##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
 For the quarterly period ended September 30, 2006
 Commission file number 000-51028
 FIRST BUSINESS FINANCIAL SERVICES, INC.
  Wisconsin
    
    39-1576570(State or jurisdiction of incorporation or organization)
    
    (I.R.S. Employer Identification No.)401 Charmany Drive Madison, WI
    
    53719(Address of Principal Executive Offices)
    
    (Zip Code)
  
   þ o
  o o þ
  o þ




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##### 



FIRST BUSINESS FINANCIAL SERVICES, INC.
INDEX  FORM 10-Q
 PagePART I.  FINANCIAL INFORMATIONItem 1. Financial Statements (Unaudited)Consolidated Balance Sheets as of September 30, 2006 and December 31, 2005
    
    
    3Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2006 and 2005
    
    
    4Consolidated Statements of Changes in Shareholders Equity and Comprehensive Income for the Nine Months Ended September 30, 2006 and 2005
    
    
    5Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2006 and 2005
    
    
    6Notes to Unaudited Consolidated Financial Statements
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and Results of OperationsResults of Operations
    
    
    19Financial Condition
    
    
    25Asset Quality
    
    
    26Liquidity and Capital Resources
    
    
    28Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    31Item 4. Controls and Procedures
    
    
    32PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    33Item 1A. Risk Factors
    
    
    33Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    33Certification of Chairman of the Board and CEOCertiifcation of Sr. VP and CFOSection 1350 Certifications
  1




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PageItem 3. Defaults upon Senior Securities
    
    
    33Item 4. Submission of Matters to Vote of Security Holders
    
    
    33Item 5. Other Information
    
    
    33Item 6. Exhibits
    
    
    33SIGNATURES
    
    
    34
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##### Table of Contents



PART I. Financial Information
 
 Item 1.  Financial Statements
 
 Consolidated Balance Sheets
 (unaudited)September 30,
    
    
    December 31,2006
    
    
    2005(In Thousands, Except Share Data)AssetsCash and due from banks
    
    $
    13,292
    
    
    $
    16,568Short-term investments
    
    
    5,536
    
    
    
    139Cash and cash equivalents
    
    
    18,828
    
    
    
    16,707Securities available-for-sale, at fair value
    
    
    95,260
    
    
    
    92,055Loans and leases receivable, net:Held for sale
    
    
    100
    
    
    
    Held for investment
    
    
    576,884
    
    
    
    532,716Leasehold improvements and equipment, net
    
    
    1,084
    
    
    
    1,155Cash surrender value of bank-owned life insurance
    
    
    13,308
    
    
    
    12,856Investment in Federal Home Loan Bank stock, at cost
    
    
    2,127
    
    
    
    2,898Goodwill and other intangibles
    
    
    2,825
    
    
    
    2,852Accrued interest receivable and other assets
    
    
    9,389
    
    
    
    8,010Total assets
    
    $
    719,805
    
    
    $
    669,249Liabilities and Stockholders EquityDeposits
    
    $
    604,794
    
    
    $
    567,464Securities sold under agreement to repurchase
    
    
    832
    
    
    
    713Federal Home Loan Bank and other borrowings
    
    
    51,423
    
    
    
    39,045Junior subordinated debentures
    
    
    10,310
    
    
    
    10,310Accrued interest payable and other liabilities
    
    
    7,936
    
    
    
    9,874Total liabilities
    
    
    675,295
    
    
    
    627,406Commitments and contingencies
    
    
    
    
    
    
    Stockholders Equity:Preferred stock, $10 par value, 10,000 Series A
shares and 10,000 Series B shares authorized, none
issued and outstanding
    
    
    
    
    
    
    Common stock, $.01 par value, 8,000,000 shares authorized,
2,511,695 and 2,456,754 shares issued, 2,489,080
and 2,435,008 outstanding in 2006 and 2005, respectively
    
    
    25
    
    
    
    24Additional paid-in capital
    
    
    22,965
    
    
    
    22,712Retained earnings
    
    
    23,441
    
    
    
    21,085Accumulated other comprehensive loss
    
    
    (1,391
    )
    
    
    (1,469
    )Treasury stock (22,615 and 21,746 shares in 2006 and 2005,
respectively), at cost
    
    
    (530
    )
    
    
    (509
    )Total stockholders equity
    
    
    44,510
    
    
    
    41,843Total liabilities and stockholders equity
    
    $
    719,805
    
    
    $
    669,249
  3




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Unaudited Consolidated Statements of Income
 Three Months Ended,
    
    
    Nine Months Ended,September 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(In Thousands, Except Share Data)Interest income:Loans and leases
    
    $
    11,097
    
    
    $
    8,514
    
    
    $
    31,415
    
    
    $
    23,768Securities income:Taxable
    
    
    1,026
    
    
    
    818
    
    
    
    2,974
    
    
    
    2,281Short-term investments
    
    
    42
    
    
    
    44
    
    
    
    123
    
    
    
    146Total interest income
    
    
    12,165
    
    
    
    9,376
    
    
    
    34,512
    
    
    
    26,195Interest expense:Deposits
    
    
    6,571
    
    
    
    4,444
    
    
    
    18,087
    
    
    
    11,559Notes payable and other borrowings
    
    
    617
    
    
    
    334
    
    
    
    1,616
    
    
    
    768Junior subordinated debentures
    
    
    260
    
    
    
    238
    
    
    
    762
    
    
    
    700Total interest expense
    
    
    7,448
    
    
    
    5,016
    
    
    
    20,465
    
    
    
    13,027Net interest income
    
    
    4,717
    
    
    
    4,360
    
    
    
    14,047
    
    
    
    13,168Provision for loan and lease losses
    
    
    413
    
    
    
    53
    
    
    
    484
    
    
    
    118Net interest income after provision for loan and lease losses
    
    
    4,304
    
    
    
    4,307
    
    
    
    13,563
    
    
    
    13,050Non-interest income:Service charges on deposits
    
    
    186
    
    
    
    202
    
    
    
    563
    
    
    
    630Credit, merchant and debit card fees
    
    
    51
    
    
    
    36
    
    
    
    129
    
    
    
    117Loan fees
    
    
    181
    
    
    
    166
    
    
    
    472
    
    
    
    444Gain on sale of 50% owned joint venture
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    973Increase in cash surrender value of bank-owned life insurance
    
    
    154
    
    
    
    101
    
    
    
    452
    
    
    
    282Trust and investment services fee income
    
    
    361
    
    
    
    258
    
    
    
    1,022
    
    
    
    784Change in fair value of interest rate swaps
    
    
    (68
    )
    
    
    (198
    )
    
    
    (239
    )
    
    
    75Net cash settlement of interest rate swaps
    
    
    74
    
    
    
    (26
    )
    
    
    92
    
    
    
    (78
    )Other
    
    
    65
    
    
    
