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  **UNITED STATES SECURITIES AND EXCHANGE COMMISSION****WASHINGTON, D.C. 20549****FORM 10-K****(Mark One)**   þ **ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934****For the fiscal year ended December 31, 2009**   o **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934****For the transition period from                      to                     ****Commission file number 001-34095****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)Registrant’s telephone number, including area code (608) 238-8008Securities registered pursuant to Section 12(b) of the Act:   Title of Each Class Name of each exchange on which registeredCommon Stock, $0.01 par value NASDAQ Stock ExchangeCommon Share Purchase Rights NASDAQ Stock ExchangeSecurities registered pursuant to section 12(g) of the Act**None**Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule405 of the Securities Act.Yes o No þIndicate by check mark if the registrant is not required to file reports pursuant to Section 13 or15(d) of the Act.Yes o No þIndicate by check mark whether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or forsuch 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 has submitted electronically and posted on itscorporate website, if any, every Interactive Data File required to be submitted and posted pursuantto Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that theregistrant was required to submit and post such files.)Yes o No oIndicate by check mark if the disclosure of delinquent filers pursuant to Item 405 of RegulationS-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, indefinitive proxy or information statements incorporated by reference in Part III of this From 10-Kor any amendment to this Form 10-K. oIndicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company. See the definitions of “large acceleratedfiler,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.(Check one):       Large accelerated filer o Accelerated filer o Non-accelerated filer o Smaller reporting company þ    (Do not check if a smaller reporting company)  Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of theAct).Yes o No þThe aggregate market value of the common equity held by non-affiliates computed by reference to theclosing price of such common equity, as of the last business day of the registrant’s most recentlycompleted second fiscal quarter was approximately $27.8 million.As of March 4, 2010, 2,540,141 shares of common stock were outstanding.**DOCUMENTS INCORPORATED BY REFERENCE**Part III – Portions of the Proxy Statement for the Annual Meeting of Stockholders to be held on May17, 2010 are incorporated by reference into Part III hereof.  
 
 

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**Table of Contents**     PART I  4      Item 1. Business  4      Item 1A. Risk Factors  13      Item 1B. Unresolved Staff Comments  18      Item 2. Properties  18      Item 3. Legal Proceedings  19      Item 4. Reserved  19      PART II  19      Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and IssuerPurchases of Equity Securities  19      Item 6. Selected Consolidated Financial Data  21      Item 7. Management’s Discussion and Analysis of Financial Condition and Results ofOperations  22      Item 7A. Quantitative and Qualitative Disclosures about Market Risk  53      Item 8. Financial Statements and Supplementary Data  56      Item 9. Changes in and Disagreements with Accountants on Accounting and FinancialDisclosure  104      Item 9A(T). Controls and Procedures  104      Item 9B. Other Information  104      PART III  105      Item 10. Directors, Executive Officers and Corporate Governance  105      Item 11. Executive Compensation  105      Item 12. Security Ownership of Certain Beneficial Owners and Management and RelatedStockholder Matters  105      Item 13. Certain Relationships and Related Transactions, and Director Independence  105      Item 14. Principal Accountant Fees and Services  105      PART IV  105      Item 15. Exhibits, Financial Statements Schedules  105      Signatures  106       Exhibit 23 Exhibit 31.1 Exhibit 31.2 Exhibit 32
 
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**PARTI.****Item 1.** **Business****General**First Business Financial Services, Inc. (FBFS or the Corporation) is a registered bank holdingcompany incorporated under the laws of the State of Wisconsin and is engaged in the commercialbanking business through its wholly-owned banking subsidiaries First Business Bank and FirstBusiness Bank – Milwaukee (referred to as “the Banks”). All of the operations of FBFS areconducted through the Banks and certain subsidiaries of First Business Bank. The Banks operate asbusiness banks focusing on delivering a full line of commercial banking products and servicestailored to meet the specific needs of small and medium-sized businesses, business owners,executives, professionals and high net worth individuals. The Banks do not utilize a branchnetwork to attract retail clients. The Banks generally target businesses with sales between $2million and $50 million. For a more detailed discussion of loans, leases and the underwritingcriteria of the Banks, see **Item 7, Management’s Discussion and Analysis of Financial Condition andResults of Operations – Loans and Leases.**To supplement its business banking deposit base, theBanks utilize wholesale funding alternatives to fund a portion of their assets.First Business Bank (FBB) is a state bank that was chartered in 1909 under the name Kingston StateBank. In 1990, FBB relocated its home office to Madison, Wisconsin, opened a banking facility inUniversity Research Park, and began focusing on providing high-quality banking services to smalland medium-sized businesses located in Madison, Wisconsin and the surrounding area. FBB’s productlines include commercial and consumer treasury management services, commercial lending, commercialreal estate lending, equipment financing and a variety of deposit accounts and personal loans tobusiness owners, executives and high net worth individuals. FBB also offers trust and investmentservices through First Business Trust & Investments (FBTI), a division of FBB. FBB has three loanproduction offices in the Northeast Region of Wisconsin to serve Appleton, Wisconsin, Oshkosh,Wisconsin and Green Bay, Wisconsin and their surrounding areas.FBB has four wholly-owned subsidiaries. First Business Capital Corp. (FBCC) operates as anasset-based commercial lending company specializing in providing secured lines of credit as well asterm loans on equipment and real estate assets primarily to manufacturers and wholesaledistribution companies located throughout the United States. First Business Equipment Finance, LLC(FBEF) operates as a commercial equipment finance company specializing in financing of generalequipment to small and middle market companies. First Business Real Estate LLC (FBBRE) is a limitedliability company established for the purpose of holding and liquidating real estate and otherassets acquired through foreclosure or other legal proceedings. First Madison Investment Corp.(FMIC) is located in and formed under the laws of the state of Nevada. FMIC was organized for thepurpose of managing a portion of the Bank’s investment portfolio. FMIC invests in marketablesecurities and loans purchased from FBB. FBB also has one indirect subsidiary, First MadisonCapital Corp Nevada Corp (FMCCNC), a wholly-owned subsidiary of FBCC located in and formed underthe laws of the state of Nevada, organized for the purpose of investing in loans purchased fromFBCC.First Business Bank – Milwaukee (FBB – Milwaukee) is a state bank that was chartered in 2000 inWisconsin. Like FBB, FBB – Milwaukee’s product lines include commercial and consumer treasurymanagement services, commercial lending and commercial real estate lending for similar sizedbusinesses as FBB. FBB – Milwaukee also offers trust and investment services through a trustservice office agreement with FBB. FBB – Milwaukee offers business owners, executives,professionals and high net worth individuals, consumer services which include a variety of depositaccounts and personal loans. FBB – Milwaukee has one wholly owned subsidiary, First Business –Milwaukee Real Estate LLC (FBBMRE). FBBMRE is a limited liability company established for thepurpose of holding and liquidating real estate and other assets acquired through foreclosure orother legal proceedings.
 
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In September 2008, FBFS formed FBFS Statutory Trust II, (Trust II), a Delaware business trustwholly owned by the Corporation. In 2008, Trust II completed the sale of $10.0 million of 10.5%fixed rate trust preferred securities. Trust II also issued common securities in the amount of$315,000 to the Corporation. Trust II used the proceeds from the offering to purchase $10.3million of 10.5% junior subordinated notes (the Notes) of the Corporation. The Corporation has theright to redeem the Notes at any time on or after September 26, 2013. The preferred securities aremandatorily redeemable upon the maturity of the Notes on September 26, 2038. See **Note 10**to theConsolidated Financial Statements for additional information.**Available Information**The Corporation maintains a web site at www.firstbusiness.com. This Form 10-K and all ofthe Corporation’s filings under the Securities Exchange Act of 1934, as amended, including theCorporation’s proxy statement, are available through that web site, free of charge, includingcopies of annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-Kand any amendments to those reports, on the date that the Corporation files those materials with,or furnishes them to, the Securities and Exchange Commission (SEC). These filings are alsoavailable to the public on the internet at the SEC’s website atwww.sec.gov. Shareholders may alsoread and copy any document that we file at the SEC’s public reference rooms located at 100 FStreet, NE, Washington, DC 20549. Shareholders may call the SEC at 1-800-SEC-0300 for furtherinformation on the public reference room.**Employees**At December 31, 2009, FBFS had 137 employees which equates to 121.5 full-time equivalent employees.No employee is covered by a collective bargaining agreement, and we believe our relationship withour employees to be very good.**Competition**The Banks encounter strong competition in attracting commercial loan, equipment finance and depositclients as well as trust and investment clients. Such competition includes banks, savingsinstitutions, mortgage banking companies, credit unions, finance companies, equipment financecompanies, mutual funds, insurance companies, brokerage firms and investment banking firms. TheBanks’ market areas include branches of several commercial banks that are substantially larger interms of loans and deposits. Furthermore, tax exempt credit unions operate in most of the Banks’market areas and aggressively price their products and services to a large portion of the market.The Banks also compete with regional and national financial institutions, many of which havegreater liquidity, higher lending limits, greater access to capital, more established marketrecognition and more resources and collective experience than the Banks. Our profitability dependsupon the Banks’ ability to successfully maintain and increase market share.**Supervision and Regulation**Below is a brief description of certain laws and regulations that relate to the Corporation and theBanks. This narrative does not purport to be complete and is qualified in its entirety byreference to applicable laws and regulations.***General***The Banks are chartered in the State of Wisconsin and are subject to regulation and supervision bythe Division of Banking of the Wisconsin Department of Financial Institutions (WDFI), and aresubject to periodic examinations. Review of fiduciary operations is included in the periodicexaminations. The Banks’ deposits are insured by the Deposit Insurance Fund (DIF). The DIF isadministered by the Federal Deposit Insurance Corporation (FDIC), and therefore the Banks are alsosubject to regulation by the FDIC. Periodic examinations of the Banks are also conducted by theFDIC. The Banks must file periodic reports with the FDIC concerning their activities and financialcondition and must obtain regulatory approval prior to entering into certain transactions such asmergers with or acquisitions of other depository institutions and opening or acquiring branchoffices. This regulatory structure gives the regulatory authorities extensive discretion inconnection with their supervisory and enforcement activities and examination policies, includingpolicies regarding the classification of assets and the establishment of adequate loan and leaseloss reserves.
 
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Wisconsin banking laws restrict the payment of cash dividends by the Banks by providing that (i)dividends may be paid only out of the Banks’ undivided profits, and (ii) prior consent of the WDFIis required for the payment of a dividend which exceeds current year income if dividends declaredhave exceeded net profits in either of the two immediately preceding years. The various bankregulatory agencies have authority to prohibit the banks under their jurisdiction from engaging inan unsafe or unsound practice. Under certain circumstances, the payment of a dividend by the Bankscould be considered an unsafe or unsound practice. In the event that (i) the FDIC or the WDFIshould increase minimum required levels of capital; (ii) the total assets of the Banks increasesignificantly; (iii) the income of the Banks decrease significantly; or (iv) any combination of theforegoing occurs, then the Boards of Directors of the Banks may decide or be required by the FDICor the WDFI to retain a greater portion of the Banks’ earnings, thereby reducing dividends.The Banks are subject to certain restrictions imposed by the Federal Reserve Act on any extensionsof credit to their parent holding company, FBFS. Also included in this Act are restrictions oninvestments in the capital stock or other securities of FBFS and on taking of such stock orsecurities as collateral for loans to any borrower. Under this Act and regulations of the FederalReserve Board, FBFS and its Banks are prohibited from engaging in certain tie-in arrangements inconnection with any extension of credit or any property or service.**The Corporation**FBFS is a financial holding company registered under the Bank Holding Company Act of 1956 (theBHCA), as amended, and is subject to regulation, supervision, and examination by the Board ofGovernors of the Federal Reserve System (the FRB). The Corporation is required to file an annualreport with the FRB and such other reports as the FRB may require. Prior approval must be obtainedbefore the Corporation may merge with or consolidate into another bank holding company, acquiresubstantially all the assets of any bank or bank holding company, or acquire ownership or controlof any voting shares of any bank or bank holding company if after such acquisition it would own orcontrol, directly or indirectly, more than 5% of the voting shares of such bank or bank holdingcompany.In reviewing applications for such transactions, the FRB considers managerial, financial, capitaland other factors, including financial performance of the bank or banks to be acquired under theCommunity Reinvestment Act of 1977 (the CRA), as amended. Also, under the Riegle-Neal InterstateBanking and Branching Efficiency Act of 1994, as amended, state laws governing interstate bankingacquisitions subject bank holding companies to some limitations in acquiring banks outside of theirhome state without regard to local law.The Gramm-Leach Bliley Act of 1999 (the GLBA) eliminates many of the restrictions placed on theactivities of bank holding companies. Bank holding companies such as FBFS can expand into a widevariety of financial services, including securities activities, insurance, and merchant bankingwithout the prior approval of the FRB.**Sarbanes-Oxley Act of 2002**. The Sarbanes-Oxley Act (SOX) was enacted by the United States Congressto improve the accuracy and reliability of corporate disclosures made pursuant to securities laws,and for other purposes. A primary focus of SOX is to improve the quality and transparency infinancial reporting and independent auditor services for public companies. As directed by SOX, theSEC adopted rules that require conformance with specific sections of SOX. Section 302 of SOX andrelated SEC rules require the Corporation’s CEO and CFO to certify that they (i) are responsiblefor establishing, maintaining, and regularly evaluating the effectiveness of the Corporation’sinternal controls; (ii) have made certain disclosures to the Corporation’s auditors and the auditcommittee of the Corporation’s board of directors about the Corporation’s internal controls; and(iii) have included information in the Corporation’s quarterly and annual reports about theirevaluation and whether there have been significant changes in the Corporation’s internal controlsover financial reporting that have materially affected, or are reasonably likely to materiallyaffect the Corporation.
 
