##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
 For the quarterly period ended September 30, 2009
 OR
 o
    
    Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 Commission file number 001-34095
 FIRST BUSINESS FINANCIAL SERVICES, INC.
  Wisconsin
    
    39-1576570(State or jurisdiction of incorporation or organization)
    
    (I.R.S. Employer Identification No.)401 Charmany Drive Madison, WI
    
    53719(Address of Principal Executive Offices)
    
    (Zip Code)
 
   þ o
  o o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer o
(Do not check if a smaller reporting company)
    
    Smaller reporting company þ
  o þ




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##### Table of Contents



2




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##### 



FIRST BUSINESS FINANCIAL SERVICES, INC.
INDEX  FORM 10-Q
 PagePART I. FINANCIAL INFORMATIONItem 1. Financial Statements (Unaudited)Consolidated Balance Sheets as of September 30,
2009 and December 31, 2008
    
    
    1Consolidated Statements of Income for the Three
Months and Nine Months Ended September 30, 2009 and
2008
    
    
    2Consolidated Statements of Changes in Stockholders
Equity and Comprehensive Income for the Nine Months
Ended September 30, 2009 and 2008
    
    
    3Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 2009 and 2008
    
    
    4Notes to Unaudited Consolidated Financial Statements
    
    
    5Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations
    
    
    21Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    40Item 4T. Controls and Procedures
    
    
    41PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    41Item 1A. Risk Factors
    
    
    41Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    41Item 3. Defaults upon Senior Securities
    
    
    42Item 4. Submission of Matters to a Vote of Security Holders
    
    
    42Item 5. Other information
    
    
    42Item 6. Exhibits
    
    
    42SIGNATURES
    
    
    43EX-31.1EX-31.2EX-32




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##### Table of Contents



PART I. Financial Information
 
 Item 1.
    
    Financial Statements
 
 First
Business Financial Services, Inc.
 
 Consolidated Balance Sheets
 (Unaudited)September 30,
    
    
    December 31,2009
    
    
    2008(In Thousands, Except Share Data)AssetsCash and due from banks
    
    $
    10,315
    
    
    $
    19,216Short-term investments
    
    
    47,372
    
    
    
    4,468Cash and cash equivalents
    
    
    57,687
    
    
    
    23,684Securities available-for-sale, at fair value
    
    
    120,448
    
    
    
    109,124Loans and leases receivable, net of allowance for loan and lease losses of $12,805 and
$11,846, respectively
    
    
    857,736
    
    
    
    840,546Leasehold improvements and equipment, net
    
    
    1,291
    
    
    
    1,529Foreclosed properties and repossessed assets
    
    
    3,174
    
    
    
    3,011Cash surrender value of bank-owned life insurance
    
    
    16,061
    
    
    
    15,499Investment in Federal Home Loan Bank stock, at cost
    
    
    2,367
    
    
    
    2,367Goodwill and other intangibles
    
    
    2,745
    
    
    
    2,762Accrued interest receivable and other assets
    
    
    12,144
    
    
    
    12,264Total assets
    
    $
    1,073,653
    
    
    $
    1,010,786Liabilities and Stockholders EquityDeposits
    
    $
    936,672
    
    
    $
    838,874Federal Home Loan Bank and other borrowings
    
    
    57,518
    
    
    
    94,526Junior subordinated notes
    
    
    10,315
    
    
    
    10,315Accrued interest payable and other liabilities
    
    
    14,093
    
    
    
    14,065Total liabilities
    
    
    1,018,598
    
    
    
    957,780Commitments and contingenciesStockholders equity:Preferred stock, $0.01 par value, 2,500,000 shares authorized, none issued or
outstanding
    
    
    
    
    
    
    Common stock, $0.01 par value, 25,000,000 shares authorized, 2,612,010 and 2,616,424
shares issued, 2,535,306 and 2,545,546 outstanding at 2009 and 2008, respectively
    
    
    26
    
    
    
    26Additional paid-in capital
    
    
    24,569
    
    
    
    24,088Retained earnings
    
    
    30,137
    
    
    
    29,252Accumulated other comprehensive income
    
    
    1,813
    
    
    
    1,065Treasury stock (76,704 and 70,878 shares in 2009 and 2008, respectively), at cost
    
    
    (1,490
    )
    
    
    (1,425
    )Total stockholders equity
    
    
    55,055
    
    
    
    53,006Total liabilities and stockholders equity
    
    $
    1,073,503
    
    
    $
    1,010,786
  1




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##### Table of Contents



First
Business Financial Services, Inc.
 