    52
    
    
    
    183
    
    
    
    148Total non-interest income
    
    
    1,004
    
    
    
    591
    
    
    
    2,674
    
    
    
    3,375Non-interest expense:Compensation
    
    
    2,508
    
    
    
    2,170
    
    
    
    7,524
    
    
    
    6,525Occupancy
    
    
    247
    
    
    
    226
    
    
    
    743
    
    
    
    715Equipment
    
    
    117
    
    
    
    109
    
    
    
    364
    
    
    
    347Data processing
    
    
    228
    
    
    
    208
    
    
    
    673
    
    
    
    603Marketing
    
    
    237
    
    
    
    233
    
    
    
    657
    
    
    
    627Professional fees
    
    
    331
    
    
    
    249
    
    
    
    913
    
    
    
    875Other
    
    
    465
    
    
    
    355
    
    
    
    1,309
    
    
    
    1,179Total non-interest expense
    
    
    4,133
    
    
    
    3,550
    
    
    
    12,183
    
    
    
    10,871Income before income tax expense
    
    
    1,175
    
    
    
    1,348
    
    
    
    4,054
    
    
    
    5,554Income tax expense
    
    
    309
    
    
    
    432
    
    
    
    1,252
    
    
    
    1,889Net income
    
    $
    866
    
    
    $
    916
    
    
    $
    2,802
    
    
    $
    3,665Earnings per share:Basic
    
    $
    0.35
    
    
    $
    0.38
    
    
    $
    1.13
    
    
    $
    1.52Diluted
    
    
    0.35
    
    
    
    0.37
    
    
    
    1.13
    
    
    
    1.49Dividends declared per share
    
    
    0.06
    
    
    
    
    
    
    
    0.18
    
    
    
    0.115
  4




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Unaudited Consolidated Statements of Changes in Stockholders Equity and Comprehensive Income
 AccumulatedAdditional
    
    
    
    
    
    
    otherCommon
    
    
    paid-in
    
    
    Retained
    
    
    comprehensive
    
    
    Treasurystock
    
    
    capital
    
    
    earnings
    
    
    loss
    
    
    stock
    
    
    Total(Dollars in thousands, except share data)Balance at December 31, 2004
    
    $
    24
    
    
    $
    22,426
    
    
    $
    16,752
    
    
    $
    (677
    )
    
    $
    (384
    )
    
    $
    38,141Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    3,665
    
    
    
    
    
    
    
    
    
    
    
    3,665Unrealized securities losses arising during the period
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (689
    )
    
    
    
    
    
    
    (689
    )Unrealized derivatives gains arising during the period
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    27
    
    
    
    
    
    
    
    27Reclassification adjustment for realized loss on derivatives
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    180
    
    
    
    
    
    
    
    180Income tax effect
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    229
    
    
    
    
    
    
    
    229Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,412Cash dividends ($0.115 per share)
    
    
    
    
    
    
    
    
    
    
    (278
    )
    
    
    
    
    
    
    
    
    
    
    (278
    )Treasury stock purchased (150 shares)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5
    )
    
    
    (5
    )Stock options exercised (6,280 shares)
    
    
    
    
    
    
    166
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    166Balance at September 30, 2005
    
    $
    24
    
    
    $
    22,592
    
    
    $
    20,139
    
    
    $
    (930
    )
    
    $
    (389
    )
    
    $
    41,436
 AccumulatedAdditional
    
    
    
    
    
    
    otherCommon
    
    
    paid-in
    
    
    Retained
    
    
    comprehensive
    
    
    Treasurystock
    
    
    capital
    
    
    earnings
    
    
    loss
    
    
    stock
    
    
    Total(Dollars in thousands, except share data)Balance at December 31, 2005
    
    $
    24
    
    
    $
    22,712
    
    
    $
    21,085
    
    
    $
    (1,469
    )
    
    $
    (509
    )
    
    $
    41,843Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    2,802
    
    
    
    
    
    
    
    
    
    
    
    2,802Unrealized securities losses arising
during the period
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (14
    )
    
    
    
    
    
    
    (14
    )Unrealized derivatives gains arising
during the period
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4
    
    
    
    
    
    
    
    4Reclassification adjustment for
realized loss on derivatives
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    86
    
    
    
    
    
    
    
    86Income tax effect
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    2Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,880Share based compensation  restricted
shares
    
    
    1
    
    
    
    117
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    118Cash dividends ($0.18 per share)
    
    
    
    
    
    
    
    
    
    
    (446
    )
    
    
    
    
    
    
    
    
    
    
    (446
    )Treasury stock purchased (869 shares)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (21
    )
    
    
    (21
    )Stock options exercised (14,314 shares)
    
    
    
    
    
    
    136
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    136Balance at September 30, 2006
    
    $
    25
    
    
    $
    22,965
    
    
    $
    23,441
    
    
    $
    (1,391
    )
    
    $
    (530
    )
    
    $
    44,510
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Unaudited Consolidated Statements of Cash Flows
 Nine Months Ended September 30,2006
    
    
    2005(In Thousands)Operating ActivitiesNet income
    
    $
    2,802
    
    
    $
    3,665Adjustments to reconcile net income to net cash
provided by operating activities:Deferred income taxes, net
    
    
    276
    
    
    
    (1,820
    )Provision for loan and lease losses
    
    
    484
    
    
    
    118Depreciation, amortization and accretion, net
    
    
    459
    
    
    
    751Share based compensation
    
    
    118
    
    
    
    Change in fair value of interest rate swaps
    
    
    239
    
    
    
    (75
    )Increase in cash surrender value of bank-owned life
insurance
    
    
    (452
    )
    
    
    (282
    )Origination of loans originated for sale
    
    
    (897
    )
    
    
    (500
    )Sale of loans originated for sale
    
    
    797
    
    
    
    637Gain on sale of loans originated for sale
    
    
    (6
    )
    
    
    (3
    )Gain on sale of 50% owned joint venture
    
    
    
    
    
    
    (973
    )(Increase) decrease in accrued interest receivable
and other assets
    
    
    (1,606
    )
    
    
    183(Decrease) increase in accrued expenses and other
liabilities
    
    
    (792
    )
    
    
    1,783Net cash provided by operating activities
    
    
    1,422
    
    
    
    3,484Investing activitiesProceeds from maturities of available-for-sale
securities
    
    
    16,630
    
    
    
    21,540Proceeds from sale of 50% owned joint venture
    
    
    
    
    
    
    2,082Purchases of available-for-sale securities
    
    
    (19,971
    )
    
    
    (50,072
    )Proceeds from sale of FHLB stock
    
    
    771
    
    
    
    (Increase) in investment in FHLB stock
    
    
    
    
    
    
    (111
    )Net increase in loans and leases
    
    
    (44,647
    )
    
