off.     **Deposits.**As of June 30, 2005, deposits increased $35.9 million to $510.6 million from $474.7million at December 31, 2004. The increase during the six months ended June 30, 2005 was largelyattributable to an increase of $18.9 million in money market accounts accompanied by an increase incertificates of deposit of $12.4 million and an increase of $4.7 million in transaction accounts,respectively. The weighted average cost of deposits increased to 3.05% at June 30, 2005 from 2.33%at December 31, 2004.     **Borrowings.**The Corporation had borrowings of $44.0 million as of June 30, 2005, largelyconsisting of FHLB advances of $12.6 million which had a weighted average rate of 2.79%. Fed fundspurchased and securities sold under agreement to repurchase totaled $13.6 million and had aweighted average rate of 2.92%. The Corporation also had a $2.5 million line of credit with aweighted average rate of 4.42%, a $5.0 million subordinated note payable which carried a weightedaverage rate of 5.20% and junior subordinated debentures of $10.3 million with a weighted averagerate of 8.96%. Borrowings increased $3.7 million during the six months ended June 30, 2005.Maturing FHLB advances of approximately $12.9 million were replaced with Fed funds of approximately$11.2 million along with the availability of deposits for funding. At December 31, 2004, FHLBadvances were $23.8 million with a weighted average rate of 1.91%. Fed funds purchased andsecurities sold under agreement to repurchase totaled $678,000 and had a weighted average rate of2.20%. The Corporation’s line of credit of $500,000 had a weighted average rate of 3.76%, thesubordinated note payable carried a weighted average rate of 4.62% and junior subordinateddebentures of $10.3 million had a weighted average rate of 8.66%.     **Stockholders’ Equity.**As of June 30, 2005, stockholders’ equity was $40.4 million or 6.7% oftotal assets. Stockholders’ equity increased $2.3 million during the six months ended June 30,2005 primarily as a result of comprehensive income of $2.5 million, which includes net income of$2.7 million. Stock options exercised totaled $103,000. These increases were partially offset byan increase in accumulated other comprehensive loss of $293,000, dividends paid of $278,000 andtreasury stock purchases of $3,000. As of December 31, 2004, stockholders’ equity totaled $38.1million or 6.8% of total assets.     During the six months ended June 30, 2005, options for 6,280 shares of common stock wereexercised at a weighted-average price of $16.34 per share.
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**Asset Quality**     **Non-performing Assets.**Non-performing assets consists of non-accrual loans and leases of $1.2million as of June, 2005, or 0.31% of total assets, as compared to $2.9 million, or 0.52% of totalassets, as of December 31, 2004. This represents a decrease of $1.1 million in non-performingassets largely due to the receipt of $750,000 from the sale of printing equipment which was part ofthe collateral for a non-accrual lease which had a carrying value of $1.1 million as of December31, 2004. Management believes it will receive payment in full on the lease.     The Corporation’s non-accrual loans and leases consist of the following at June 30, 2005 andDecember 31, 2004, respectively.           **As of June 30,**  **As of December 31,**   **2005**  **2004**   (Dollars in Thousands) Non-accrual loans $711  $696 Non-accrual leases  507   1,566        Total non-accrual loans and leases  1,218   2,262 Foreclosed properties and repossessedassets, net  650   665        Total non-performing assets $1,868  $2,927                 Performing troubled debt restructurings $—  $—                 Total non-accrual loans and leases to totalloans and leases  0.25%  0.47%Total non-performing assets to total assets  0.31   0.52 Allowance for loan and lease losses tototal loans and leases  1.31   1.34 Allowance for loan and lease losses tonon-accrual loans and leases  528.49   281.83      At June 30, 2005, the Banks had a total of $5.8 million in assets classified substandard ascompared to $5.5 million at December 31, 2004. This increase of $300,000 is primarily attributableto the addition of a foreclosed property which was formerly a first and second mortgage secured bya borrower’s residence in the amount of $650,000. The foreclosure took place in May, 2005. Theproperty is located in Eagle, Wisconsin and FBB – Milwaukee believes it will be able to sell theproperty at or above its carrying amount. The majority of the decrease in substandard assets thatoffset the addition of the foreclosed property was a lease with a net carrying value of $115,000upgraded from substandard due to its performance in accordance with contractual terms.     Included in assets classified substandard are loans and leases of $4.6 million and $507,000,respectively at June 30, 2005 and the above foreclosed property with a net carrying value of$650,000. There are two substandard loans with a net carrying value greater than $1.0 million asof June 30, 2005. The first is a $1.5 million loan to a concrete contractor. The second is a $1.5million loan to a plastic injection molding company. This loan was subsequently paid in full onJuly 11, 2005. The loan to the concrete contractor is current as of June 30, 2005. As of December31, 2004, assets classified substandard with a net carrying value of greater than $1.0 millionincluded the above loan to a plastic injection molding company with a net carrying value of $1.3million and a loan to a metal stamping company with a net carrying value of $1.7 million. Thesecond loan was removed from the substandard classification as a result of performance inaccordance with contractual terms.