 Consolidated Statements of Income (Unaudited)
 For the Three Months Ended
    
    
    For the Nine Months Ended,September 30,
    
    
    September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008(In Thousands, Except Share Data)Interest income:Loans and leases
    
    $
    13,025
    
    
    $
    13,518
    
    
    $
    38,388
    
    
    $
    41,100Securities income, taxable
    
    
    1,191
    
    
    
    1,205
    
    
    
    3,636
    
    
    
    3,444Short-term investments
    
    
    19
    
    
    
    16
    
    
    
    48
    
    
    
    74Total interest income
    
    
    14,235
    
    
    
    14,739
    
    
    
    42,072
    
    
    
    44,618Interest expense:Deposits
    
    
    5,874
    
    
    
    7,245
    
    
    
    18,514
    
    
    
    22,474Notes payable and other borrowings
    
    
    748
    
    
    
    962
    
    
    
    2,060
    
    
    
    2,898Junior subordinated notes
    
    
    280
    
    
    
    15
    
    
    
    832
    
    
    
    15Total interest expense
    
    
    6,902
    
    
    
    8,222
    
    
    
    21,406
    
    
    
    25,387Net interest income
    
    
    7,333
    
    
    
    6,517
    
    
    
    20,666
    
    
    
    19,231Provision for loan and lease losses
    
    
    1,378
    
    
    
    17
    
    
    
    5,222
    
    
    
    1,314Net interest income after
provision for loan and
lease losses
    
    
    5,955
    
    
    
    6,500
    
    
    
    15,444
    
    
    
    17,917Non-interest income:Trust and investment services income
    
    
    489
    
    
    
    489
    
    
    
    1,394
    
    
    
    1,510Service charges on deposits
    
    
    402
    
    
    
    282
    
    
    
    1,114
    
    
    
    742Increase in cash surrender value of bank-owned life
insurance
    
    
    175
    
    
    
    192
    
    
    
    562
    
    
    
    549Loan fees
    
    
    316
    
    
    
    176
    
    
    
    780
    
    
    
    471Credit, merchant and debit card fees
    
    
    49
    
    
    
    54
    
    
    
    147
    
    
    
    163Gain on sale of available-for-sale securities
    
    
    322
    
    
    
    
    
    
    
    322
    
    
    
    Other
    
    
    136
    
    
    
    147
    
    
    
    587
    
    
    
    265Total non-interest income
    
    
    1,889
    
    
    
    1,340
    
    
    
    4,906
    
    
    
    3,700Non-interest expense:Compensation
    
    
    3,000
    
    
    
    3,137
    
    
    
    9,252
    
    
    
    9,721Occupancy
    
    
    373
    
    
    
    339
    
    
    
    1,113
    
    
    
    988Equipment
    
    
    138
    
    
    
    153
    
    
    
    438
    
    
    
    457Data processing
    
    
    275
    
    
    
    228
    
    
    
    841
    
    
    
    758Marketing
    
    
    135
    
    
    
    251
    
    
    
    467
    
    
    
    727Professional fees
    
    
    404
    
    
    
    380
    
    
    
    1,340
    
    
    
    1,333Collateral liquidation costs
    
    
    120
    
    
    
    
    
    
    
    975
    
    
    
    FDIC Insurance
    
    
    397
    
    
    
    149
    
    
    
    1,657
    
    
    
    449Loss on foreclosed properties and repossessed assets
    
    
    193
    
    
    
    626
    
    
    
    181
    
    
    
    631Other
    
    
    493
    
    
    
    552
    
    
    
    1,678
    
    
    
    1,536Total non-interest expense
    
    
    5,528
    
    
    
    5,815
    
    
    
    17,942
    
    
    
    16,600Income before income tax expense
    
    
    2,316
    
    
    
    2,025
    
    
    
    2,408
    
    
    
    5,017Income tax expense
    
    
    963
    
    
    
    853
    
    
    
    989
    
    
    
    2,007Net income
    
    $
    1,353
    
    
    $
    1,172
    
    
    $
    1,419
    
    
    $
    3,010Earnings per share:Basic
    
    $
    0.53
    
    
    $
    0.46
    
    
    $
    0.56
    
    
    $
    1.20Diluted
    
    
    0.53
    
    
    
    0.46
    
    
    
    0.56
    
    
    
    1.19Dividends declared per share
    
    
    0.07
    
    
    
    0.07
    
    
    
    0.21
    
    
    
    0.21
  2




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##### Table of Contents



First Business Financial Services, Inc.
 