    
    (31,809
    )Purchases of leasehold improvements and equipment,
net
    
    
    (195
    )
    
    
    (145
    )Net cash used in investing activities
    
    
    (47,412
    )
    
    
    (58,515
    )Financing activitiesNet increase in deposits
    
    
    37,330
    
    
    
    54,063Net increase (decrease) in FHLB line of credit
    
    
    6,993
    
    
    
    (11,256
    )Repayment of long-term borrowed funds
    
    
    (5,000
    )
    
    
    Proceeds from long-term borrowed funds
    
    
    11,000
    
    
    
    Net (decrease) increase in short-term borrowed funds
    
    
    (497
    )
    
    
    20,195Termination of interest rate swaps
    
    
    (1,384
    )
    
    
    Exercise of stock options
    
    
    136
    
    
    
    166Cash dividends
    
    
    (446
    )
    
    
    (278
    )Purchase of treasury stock
    
    
    (21
    )
    
    
    (5
    )Net cash provided by financing activities
    
    
    48,111
    
    
    
    62,885Net increase in cash and cash equivalents
    
    
    2,121
    
    
    
    7,854Cash and cash equivalents at beginning of period
    
    
    16,707
    
    
    
    8,721Cash and cash equivalents at end of period
    
    $
    18,828
    
    
    $
    16,575Supplementary cash flow informationCash paid or credited to accounts:Interest on deposits and borrowings
    
    $
    19,407
    
    
    $
    12,079Income taxes
    
    
    2,851
    
    
    
    3,142Non-cash transactions:Loans transferred to foreclosed properties
    
    
    
    
    
    
    
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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 Note 1  Principles of Consolidation.
  Note 2  Basis of Presentation.
   Recent Accounting Changes.
 Accounting for Uncertainty in Income Taxes. Accounting for Uncertainty in Income
Taxes Accounting for Income Taxes
 Fair Value Measurements. Fair Value Measurements .
 Accounting for Defined Benefit Pension and Other Postretirement Plans. , Employers Accounting for Defined Benefit Pension and Other Postretirement
Plans . Employers Accounting for
Pensions, Employers Accounting for Settlements and Curtailments of Defined
Benefit Pension Plans and for Termination Benefits Employers Accounting for
Postretirement Benefits Other Than Pensions Employers
Disclosures about Pensions and Other
 7




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Postretirement Benefits,
 Consideration of the Effects of Prior Year Misstatements on Current Year Financial Statements Considering the
Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial
Statements
 Note 3  Share Based Compensation.
 Share-Based Payment Accounting for Stock-based Compensation Accounting for Stock Issued to Employees Statement of Cash
Flows
  Equity Incentive Plans.
   8




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##### Table of Contents



Stock Options
   For the nine months endedSeptember 30,2006WeightedAverageWeighted
    
    RemainingAverage
    
    ContractualOptions
    
    Price
    
    Life (Years)Outstanding at January 1, 2006
    
    
    201,532
    
    
    $
    21.06Granted
    
    
    
    
    
    
    Exercised
    
    
    (14,314
    )
    
    
    9.50Forfeited
    
    
    (19,152
    )
    
    
    21.82Outstanding at end of period
    
    
    168,066
    
    
    $
    21.95
    
    
    
    6.8Options exercisable at
September 30, 2006
    
    
    99,086
    
    
    $
    19.79
    
    
    
    6.3
  Restricted Shares
  9




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##### Table of Contents



Number of
    
    Weighted AverageRestricted
    
    Grant-DateShares
    
    Fair ValueNonvested balance as of January
1, 2006
    
    
    
    
    
    $
    Granted
    
    
    43,475
    
    
    
    23.17Vested
    
    
    
    
    
    
    Forfeited
    
    
    (2,850
    )
    
    
    23.03Nonvested balance as of
September 30, 2006
    
    
    40,625
    
    
    $
    23.18
  Note 4  Goodwill and Other Intangible Assets.
  Nine Months EndedSeptember 30,2006
    
    
    2005(In Thousands)Balance at beginning of period
    
    $
    2,689
    
    
    $
    2,689Goodwill acquired
    
    
    
    
    
    
    Balance at end of period
    
    $
    2,689
    
    
    $
    2,689
   10




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##### Table of Contents



Nine Months EndedSeptember 30,2006
    
    
    2005(In Thousands)Core deposit intangibles:Gross carrying amount
    
    $
    145
    
    
    $
    145Accumulated amortization
    
    
    (72
    )
    
    
    (47
    )Net book value
    
    $
    73
    
    
    $
    98Additions during the year
    
    $
    
    
    
    $
    Amortization during the period
    
    
    (18
    )
    
    
    (25
    )Other intangibles:Gross carrying amount
    
    $
    120
    
    
    $
    120Accumulated amortization
    
    
    (57
    )
    
    
    (45
    )Net book value
    
    $
    63
    
    
    $
    75Additions during the year
    
    $
    
    
    
    $
    Amortization during the period
    
    
    (9
    )
    
    
    (9
    )
  CoreDeposit
    
    
    OtherIntangibles
    
    
    Intangibles
    
    
    Total(In Thousands)Nine months ended September 30, 2006
    
    $
    18
    
    
    $
    9
    
    
    $
    27Estimate for the three months ended
December 31, 2006
    
    
    5
    
    
    
    3
    
    
    
    8Estimate for the year ended December 31,2007
    
    
    18
    
    
    
    12
    
    
    
    302008
    
    
    13
    
    
    
    12
    
    
    
    252009
    
    
    10
    
    
    
    12
    
    
    
    222010
    
    
    7
    
    
    
    12
    
    
    
    19$
    48
    
    
    $
    48
    
    
    $
    96
 11




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##### Table of Contents



Note 5  Securities.
  As of September 30, 2006Gross
    
    Grossunrealized
    
    unrealizedAmortized
    
    holding
    
    holding
    
    EstimatedSecurities available-for-sale
    
    cost
    
    gains
    
    losses
    
    fair value(In Thousands)U.S. Government corporations
and agencies
    
    $
    3,255
    
    
    $
    
    
    
    $
    (53
    )
    
    $
    3,202Municipals
    
    
    185
    
    
    
    
    
    
    
    (3
    )
    
    
    182Collateralized mortgage
obligations
    
    
    93,919
    
    
    
    37
    
    
    
    (2,080
    )
    
    
    91,876$
    97,359
    
    
    $
    37
    
    
    $
    (2,136
    )
    
    $
    95,260
 As of December 31, 2005Gross
    
    Grossunrealized
    
    unrealizedAmortized
    
    holding
    
    holding
    
    EstimatedSecurities available-for-sale
    
    cost
    
    gains
    
    losses
    
    fair value(In Thousands)U.S. Government corporations
and agencies
    
    $
    3,264
    
    
    $
    
    
    
    $
    (80
    )
    