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     The following represents information regarding the Corporation’s impaired loans:           **As of June 30,**  **As of December 31,**   **2005**  **2004**   (In Thousands) Impaired loans and leases with impairmentreserves required $1,184  $2,262          Less:        Impairment reserve(included in allowance for loan and lease losses)  378   470                 Net impaired loans and leases $806  $1,792                 Average impaired loans and leases $1,739  $2,112          Interest income attibutable to impaired loans and leases  80   177          Interest income recognized onimpaired loans and leases  13   85      Loan charge-offs were $9,000 for the three and six months ended June 30, 2005 and were $0 forthe same periods in 2004, respectively. Recoveries for the three and six months ended June 30,2005 were $2,000 and $6,000 and were $114,000 and $118,000 for the same periods in 2004,respectively. The higher level of recoveries in 2004 resulted from a recovery of $114,000 from alease to a printer of wall boards for manufactured housing that had been charged off in 2002.     A summary of the activity in the allowance for loan and lease losses follows:
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                   **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  $6,811 Charge-offs:                Mortgage           Commercial  —   —   —   (3)Lease  —   —   —   — Consumer  (9)  —   (9)  —              Total charge-offs  (9)  —   (9)  (3)Recoveries:                Mortgage  —   —   1   — Commercial  2   1   5   5 Lease  —   113   —   113 Consumer  —   —   —   —              Total recoveries  2   114   6   118 Net recoveries (charge-offs)  (7)  114   (3)  115 Provision  —   —   65   —              Allowance at end of period $6,437  $6,926  $6,437  $6,926                               Allowance to gross loans andleases  1.31%  1.49%  1.31%  1.49%**Liquidity and Capital Resources**     During the six months ended June 30, 2005 and the years ended December 31, 2004 and 2003, theBanks did not make dividend payments to the Corporation. The Banks are subject to certainregulatory limitations regarding their ability to pay dividends to the Corporation. Managementbelieves that the Corporation will not be adversely affected by these dividend limitations and thatany future projected dividends from the Banks will be sufficient to meet the Corporation’sliquidity needs. The Corporation’s principal liquidity requirements at June 30, 2005 are therepayment of a short-term borrowing of $2.5 million and interest payments due on subordinateddebentures and the junior subordinated debentures during 2005. The Corporation expects to meet itsliquidity needs through existing cash flow sources, its bank line of credit and/ or dividendsreceived from the Banks. The Corporation and its subsidiaries continue to have a strong capitalbase and the Corporation’s regulatory capital ratios continue to be significantly above the definedminimum regulatory ratios.     FBFS manages its liquidity to ensure that funds are available to each of its Banks to satisfythe cash flow requirements of depositors and borrowers and to ensure the Corporation’s own cashrequirements are met. The Banks maintain liquidity by obtaining funds from several sources.     The Banks’ primary sources of funds are principal and interest repayments on loans receivableand mortgage-related securities, FHLB advances, deposits and other borrowings such as federal fundsand Federal Home Loan Bank advances. The scheduled repayments of loans and the repayments ofmortgage-related securities are a predictable source of funds. Deposit flows and loan repayments,however, are greatly influenced by general interest rates, economic conditions and competition.     Brokered deposits are used by the Banks, which allows them to gather funds across a largergeographic base at price levels considered attractive. Access to such deposits allows theflexibility to not pursue single service deposit relationships in markets that have experiencedsome unprofitable pricing levels. Brokered deposits account for $262.6 million and $246.7 millionof deposits as of June 30, 2005 and December 31, 2004, respectively. Brokered deposits areutilized to support asset growth and are generally a lower cost source of funds when compared tothe interest rates that would need to be offered in