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Section 404 of SOX requires public companies’ annual reports to (i) include the company’s ownassessment of internal control over financial reporting, and (ii) include an auditor’s attestationregarding the company’s internal control over financial reporting. The primary purpose of internalcontrol over financial reporting is to foster the preparation of reliable and accurate financialstatements. Since SOX was enacted, however, both requirements of SOX 404 have been postponed forsmaller public companies such as the Corporation. The Corporation is required to assess, and hasassessed, its internal control over financial reporting. Refer to **Item 9A(T) Controls andProcedures**for the Corporation’s assessment. The requirement of an auditor’s attestation per thesecond part of Section 404 of SOX continues to be postponed per temporary Item 308T of SECRegulation S-K. Consequently, no auditor attestation accompanies Management’s Annual Report onInternal Control over Financial Reporting in this Annual Report on Form 10-K.**Emergency Economic Stabilization Act of 2008.**The Emergency Economic Stabilization Act of 2008(EESA), gives the U.S. Department of Treasury (UST) authority to take certain actions to restoreliquidity and stability to the U.S. Banking markets. Based upon its authority in the EESA, anumber of programs to implement EESA have been announced. Those programs include the following: **•** Capital Purchase Program (CPP). Pursuant to this program, the UST, on behalf of theU.S. government, was authorized to purchase preferred stock, along with warrants topurchase common stock, from certain financial institutions, including bank holdingcompanies, savings and loan holding companies and banks or savings associations notcontrolled by a holding company. We received approval from the UST to participate inthis program. We chose not to participate in the program. Refer to **Item 7 –Management’s Discussion and Analysis of Financial Condition and Results of Operations –Liquidity and Capital Resources**for further discussion. **•** Temporary Liquidity Guarantee Program. The original program contained both (i) adebt guarantee component, whereby FDIC will guarantee until June 30, 2012, the seniorunsecured debt issued by eligible financial institutions between October 14, 2008 andJune 30, 2009; and (ii) an account transaction guarantee component, whereby the FDICwill insure 100% of non-interest bearing deposit transaction accounts held at eligiblefinancial institutions through December 31, 2009. We elected to fully participate inthis program. These programs have been extended to June 30, 2010. **•** Temporary increase in deposit insurance coverage. Pursuant to the EESA, the FDICtemporarily raised the basic limit on federal deposit insurance coverage from $100,000to $250,000 per depositor. The EESA provides that the basic deposit insurance limitwill return to $100,000 after December 31, 2013.**The Banks**As state-chartered DIF-insured banks, the Banks are subject to extensive regulation by the WDFI andthe FDIC. Lending activities, fiduciary activities and other investments must comply with federalstatutory and regulatory requirements. This federal regulation establishes a comprehensiveframework of activities in which an institution can engage and is intended primarily for theprotection of the DIF, the FDIC, and depositors.
 
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**Insurance of Deposits.**The Banks’ deposits are insured under the DIF of the FDIC. On December 3,2008, the Banks elected to participate in the Transaction Account Guarantee (TAG) which is acomponent of the FDIC Temporary Liquidity Guarantee Program (TLGP) and therefore the basic depositinsurance coverage has temporarily increased to $250,000 for interest bearing accounts. There isan unlimited guarantee on non-interest bearing transaction accounts and NOW accounts that have aninterest rate of less than or equal to 0.50%. The unlimited guarantee on non-interest bearingtransaction accounts and NOW accounts that have an interest rate of less than or equal to 0.50%will be in place until June 30, 2010. Increased FDIC insurance limits will be in place untilDecember 31, 2013. The cost for participating in this plan was a 0.10% annualized fee assessedquarterly on balances of noninterest-bearing transaction accounts that exceed the existing depositinsurance limit of $250,000. Depositors may qualify for additional coverage if the depositaccounts are in different ownership categories. In addition, federal law provides up to $250,000 incoverage for self-directed retirement accounts.The Banks also elected to participate in the Debt Guarantee Program that temporarily guarantees allnewly-issued senior unsecured debt, up to 2% of the Corporation’s liabilities, issued by theparticipating entities on or after October 14, 2008 through and including June 30, 2009. Theguarantee expires on June 30, 2012. At December 31, 2009, the Banks did not have any debtguaranteed under this program. The cost for this program upon participation is based on anannualized basis points weighted by the maturity of the debt multiplied by the amount of debtissued, and calculated for the maturity period of that debt or June 30, 2012, whichever is earlier.The FDIC assigns each institution it regulates to a particular risk category based on the levels ofthe institution’s capital – “well-capitalized,” “adequately capitalized,” or “undercapitalized” andthe varying levels of supervisory concern, ranging from those institutions considered to be healthyto those that represent substantial supervisory concern. The result is four risk categories withwell-capitalized, financially sound institutions paying lower rates than those paid byundercapitalized institutions with substantial supervisory concern that pose a risk to theinsurance fund. The Banks’ assessment rate depends on the risk category to which they areassigned. Assessment rates for deposit insurance currently range from 7 to 77.5 basis points. TheBanks are well capitalized. The supervisory risk category to which the Banks are assigned by theFDIC is confidential and may not be disclosed.FDIC insurance premium rates increased for all financial institutions in 2009 based upon enactedregulations. During the second quarter of 2009, the FDIC issued a special assessment to all banksof which approximately $481,000 was assessed to our Banks. In December 2009, all banks, includingour Banks, received a notice requiring the prepayment of the 2010-2012 FDIC insurance premiums.The payment was required on or before December 30, 2009 in an effort to strengthen the cashposition of the DIF immediately without immediately impacting earnings of the banking industry.The prepaid assessment was based upon the Banks’ assessment rate in effect on September 30, 2009and will be subject to adjustments on a quarterly basis throughout the prepayment period based uponactual levels of deposits and related risk ratings. The Banks’ share of the prepayment was a cashpayment of approximately $5.4 million at December 30, 2009. In general, any increase in insuranceassessment, including special assessments, would have an adverse affect on the earnings of theBanks. The prepaid FDIC insurance prepayment will have a negative impact on our net interest marginthroughout 2010 – 2012 because the prepaid asset will be considered a non-earning asset for us asthe FDIC will not pay interest on the prepaid amounts nor will we have the ability to use that cashfor higher yielding alternatives.
 
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***Regulatory Capital Requirements***The FRB monitors the capital adequacy of the Banks because on a consolidated basis they have assetsin excess of $500.0 million. A combination of risk-based and leverage ratios are determined by theFRB. Failure to meet these capital guidelines could result in supervisory or enforcement actionsby the FRB. Under the risk-based capital guidelines, different categories of assets, includingcertain off-balance sheet items, such as loan commitments in excess of one year and letters ofcredit, are assigned different risk weights, based on the perceived credit risk of the asset.These risk-weighted assets are calculated by assigning risk weights to corresponding asset balancesto determine the risk weight of the entire asset base. Total capital, under this definition, isdefined as the sum of “Tier 1”and “Tier 2” capital elements, with Tier 2 capital being limited to100% of Tier 1 capital. Tier 1 capital, with some restrictions, includes common stockholders’equity, any perpetual preferred stock, qualifying trust preferred securities and minority interestsin any unconsolidated subsidiaries. Tier 2 capital, with certain restrictions, includes anyperpetual preferred stock not included in Tier 1 capital, subordinated debt, any trust preferredsecurities not qualifying as Tier 1 capital, specific maturing capital instruments and theallowance for loan and lease losses (limited to 1.25% of risk-weighted assets). The regulatoryguidelines require a minimum total capital to risk-weighted assets of 8%, of which at least 4% mustbe in the form of Tier 1 capital. The FRB also has a leverage ratio requirement which is definedas Tier 1 capital divided by average total consolidated assets. The minimum leverage ratiorequired is 3%. We have consistently maintained regulatory capital ratios at or above the wellcapitalized standards. For further detail on capital and capital ratios see discussion under **Item7, Management’s Discussion and Analysis of Financial Condition and Results of Operations –Liquidity and Capital Resources.*****Prompt Corrective Action***The Banks are also subject to capital adequacy requirements under the Federal Deposit InsuranceCorporation Improvement Act of 1991 (FDICIA), whereby either Bank could be required to guarantee acapital restoration plan, should it become “undercapitalized” as defined by FDICIA. The maximumliability under such a guarantee would be the lesser of 5% of the Bank’s total assets at the timeit became undercapitalized or the amount necessary to bring the Banks into compliance with thecapital restoration plan. The Corporation is also subject to the “source of strength doctrine” ofthe FRB, which requires that holding companies serve as a source of “financial and managerial”strength to their subsidiary banks.Under the guidance, if a bank would fail to submit an acceptable restoration plan, if required, itis then considered “significantly undercapitalized,” and would thus be subject to a wider range ofregulatory requirements and restrictions. Such restrictions would include activities involvingasset growth, acquisitions, branch establishment, establishment of new lines of business and alsoprohibitions on capital distributions, dividends and payment of management fees to control persons,if such payments and distributions would cause undercapitalization.The following table sets forth the FDIC’s definition of the five capital categories, in the absenceof a specific capital directive.               Total Capital to Risk  Tier 1 Capital to Risk    Category Weighted Assets  Weighted Assets  Tier 1 Leverage Ratio Well capitalized  ≥ 10%  ≥ 6%  ≥ 5%Adequately capitalized  ≥   8%  ≥ 4%  ≥ 4%*Undercapitalized  <   8%  < 4%  < 4%*Significantly undercapitalized  <   6%  < 3%  < 3%Critically undercapitalized Ratio of tangible equity to total assets ≤ 2%       * 3% if the bank receives the highest rating under the uniform system.
 