    $
    3,184Municipals
    
    
    275
    
    
    
    
    
    
    
    (3
    )
    
    
    272Collateralized mortgage
obligations
    
    
    90,601
    
    
    
    2
    
    
    
    (2,004
    )
    
    
    88,599$
    94,140
    
    
    $
    2
    
    
    $
    (2,087
    )
    
    $
    92,055
  12




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##### Table of Contents



As of September 30, 2006Less than 12 months
    
    12 months or longer
    
    TotalFair Value
    
    Unrealized loss
    
    Fair Value
    
    Unrealized loss
    
    Fair Value
    
    Unrealized loss(In Thousands)U.S. Government
corporations and
agencies
    
    $
    
    
    
    $
    
    
    
    $
    3,202
    
    
    $
    53
    
    
    $
    3,202
    
    
    $
    53Municipals
    
    
    
    
    
    
    
    
    
    
    182
    
    
    
    3
    
    
    
    182
    
    
    
    3Collateralized
mortgage
obligations
    
    
    18,629
    
    
    
    221
    
    
    
    66,860
    
    
    
    1,859
    
    
    
    85,489
    
    
    
    2,080$
    18,629
    
    
    $
    221
    
    
    $
    70,244
    
    
    $
    1,915
    
    
    $
    88,873
    
    
    $
    2,136
   Note 6  Loans and Allowance for Loan and Lease Losses.
  As of September 30,
    
    
    As of December 31,2006
    
    
    2005
    
    
    2004(In thousands)First mortgage loans:Commercial real estate
    
    $
    250,293
    
    
    $
    249,133
    
    
    $
    215,605Construction
    
    
    69,823
    
    
    
    50,619
    
    
    
    41,910Multi-family
    
    
    25,960
    
    
    
    22,115
    
    
    
    17,7861-4 family
    
    
    32,649
    
    
    
    26,513
    
    
    
    22,814378,725
    
    
    
    348,380
    
    
    
    298,115Commercial business loans
    
    
    163,226
    
    
    
    151,688
    
    
    
    136,482Direct financing leases, net
    
    
    18,899
    
    
    
    17,852
    
    
    
    25,583Second mortgage loans
    
    
    7,981
    
    
    
    8,231
    
    
    
    5,563Credit card and other
    
    
    15,573
    
    
    
    13,579
    
    
    
    10,743584,404
    
    
    
    539,730
    
    
    
    476,486Less:Allowance for loan and lease losses
    
    
    7,260
    
    
    
    6,773
    
    
    
    6,375Deferred loan fees
    
    
    160
    
    
    
    241
    
    
    
    310$
    576,984
    
    
    $
    532,716
    
    
    $
    469,801
 13




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##### Table of Contents



Nine Months Ended
    
    
    Year EndedSeptember 30,
    
    
    December 31,2006
    
    
    2005(In Thousands)Allowance at beginning of period
    
    $
    6,773
    
    
    $
    6,375Charge-offs:Mortgage
    
    
    
    
    
    
    Commercial
    
    
    
    
    
    
    Lease
    
    
    
    
    
    
    Consumer
    
    
    
    
    
    
    (10
    )Total charge-offs
    
    
    
    
    
    
    (10
    )Recoveries:Mortgage
    
    
    
    
    
    
    4Commercial
    
    
    3
    
    
    
    4Lease
    
    
    
    
    
    
    Consumer
    
    
    
    
    
    
    Total recoveries
    
    
    3
    
    
    
    8Net recoveries (charge-offs)
    
    
    3
    
    
    
    (2
    )Provision
    
    
    484
    
    
    
    400Allowance at end of period
    
    $
    7,260
    
    
    $
    6,773Allowance to gross loans and leases
    
    
    1.24
    %
    
    
    1.25
    %
 Note 7  Deposits.
  September 30,
    
    
    December 31,2006
    
    
    2005Weighted
    
    
    
    
    
    
    WeightedBalance
    
    
    Average Rate
    
    
    Balance
    
    
    Average Rate(Dollars in Thousands)Transaction accounts:Demand deposits
    
    $
    43,056
    
    
    
    0.00
    %
    
    $
    46,766
    
    
    
    0.00
    %Negotiable order of
withdrawal (NOW)
accounts
    
    
    49,524
    
    
    
    4.19
    
    
    
    46,962
    
    
    
    2.8592,580
    
    
    
    
    
    
    
    93,728Money market accounts
    
    
    155,640
    
    
    
    4.49
    
    
    
    138,442
    
    
    
    3.10Certificates of deposit
    
    
    356,574
    
    
    
    4.53
    
    
    
    335,294
    
    
    
    3.95$
    604,794
    
    
    
    
    
    
    $
    567,464
 14




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##### Table of Contents



Note 8  Borrowings.
  As of September 30,2006Weighted
    
    
    WeightedAverage
    
    
    AverageBalance
    
    
    Balance
    
    
    Rate(Dollars in Thousands)Fed funds purchased and
securities sold under agreement
to repurchase
    
    $
    21,707
    
    
    $
    12,825
    
    
    
    4.97
    %FHLB advances
    
    
    19,538
    
    
    
    17,981
    
    
    
    4.78Junior subordinated debentures
    
    
    10,310
    
    
    
    10,310
    
    
    
    9.85Line of credit
    
    
    10
    
    
    
    4,126
    
    
    
    6.88Subordinated note payable
    
    
    11,000
    
    
    
    5,044
    
    
    
    7.40$
    62,565
    
    
    $
    50,286
    
    
    
    6.31
    %Short-term borrowings
    
    $
    21,726Long-term borrowings (due
beyond one year)
    
    
    40,839$
    62,565
 As of December 31,2005Weighted
    
    
    WeightedAverage
    
    
    AverageBalance
    
    
    Balance
    
    
    Rate(Dollars in Thousands)Fed funds purchased and
securities sold under agreement
to repurchase
    
    $
    19,463
    
    
    $
    9,021
    
    
    
    3.45
    %FHLB advances
    
    
    12,545
    
    
    
    11,427
    
    
    
    3.67Junior subordinated debentures
    
    
    10,310
    
    
    
    10,310
    
    
    
    9.18Line of credit
    
    
    2,750
    
    
    
    2,338
    
    
    
    5.39Subordinated note payable
    
    
    5,000
    
    
    
    5,000
    
    
    
    5.75$
    50,068
    
    
    $
    38,096
    
    
    
    5.49
    %Short-term borrowings
    
    $
    22,222Long-term borrowings (due
beyond one year)
    