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the local markets to generate a sufficientlevel of funds. In addition, the administrative costs associated with brokered deposits areconsiderably less than the administrative costs that would be incurred to administer a similarlevel of local deposits. Although local market deposits are expected to increase as newclient relationships are established and as existing clients increase the balances in theirdeposit accounts, the usage of brokered deposits will likely remain. In order to provide forongoing liquidity and funding, all of the brokered deposits are certificates of deposit that do notallow for withdrawal, at the option of the depositor, before the stated maturity. In the event thatthere is a disruption in the availability of brokered deposits at maturity, the Banks have managedthe maturity structure so that at least 90 days of maturities would be funded through other means,including but not limited to advances from the Federal Home Loan Bank, replacement with higher costlocal market deposits or cash flow from borrower repayments and security maturities.     The Banks are required by federal regulation to maintain sufficient liquidity to ensure safeand sound operations. Management believes that its Banks have an acceptable liquidity percentageto match the balance of net withdrawable deposits and short-term borrowings in light of presenteconomic conditions and deposit flows.     Under Federal law and regulation, the Banks are required to meet certain tier 1 and risk-basedcapital requirements. Tier 1 capital generally consists of stockholders’ equity plus certainqualifying debentures and other specified items less intangible assets such as goodwill.Risk-based capital requirements presently address credit risk related to both recorded andoff-balance sheet commitments and obligations.     As of June 30, 2005 and 2004, the most recent notification from the Federal Deposit InsuranceCorporation and the state of Wisconsin Department of Financial Institutions (DFI) categorized theBanks as well capitalized under the regulatory framework for prompt corrective action. Thequalification results in lower assessment of FDIC premiums, among other benefits.     In addition, the Banks exceeded minimum net worth requirement of 6.0% as required by the State ofWisconsin at December 31, 2004 and 2003.     The following table summarizes the Corporation and Banks’ capital ratios and the ratios required byits federal regulators at June 30, 2005, December 31, 2004 and June 30, 2004, respectively:
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                                           **Minimum Required**          **Minimum Required** **to be Well**          **for Capital** **Capitalized Under**  **Actual** **Adequacy Purposes** **FDIC Requirements**  **Amount** **Ratio** **Amount** **Ratio** **Amount** **Ratio**  (Dollars in Thousands)**As of June 30, 2005 (asrestated):**                                                 Total capital(to risk-weighted assets)                        Consolidated $59,954   11.21% $42,787   8.00%  N/A   N/A First Business Bank  52,158   11.24   37,116   8.00  $46,395   10.00%First Business Bank — Milwaukee  8,507   11.65   5,839   8.00   7,299   10.00                          Tier 1 capital(to risk-weighted assets)                        Consolidated $48,517   9.07% $21,393   4.00%  N/A   N/A First Business Bank  46,874   10.10   18,558   4.00  $27,837   6.00%First Business Bank — Milwaukee  7,592   10.40   2,920   4.00   4,380   6.00                          Tier 1 capital(to average assets)                        Consolidated $48,517   8.08% $24,030   4.00%  N/A   N/A First Business Bank  46,874   9.03   20,770   4.00  $25,962   5.00%First Business Bank — Milwaukee  7,592   9.09   3,342   4.00   4,177   5.00 
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                                           **Minimum Required**          **Minimum Required** **to be Well**          **for Capital** **Capitalized Under**  **Actual** **Adequacy Purposes** **FDIC Requirements**  **Amount** **Ratio** **Amount** **Ratio** **Amount** **Ratio**  (Dollars in Thousands)**As of December 31, 2004 (as restated):**                                                 Total capital(to risk-weighted assets)                        Consolidated $57,296   11.03% $41,550   8.00%  N/A   N/A First Business Bank  48,611   10.75   36,164   8.00  $45,205   10.00%First Business Bank — Milwaukee  8,185   12.45   5,259   8.00   6,574   10.00                          Tier 1 capital(to risk-weighted assets)                        Consolidated $45,921   8.84% $20,775   4.00%  N/A   N/A First Business Bank  43,323   9.58   18,082   4.00  $27,123   6.00%First Business Bank — Milwaukee  7,360   11.20   2,629   4.00   3,944   6.00                          Tier 1 capital(to average assets)                        Consolidated $45,921   8.21% $22,365   4.00%  N/A   N/A First Business Bank  43,323   8.92   19,430   4.00  $24,287   5.00%First Business Bank — Milwaukee  7,360   10.09   2,918   4.00   3,648   5.00 