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***Limitations on Dividends and Other Capital Distributions***Federal and state regulations impose various restrictions or requirements on state-chartered bankswith respect to their ability to pay dividends or make various other distributions of capital.Generally, such laws restrict dividends to undivided profits or profits earned during precedingperiods. Also, FDIC insured institutions may not pay dividends while undercapitalized or if sucha payment would cause undercapitalization. The FDIC also has authority to prohibit the payment ofdividends if such a payment constitutes an unsafe or unsound practice in light of the financialcondition of a particular bank. At December 31, 2009, considering such limitations, subsidiaryunencumbered retained earnings of approximately $45.4 million could be transferred to theCorporation in the form of cash dividends, subject to the capital needs of each subsidiary.***Liquidity***The Banks are required by federal regulation to maintain sufficient liquidity to ensure safe andsound operations. We believe that the Banks have an acceptable liquidity percentage to match thebalance of net withdrawable deposits and short-term borrowings in light of present economicconditions and deposit flows. Refer to **Item 7, Management’s Discussion and Analysis of FinancialCondition and Results of Operations – Liquidity and Capital Resources**for additional information.***Federal Reserve System***The Banks are required to maintain reserves at specified levels against their transaction accountsand non-personal time deposits. As of December 31, 2009, the Banks were in compliance with theserequirements.***Federal Home Loan Bank System***The Banks are members of the Federal Home Loan Bank of Chicago (FHLB). The FHLB serves as acentral credit facility for its members. The FHLB is funded primarily from proceeds from the saleof obligations of the FHLB system. It makes loans to member banks in the form of FHLB advances.All advances from the FHLB are required to be fully collateralized as determined by the FHLB.As a member, each Bank is required to own shares of capital stock in the FHLB in an amount equal tothe greatest of $500, 1% of its aggregate unpaid residential mortgage loans, home purchasecontracts or similar obligations at the beginning of each year or 20% of its outstanding advances.The FHLB also imposes various limitations on advances relating to the amount and type ofcollateral, the amount of advances and other items. At December 31, 2009, the Banks owned a totalof $2.4 million in FHLB stock and both were in compliance with FHLB requirements. The Banksreceived no dividends from the FHLB for the years ended December 31, 2009, and 2008. OutstandingFHLB advances as of December 31, 2009 and 2008 were $18.5 million and $33.5 million, respectively.Since October 2007, the FHLB has been under a consensual cease and desist order with its regulator,the Federal Housing Finance Board. Under the terms of the order, capital stock repurchases andredemptions, including redemptions upon membership withdrawal or other termination, are prohibitedunless FHLB has received approval of the Director of the Office of Supervision of the FinanceBoard. FHLB has not declared or paid a dividend since the third quarter of 2007. As a result ofthis consensual cease and desist order, the Banks do not expect dividend income from their holdingsof FHLB stock to be a significant source of income for the foreseeable future. The Banks currentlyhold $2.4 million, at cost, of FHLB stock, of which $1.2 million is deemed voluntary stock. Webelieve we will ultimately recover the value of this stock. Refer to **Item 7 – Management’sDiscussion and Analysis of Financial Condition and Results of Operations – Liquidity and CapitalResources**for further discussion relating to the impact of this order on our ability to obtainresources from the FHLB to meet the liquidity needs of the Banks.
 
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***Transactions with Affiliates***The Banks’ loans to their own and the Corporation’s executive officers, directors and owners ofgreater than 10% of any of their respective stock (so-called “insiders”) and any entitiesaffiliated with such insiders are subject to the conditions and limitations under Section 23A ofthe Federal Reserve Act and the Federal Reserve Bank’s Regulation O. In general, the provisionsof Section 23A require that transactions between a banking institution or its subsidiaries and suchinstitution’s affiliates be on terms as favorable to the institution as transactions withnon-affiliates. In addition, these provisions contain certain restrictions on loans to affiliates,restricting such loans to a percentage of the institution’s capital. A covered “affiliate,” forpurposes of these provisions, would include the Corporation and any other company that is under ourcommon control. Certain transactions with our directors, officers or controlling persons are alsosubject to conflict of interest regulations. Among other things, these regulations require thatloans to such persons and their related interests be made on terms substantially the same as forloans to unaffiliated individuals and must not create an abnormal risk of repayment or otherunfavorable features for the Banks in accordance with Regulation O. The Banks can make exceptionsto the foregoing procedures if they offer extensions of credit that are widely available toemployees of the Banks and that do not give any preference to insiders over other employees of theBanks.***Privacy***Financial institutions are required by statute and regulation to disclose their privacy policies.In addition, such financial institutions must appropriately safeguard their clients’ nonpublic,personal information.***Community Reinvestment Act Requirements***The Community Reinvestment Act (CRA) requires each Bank to have a continuing and affirmativeobligation in a safe and sound manner to help meet the credit needs of its entire community,including low and moderate income neighborhoods. Federal regulators regularly assess the Banks’record of meeting the credit needs of their respective communities. Applications for additionalacquisitions would be affected by the evaluation of the Banks’ effectiveness in meeting its CRArequirements.***Anti – Money Laundering***The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept andObstruct Terrorism Act of 2001 (the Patriot Act) is designed to deny terrorists and criminals theability to obtain access to the United States financial system and has significant implications fordepository institutions, brokers, dealers and other businesses involved in the transfer of money.The Patriot Act mandates financial services companies to implement additional policies andprocedures with respect to additional measures designed to address any or all of the followingmatters: customer identification programs, money laundering, terrorist financing, identifying andreporting suspicious activities and currency transactions, currency crimes, and cooperation betweenfinancial institutions and law enforcement authorities.***Commercial Real Estate Guidance***The FDIC’s Concentrations in Commercial Real Estate Lending, Sound Risk Management Practices (CREGuidance) provides supervisory criteria, including the following numerical indicators, to assistbank examiners in identifying banks with potentially significant commercial real estate loanconcentrations that may warrant greater supervisory scrutiny: (1) commercial real estate loansexceed 300% of capital and increased 50% or more in the preceding three years or (2) constructionand land development loans exceed 100% of capital. The CRE Guidance does not limit banks’ levels ofcommercial real estate lending activities but rather guides institutions in developing riskmanagement practices and levels of capital that are commensurate with the level and nature of theircommercial real estate concentrations. Based on our current loan portfolio, our Banks do not exceedthese guidelines. Eventhough the banks do not exceed these regulatoryguidelines, we believe that we have taken appropriate precautions to address the risksassociated with our concentrations in commercial real estate lending. We do not expect the CREGuidance to adversely affect our operations or our ability to execute our growth strategy.
 
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***Processing of Deposit Accounts in the Event of an Insured Depository Institution Failure***The FDIC issued a final rule establishing practices for determining deposit and other liabilityaccount balances at a failed insured depository institution. The final rule requires institutionsto prominently disclose to sweep account clients whether the swept funds are deposits and thestatus of the swept funds if the institution were to fail. The final rule became effective on March4, 2009; however, the effective date of the sweep account disclosure requirements was July 1,2009. We do not transfer deposit funds to sweep investments outside of the Banks, and therefore,the deposit funds would be FDIC insured under their established limits.***Other Regulations***The Banks are also subject to a variety of other regulations with respect to the operation of theirbusinesses, including but not limited to Fair and Accurate Transactions Act, Truth in Lending Act,Truth in Savings Act, the Equal Credit Opportunity Act, the Electronic Funds Transfer Act, FundsAvailability Act, Privacy of Consumer Financial Information Act, the Fair Housing Act, the HomeMortgage Disclosure Act, the Fair Debt Collection Practices Act and the Fair Credit Reporting Act.***Changing Regulatory Structure***Regulation of the activities of national and state banks and their holding companies imposes aheavy burden on the banking industry. The FRB, FDIC, and WDFI all have extensive authority topolice unsafe or unsound practices and violations of applicable laws and regulations by depositoryinstitutions and their holding companies. These agencies can assess civil monetary penalties,issue cease and desist or removal orders, seek injunctions, and publicly disclose such actions.Moreover, the authority of these agencies has expanded in recent years, and the agencies have notyet fully tested the limits of their powers.The laws and regulations affecting banks and financial or bank holding companies have changedsignificantly in recent years, and there is reason to expect changes will continue in the future,although it is difficult to predict the outcome of these changes. From time to time, various billsare introduced in the United States Congress with respect to the regulation of financialinstitutions. Certain of those proposals, if adopted, could significantly change the regulation ofbanks and the financial services industry.***Monetary Policy***The monetary policy of the FRB has a significant effect on the operating results of financial orbank holding companies and their subsidiaries. Among the means available to the FRB to affect themoney supply are open market transactions in U.S. government securities, changes in the discountrate on member bank borrowings and changes in reserve requirements against member bank deposits.These means are used in varying combinations to influence overall growth and distribution of bankloans, investments and deposits, and their use may affect interest rates charged on loans or paidon deposits.**Executive Officers of the Registrant**The following contains certain information about the executive officers of FBFS. There are nofamily relationships between any directors or executive officers of FBFS.**Corey A. Chambas**, age 47, has served as the President and Chief Executive Officer of First BusinessFinancial Services, Inc. since December 2006. Mr. Chambas joined the Corporation in 1993 and hasheld various positions including Chief Operating Officer, Executive Vice President, and ChiefExecutive Officer of First Business Bank. Mr. Chambas has over 25 years of commercial bankingexperience. Prior to joining the Corporation, he was a Vice President of Commercial Lending withM&I Bank in Madison, Wisconsin.
 
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**James F. Ropella**, age 50, has served as Senior Vice President and Chief Financial Officer of theCorporation since September 2000. Mr. Ropella also serves as the Chief Financial Officer of thesubsidiaries of the Corporation. Mr. Ropella has 22 years of experience in finance and accounting,primarily in the banking industry. Prior to joining First Business Financial Services, Inc., Mr.Ropella was Treasurer of a consumer products company. Prior to that, he was Treasurer of FirstarCorporation, now known as US Bank.**Michael J. Losenegger**, age 52, has served as Chief Operating Officer of First Business FinancialServices, Inc. since September 2006. Mr. Losenegger joined the Corporation in 2003 and has heldvarious positions with First Business Bank including Chief Executive Officer, Chief OperatingOfficer and Senior Vice President of Business Development. Mr. Losenegger has over 23 years ofexperience in commercial lending. Prior to joining the Corporation, Mr. Losenegger was Senior VicePresident of Lending at M&I Bank in Madison, Wisconsin.**Barbara M. Conley**, age 56, joined First Business Financial Services, Inc. in December 2007 asSenior Vice President, General Counsel and Corporate Secretary. Ms. Conley has over 25 years ofexperience in commercial banking. Directly prior to joining the Corporation in 2007, Ms. Conleywas a Senior Vice President in Corporate Banking with Associated Bank. She had been employed atAssociated Bank since May 1976.**Mark J. Meloy**, age 48, has served as President and Chief Executive Officer of First Business Banksince December 2007. Mr. Meloy joined the Corporation in 2000 and has held various positionsincluding Executive Vice President of First Business Bank and President and Chief Executive Officerof First Business Bank – Milwaukee. Mr. Meloy has over 25 years of commercial lending experience.Prior to joining the Corporation, Mr. Meloy was a Vice President and Senior Relationship Managerwith Firstar Bank, NA, Cedar Rapids, Iowa and Milwaukee, Wisconsin, working in their financialinstitutions group with mergers and acquisition financing.**Joan A. Burke**, age 58, has served as President of First Business Bank’s Trust Division sinceSeptember 2001. Ms. Burke has over 30 years of experience in providing trust and investment advice.Prior to joining the Corporation, Ms. Burke was the President, Chief Executive Officer andChairperson of the Board of Johnson Trust Company and certain of its affiliates.**Charles H. Batson**, age 56, has served as the President and Chief Executive Officer of FirstBusiness Capital Corp since January 2006. Mr. Batson has 32 years of experience in asset-basedlending. Directly prior to joining First Business Capital Corp., Mr. Batson served as VicePresident and Business Development Manager for Wells Fargo Business Credit, Inc. since 1990.**David J. Vetta**, age 55, has served as President and Chief Executive Officer of First BusinessBank-Milwaukee since January 2007. Directly prior to joining First Business Bank – Milwaukee, Mr.Vetta was Managing Director at JP Morgan Chase since 1992 and affiliated with JP Morgan Chase andits predecessor companies since 1976.**Item 1A.** **Risk Factors**You should carefully read and consider the following risks and uncertainties because they couldmaterially and adversely affect our business, financial condition and results of operations.
 