    
    27,846$
    50,068
 15




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##### Table of Contents



Note 9  Derivative and Hedging Activities.
    As of September 30,
    
    
    As of December 31,2006
    
    
    2005(In thousands)Notional
    
    
    Maturity
    
    Fixed
    
    
    Variable
    
    
    Notional
    
    
    Maturity
    
    Fixed
    
    
    VariableAmount
    
    
    Date
    
    Rate
    
    
    Rate
    
    
    Amount
    
    
    Date
    
    Rate
    
    
    RateCash Flow Hedge:Pay-fixed interest
rate swap
    
    $
    660
    
    
    April, 2009
    
    
    5.24
    %
    
    
    5.04
    %
    
    $
    789
    
    
    April, 2009
    
    
    5.24
    %
    
    
    3.97
    %Other Derivatives:Pay-fixed interest
rate swap
    
    
    10,000
    
    
    October, 2006
    
    
    3.94
    
    
    
    5.03
    
    
    
    10,000
    
    
    October, 2006
    
    
    3.94
    
    
    
    4.08Pay-fixed interest
rate swap
    
    
    10,000
    
    
    November, 2006
    
    
    3.75
    
    
    
    5.03
    
    
    
    10,000
    
    
    November, 2006
    
    
    3.75
    
    
    
    4.12Pay-fixed interest
rate swap
    
    
    10,000
    
    
    December, 2006
    
    
    4.94
    
    
    
    5.39
    
    
    
    10,000
    
    
    December, 2006
    
    
    4.94
    
    
    
    4.50Callable
receive-fixed
interest rate swap
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,000
    
    
    January, 2010
    
    
    4.25
    
    
    
    4.44Callable
receive-fixed
interest rate swap
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,000
    
    
    February, 2010
    
    
    4.35
    
    
    
    4.39Callable
receive-fixed
interest rate swap
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,000
    
    
    February, 2010
    
    
    4.10
    
    
    
    4.42Callable
receive-fixed
interest rate swap
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,000
    
    
    November, 2010
    
    
    4.00
    
    
    
    4.41Pay-fixed interest
rate swap
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,742
    
    
    June, 2011
    
    
    5.49
    
    
    
    4.20$
    30,660
    
    
    
    
    
    
    
    
    
    
    
    
    $
    75,531
  16




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##### Table of Contents



Note 10  Earnings Per Share.
  Three Months Ended September 30,2006
    
    
    2005Numerator:Net income
    
    $
    866,302
    
    
    $
    916,404Numerator for basic and diluted
earnings per share  income
available to common stockholders
    
    
    866,302
    
    
    
    916,404Denominator:Denominator for basic earnings per
shareweighted-average common
shares outstanding
    
    
    2,480,023
    
    
    
    2,423,847Effect of dilutive securities:Employee stock options
    
    
    13,232
    
    
    
    41,357Denominator for diluted earnings per
shareadjusted weighted-average
common shares and assumed conversions
    
    
    2,493,255
    
    
    
    2,465,204Basic earnings per share
    
    $
    0.35
    
    
    $
    0.38Diluted earnings per share
    
    
    0.35
    
    
    
    0.37
 17




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##### Table of Contents



Nine Months Ended September 30,2006
    
    
    2005Numerator:
    
    $
    2,801,980
    
    
    $
    3,664,539Net incomeNumerator for basic and diluted
earnings per share  income
available to common stockholders
    
    $
    2,801,980
    
    
    $
    3,664,539Denominator:Denominator for basic earnings per
shareweighted-average common
shares outstanding
    
    
    2,471,825
    
    
    
    2,418,679Effect of dilutive securities:Employee stock options
    
    
    16,765
    
    
    
    45,190Denominator for diluted earnings per
shareadjusted weighted-average
common shares and assumed conversions
    
    
    2,488,590
    
    
    
    2,463,869Basic earnings per share
    
    $
    1.13
    
    
    $
    1.52Diluted earnings per share
    
    
    1.13
    
    
    
    1.49
 
 Item 2.  Managements Discussion and Analysis of Financial Condition and Results of Operations
 Cautionary Factors
 Item 1a. Risk Factors
 18




---



##### Table of Contents



Overview
   Recent Developments/Financial Highlights
 
    
    Net income for the three and nine months ended September 30, 2006 decreased $50,000 and
$863,000 over the comparable prior year periods due to higher compensation expense as the
Corporation continues to hire additional business development staff in order to increase
loan and lease receivables, greater provision for loan and lease losses primarily due to
the growth in the loan and lease portfolio accompanied by no significant changes in the
risk profile of the loan and lease portfolio and the nine month period ended September 30,
2005 included a $973,000 pre-tax gain on the sale of the 50% owned joined venture
    
    Net loans and leases receivable increased 8.3% from December 31, 2005 to $577 million
at September 31, 2006
    
    Deposits increased 6.6% to $605 million
 
 Results of Operations
 Comparison of Three and Nine Months Ended September 30, 2006 and 2005
 General.
 19




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##### Table of Contents



Net Interest Income.
     20




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##### Table of Contents



Provision for Loan and Lease Losses.
 21




---



##### Table of Contents



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




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##### Table of Contents



Three Months Ended September 30,2006
    
    
    2005Average
    
    
    
    
    
    
    
    
    
    
    AverageAverage
    
    
    
    
    
    
    Yield/
    
    
    Average
    
    
    
    
    
    
    Yield/Balance
    
    
    Interest
    
    
    Cost
    
    
    Balance
    
    
    Interest
    
    
    Cost(Dollars in Thousands)Interest-Earning AssetsMortgage loans (1)
    
    $
    376,230
    
    
    $
    6,891
    
    
    
    7.33
    %
    
    $
    335,733
    
    
    $
    5,406
    
    
    
    6.44
    %Commercial loans
    
    
    167,696
    
    
    
    3,847
    
    
    
    9.18
    
    
    
    144,439
    
    
    
    2,797
    
    
    
    7.75Leases
    
    
    17,818
    
    
    
    314
    
    
    
    7.05
    
    
    
    20,172
    
    
    
    270
    
    
    
    5.35Consumer loans
    
    
    2,740
    
    
    
    45
    
    
    
    6.57
    
    
    
    2,683
    
    
    
    41
    
    
    
    6.11Total loans and leases receivable (1)
    
    
    564,484
    
    
    
    11,097
    
    
    
    7.86
    
    
    
    503,027
    
    
    
    8,514
    
    
    
    6.77Mortgage-related securities (2)
    
    
    92,487
    
    
    
    997
    
    
    
    4.31
    
    
    
    84,847
    
    
    
    791
    
    
    
    3.73Investment securities (2)
    
    
    3,409
    
    
    
    28
    
    
    
    3.29
    
    
    
    3,436
    
    
    
    28
    
    
    
    3.26Federal Home Loan Bank stock
    
    
    2,127
    
    
    
    22
    
    
    
    4.14
    
    
    
    2,848
    
    
    
    35
    
    
    
    4.92Fed funds sold and other
    
    
    
    
    
    
    
    
    
    
    0.00
    
    
    
    107
    
    
    