 Consolidated Statements of Changes in Stockholders Equity and Comprehensive Income (Unaudited)
 AccumulatedAdditional
    
    
    
    
    
    
    otherCommon
    
    
    paid-in
    
    
    Retained
    
    
    comprehensive
    
    
    Treasurystock
    
    
    capital
    
    
    earnings
    
    
    income (loss)
    
    
    stock
    
    
    Total(In Thousands, Except Share Data)Balance at December 31, 2007
    
    $
    26
    
    
    $
    23,462
    
    
    $
    26,836
    
    
    $
    (399
    )
    
    $
    (1,373
    )
    
    $
    48,552Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    3,010
    
    
    
    
    
    
    
    
    
    
    
    3,010Unrealized securities
gains arising during
the period
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    464
    
    
    
    
    
    
    
    464Unrealized derivative
losses arising during
the period
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4
    )
    
    
    
    
    
    
    (4
    )Reclassification
adjustment for
realized losses on
derivatives
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9
    
    
    
    
    
    
    
    9Income tax effect
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (160
    )
    
    
    
    
    
    
    (160
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,319Share-based compensation  restricted
shares
    
    
    
    
    
    
    450
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    450Cash dividends ($0.21 per share)
    
    
    
    
    
    
    
    
    
    
    (530
    )
    
    
    
    
    
    
    
    
    
    
    (530
    )Treasury stock purchased (3,242 shares)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (52
    )
    
    
    (52
    )Balance at September 30, 2008
    
    $
    26
    
    
    $
    23,912
    
    
    $
    29,316
    
    
    $
    (90
    )
    
    $
    (1,425
    )
    
    $
    51,739
 AccumulatedAdditional
    
    
    
    
    
    
    otherCommon
    
    
    paid-in
    
    
    Retained
    
    
    comprehensive
    
    
    Treasurystock
    
    
    capital
    
    
    earnings
    
    
    income
    
    
    stock
    
    
    Total(In Thousands, Except Share Data)Balance at December 31, 2008
    
    $
    26
    
    
    $
    24,088
    
    
    $
    29,252
    
    
    $
    1,065
    
    
    $
    (1,425
    )
    
    $
    53,006Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    1,419
    
    
    
    
    
    
    
    
    
    
    
    1,419Unrealized securities
gains arising during
the period
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,551
    
    
    
    
    
    
    
    1,551Unrealized derivative
losses arising during
the period
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1
    )
    
    
    
    
    
    
    (1
    )Reclassification
adjustment for
realized gains on
securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (322
    )
    
    
    
    
    
    
    (322
    )Reclassification
adjustment for
realized losses on
derivatives
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3
    
    
    
    
    
    
    
    3Income tax effect
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (483
    )
    
    
    
    
    
    
    (483
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,167Share-based compensation  restricted
shares
    
    
    
    
    
    
    481
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    481Cash dividends ($0.21 per share)
    
    
    
    
    
    
    
    
    
    
    (534
    )
    
    
    
    
    
    
    
    
    
    
    (534
    )Treasury stock purchased (5,826 shares)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (65
    )
    
    
    (65
    )Balance at September 30, 2009
    
    $
    26
    
    
    $
    24,569
    
    
    $
    30,137
    
    
    $
    1,813
    
    
    $
    (1,490
    )
    
    $
    55,055
  3




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##### Table of Contents



First Business Financial Services, Inc.
 
 Consolidated Statements of Cash Flows (Unaudited)
 For the Nine Months EndedSeptember 30,2009
    
    
    2008(In Thousands)Operating activitiesNet income
    
    $
    1,419
    
    
    $
    3,010Adjustments to reconcile net income to net cash provided by
operating activities:Deferred income taxes, net
    
    
    (586
    )
    
    
    (612
    )Provision for loan and lease losses
    
    
    5,222
    
    
    
    1,314Depreciation, amortization and accretion, net
    
    
    565
    
    
    
    391Share-based compensation
    
    
    481
    
    
    
    450Increase in cash surrender value of bank-owned life insurance
    
    
    (562
    )
    
    
    (549
    )Gain on sale of available-for-sale securities
    
    
    (322
    )
    
    
    Origination of loans for sale
    
    
    (3,164
    )
    
    
    (586
    )Sale of loans originated for sale
    
    
    3,173
    
    
    
    588Gain on sale of loans originated for sale
    
    
    (9
    )
    
    
    (2
    )Loss on foreclosed properties and repossessed assets
    
    
    181
    
    
    
    631Decrease (increase) in accrued interest receivable and other assets
    
    
    229
    
    
    
    (1,247
    )Increase in accrued interest payable and other liabilities
    
    
    32
    
    
    
    3,362Net cash provided by operating activities
    
    
    6,659
    
    
    
    6,750Investing activitiesProceeds from maturities of available-for-sale securities
    
    
    24,106
    
    
    
    22,340Proceeds from sales of available-for-sale securities
    
    
    15,003
    
    
    