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***Adverse changes in economic conditions, particularly a continuing or worsening slowdown in Dane,Waukesha and Outagamie counties where our business is concentrated, could harm our business.***Our success depends on the economic conditions in the U.S. and general economic conditions in thespecific local markets in which we operate, principally in Dane County, Wisconsin and to a lesserextent, Waukesha County, Wisconsin, and Outagamie County, Wisconsin. The origination of loanssecured by real estate and business assets of those businesses is our primary business and ourprincipal source of profits. Client demand for loans could be reduced further by a continuedweakening economy, further increase in unemployment or an increase in interest rates in theseareas. The duration and severity of the economic decline, including the decline in real estate andequipment values, that is prevailing in these areas could reduce our growth rate, impair ourability to collect loans or attract deposits, cause loans to become inadequately collateralized andgenerally have an adverse impact on our results of operations and financial condition.The national and global economic downturn has resulted in unprecedented levels of financial marketvolatility which has depressed the overall market value of financial institutions, limited accessto capital, and has had a material adverse effect on the financial condition or results of bankingcompanies in general and our Corporation. UST and FDIC programs were initiated to address economicstabilization. There can be no assurance that the actions taken by the U.S. Government, FRB andother governmental and regulatory bodies for the purpose of stabilizing the financial markets, ormarket responses to those actions, will achieve their intended effect or will be continued.Actions included the CPP, the temporary liquidity guarantee program, and temporary increases inFDIC insurance levels.***Declines in fair market values of commercial real estate or equipment provided as collateral couldincrease our exposure to future probable losses.***The market value of real estate can fluctuate significantly in a short period of time as a resultof economic conditions. Adverse developments affecting real estate values in one or more of ourmarkets could impact collateral coverage associated with our commercial real estate portfoliopossibly leading to increased specific reserves or charge-offs. We also provide lendingcollateralized by general business assets including accounts receivable, inventory, and businessequipment. Significant adverse changes in various industries could cause rapid declines in valuesand collectibility associated with those business assets resulting in inadequate collateralcoverage that may expose us to future losses. An increase in specific reserves and charge-offs mayhave a material adverse impact on our results of operation.***Our loan portfolio has a concentration of commercial real estate loans.***We have a concentration of commercial real estate in the primary markets we service. Commercialreal estate lending typically involves larger loan principal amounts than that for residentialmortgage loans or consumer loans. Commercial real estate loans have historically been viewed ashaving more inherent risk of default implying a higher potential loss on an individual loan basis.The repayment of these loans generally is dependent on sufficient income from the propertiessecuring the loans to cover operating expenses and debt service. Payments on loans secured bycommercial real estate are often dependent upon the successful operation and management of theproperties. Therefore repayment of these loans may be affected by factors outside the borrower’scontrol, including adverse conditions in the real estate market or the economy. In the event thatthe cash flow from the property is reduced, the borrower’s ability to repay the loan could beimpacted. The deterioration of one or a few of these loans could cause a significant increase inour percentage of non-performing loans. An increase in non-performing loans results in a loss ofearnings from these loans and could result in an increase in the provision for loan and lease lossand an increase in charge-offs, all of which could have a material adverse impact on our netincome.
 
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***Our loan and lease loss allowance may not be adequate to cover actual losses.***We are exposed to the risk that our loan and lease clients may not repay their loans and leasesaccording to their terms and that the collateral securing the payment of these loans and leases maybe insufficient to assure repayment. We may experience significant loan and lease losses whichcould have a material adverse impact on operating results. There is a risk that some of ourassumptions and judgments about the collectibility of the loan and lease portfolios could be formedfrom inaccurately assessed conditions. Those assumptions and judgments are based, in part, onassessment of the following conditions: **•** current economic conditions and their estimated effects on specific borrowers andcollateral values; **•** an evaluation of the existing relationships among loans and leases, probable loanand lease losses and the present level of the allowance for loan and lease losses; **•** results of examinations of our loan and lease portfolios by regulatory agencies; and **•** Management’s internal review of the loan and lease portfolios.We maintain an allowance for loan and lease losses to cover probable losses inherent in the loanand lease portfolios. Additional loan and lease losses will likely occur in the future and mayoccur at a rate greater than that experienced to date. An analysis of the loan and leaseportfolios, historical loss experience and an evaluation of general economic conditions are allutilized in determining the size of the allowance. Additional adjustments may be necessary toallow for unexpected volatility or deterioration in the local or national economy. If significantadditions are made to the allowance for loan and leases losses, this would materially decrease netincome. Additionally, regulators periodically review our allowance for loan and lease losses oridentify further loan or lease charge-offs to be recognized based on judgments different from ours.Any increase in the loan or lease allowance for loan and lease charge-offs, including as requiredby regulatory agencies could have a material adverse impact on net income.***Capital may not be available or may not be on terms acceptable to us when it is needed.***We are required by regulatory authorities to maintain adequate levels of capital to support ouroperations. We may decide to raise additional capital to support growth, either internally orthrough acquisitions. Our ability to raise additional capital, if needed, will depend onconditions in the capital markets at that time, which are outside our control, and on our financialperformance. Accordingly, we cannot be certain of our ability to raise additional capital onacceptable terms or at all in the future if needed. If we cannot raise additional capital whenneeded, our ability to further expand our operations through internal growth, deposit gathering andacquisitions could be materially impacted. The current economic environment, the significantdecline of financial institution stock prices and the overall condition of capital markets providefor uncertainty of when capital on acceptable terms will be available.***We rely, in part, on external financing to fund our operations and the lack of availability of suchfunds in the future could adversely affect our operations.***Our ability to implement our business strategy will depend on our ability to obtain funding forloan originations, working capital and other general corporate purposes. If our core banking andcommercial deposits are not sufficient to meet our funding needs, we may increase our utilizationof brokered deposits, FHLB advances and other wholesale funding sources necessary to fund desiredgrowth levels. Because these funds generally are more sensitive to interest rate changes than ourcore deposits, they are more likely to move to the highest rate available. In addition, the use ofbrokered deposits without regulatory approval is limited to banks that are “well capitalized”according to regulation. If our Banks are unable to maintain their capital levels at “wellcapitalized” minimums, we could lose a significant source of funding, which would force us toutilize additional wholesale funding or potentially sell loans at a time when loan sales pricingmay be unfavorable. To the extent we are not successful in obtaining such funding, we will beunable to implement our strategy as planned, which would have a material adverse effect on ourfinancial condition, results of operations and cash flows.
 
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***Our financial condition and results of operations could be negatively affected if we fail toeffectively execute our strategic plan.***Our ability to increase profitability will depend on a variety of factors including theidentification of desirable business opportunities, competitive responses from financialinstitutions in our market areas and our ability to manage liquidity and funding sources. While webelieve we have the management resources and internal systems in place to successfully manage ourstrategic plan, there can be no assurances that opportunities will be available and that thestrategic plan will be successfully managed.***Competition from other financial institutions could adversely affect our profitability.***We encounter heavy competition in attracting commercial loan, equipment finance and deposit clientsas well as trust and investment clients. We believe the principal factors that are used to attractcore deposit accounts and that distinguish one financial institution from another includevalue-added relationships, rates of return, types of accounts, service fees, convenience of officelocations and hours and quality of service to the depositors. We believe the primary factors incompeting for commercial loans are interest rates, loan fee charges, loan structure and timelinessand quality of service to the borrower.Our competition includes banks, savings institutions, mortgage banking companies, credit unions,finance companies, equipment finance companies, mutual funds, insurance companies, brokerage firmsand investment banking firms. Our market areas include branches of several commercial banks thatare substantially larger in terms of loans and deposits. Furthermore, tax exempt credit unionsoperate in most of our market areas and aggressively price their products and services to a largeportion of the market. We also compete with regional and national financial institutions, many ofwhich have greater liquidity, higher lending limits, greater access to capital, more establishedmarket recognition and more resources and collective experience than us. Our profitabilitydepends, in part, upon our ability to successfully maintain and increase market share.***We rely on our management, and the loss of one or more of those managers may harm our business.***Our success has been and will be greatly influenced by our continuing ability to retain theservices of our existing senior management and, as we expand, to attract and retain additionalqualified senior and middle management. The unexpected loss of key management personnel or theinability to recruit and retain qualified personnel in the future could have an adverse effect onour business and financial results.***Variations in interest rates may harm our financial results.***We are subject to interest rate risk. Changes in the interest rate environment, whether as aresult of changes in monetary policies of the FRB or otherwise, may reduce our profits. Netinterest spreads are affected by the difference between the maturities and repricingcharacteristics of interest-earning assets and interest-bearing liabilities. They are alsoaffected by the proportion of interest-earning assets that are funded by interest-bearingliabilities. Loan volume and yield are affected by market interest rates on loans, and increasinginterest rates are generally associated with a lower volume of loan originations. There is noassurance that we can minimize our interest rate risk. In addition, an increase in the generallevel of interest rates may adversely affect the ability of certain borrowers to pay theirobligations if the reason for that increase in rates is not a result of a general expansion of theeconomy. Accordingly, changes in levels of market interest rates could materially and adverselyaffect our net interest spread, asset quality, loan origination volume and overall profitability.
 
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***We are subject to extensive regulation, and changes in banking laws and regulations could adverselyaffect our business.***Our businesses are subject to extensive state and federal government supervision, regulation, andcontrol. Existing state and federal banking laws subject us to substantial limitations withrespect to loans, purchases of securities, payment of dividends and many other aspects of ourbusinesses. There can be no assurance that future legislation or government policy will notadversely affect the banking industry and our operations by further restricting activities orincreasing the cost of compliance. **See Item 1, Business – Supervision and Regulation.*****Our trust operations subject us to financial and reputational risks.***We are subject to trust operations risk related to performance of fiduciary responsibilities.Clients may make claims and take legal action pertaining to our performance of our fiduciaryresponsibilities. Whether client claims and legal action related to our performance of ourfiduciary responsibilities are founded or unfounded, if such claims and legal actions are notresolved in a manner favorable to us, they may result in significant financial liability and/oradversely affect the market perception of us and our products and services, as well as impactclient demand for those products and services. Any financial liability or reputational damagecould have a material adverse affect on our business, which, in turn, could have a material adverseeffect on our financial condition and results of operations.***If we are unable to keep pace with technological advances in our industry, our ability to attractand retain clients could be adversely affected.***The banking industry is constantly subject to technological changes with frequent introductions ofnew technology-driven products and services. In addition to better serving clients, the effectiveuse of technology increases our efficiency and enables our financial institutions to reduce costs.Our future success will depend in part on our ability to address the needs of our clients by usingtechnology to provide products and services that will satisfy client demands for convenience aswell as create additional efficiencies in our operations. A number of our competitors havesubstantially greater resources to invest in technological improvements, as well as significanteconomies of scale. There can be no assurance that we will be able to implement newtechnology-driven products and services to our clients. If we fail to do so, our ability toattract and retain clients may be adversely affected.***Our business continuity plans or data security systems could prove to be inadequate, resulting in amaterial interruption in or disruption to, our business and a negative impact on the results ofoperations.***We rely heavily on communications and information systems to conduct our business and ouroperations are dependent on our ability to protect our systems against damage from fire, powerloss, or telecommunication failure. The computer systems and network infrastructure we use couldbe vulnerable to unforeseen problems. These problems may arise in both our internally developedsystems and the systems of our third-party service providers. Any failure, interruption or breachin security of these systems, whether due to severe weather, natural disasters, acts of war orterrorism, criminal activity or other factors, could result in failures or disruptions in generalledger, deposit, loan, client relationship management and other systems. While we have a businesscontinuity plan and other policies and procedures designed to prevent or limit the effect of thefailure, interruption or security breach of our information systems, there can be no assurance thatany such failures, interruptions or security breaches will not occur or, if they do occur, thatthey will be adequately addressed. The occurrence of any failures, interruptions or securitybreaches of our information systems could damage our reputation, result in a loss of clients,subject us to additional regulatory scrutiny, or expose us to civil litigation and possiblefinancial liability, any of which could have a material adverse effect on our results ofoperations.
 