    1
    
    
    
    3.74Short-term investments
    
    
    1,755
    
    
    
    21
    
    
    
    4.79
    
    
    
    944
    
    
    
    7
    
    
    
    2.97Total interest-earning assets
    
    
    664,262
    
    
    
    12,165
    
    
    
    7.33
    
    
    
    595,209
    
    
    
    9,376
    
    
    
    6.30Non-interest-earning assets
    
    
    30,807
    
    
    
    
    
    
    
    
    
    
    
    22,357Total assets
    
    $
    695,069
    
    
    
    
    
    
    
    
    
    
    $
    617,566Interest-Bearing LiabilitiesNOW accounts
    
    $
    48,755
    
    
    $
    543
    
    
    
    4.45
    %
    
    $
    47,647
    
    
    $
    368
    
    
    
    3.09
    %Money market
    
    
    155,794
    
    
    
    1,871
    
    
    
    4.80
    
    
    
    117,444
    
    
    
    959
    
    
    
    3.27Certificates  regular
    
    
    303,267
    
    
    
    3,635
    
    
    
    4.79
    
    
    
    278,691
    
    
    
    2,737
    
    
    
    3.93Certificates  large
    
    
    42,095
    
    
    
    522
    
    
    
    4.96
    
    
    
    44,198
    
    
    
    380
    
    
    
    3.44Total deposits
    
    
    549,911
    
    
    
    6,571
    
    
    
    4.78
    
    
    
    487,980
    
    
    
    4,444
    
    
    
    3.64Junior subordinated debentures
    
    
    10,310
    
    
    
    260
    
    
    
    10.09
    
    
    
    10,310
    
    
    
    238
    
    
    
    9.23FHLB advances
    
    
    19,605
    
    
    
    238
    
    
    
    4.86
    
    
    
    9,811
    
    
    
    108
    
    
    
    4.40Other borrowings
    
    
    23,816
    
    
    
    379
    
    
    
    6.37
    
    
    
    20,328
    
    
    
    226
    
    
    
    4.45Total interest-bearing liabilities
    
    
    603,642
    
    
    
    7,448
    
    
    
    4.94
    
    
    
    528,429
    
    
    
    5,016
    
    
    
    3.80Non-interest-bearing liabilities
    
    
    47,944
    
    
    
    
    
    
    
    
    
    
    
    48,429Total liabilities
    
    
    651,586
    
    
    
    
    
    
    
    
    
    
    
    576,858Stockholders equity
    
    
    43,483
    
    
    
    
    
    
    
    
    
    
    
    40,708Total liabilities and
Stockholders equity
    
    $
    695,069
    
    
    
    
    
    
    
    
    
    
    $
    617,566Net interest income/interest
rate spread
    
    
    
    
    
    $
    4,717
    
    
    
    2.39
    %
    
    
    
    
    
    $
    4,360
    
    
    
    2.50
    %Net interest-earning assets
    
    $
    60,620
    
    
    
    
    
    
    
    
    
    
    $
    66,780Net interest margin
    
    
    
    
    
    
    
    
    
    
    2.84
    %
    
    
    
    
    
    
    
    
    
    
    2.93
    %Ratio of average interest-earning
assets to average interest-earning liabilities
    
    
    1.10
    
    
    
    
    
    
    
    
    
    
    
    1.13Return on average assets
    
    
    0.50
    %
    
    
    
    
    
    
    
    
    
    
    0.59
    %Return on average equity
    
    
    7.97
    %
    
    
    
    
    
    
    
    
    
    
    9.00
    %Average equity to average assets
    
    
    6.26
    %
    
    
    
    
    
    
    
    
    
    
    6.59
    %Non-interest expense to average assets
    
    
    2.38
    %
    
    
    
    
    
    
    
    
    
    
    2.36
    %
 
 (1)
    
    The average balances of loans and leases include non-performing loans and leases, interest of which is generally recognized on a cash
basis.(2)
    
    Includes amortized cost basis of assets held and available for sale. 23




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##### Table of Contents



Nine Months Ended September 30,2006
    
    
    2005Average
    
    
    
    
    
    
    
    
    
    
    AverageAverage
    
    
    
    
    
    
    Yield/
    
    
    Average
    
    
    
    
    
    
    Yield/Balance
    
    
    Interest
    
    
    Cost
    
    
    Balance
    
    
    Interest
    
    
    Cost(Dollars in Thousands)Interest-Earning AssetsMortgage loans (1)
    
    $
    364,253
    
    
    $
    19,353
    
    
    
    7.08
    %
    
    $
    324,443
    
    
    $
    14,891
    
    
    
    6.12
    %Commercial loans
    
    
    162,372
    
    
    
    10,944
    
    
    
    8.99
    
    
    
    140,197
    
    
    
    7,861
    
    
    
    7.48Leases
    
    
    18,230
    
    
    
    979
    
    
    
    7.16
    
    
    
    22,605
    
    
    
    900
    
    
    
    5.31Consumer loans
    
    
    2,793
    
    
    
    139
    
    
    
    6.64
    
    
    
    2,692
    
    
    
    116
    
    
    
    5.75Total loans and leases receivable (1)
    
    
    547,648
    
    
    
    31,415
    
    
    
    7.65
    
    
    
    489,937
    
    
    
    23,768
    
    
    
    6.47Mortgage-related securities (2)
    
    
    91,749
    
    
    
    2,888
    
    
    
    4.20
    
    
    
    80,590
    
    
    
    2,201
    
    
    
    3.64Investment securities (2)
    
    
    3,439
    
    
    
    85
    
    
    
    3.30
    
    
    
    3,443
    
    
    
    80
    
    
    
    3.10Federal Home Loan Bank stock
    
    
    2,607
    
    
    
    66
    
    
    
    3.38
    
    
    
    2,813
    
    
    
    111
    
    
    
    5.26Fed funds sold and other
    
    
    44
    
    
    
    2
    
    
    
    6.06
    
    
    
    1,084
    
    
    
    17
    
    
    
    2.09Short-term investments
    
    
    1,696
    
    
    
    56
    
    
    
    4.40
    
    
    
    974
    
    
    
    18
    
    
    
    2.46Total interest-earning assets
    
    
    647,183
    
    
    
    34,512
    
    
    
    7.11
    
    
    
    578,841
    
    
    
    26,195
    
    
    
    6.03Non-interest-earning assets
    
    
    31,043
    
    
    
    
    
    
    
    
    
    
    
    22,029Total assets
    
    $
    678,226
    
    
    
    
    
    
    
    
    
    
    $
    600,870Interest-Bearing LiabilitiesNOW accounts
    
    $
    50,442
    
    
    $
    1,586
    
    
    
    4.19
    %
    
    $
    50,275
    
    
    $
    1,000
    
    
    
    2.65
    %Money market
    
    
    147,989
    
    
    