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                                           **Minimum Required**           **Minimum Required**  **to be Well**           **for Capital**  **Capitalized Under**   **Actual**  **Adequacy Purposes**  **FDIC Requirements**   **Amount**  **Ratio**  **Amount**  **Ratio**  **Amount**  **Ratio**   (Dollars in Thousands) **As of June 30, 2004 (asrestated):**                                                 Total capital(to risk-weighted assets)                        Consolidated $54,249   11.04% $39,293   8.00%  N/A   N/A First Business Bank  45,880   10.87   34,475   8.00  $43,094   10.00%First Business Bank -Milwaukee  8,334   13.97   4,772   8.00   5,965   10.00                          Tier 1 capital(to risk-weighted assets)                        Consolidated $43,100   10.00% $19,647   4.00%  N/A   N/A First Business Bank  40,484   9.59   17,238   4.00  $25,856   6.00%First Business Bank -Milwaukee  7,588   12.72   2,386   4.00   3,579   6.00                          Tier 1 capital(to average assets)                        Consolidated $43,100   8.23% $20,956   4.00%  N/A   N/A First Business Bank  40,484   8.97   18,046   4.00  $22,558   5.00%First Business Bank -Milwaukee  7,588   10.70   2,838   4.00   3,547   5.00 **Contractual Obligations**     The following table summarizes the Corporation’s contractual cash obligations and othercommitments at June 30, 2005.                       **Payment Due by Period**       **Less than**          **More than** **Contractual 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  $2,829 Fed funds purchased andsecuritiesrepurchase agreements  13,588   13,588   —   —   — Time deposits  319,852   182,478   87,660   39,517   10,197 Line of Credit  2,500   2,500   —   —   — Subordinated debt  5,000   —   —   —   5,000 Junior subordinated debentures  10,310   —   —   —   10,310 FHLB advances  12,649   11,104   1,029   11   505 Other long-term liabilities  —   —   —   —   —                                      Total contractual obligations $369,393  $210,204  $89,755  $40,593  $28,841                 
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**Off-balance Sheet Arrangements**     As of June 30, 2005 the Corporation had outstanding commitments to originate $153.5 million ofloans and commitments to extend funds to or on behalf of clients pursuant to standby letters ofcredit of $13.3 million. Commitments to extend funds typically have a term of less than one year;however the Banks have $53.5 million of commitments which extend beyond one year. No losses areexpected as a result of these funding commitments. The Banks have entered into agreements withcertain brokers that provide blocks offunds at specified interest rates for agreed upon fees. The Banks also utilize interest rate swapsfor the purposes of interest rate risk management. Such instruments are discussed in **Note 10**tothe Consolidated Financial Statements. Management believes adequate capital and liquidity areavailable from various sources to fund projected commitments.**Item 3. Quantitative and Qualitative Disclosures About Market Risk**     The primary function of asset liability management is to provide liquidity and maintain anappropriate balance between interest-earning assets and interest-bearing liabilities withinspecified maturities and/or repricing dates. Interest rate risk is the imbalance betweeninterest-earning assets and interest-bearing liabilities at a given maturity or repricing date, andis commonly referred to as the interest rate gap (the “gap”). A positive gap exists when there aremore assets than liabilities maturing or repricing within the same time frame. A negative gapoccurs when there are more liabilities than assets maturing or repricing within the same timeframe. During a period of rising interest rates, a negative gap over a particular period wouldtend to adversely affect net interest income over such a period, while a positive gap over aparticular period would tend to result in an increase in net interest income.     