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***We are exposed to risks of environmental liabilities with respect to secured properties orproperties to which we take title.***We encounter certain environmental risks in our lending activities. Under federal and state law,we may become liable for costs of cleaning up hazardous materials found on properties on which wehave taken title. Certain states may also impose liens with higher priorities than first mortgageson properties to recover funds used in such efforts. We attempt to control our exposure toenvironmental risks with respect to loans secured by larger properties by monitoring availableinformation on hazardous waste disposal sites and occasionally requiring environmental inspectionsof such properties prior to closing a loan, as warranted. No assurance can be given, however, thatthe value of properties securing loans in our portfolio will not be adversely affected by thepresence of hazardous materials, increasing the risks of borrower default, or that future changesin federal or state laws will not increase our exposure to liability for environmental cleanup,which, in either case, may adversely affect our profitability.***Our stock is thinly traded.***Low volume of trading activity of our stock may make it difficult for investors to resell theircommon stock when they want at prices they find attractive. Our stock price can fluctuatesignificantly in response to a variety of factors and the volume of shares traded can be influencedby: **•** limited research analysis performed on our Corporation; **•** operating results and stock price performance of other companies that investors deemcomparable to us; **•** news reports relating to trends, concerns and other issues in the financial servicesindustry; **•** perceptions in the marketplace regarding us and/or our competitors; and **•** changes in government regulations.General market fluctuations, industry factors and general economic and political conditions andevents, such as economic slowdowns or recessions, interest rate changes or credit loss trends couldalso cause our stock price to decrease regardless of operating results.**Item 1B.** **Unresolved Staff Comments**None.**Item 2.** **Properties**The following table provides certain summary information with respect to the principal propertiesthat we leased as of December 31, 2009:               Expiration Location Function  Date 401 Charmany Drive, Madison, WI Full service banking location of First Business Bank and office of First Business Financial Services, Inc.  2016          18500 W. Corporate Drive, Brookfield, WI Full service banking location of First Business Bank – Milwaukee  2010          3913 West Prospect Avenue, Appleton, WI Loan production office of First Business Bank  2017          230 Ohio Street, Oshkosh, WI Loan production office of First Business Bank  2017 
 
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FBB also conducts trust and investment business from a limited purpose branch located at 3500University Avenue, Madison, Wisconsin. Office space is also leased in Burnsville, Minnesota,Independence, Ohio, St. Louis, Missouri, Chicago, Illinois and Green Bay, WI under short-term leaseagreements which have terms of less than one year. See **Note 6**and **Note 15**to the ConsolidatedFinancial Statements for more information regarding leasehold improvements and equipment andoperating lease agreements.**Item 3.** **Legal Proceedings**We believe that no litigation is threatened or pending in which we face potential loss or exposurewhich could materially affect our consolidated financial position, consolidated results ofoperations or cash flows. Since our subsidiaries act as depositories of funds and trust agents,they are occasionally named as defendants in lawsuits involving claims to the ownership of funds inparticular accounts. This and other litigation is incidental to our business.**Item 4.** **Reserved****PART II.****Item 5.** **Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases ofEquity Securities**The common stock of FBFS is traded on the Nasdaq National Market under the symbol “FBIZ”. As ofJanuary 31, 2010, there were 453 registered shareholders of record of FBFS common stock. Certain ofthe Corporation’s shares are held in “nominee” or “street” name and the number of beneficial ownersof such shares is approximately 379.The following table presents the range of high and low closing sale prices of our common stock foreach quarter within the two most recent fiscal years, according to information available, and cashdividends declared for the years ended December 31, 2009 and 2008, respectively.               High  Low  Dividend Declared 2009            1st Quarter $15.08  $10.50  $0.07 2nd Quarter  13.95   10.45   0.07 3rd Quarter  11.72   7.70   0.07 4th Quarter  10.42   9.10   0.07              2008            1st Quarter $17.94  $15.90  $0.07 2nd Quarter  19.64   15.53   0.07 3rd Quarter  17.48   14.01   0.07 4th Quarter  17.25   13.00   0.07 The timing and amount of future dividends are at the discretion of the Board of Directors of theCorporation (the Board) and will depend upon the consolidated earnings, financial condition,liquidity and capital requirements of the Corporation and its subsidiaries, the amount of cashdividends paid to the Corporation by its subsidiaries, applicable government regulations andpolicies and other factors considered relevant by the Board. **Refer to Item 1, Business –Supervision and Regulation**for additional discussion regarding the limitations on dividends andother capital contributions by the Banks to the Corporation. The Board anticipates it willcontinue to pay dividends in amounts determined based on the above factors.
 
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The following table summarizes compensation plans under which equity securities of the registrantare authorized for issuance as of December 31, 2009.             Equity Compensation Plan Information           Number of securities           remaining available for           future issuance under   Number of securities to  Weighted-average  equity compensation   be issued upon exercise  exercise price of  plans (excluding   of outstanding options,  outstanding options,  securities reflected in Plan category warrants, and rights.  warrants, and rights  column (a))   (a)  (b)  (c) Equity compensation plans approved by security holders  142,790  $22.01   135,404 On November 20, 2007, the Corporation publicly announced a stock repurchase program whereby theCorporation would repurchase up to approximately $1,000,000 of the Corporation’s outstanding stock.There currently is no expiration date to this stock repurchase program.                 Issuer Purchases of Securities               Approximate           Total Number of  Dollar Value of           Shares Purchased  Shares that May           as Part of Publicly  Yet Be Purchased   Total Number of  Average Price Paid  Announced Plans  Under the Plans or Period Shares Purchased  Per Share  or Programs  Programs                  October 1 – 31, 2009  —   —   —  $177,150 November 1 – 30, 2009  —   —   —   177,150 December 1 – 31, 2009  —   —   —   177,150 
 
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**Item 6.** **Selected Consolidated Financial Data**Three Year Comparison of Selected Consolidated Financial Data               As of and for the Year Ended December 31,   2009  2008  2007   (Dollars In Thousands, Except Share Data) FOR THE YEAR:            Interest income $56,356  $59,773  $59,488 Interest expense  28,322   33,515   36,280           Net interest income  28,034   26,258   23,208 Provision for loan and lease losses  8,225   4,299   2,904 Non-interest income  6,450   5,105   4,383 Non-interest expense  23,810   20,841   19,624 Loss on foreclosed properties  691   1,043   — Income tax expense  717   2,056   1,807           Net income $1,041  $3,124  $3,256                        Yield on earning assets  5.57%  6.39%  7.36%Cost of funds  3.03   3.89   4.91 Interest rate spread  2.53   2.50   2.45 Net interest margin  2.77   2.81   2.87 Return on average assets  0.10   0.32   0.39 Return on average equity  1.90   6.11   6.86                        ENDING BALANCE SHEET:            Total Assets $1,117,436  $1,010,786  $918,438 Securities  122,286   109,124   97,378 Loans and leases, net  839,807   840,546   771,633 Deposits  984,374   838,874   776,060 Borrowed funds  57,515   94,526   81,986 Junior subordinated notes  10,315   10,315   — Stockholders’ equity  54,393   53,006   48,552                        FINANCIAL CONDITION ANALYSIS:            Allowance for loan losses to year-end loans  1.65%  1.39%  1.26%Allowance to non-accrual loans  50.76   72.74   111.17 Net charge-offs to average loans  0.69   0.28   0.19 Non-accrual loans to gross loans  3.26   1.91   1.13 Average equity to average assets  5.19   5.27   5.64              STOCKHOLDERS’ DATA:            Basic earnings per share(1) $0.41  $1.24  $1.29 Diluted earnings per share(1)  0.41   1.24   1.29 Book value per share at end of period  21.42   20.82   19.35 Dividend declared per share  0.28   0.28   0.26 Dividend payout ratio  68.29%  22.58%  20.15%Shares outstanding  2,539,306   2,545,546   2,509,213    (1) Basic and diluted earnings per share for 2008 and 2007 have been restated due to the adoptionof a new accounting pronouncement. Refer to **Note 1**in the Notes to the Consolidated FinancialStatements.
 
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**Item 7.** **Management’s Discussion and Analysis of Financial Condition and Results of Operations****Forward-Looking Statements**When used in this report, and in any oral statements made with the approval of an authorizedexecutive officer, the words or phrases “may,” “could,” “should,” “hope,” “might,” “believe,”“expect,” “plan,” “assume,” “intend,” “estimate,” “anticipate,” “project,” “likely,” or similarexpressions are intended to identify “forward-looking statements.” Such statements are subject torisks and uncertainties, including, without limitation, changes in economic conditions in themarket area of FBB or FBB – Milwaukee, changes in policies by regulatory agencies, fluctuation ininterest rates, demand for loans in the market area of FBB or FBB – Milwaukee, borrowers defaultingin the repayment of loans and competition. These risks could cause actual results to differmaterially from what FBFS has anticipated or projected. These risk factors and uncertaintiesshould be carefully considered by potential investors. See**Item 1A – Risk Factors**for discussionrelating to risk factors impacting the Corporation. Investors should not place undue reliance onany such forward-looking statements, which speak only as of the date made. The factors describedwithin this Form 10-K could affect the financial performance of FBFS and could cause actual resultsfor future periods to differ materially from any opinions or statements expressed with respect tofuture periods.Where any such forward-looking statement includes a statement of the assumptions or basesunderlying such forward-looking statement, FBFS cautions that, while its management believes suchassumptions or bases are reasonable and are made in good faith, assumed facts or bases can varyfrom actual results, and the differences between assumed facts or bases and actual results can bematerial, depending on the circumstances. Where, in any forward-looking statement, an expectationor belief is expressed as to future results, such expectation or belief is expressed in good faithand believed to have a reasonable basis, but there can be no assurance that the statement ofexpectation or belief will result in, or be achieved or accomplished.FBFS does not intend to, and specifically disclaims any obligation to, update any forward-lookingstatements.The following discussion and analysis is intended as a review of significant events and factorsaffecting the financial condition and results of operations of FBFS for the periods indicated. Thediscussion should be read in conjunction with the Consolidated Financial Statements and the Notesthereto and the Selected Consolidated Financial Data presented in this Form 10-K.**Overview**Our principal business is conducted by FBB and FBB – Milwaukee and certain subsidiaries of FBB andconsists of a full range of commercial banking products and services tailored to meet the financialservice needs of small and medium size businesses, business owners, executives, professionals, andhigh net worth individuals. Products include commercial lending, asset-based lending, equipmentfinancing, trust and investment services and a broad range of deposit products. Our operatingphilosophy is focused on local decision making and local client service from each of our primarybanking locations in Madison, Brookfield and Appleton, Wisconsin combined with the efficiency ofcentralized administrative functions such as support for information technology, finance andaccounting and human resources. We believe we have a unique niche business banking model and weconsistently operate within this niche. This allows us to provide a great deal of expertise inproviding financial solutions to our clients with an experienced staff to serve our clients on anongoing basis.
 