    4,982
    
    
    
    4.49
    
    
    
    107,017
    
    
    
    2,272
    
    
    
    2.83Certificates  regular
    
    
    295,057
    
    
    
    10,020
    
    
    
    4.53
    
    
    
    275,007
    
    
    
    7,339
    
    
    
    3.56Certificates  large
    
    
    43,863
    
    
    
    1,499
    
    
    
    4.56
    
    
    
    42,488
    
    
    
    948
    
    
    
    2.97Total deposits
    
    
    537,351
    
    
    
    18,087
    
    
    
    4.49
    
    
    
    474,787
    
    
    
    11,559
    
    
    
    3.25Junior subordinated debentures
    
    
    10,310
    
    
    
    762
    
    
    
    9.85
    
    
    
    10,310
    
    
    
    700
    
    
    
    9.05FHLB advances
    
    
    17,981
    
    
    
    645
    
    
    
    4.78
    
    
    
    11,044
    
    
    
    271
    
    
    
    3.27Other borrowings
    
    
    21,994
    
    
    
    971
    
    
    
    5.89
    
    
    
    15,739
    
    
    
    497
    
    
    
    4.21Total interest-bearing liabilities
    
    
    587,636
    
    
    
    20,465
    
    
    
    4.64
    
    
    
    511,880
    
    
    
    13,027
    
    
    
    3.39Non-interest-bearing liabilities
    
    
    47,841
    
    
    
    
    
    
    
    
    
    
    
    49,771Total liabilities
    
    
    635,477
    
    
    
    
    
    
    
    
    
    
    
    561,651Stockholders equity
    
    
    42,749
    
    
    
    
    
    
    
    
    
    
    
    39,219Total liabilities andStockholders equity
    
    $
    678,226
    
    
    
    
    
    
    
    
    
    
    $
    600,870Net interest income/interest
rate spread
    
    
    
    
    
    $
    14,047
    
    
    
    2.47
    %
    
    
    
    
    
    $
    13,168
    
    
    
    2.64
    %Net interest-earning assets
    
    $
    59,547
    
    
    
    
    
    
    
    
    
    
    $
    66,961Net interest margin
    
    
    
    
    
    
    
    
    
    
    2.89
    %
    
    
    
    
    
    
    
    
    
    
    3.03
    %Ratio of average interest-earning
assets to average interest-earning liabilities
    
    
    1.10
    
    
    
    
    
    
    
    
    
    
    
    1.13Return on average assets
    
    
    0.55
    %
    
    
    
    
    
    
    
    
    
    
    0.81
    %Return on average equity
    
    
    8.74
    %
    
    
    
    
    
    
    
    
    
    
    12.46
    %Average equity to average assets
    
    
    6.30
    %
    
    
    
    
    
    
    
    
    
    
    6.53
    %Non-interest expense to average assets
    
    
    2.40
    %
    
    
    
    
    
    
    
    
    
    
    2.49
    %
 
 (1)
    
    The average balances of loans and leases include non-performing loans and leases, interest of which is generally recognized on a cash basis.(2)
    
    Includes amortized cost basis of assets held and available for sale. 24




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##### Table of Contents



Financial Condition
 General.
 Securities.
 Loans and Leases Receivable.
 Investment in FHLB stock.
 Deposits.
 Borrowings.
 Stockholders Equity. . Note 3
 25




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##### Table of Contents



Asset Quality
 Non-performing Assets.
  At September 30,
    
    
    At December 31,2006
    
    
    2005(Dollars in Thousands)Non-accrual loans
    
    $
    1,332
    
    
    $
    1,454Non-accrual leases
    
    
    
    
    
    
    90Total non-accrual loans and leases
    
    
    1,332
    
    
    
    1,544Foreclosed properties and repossessed
assets, net
    
    
    
    
    
    
    Total non-performing assets
    
    $
    1,332
    
    
    $
    1,544Performing troubled debt restructurings
    
    $
    
    
    
    $
    Total non-accrual loans and leases to total
loans and leases
    
    
    0.23
    %
    
    
    0.29
    %Total non-performing assets to total assets
    
    
    0.19
    
    
    
    0.23Allowance for loan and lease losses to
total loans and leases
    
    
    1.24
    
    
    
    1.25Allowance for loan and lease losses to
non-accrual loans and leases
    
    
    544.87
    
    
    
    438.64
 26




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##### Table of Contents



September 30,
    
    
    December 31,2006
    
    
    2005(In Thousands)Impaired loans and leases
    
    $
    655
    
    
    $
    811Impaired loans and leases with impairment
reserves required
    
    
    677
    
    
    
    733Less:Impairment reserve
(included in allowance for loan and lease losses)
    
    
    428
    
    
    
    399Net impaired loans and leases
    
    $
    904
    
    
    $
    1,145Average impaired loans and leases
    
    $
    1,440
    
    
    $
    1,790Interest income attibutable to impaired loans and
leases
    
    
    104
    
    
    
    177Interest income recognized on
impaired loans and leases
    
    
    72
    
    
    
    65
   Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(Dollars in Thousands)Allowance at beginning of period
    
    $
    6,846
    
    
    $
    6,437
    
    
    $
    6,773
    
    
    $
    6,375Charge-offs:MortgageCommercial
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Lease
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Consumer
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9
    )Total charge-offs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9
    )Recoveries:Mortgage
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1Commercial
    
    
    1
    
    
    
    1
    
    
    
    3
    
    
    
    6Lease
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Consumer
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total recoveries
    
    
    1
    
    
    
    1
    
    
    
    3
    
    
    
    7Net recoveries (charge-offs)
    
    
    1
    
    
    
    1
    
    
    
    3
    
    
    
    (2
    )Provision
    
    
    413
    
    
    
    53
    
    
    
    484
    
    
    
    118Allowance at end of period
    
    $
    7,260
    
    
    $
    6,491
    
    
    $
    7,260
    
    
    $
    6,491Allowance to gross loans and leases
    
    
    1.24
    %
    
    
    1.28
    %
    
    
    1.24
    %
    
    
    1.28
    %
 27




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##### Table of Contents



Liquidity and Capital Resources
       28




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##### Table of Contents



Minimum RequiredMinimum Required
    
    to be Wellfor Capital
    
    Capitalized UnderActual
    
    Adequacy Purposes
    
    FDIC RequirementsAmount
    
    Ratio
    
    Amount
    
    Ratio
    
    Amount
    
    Ratio(Dollars in Thousands)As of September 30, 2006:Total
capital(to risk-weighted assets)Consolidated
    
    $
    71,336
    
    
    
    10.93
    %
    
    $
    52,219
    
    
    
    8.00
    %
    
    
    N/A
    
    
    
    N/AFirst Business Bank
    
    
    60,130
    
    
    
    10.70
    
    
    