The Corporation’s strategy for asset and liability management is to maintain an interest rategap that minimizes the impact of interest rate movements to the net interest margin by maintaininga favorable match between the maturities and repricing dates of interest-earning assets andinterest-bearing liabilities. This strategy is monitored by the respective Banks’Asset/Liability            Management Committees, in accordance with policies approved by therespective Banks’ Boards. These committees meet regularly to review the sensitivity of theCorporation’s assets and liabilities to changes in interest rates, liquidity needs and sources, andpricing and funding strategies.     The Corporation uses two techniques to measure interest rate risk. The first issimulation of earnings. The balance sheet is modeled as an ongoing entity whereby future growth,pricing, and funding assumptions are implemented. These assumptions are modeled under differentrate scenarios that include a simultaneous, instant and sustained change in interest rates.     The second measurement technique used is static gap analysis. This technique measures thedifference between the amount of interest-earning assets maturing and/or repricing and the amountof interest-bearing liabilities and interest rate swaps maturing and/or repricing in specified timeperiods. A significant repricing gap could result in a large impact on net interest margin duringperiods of changing interest rates.     The Corporation’s asset and liability management requires management to make a number ofassumptions as to when an asset or liability will reprice or mature. Management believes that itsassumptions approximate actual experience and considers them reasonable, although the actualamortization and repayment of assets and liabilities may vary substantially. The Corporation’seconomic sensitivity to change in rates at June 30, 2005 has not changed materially since December31, 2004.
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**Item 4 – Controls and Procedures**     *Evaluation of Disclosure Controls and Procedures*     FBFS maintains disclosure controls and procedures as required under Rule 13a-15 promulgatedunder the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are designed toensure that information required to be disclosed in our Exchange Act reports is recorded,processed, summarized and reported within the time periods in the SEC’s rules and forms, and that such informationis accumulated and communicated to the Corporation’s management, including its Chief ExecutiveOfficer and Chief Financial Officer, as appropriate, to allow timely decisions regarding requireddisclosures.     At December 31, 2004, March 31, 2005 and June 30, 2005, FBFS’s management carried out anevaluation, under the supervision and with the participation of FBFS’s Chief Executive Officer andChief Financial Officer, of the effectiveness of its disclosure controls and procedures. Based onthose evaluations, FBFS’s management initially concluded that as of December 31, 2004, March 31,2005 and June 30, 2005, such disclosure controls and procedures were effective. However, onNovember 8, 2005, management and the Audit Committee of the Board of Directors of FBFS concludedthat FBFS had a material weakness in its internal control over financial reporting as describedbelow. Because of this material weakness in its internal control over financial reporting(described below) which impacted the financial statements for the first two quarters of 2005 and asof and for the years ended December 31, 2004, 2003, and 2002, management has, as of the date of thefiling of this Form 10-Q/A, concluded that FBFS’s disclosure controls and procedures were noteffective as of December 31, 2004, March 31, 2005 or June 30, 2005. Management identified thefollowing material weakness in internal control over financial reporting as of December 31, 2004,March 31, 2005 and June 30, 2005:     As of the aforementioned period-ends, FBFS had ineffective policies and procedures relating tothe accounting for certain derivative financial instruments under Statement of Financial AccountingStandards No. 133, *Accounting for Derivative Instruments and Hedging Activities (“SFAS 133”).