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Beginning in 2008, continuing throughout 2009 and into 2010, the U.S. and world economies haveexperienced unprecedented changes in the capital and credit markets that have adversely affectedthe U.S. banking industry. The turmoil in the credit and capital markets has adversely impactedreal estate values, businesses and the demand for credit, and the overall economic climate. Manyfinancial institutions have sought merger partners or buyers, been forced to raise additionalcapital or forced into FDIC receivership by their primary regulator. The U.S. government hasinstituted several programs to stabilize the U.S. financial system and/or stimulate the U.S.economy that, among other things, were directed at increasing the capital bases of financialinstitutions.The current economic environment presents significant challenges for us and our industry. Webelieve that our historic policies and underwriting practices, which we believe to be conservative,have left us relatively well-positioned in the current economic climate as compared to many U.S.financial institutions.Our profitability depends on our ability to execute our strategic plan. Our plan emphasizesimproving the overall quality of our loan and lease portfolio, minimizing loan and lease lossspecific reserves and charge-offs, generating organic growth in our loan and lease portfolios andincreasing our market share of in-market core deposits. Given a troubled economy throughout 2009,there were limited opportunities to grow the loan and lease portfolios of the Banks withappropriate quality and there was additional stress on our loan and lease portfolios. Therefore,our focus in 2009 was to closely monitor our loan portfolio, work through identified credit issues,maintain adequate capital levels and build prudent liquidity to be able to position the Banks for areturn to a growth strategy and navigate through the economic turmoil. While our long termstrategic plan remains the same, current weak economic conditions will dictate similar areas offocus in the near term.As of December 31, 2009, our capital position and the capital position of each of our Banks isgreater than regulatory minimum requirements and each of our Bank’s regulatory capital is greaterthan the level required to be “well capitalized” under Prompt Corrective Action Requirements.In March 2009, we were approved to participate in the CPP offered by the UST. Subsequently, ourBoard elected not to participate in this program after fully evaluating the related costs andbenefits, as well as the potential impact on the long-term value of our common stock outstanding.**Operational highlights** **•** Our total assets increased to $1.1 billion as of December 31, 2009, a 10.5% increase ascompared to $1.0 billion at December 31, 2008. The asset growth was primarily in ourshort-term investments which increased by approximately $99.7 million to $104.2 million atDecember 31, 2009 from $4.5 million at December 31, 2008. The majority of our short-terminvestments are maintained in balances with the Federal Reserve Bank. We view liquidityand safety and soundness to be a priority. Maintaining this level of liquidity with theFederal Reserve Bank was deemed a prudent business decision as we continue to navigatethrough the economic challenges that we currently face. **•** Net income for the year ended December 31, 2009 was $1.0 million compared to $3.1million for the year ending December 31, 2008. The decline in net income is primarilyattributable to an increase in the provision for loan and lease losses, increasedcollateral liquidation costs, and increased FDIC insurance expense. **•** Return on average equity was 1.90% in 2009 compared to 6.11% in 2008. **•** Top line revenue, which consists of net interest revenue and non-interest income,increased 10.0% to $34.5 million in 2009 compared to $31.4 million in 2008. **•** Our net interest margin decreased slightly to 2.77% for 2009 as compared to 2.81% for2008. **•** Non-accrual loans and leases increased approximately $11.5 million, or 70.9%, to $27.8million as of December 31, 2009 from $16.3 million as of December 31, 2008.
 
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***Recent Developments and Other Income Tax Matters***On February 19, 2009, the State of Wisconsin passed the Budget Stimulus Bill containing a number ofprovisions affecting business taxpayers including the adoption of unitary combined reporting.Effective for tax periods beginning January 1, 2009, corporations engaged in a unitary business arerequired to report their share of income from that unitary business to Wisconsin through the use ofa combined report. Key components of the new combined reporting requirements include thefollowing: **•** Many types of corporate entities, including certain activities of foreign entities,financial institutions and domestic insurance companies, are included in the combinedgroup; **•** A greater than fifty percent direct or indirect ownership test applies fordetermining which corporate entities are included in the combined group; **•** The definition of a “unitary business” is construed as broadly as permitted underthe U.S. Constitution and there is a presumption that a unitary business exists ifcertain factors – such as centralized management, intercorporate debts, orintercorporate services – are present; **•** Only specified losses (e.g., losses generated when included in a combined report)may be shared amongst members of the combined group; and **•** Members of combined group shall be jointly and severally liable for costs,penalties, interest and taxes associated with the combined report.We have completed our evaluation of the new Wisconsin Department of Revenue tax legislation andhave concluded that our Nevada Investment subsidiaries will be included in the unitary group andare subject to Wisconsin income tax beginning on January 1, 2009. The adoption of the combinedreporting rules had minimal impact on the consolidated financial results of the Corporation.Please refer to **Note 16**in the Notes to the Consolidated Financial Statements for further details.Like many financial institutions located in Wisconsin, FBB established a Nevada subsidiary for thepurpose of investing and managing the Bank’s investment portfolio and purchasing a portion of FBB’sloans. FBB’s Nevada investment subsidiaries now hold and manage these assets. FBCC established aNevada subsidiary for the purpose of purchasing FBCC’s loans. The investment subsidiaries have notfiled returns with, or paid income or franchise taxes to, the State of Wisconsin. The WisconsinDepartment of Revenue (the Department) implemented a program to audit Wisconsin financialinstitutions which formed investment subsidiaries located outside of Wisconsin, and the Departmenthas generally indicated that it intends to assess income or franchise taxes on the income of theout-of-state investment subsidiaries of Wisconsin financial institutions. FBB received a Notice ofAudit from the Department that covers the years from 1999 through 2005 and relates primarily to theissue of income of the Nevada investment subsidiaries. FBCC received a Notice of Audit from theDepartment that covers the years from 2001 through 2005. During 2004, the Department offered ablanket settlement agreement to most banks in Wisconsin having Nevada investment subsidiaries. TheDepartment has not issued an assessment to FBB or FBCC, but the Department has stated that itintends to do so if the matter is not settled.Prior to the formation of the investment subsidiaries, we obtained private letter rulings from theDepartment regarding the non-taxability of income generated by the investment subsidiaries in theState of Wisconsin. We believe we complied with Wisconsin law and the private rulings receivedfrom the Department. Should an assessment be forthcoming, we intend to defend our positionvigorously through the normal administrative appeals process in place at the Department and throughother judicial channels should they become necessary. Although we will vigorously oppose any suchassessment, there can be no assurance that the Department will not be successful in whole or inpart in its efforts to tax the income of our Nevada investment subsidiaries. We recorded, as acomponent of current state income tax expense, an estimated liability including interest which isthe most likely amount within a range of probable settlement amounts relating to the taxation ofincome generated by the Nevada subsidiaries prior to January 1, 2009. In 2009, we continued toaccrue interest related to the uncertain tax position surrounding this issue. We do not expect theresolution of this matter to materially affect our consolidated results of operations and financialposition beyond the amounts accrued.
 
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**Critical Accounting Policies and Estimates**The preparation of financial statements in conformity with accounting principles generally acceptedin the United States requires management to make estimates and assumptions that affect the reportedamounts of assets and liabilities and disclosure of contingent assets and liabilities at the dateof the financial statements and the reported amounts of revenues and expenses during the reportingperiod. By their nature, changes in these assumptions and estimates could significantly affect thefinancial position or results of operations for FBFS. Actual results could differ from thoseestimates. Please refer to **Note 1**to the Consolidated Financial Statements for a discussion of themost significant accounting policies followed by FBFS. Discussed below are certain policies thatare critical to FBFS. We view critical accounting policies to be those which are highly dependenton subjective or complex judgments, estimates, and assumptions, and where changes in thoseestimates and assumptions could have a significant impact on the financial statements.**Allowance for Loan and Lease Losses.**The allowance for loan and lease losses represents ourrecognition of the risks of extending credit and our evaluation of the quality of the loan andlease portfolio and as such, requires the use of judgment as well as other systematic objective andquantitative methods. The risks of extending credit and the accuracy of our evaluation of thequality of the loan and lease portfolio are neither static nor mutually exclusive and could resultin a material impact on our consolidated financial statements. We could over-estimate the qualityof the loan and lease portfolio resulting in a lower allowance for loan and lease losses thannecessary, overstating net income and equity. Conversely, we could under-estimate the quality ofthe loan and lease portfolio, resulting in a higher allowance for loan and lease losses thannecessary, understating net income and equity. The allowance for loan and lease losses is avaluation allowance for probable credit losses, increased by the provision for loan and leaselosses and decreased by charge-offs, net of recoveries. We estimate the allowance reserve balancerequired and the related provision for loan and lease losses based on monthly evaluations of theloan and lease portfolio, with particular attention paid to loans and leases that have beenspecifically identified as needing additional management analysis because of the potential forfurther problems. During these evaluations, consideration is also given to such factors as thelevel and composition of impaired and other non-performing loans and leases, historical lossexperience, results of examinations by regulatory agencies, independent loan and lease reviews, themarket value of collateral, the strength and availability of guarantees, concentration of creditsand other factors. Allocations of the allowance may be made for specific loans or leases, but theentire allowance is available for any loan or lease that, in our judgment, should be charged off.Loan and lease losses are charged against the allowance when we believe that the uncollectibilityof a loan or lease balance is confirmed. See **Note 1**to the Consolidated Financial Statements forfurther discussion of the allowance for loan and lease losses.We also continue to pursue all practical and legal methods of collection, repossession and disposalof problem loans, and adhere to rigorous underwriting standards in our origination process in orderto continue to maintain strong asset quality. Although we believe that the allowance for loan andlease losses is adequate based upon current evaluation of loan and lease delinquencies,non-performing assets, charge-off trends, economic conditions and other factors, there can be noassurance that future adjustments to the allowance will not be necessary. Should the quality ofloans or leases deteriorate, then the allowance for loan and lease losses would generally beexpected to increase relative to total loans and leases. When loan or lease quality improves, thenthe allowance would generally be expected to decrease relative to total loans and leases.
 
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**Income Taxes.**FBFS and its wholly owned subsidiaries file a consolidated federal income tax returnand effective January 1, 2009, a combined Wisconsin state tax return. Deferred income taxes arerecognized for the future tax consequences attributable to differences between the financialstatement carrying amounts of existing assets and liabilities and their respective tax bases. Thedetermination of current and deferred income taxes is based on complex analyses of many factors,including the interpretation of federal and state income tax laws, the difference between the taxand financial reporting basis of assets and liabilities (temporary differences), estimates ofamounts currently due or owed, such as the timing of reversals of temporary differences and currentaccounting standards. We apply a more likely than not approach to each of our tax positions whendetermining the amount of tax benefit to record in our consolidated financial statements. Deferredtax assets and liabilities are measured using enacted tax rates expected to apply to taxable incomein the years in which those temporary differences are expected to be recovered or settled. Theeffect of a change in tax rates on deferred taxes is recognized in income in the period thatincludes the enactment date. We have made our best estimate of valuation allowances utilizingpositive and negative evidence and evaluation of sources of taxable income including tax planningstrategies and expected reversals of timing differences to determine our best estimate of valuationallowances needed for deferred tax assets on certain net operating loss carryforwards and othertemporary differences. Realization of deferred tax assets over time is dependent on our ability togenerate sufficient taxable earnings in future periods. A valuation allowance has been establishedfor the future benefits attributable to certain of our state net operating losses. We have alsomade our best estimate of the probable loss related to a state tax exposure matter. Theseestimates are subject to change. Changes in these estimates could adversely affect futureconsolidated results of operations.FBFS and its subsidiaries have state net operating loss (NOL) carryforwards as of December 31, 2009of approximately $49.4 million, which expire in years 2010 through 2025. The majority of the stateNOL carryforwards are attributable to the State of Wisconsin. We have established a valuationallowance of approximately $24.3 million for the NOL carryforwards. See **Note 16**to theConsolidated Financial Statements for further discussion of income taxes. The federal and statetaxing authorities who make assessments based on their determination of tax laws may periodicallyreview our interpretation of federal and state income tax laws. Tax liabilities could differsignificantly from the estimates and interpretations used in determining the current and deferredincome tax liabilities based on the completion of taxing authority examinations.**Goodwill and Other Intangible Assets.**Goodwill was recorded as a result of the acquisition of the49% interest in the Business Banc Group (BBG) on June 1, 2004, the purchase price of which exceededthe fair value of the net assets acquired. Goodwill is reviewed at least annually, as of June 30,for impairment. This review requires judgment. If goodwill is determined to be impaired, areduction in value would be expensed in the period in which it became impaired. No impairmentshave been recognized for the years ended December 31, 2009 or 2008. Our goodwill impairmentevaluation is based upon discounted cash flows of the subsidiary reporting unit with furtherevaluation of the consolidated entity market capitalization. A series of assumptions, includingthe discount rate applied to the estimated future cash flows, are embedded within the evaluation.These assumptions and estimates are subject to uncertainties. There can be no assurances thatdiscount rates will not increase, projected earnings and cash flows of our subsidiary reportingunit will not decline, and facts and circumstances influencing our consolidated marketcapitalization will not be altered. Accordingly, an impairment charge to goodwill and otherintangible assets may be required if the book equity of our subsidiary reporting unit exceeds itsfair value. An impairment charge to goodwill could have an adverse impact on future consolidatedresults of operations. See **Note 1**and **Note 7**to the Consolidated Financial Statements for furtherdiscussion of goodwill and other intangible assets.Judgment is also used in the valuation of other intangible assets consisting of a core depositintangible and a client list from a purchased brokerage/investment business. Core depositintangibles were recorded for core deposits acquired in the BBG acquisition which was accounted forusing the purchase method of accounting. The core deposit intangible assets were recorded underthe presumption that they provide a more favorable source of funding than wholesale borrowings. Anintangible asset was recorded for the present value of the difference between the expected interestto be incurred on these deposits and interest expense that would be expected if these deposits werereplaced by wholesale borrowings, over the expected lives of the core deposits. The originalestimate of the underlying lives of core deposits is fifteen years and ten years for the clientlist. These definite life intangible assets are amortized over the expected useful life. If it isdetermined that the deposits or the client list have shorter lives, the assets will be adjusted andan expense will be recorded for the amount that is impaired. No adjustments to the estimateduseful lives of these intangible assets were made during the years ended December 31, 2009 or 2008.
 