    44,972
    
    
    
    8.00
    
    
    $
    56,215
    
    
    
    10.00
    %First Business Bank 
Milwaukee
    
    
    10,158
    
    
    
    11.40
    
    
    
    7,127
    
    
    
    8.00
    
    
    
    8,909
    
    
    
    10.00Tier 1
capital(to risk-weighted assets)Consolidated
    
    $
    53,076
    
    
    
    8.13
    %
    
    $
    26,109
    
    
    
    4.00
    %
    
    
    N/A
    
    
    
    N/AFirst Business Bank
    
    
    54,135
    
    
    
    9.63
    
    
    
    22,486
    
    
    
    4.00
    
    
    $
    33,729
    
    
    
    6.00
    %First Business Bank 
Milwaukee
    
    
    9,043
    
    
    
    10.15
    
    
    
    3,564
    
    
    
    4.00
    
    
    
    5,345
    
    
    
    6.00Tier 1 capital(to average assets)Consolidated
    
    $
    53,076
    
    
    
    7.64
    %
    
    $
    27,801
    
    
    
    4.00
    %
    
    
    N/A
    
    
    
    N/AFirst Business Bank
    
    
    54,135
    
    
    
    9.13
    
    
    
    23,708
    
    
    
    4.00
    
    
    $
    29,635
    
    
    
    5.00
    %First Business Bank 
Milwaukee
    
    
    9,043
    
    
    
    8.59
    
    
    
    4,212
    
    
    
    4.00
    
    
    
    5,265
    
    
    
    5.00
 29




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##### Table of Contents



Minimum RequiredMinimum Required
    
    to be Wellfor Capital
    
    Capitalized UnderActual
    
    Adequacy Purposes
    
    FDIC RequirementsAmount
    
    Ratio
    
    Amount
    
    Ratio
    
    Amount
    
    Ratio(Dollars in Thousands)As of December 31, 2005:Total
capital(to risk-weighted assets)Consolidated
    
    $
    62,234
    
    
    
    10.43
    %
    
    $
    47,748
    
    
    
    8.00
    %
    
    
    N/A
    
    
    
    N/AFirst Business Bank
    
    
    55,240
    
    
    
    10.88
    
    
    
    40,610
    
    
    
    8.00
    
    
    $
    50,763
    
    
    
    10.00
    %First Business Bank  Milwaukee
    
    
    9,009
    
    
    
    10.32
    
    
    
    6,981
    
    
    
    8.00
    
    
    
    8,727
    
    
    
    10.00Tier 1
capital(to risk-weighted assets)Consolidated
    
    $
    50,461
    
    
    
    8.45
    %
    
    $
    23,874
    
    
    
    4.00
    %
    
    
    N/A
    
    
    
    N/AFirst Business Bank
    
    
    49,713
    
    
    
    9.79
    
    
    
    20,305
    
    
    
    4.00
    
    
    $
    30,458
    
    
    
    6.00
    %First Business Bank  Milwaukee
    
    
    7,917
    
    
    
    9.07
    
    
    
    3,491
    
    
    
    4.00
    
    
    
    5,236
    
    
    
    6.00Tier 1
capital(to average assets)Consolidated
    
    $
    50,461
    
    
    
    7.92
    %
    
    $
    25,486
    
    
    
    4.00
    %
    
    
    N/A
    
    
    
    N/AFirst Business Bank
    
    
    49,713
    
    
    
    9.14
    
    
    
    21,746
    
    
    
    4.00
    
    
    $
    27,182
    
    
    
    5.00
    %First Business Bank  Milwaukee
    
    
    7,917
    
    
    
    8.21
    
    
    
    3,858
    
    
    
    4.00
    
    
    
    4,823
    
    
    
    5.00
 Contractual Obligations
  Payment Due by PeriodLess than
    
    
    
    
    
    
    
    
    
    
    More thanContractual Obligations
    
    Total
    
    
    1 Year
    
    
    1-3 Years
    
    
    4-5 Years
    
    
    5 Years(Dollars in Thousands)Operating lease obligations
    
    $
    4,973
    
    
    $
    577
    
    
    $
    1,139
    
    
    $
    1,066
    
    
    $
    2,191Fed funds purchased and securities sold
under repurchase agreements
    
    
    21,706
    
    
    
    21,706
    
    
    
    
    
    
    
    
    
    
    
    Time deposits
    
    
    356,574
    
    
    
    129,681
    
    
    
    138,805
    
    
    
    80,206
    
    
    
    7,882Line of Credit
    
    
    10
    
    
    
    10
    
    
    
    
    
    
    
    
    
    
    
    Subordinated debt
    
    
    11,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,000Junior subordinated debentures
    
    
    10,310
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,310FHLB advances
    
    
    19,538
    
    
    
    9
    
    
    
    6,021
    
    
    
    13,023
    
    
    
    485Total contractual obligations
    
    $
    424,111
    
    
    $
    151,983
    
    
    $
    145,965
    
    
    $
    94,295
    
    
    $
    31,868
 30




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##### Table of Contents



Off-balance Sheet Arrangements
  
 Item 3.  Quantitative and Qualitative Disclosures about Market Risk
      31




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##### Table of Contents



Item 4.  Controls and Procedures
   32




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##### Table of Contents



Part II. Other Information
 
 Item 1.  Legal Proceedings
  
 Item 1A. Risk Factors
  
 Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds
 (a)
    
    The following transactions occurred during the quarter ended September 30,
2006 pursuant to the 1993 Equity Incentive Plan. On July 26, 2006, 4,620 shares of
FBFS common stock were sold for $41,995.80. On July 28, 2006, 416 shares of FBFS
common stock were sold for $3,781.44. Those transactions were entered into pursuant to
the exemption provided in Rule 701.(b)
    
    None.(c)
    
    Issuer Purchases of Equity Securities
 Total Number
    
    MaximumOf Shares
    
    Number thatPurchased as
    
    May Yet BeTotal Number
    
    Average
    
    Part of Publicly
    
    PurchasedOf Shares
    
    Price Paid
    
    Announced
    
    Under thePeriod
    
    Purchased
    
    Per Share
    
    Plans or Programs
    
    Plans or ProgramsJuly 1 - 31, 2006
    
    
    157
    
    
    $
    24.00
    
    
    None
    
    NoneAugust 1 - 31, 2006
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    September 1 - 30,
2006
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 
 Item 3.  Defaults Upon Senior Securities
  
 Item 4.  Submission of Matters to a Vote of Security Holders
  
 Item 5.  Other Information.
  
 Item 6.  Exhibits.
     33




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##### Table of Contents



Signatures
  FIRST BUSINESS FINANCIAL SERVICES, INC.By: /s/ Jerome J. Smith

Jerome J. SmithChairman of the Board and Chief Executive OfficerNovember 2, 2006
 34