*Specifically, FBFS’s policies and procedures did not provide for sufficient testing andverification of the criteria for the “short cut” method to ensure proper application of theprovisions of SFAS 133 at inception for certain derivative financial instruments and did notprovide for periodic timely review of the proper accounting for certain derivative financialinstruments for periods subsequent to inception. In addition, FBFS did not have personnelpossessing sufficient technical expertise related to the application of the provisions of SFAS 133,or with a sufficient understanding of derivative instruments. This material weakness has resultedin the restatement of the Company’s financial statements for the first two quarters of 2005 and forthe years ended December 31, 2004, 2003 and 2002 and the restatement of financial information forthe year ended December 31, 2001 and each of the quarters in 2004.*Changes in Internal Control over Financial Reporting*     FBFS continually assesses the adequacy of its internal control over financial reporting andenhances its controls in response to internal control assessments and internal and external auditand regulatory recommendations.     There were no changes in our internal control over financial reporting that were implementedduring the quarter ended June 30, 2005, that materially affected, or are reasonably likely tomaterially affect, our internal control over financial reporting.     Since November 8, 2005, we have implemented or are in the process of implementing severalimportant changes in our internal control over financial reporting related to our accounting forderivatives. These actions include: **•** Enhancing risk management policies and procedures related to reviewing derivativetransactions;
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 **•** Reviewing policies and procedures related to the initiation and subsequent reviewof hedge strategies; and  **•** Changing policies and procedures to limit the Corporation’s use of the “short cut”method.     While we believe these actions have significantly improved our internal control over financialreporting, we further believe that additional time and testing are necessary before concluding thatthe material weakness has been fully remediated. We anticipate that we will have fully remediatedthe material weakness by December 31, 2005.**Part II. Other Information****Item 1. Legal Proceedings**     From time to time, the Corporation and its subsidiaries are engaged in legal proceedings inthe ordinary course of their respective businesses. Management believes that any liability arisingfrom any such proceedings currently existing or threatened will not have a material adverse effecton the Corporation’s financial position, results of operations, and cash flows.**Item 2. Unregistered Sales of Equity Securities and Use of Proceeds** (a) The following transactions occurred during the quarter ended June 30, 2005pursuant to the 2001 Equity Incentive Plan. On April 14, 2005, 275 shares of FBFScommon stock were sold for $4,217.68, 1,050 shares were sold for $19,950.00 and 750shares were sold for $16,500.00. Those transactions were entered into pursuant to theexemption provided in Rule 701.  (b) None.  (c) None.**Item 3. Defaults Upon Senior Securities**     Not applicable.**Item 4. Submission of Matters to a Vote of Security Holders**     The Annual Meeting of Stockholders was held May 2, 2005. There were 2,418,539 shares ofcommon stock that could be voted, and 1,413,778 shares present at the meeting by holders thereofin person or by proxy, which constituted a quorum. The following is a summary of the results ofitems voted on:
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               **Number of Shares**  **For** **Against** **Abstained**Election of Directors for a three-yearterm expiring in 2008:                         Jerome J. Smith  1,409,499   —   4,279              Leland C. Bruce  1,406,811   —   6,967              Loren D. Mortenson  1,406,127   —   7,651              Appointment of KPMG as independentauditors for the yearending December 31, 2005  1,374,903   1,630   37,245 **Item 5. Other Information.**     None.**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 ChiefFinancial Officer pursuant to 18 U.S.C. paragraph 1350.
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**Signatures**     Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, theregistrant has duly caused this amendment to be signed on its behalf by the undersigned, thereuntoduly authorized.     **FIRST BUSINESS FINANCIAL SERVICES, INC.**** **    By: /s/     Jerome J. Smith     Jerome J. Smith       Director and Chief Executive Officer     December 21, 2005
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