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**Results of Operations***Comparison of the Years Ended December 31, 2009 and 2008***Overview.**Net income for the year ended December 31, 2009 was $1.0 million, a decline of 66.7%, or$2.1 million, from $3.1 million for the year ended December 31, 2008. The principal factors thatcontributed to this decline include an increase in the provision for loan and lease losses and anincrease in certain non-interest expenses. The provision for loan and lease losses increased $3.9million primarily as a result of charges to the provision for the amount necessary to cover higherthan anticipated charge-offs due to further deterioration of market conditions and increases in ourgeneral reserves caused by changes in our subjective criteria used to identify probable losseswithin the loan and lease portfolio. Non-interest expenses increased $2.6 million primarily due toincreases in FDIC insurance expense and increased collateral liquidation costs. Positive factorspartially offsetting the decline in net income include an increase in net interest income of $1.8million and a $1.3 million increase in non-interest income which was primarily driven by increasedservice charges on deposits, increased loan fees and gains on sales of securities. Both basicearnings and diluted earnings per share were $0.41 for the year ended December 31, 2009. Bothbasic and diluted earnings per share were $1.24 for the year ended December 31, 2008. The declinein both basic and diluted earnings per share was directly related to the 66.7% decline in netincome for the year ended December 31, 2009. Return on average assets and return on average equitywere 0.10% and 1.90%, respectively, for the year ended December 31, 2009 compared to 0.32% and6.11%, respectively, for the year ended December 31, 2008.**Top Line Revenue**. Top line revenue is comprised of net interest income and non-interest income.This measurement is also commonly referred to as operating revenue. Top line revenue increased byapproximately 10.0% from the prior year. The components of top line revenue were as follows:               For the Year Ended   December 31,   2009  2008  Change   (Dollars In Thousands) Net interest income $28,034  $26,258   6.8%Non-interest income  6,450   5,105   26.3            Total top line revenue $34,484  $31,363   10.0            
 
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**Adjusted Net Income.**Adjusted net income is comprised of our net income as presented undergenerally accepted accounting principles (GAAP) adjusted for the after tax effects of the provisionfor loan and lease losses and actual net charge-offs incurred during the year. Historically, weexperienced substantial organic growth in our loan and lease portfolio. As a result of thisorganic growth and the need for an additional provision for loan and lease losses required tosupport the increased inherent risk associated with a growing portfolio, we adjusted our GAAP netincome for the after tax effects of the provision for loan and lease losses and related netcharge-off activities to allow our management to better analyze the growth of our earnings,including a comparison to our benchmark peers. Institutions with different loan and lease growthrates may not have comparable provisions for loan and lease loss amounts and net charge-offactivity. In our judgment, presenting net income excluding the after tax effects of the provisionfor loan and lease losses and actual net charge-offs allows investors to trend, analyze andbenchmark our results of operations in a more meaningful manner. Our adjusted net income declinedby 44.1% to $2.4 million for the year ended December 31, 2009 compared to $4.3 million for the yearended December 31, 2008. The decline in adjusted net income was primarily driven by the increasedcharge-offs recorded during 2009 coupled with increased collateral liquidation costs incurred towork through an increase in the number of impaired loans and leases in the loan and lease portfolioand a substantial increase in FDIC insurance expense. Adjusted net income is a non-GAAP financialmeasure that does not represent and should not be considered as an alternative to net incomederived in accordance with GAAP. A reconciliation of net income to adjusted net income is asfollows:               For the Year Ended December 31,   2009  2008  Change   (Dollars in Thousands) Net income, presented under US GAAP $1,041  $3,124   (66.7)%Add back:            Provision for loan and lease losses, after tax  5,000   2,613   91.4 Less:            Net charge-offs, net of tax  3,616   1,402   157.9            Adjusted net income $2,425  $4,335   (44.1)           **Return on Equity.**Return on equity for the year ended December 31, 2009 was 1.90% compared to6.11% for the year ended December 31, 2008. The decline in return on equity was directly relatedto the decline in net income which was caused by increased provision for loan and lease losses,increased collateral liquidation costs, and increased FDIC insurance expense, including a specialassessment accrued for during the second quarter of 2009, along with other factors discussedthroughout this Annual Report on Form 10-K, partially offset by increases in net interest incomeand non-interest income. We view return on equity as an important measurement for monitoringprofitability and we are continuing to focus on improving our return to our shareholders byenhancing the overall profitability of our client relationships, controlling our expenses andminimizing our costs of credit.**Net Interest Income.**Net interest income is dependent on the amounts of and yields oninterest-earning assets as compared to the amounts of and rates on interest-bearing liabilities.Net interest income is sensitive to changes in market rates of interest and the asset/liabilitymanagement strategies used by management in responding to such changes. The dollar volume of loans,leases and investments compared to the dollar volume of deposits and borrowings, combined with theinterest rate spread, produces the changes in net interest income between periods. The table belowprovides information with respect to (1) the effect on interest income attributable to changes inrate (changes in rate multiplied by prior volume), (2) the effect on interest income attributableto changes in volume (changes in volume multiplied by prior rate) and (3) the changes inrate/volume (changes in rate multiplied by changes in volume) for the year ended December 31, 2009compared to the year ended December 31, 2008.
 
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**Rate/Volume Analysis**                   Increase (Decrease) for the Year Ended December 31,   2009 Compared to 2008           Rate/      Rate  Volume  Volume  Net   (In Thousands) **Interest-Earning Assets**                Commercial real estate and other mortgage loans $(4,625) $3,092  $(412) $(1,945)Commercial and industrial loans  (403)  (1,027)  24   (1,406)Leases  (30)  75   (1)  44 Consumer loans  (159)  (57)  7   (209)             Total loans and leases receivable  (5,217)  2,083   (382)  (3,516)Mortgage-related securities  (411)  570   (50)  109 Investment securities  —   (10)  —   (10)FHLB Stock  —   —   —   — Short-term investments  (75)  624   (549)  —              Total net change in income on interest-earning assets  (5,703)  3,267   (981)  (3,417)             **Interest-Bearing Liabilities**                NOW accounts  (767)  64   (48)  (751)Money market  (619)  1,163   (269)  275 Certificates of deposit  (949)  1,654   (577)  128 Brokered certificates of deposit  (3,569)  (1,321)  205   (4,685)             Total deposits  (5,904)  1,560   (689)  (5,033)FHLB advances  102   (563)  (42)  (503)Other borrowings  (62)  (421)  10   (473)Junior subordinated notes  (1)  821   (4)  816              Total net change in expense oninterest-bearing liabilities  (5,865)  1,397   (725)  (5,193)             Net change in net interest income $162  $1,870  $(256) $1,776              The yield on earning assets was 5.57% for the year ended December 31, 2009, a decline of 82 basispoints from 6.39% for the year ended December 31, 2008. Loan and lease yields were primarilyimpacted by a low interest rate environment and the re-pricing of adjustable rate loans mitigatedby the existence of interest rate floors within the terms of the loan agreements. As of December31, 2009, approximately 55% of our loan and lease portfolio had a fixed interest rate while another26.3% of our loan and lease portfolio contained interest rate floors. The magnitude of theportfolio being fixed rate in nature or represented by “in-the-money” floors has protected our loanand lease portfolio yield from declines of the same magnitude as the overall interest rateenvironment. The average prime rate declined 183 basis points to 3.25% for the year ended December31, 2009 compared to 5.08% for the same period of 2008. Our loan yield is affected by the levelof non-accrual loans and by the varying amount of loan fees collected in lieu of interest. For theyear ended December 31, 2009 as compared to the year ended December 31, 2008, the net effect ofthese factors was approximately only two basis points on the overall yield of the loan and leaseportfolio.
 
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The rate on interest-bearing liabilities was 3.03% for the year ended December 31, 2009, a decreaseof 86 basis points from 3.89% for the comparable period of the prior year. Rates oninterest-bearing deposits were 2.82% for the year ended December 31, 2009, a decrease of 97 basispoints from 3.79% for the comparable period of the prior year. The decrease was primarily due tothe overall lower rate environment partially offset by influences of competitive pricing andimplied interest rate floors necessary to retain in-market deposit balances.The average cost of borrowings including FHLB advances, other borrowings, and junior subordinatednotes for the year ended December 31, 2009 was 5.61% compared to 4.86% for the year ended December31, 2008. The increase in the weighted average cost of borrowings is primarily due to the timingof the issuance of our junior subordinated notes and the April 2009 re-issuance of approximately$31 million of subordinated debt. The junior subordinated notes were issued on September 26, 2008and bear a fixed interest rate of 10.5%. We re-issued approximately $31 million of subordinateddebt with increased spreads over the 1 Month LIBOR index and a floor of 5.5% where the prior yearsubordinated notes did not contain interest rate floors. The notes were re-issued in April 2009and have been at their floor since the end of April 2009; however, this is partially offset by adecline in the average 1 Month LIBOR index year over year.Net interest margin decreased to 2.77% for the year ended December 31, 2009 from 2.81% for the yearended December 31, 2008. The decline in net interest margin was primarily caused by our strategicshift toward increased on-balance sheet liquidity by maintaining a higher level of lower yielding,immediately available deposits with the Federal Reserve Bank and a decline in the relativecontribution of net free funds to the net interest margin. In this challenging economicenvironment, we are generally implementing interest rate floors on new and renewed variable rateloans and increasing spreads on loans which have allowed us to increase our overall net interestspread. For the year ended December 31, 2009 average short-term investments were approximately$34.8 million and were earning approximately 24 basis points. This compares to an average balanceof short-term investments for the year ended December 31, 2008 of $4.2 million yielding 2.04%. Thesubstantial increase in the average balance of the short-term investments is directly related toour emphasis of increasing our on-balance sheet liquidity held on deposit with the Federal ReserveBank.
 
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**Net Interest Income Information****Average Interest-Earning Assets, Average Interest-Bearing Liabilities, Interest Rate Spread and NetInterest Margin.**The following table shows our average balances, interest, average rates, netinterest margin and the spread between combined average rates earned on the our interest-earningassets and cost of interest-bearing liabilities for the periods indicated. The average balancesare derived from average daily balances.                           For the Year Ended December 31,   2009  2008           Average          Average   Average      yield/  Average      yield/   balance  Interest  cost   balance  Interest  cost   (Dollars In Thousands) **Interest-Earning Assets**                        Commercial real estate and other mortgage loans $595,885  $32,794   5.50% $547,177  $34,739   6.35%Commercial and industrial loans  214,212   15,822   7.39   227,795   17,228   7.56 Leases  29,577   1,847   6.24   28,398   1,803   6.35 Consumer loans  21,583   1,005   4.66   22,648   1,214   5.36                      Total loans and leases receivable(1)  861,257   51,468   5.98   826,018   54,984   6.66 Mortgage-related securities(2)  114,151   4,803   4.21   101,787   4,694   4.61 Investment securities(2)  —   —   —   261   10   3.83 Federal Home Loan Bank stock  2,367   —   —   2,367   —   — Short-term investments  34,762   85   0.24   4,169   85   2.04                      Total interest-earning assets  1,012,537   56,356   5.57   934,602   59,773   6.39 Non-interest-earning assets  40,779           34,758                                Total assets $1,053,316          $969,360                                **Interest-Bearing Liabilities**                        NOW accounts $67,061   266   0.40  $63,089   1,017   1.61 Money market  214,751   2,953   1.38   149,727   2,678   1.79 Certificates of deposit  121,801   2,847   2.34   75,730   2,719   3.59 Brokered certificates of deposit  460,691   18,332   3.98   488,734   23,017   4.71                      Total deposits  864,304   24,398   2.82   777,280   29,431   3.79 FHLB advances  18,873   880   4.66   31,840   1,383   4.34 Other borrowings  40,738   1,932   4.74   49,393   2,405   4.87 Junior subordinated notes  10,315   1,112   10.78   2,734   296   10.83                      Total interest-bearing liabilities  934,230   28,322   3.03   861,247   33,515   3.89 Non-interest-bearing liabilities  64,398           57,009                                Total liabilities  998,628           918,256         Stockholders’ equity  54,688           51,104                                Total liabilities and stockholders’ equity $1,053,316          $969,360                                Net interest income/interest rate spread     $28,034   2.53%     $26,258   2.50%                       Net interest-earning assets $78,307          $73,355                                Net interest margin          2.77%          2.81%Average interest-earning assets to average interest-bearing liabilities  108.38%          108.52%        Return on average assets  0.10           0.32         Return on average equity  1.90           6.11         Average equity to average assets  5.19           5.27         Non-interest expense to average assets  2.33           2.26            (1) The average balances of loans and leases include non-performing loans and leases. Interestincome related to non-performing loans and leases is recognized when collected. (2) Includes amortized cost of basis of assets held and available for sale.
 
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**Provision for Loan and Lease Losses.**Our provision for loan and lease losses is dependent oncredit quality and determined based upon the inherent credit risk and other subjective factorspursuant to our allowance for loan and lease loss methodology, the magnitude of net charge-offsrecorded in the period and the amount of reserves established for impaired loans that presentcollateral shortfall positions. To establish the appropriate level of the allowance for loan andlease losses, we regularly review our historical charge-off migration analysis and an analysis ofthe current level and trend of several factors that we believe may indicate losses in the loan andlease portfolio. These factors include delinquencies, volume, average size, average risk rating,technical defaults, unemployment rates, geographic concentrations, industry concentrations, loansand leases on the management attention watch list, experience in the credit granting functions andchanges in underwriting standards, and level of non-performing assets and related fair value ofunderlying collateral. While we have made no significant changes to our loan and lease policies in2009 or 2008, current economic conditions have caused us to add additional rigor to ourunderwriting and monitoring processes.The provision for loan and lease losses totaled $8.2 million for the year ended December 31, 2009compared to $4.3 million for the year ended December 31, 2008. During the year ended December 31,2009, the significant factors influencing the provision for loan and lease losses were thefollowing: **•** increasing the amount of the general reserve by approximately $2.0 million due tochanges in the evaluation of the subjective factors including changes in the charge-offmigration analysis for current year activity, **•** increasing the reserve by approximately $6.1 million for the amount necessary to coverhigher than anticipated net charge-offs due to further deterioration of market conditions, **•** a net increase of approximately $429,000 due to required specific reserves on impairedloans and **•** decreasing the reserve by approximately $179,000 for decreased inherent risk associatedwith the net decline of non-impaired loans in the loan and lease portfolio.Refer to **Allowance for Loan and Lease Losses**for further information.**Non-Interest Income.**Non-interest income, consisting primarily of fees earned for trust andinvestment services, service charges and fees on deposits and loans and income from bank-owned lifeinsurance, increased $1.3 million, or 26.3%, to $6.5 million for the year ended December 31, 2009,from $5.1 million for the year ended December 31, 2008.Trust and investment services fee income declined by $50,000, or 2.6%, to $1.9 million for the yearended December 31, 2009 compared to $2.0 million for the year ended December 31, 2008. Trust andinvestment services fee income can be broken into two components including trust fee income andbrokerage income. Trust fee income is driven by the market value of assets under management.Trust fee income remained flat at $1.6 million for the year ended December 31, 2009. As clients addor withdraw assets and market values fluctuate, so does trust fee income. At December 31, 2009, wehad $323.3 million of trust assets under management. This is a $67.9 million, or 27.1%, increasein trust assets under management which were $255.4 million at December 31, 2008. The increase intrust assets under management is a result of the overall change in equity market values late in2009 coupled with additional assets received from new and existing clients. In thesix month period ending February 2009, the equity markets suffered their worst downturn since theGreat Depression as measured by the performance of Dow JonesIndustrial average. Equity markets had a significant recovery in theremaining ten months of2009, but remained down over the two year period by more than 21% asmeasured by the Dow Jones Industrial average, thusaffecting the level of trust fee income recorded. The second component of trust and investmentservices fee income relates to brokerage income. Brokerage income is comprised of commissions ontrading activity and 12b-1 fees on mutual fund positions. As a result of changes in clientactivity, brokerage income decreased by approximately $90,000, or 23.0%, for the year endedDecember 31, 2009 compared to the year ended December 31, 2008. As of December 31, 2009, thebrokerage assets under administration increased by $17.3 million, or 16.2%, to $124.2 millioncompared to $106.8 million at December 31, 2008.
 
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Service charges on deposits increased $438,000, or 39.8%, to $1.5 million for the year endedDecember 31, 2009 from $1.1 million for the year ended December 31, 2008. The increase in servicecharge income is in direct correlation to a lower interest rate environment. Our business demanddeposit clients receive an earnings credit based upon current market rates and balances kept withinour Banks. These earnings credits are utilized to reduce the service charges incurred on theirdeposit accounts. As the interest rate index utilized to calculate the earnings credit has fallenover the measurement period, the majority of our clients do not have sufficient earnings credits tofully eliminate the service charges on their accounts, resulting in increased service charge incomerecognized within our consolidated financial statements.Loan fees increased approximately $415,000, or 65.3%, to $1.1 million for the year ended December31, 2009 from $636,000 for the year ended December 31, 2008. Loan fees represent non-deferrablefees earned on loan activity and the revenue generated through our collateral audit process weperform to ensure the integrity of the collateral associated with our asset-based loans. Theincrease in loan fees was primarily related to additional audit fee income recognized.During the third quarter of 2009, we sold approximately $15.0 million of collateralized mortgageobligations of government-sponsored enterprises in an effort to modify the overall risk profile ofour investment portfolio. A gain of approximately $322,000 was recognized on the sale of thesesecurities. Proceeds from the sale of these securities were used to purchase collateralizedmortgage obligations of government agencies, or GNMA securities. GNMA securities are guaranteed bythe U.S. federal government which reduces our overall exposure to other than temporary losses andhave favorable capital treatment under the regulatory guidelines. No securities were sold duringthe year ended December 31, 2008.Beginning in the third quarter of 2008, we offered interest rate swap products directly to ourqualified commercial borrowers. We simultaneously economically hedged these client derivativetransactions by entering into offsetting interest rate swap contracts with dealer counterparties.Derivative transactions executed as part of this program are not designated as hedge relationshipsand are marked-to-market through earnings each period. We recognize income in the consolidatedincome statements related to the initial fair value for the swaps which for the year ended December31, 2009 and 2008 totaled $279,000 and $188,000, respectively. With changes in the economicenvironment and overall interest rate changes, our activity of closing interest rate swaps as ameans to offer a fixed rate alternative to our clients has slowed. At this time, we do not expecta significant increase in our derivative portfolio. Change in fair value of non-hedge derivativecontracts is included in other income in the consolidated statements of income. The derivativecontracts have mirror-image terms, which results in the positions’ changes in fair value primarilyoffsetting through earnings each period. Each of the swap contracts include a credit riskcomponent of the fair value calculation which is included in earnings but was not significant forthe year ended December 31, 2009 and 2008.**Non-Interest Expense.**Non-interest expense increased $2.6 million, or 12.0%, to $24.5 million forthe year ended December 31, 2009 from $21.9 million for the comparable period of 2008, primarilydue to an increase in FDIC insurance expense and an increase in collateral liquidation costs.FDIC insurance expense was $2.2 million for the year ended December 31, 2009 compared to $599,000for the year ended December 31, 2008. The increase in FDIC insurance expense is due to higherpremium rates to reflect our participation in the temporary liquidity guarantee program, generaloverall increases in the rates charged by the FDIC applied to our larger deposit base and therecognition of a special assessment of approximately $481,000 that was paid during 2009. OnDecember 31, 2009, the Banks prepaid their estimated regular insurance assessment for 2010, 2011and 2012. The payment, in the amount of $5.4 million, is reflected as a prepaid asset in otherassets in our consolidated balance sheet and will be amortized over the insurance coverage periods.
 
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Collateral liquidation costs were $1.3 million for the year ended December 31, 2009 compared to$41,000 for the year ended December 31, 2008. These expenses represent costs incurred to workthrough our impaired loans. Collateral liquidation costs include legal expenses, rent expenses,shipping costs, warranty expenses, taxes incurred by the client and other necessary expensesrequired for us to pay to protect our security interest. It is doubtful that we will recoup theseexpenses and have recognized them through our consolidated results of operations as incurred. Ourfocus in 2009 was on working through our impaired loans and leases and resulted in the substantialincrease in expense in 2009 as compared to 2008. While we will continue to work through ourimpaired loan portfolio, we do not expect the 2009 level of collateral liquidation costs to repeatin 2010.**Income Taxes.**Income tax expense was $717,000 for the year ended December 31, 2009, with aneffective tax rate of 40.8%, compared to $2.1 million, with an effective tax rate of 39.7%, for theyear ended December 31, 2008. The effective tax rate also includes additional interest expense,net of federal tax benefit, accrued on our uncertain tax positions. Interest expense, net offederal tax benefit, recognized on these uncertain tax positions was approximately $160,000 and$116,000 for the years ended December 31, 2009 and 2008, respectively. Excluding the interestexpenses related to the uncertain tax positions, our effective tax rate for the years endedDecember 31, 2009 and 2008 would have been 31.7% and 37.4%, respectively. The decline in theeffective tax rate, based on this measurement, was due to the relationship of tax-exempt income(e.g., increase in cash surrender value of life insurance) to income before tax expense. Inaddition, in 2008, we recorded an additional expense of $35,000 associated with closing of an IRSexamination of the 2004 and 2005 tax years.In February 2009, the State of Wisconsin enacted unitary combined reporting effective January 1,2009. Due to the new tax law, we have included income generated by our investment subsidiaries,which are domiciled in Nevada, into our calculation of taxable income to determine our expectedWisconsin tax liability. As a result of the new law, 2009 and future tax losses generated by ourholding company will be recognized and offset against Wisconsin income generated by other membersof the combined group. The deferred tax asset related to existing Wisconsin holding company statetax net operating losses from years prior to 2009 will continue to maintain a 100% valuationallowance since we have determined that it is more likely than not that the deferred tax asset willnot be realized.As discussed earlier in management’s discussion and analysis, the Wisconsin Department of Revenueis auditing our treatment of our Nevada investment subsidiaries within FBB’s tax returns for theperiods from 1999-2005, and FBCC’s tax returns for the period from 2001-2005. We had previouslyrecorded an uncertain tax position reserve related to the treatment of the income generated by theNevada investment subsidiaries in our separate company tax returns. Due to the change in the taxlaw, additional reserves relating to this uncertain tax position are no longer necessary since theinvestment subsidiaries’ income are taxed in Wisconsin beginning in 2009. The difference betweenthe additional tax incurred from the Wisconsin unitary provisions and the amount of tax expensepreviously related to uncertain tax positions was minor and therefore the change in the Wisconsintax law did not have a significant impact to our overall effective tax rate or tax position for theyear ended December 31, 2009 compared to the year ended December 31, 2008. Please refer to **Note 16**in the Notes to the Consolidated Financial Statements for further discussion.**Financial Condition**