    Purchases of available-for-sale securities
    
    
    (49,019
    )
    
    
    (31,947
    )Proceeds from sale of foreclosed properties and repossessed assets
    
    
    296
    
    
    
    655Net increase in loans and leases
    
    
    (23,051
    )
    
    
    (62,155
    )Purchases of leasehold improvements and equipment, net
    
    
    (182
    )
    
    
    (434
    )Net cash used in investing activities
    
    
    (32,847
    )
    
    
    (71,541
    )Financing activitiesNet increase in deposits
    
    
    97,798
    
    
    
    55,229Repayment of FHLB advances
    
    
    (15,008
    )
    
    
    (41,007
    )Proceeds from FHLB advances
    
    
    
    
    
    
    50,000Net decrease increase in short-term borrowed funds
    
    
    (22,000
    )
    
    
    (9,150
    )Proceeds from other borrowings
    
    
    31,000
    
    
    
    39,000Repayment of other borrowings
    
    
    (31,000
    )
    
    
    (31,000
    )Proceeds from junior subordinated notes
    
    
    
    
    
    
    10,315Cash dividends paid
    
    
    (534
    )
    
    
    (515
    )Purchase of treasury stock
    
    
    (65
    )
    
    
    (52
    )Net cash provided by financing activities
    
    
    60,191
    
    
    
    72,820Net increase in cash and cash equivalents
    
    
    34,003
    
    
    
    8,029Cash and cash equivalents at the beginning of the period
    
    
    23,684
    
    
    
    17,624Cash and cash equivalents at the end of the period
    
    $
    57,687
    
    
    $
    25,653Supplementary cash flow informationInterest paid on deposits and borrowings
    
    $
    22,132
    
    
    $
    23,260Income taxes paid
    
    
    188
    
    
    
    896Transfer to foreclosed properties and repossessed assets
    
    
    640
    
    
    
    4,117
  4




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##### Table of Contents



NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 Note 1  Principles of Consolidation
  Note 2  Basis of Presentation
   Note 3  Recent Accounting Pronouncements
 New Accounting Pronouncements.
 Transfers and Servicing of Financial Assets
 5




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##### Table of Contents



Fair Value Disclosures.
   Note 10  Fair Value Disclosure
 Derivative Instruments and Hedging Activities.
 Instruments Granted in Share-Based Payment Transactions as Participating Securities
 6




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##### Table of Contents



Consolidation of Variable Interest Entities.
 
    
    The power to direct the activities of a variable interest entity that most
significantly impact the entitys economic performance; and
    
    The obligation to absorb losses of the entity that could potentially be significant to
the variable interest entity or the right to receive benefits from the entity that could
potentially be significant to the variable interest entity.
  Note 4  Earnings Per Share.
  7




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For the Three Months Ended
    
    
    For the Nine Months EndedSeptember 30,
    
    
    September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Distributed earnings allocated to common stockholders
    
    $
    172,234
    
    
    $
    170,937
    
    
    $
    514,723
    
    
    $
    510,785Undistributed earnings allocated to common stockholders
    
    
    1,140,335
    
    
    
    953,718
    
    
    
    854,372
    
    
    
    2,391,280Income available to common stockholders for basic earnings per share
    
    
    1,312,569
    
    
    
    1,124,655
    
    
    
    1,369,095
    
    
    
    2,902,065Reallocation of undistributed earnings for diluted earnings per share
    
    
    
    
    
    
    4
    
    
    
    
    
    
    
    21Income available to common stockholders for diluted earnings per share
    
    $
    1,312,569
    
    
    $
    1,124,659
    
    
    $
    1,369,095
    
    
    $
    2,902,086Basic average shares
    
    
    2,462,289
    
    
    
    2,435,188
    
    
    
    2,452,336
    
    
    
    2,428,271Dilutive effect of share-based awards
    
    
    
    
    
    
    251
    
    
    
    
    
    
    
    594Dilutive average shares
    
    
    2,462,289
    
    
    
    2,435,439
    
    
    
    2,452,336
    
    
    
    2,428,865Earnings per share:Basic
    
    $
    0.53
    
    
    $
    0.46
    
    
    $
    0.56
    
    
    $
    1.20Diluted
    
    
    0.53
    
    
    
    0.46
    
    
    
    0.56
    
    
    
    1.19
 Note 5  Share-Based Compensation
  Stock Options
  8




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##### Table of Contents



WeightedAverageRemainingWeighted
    
    
    ContractualOptions
    
    
    Average Price
    
    
    Life (Years)Outstanding at December 31, 2007
    
    
    159,540
    
    
    $
    22.10Granted
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    Forfeited
    
    
    (2,250
    )
    
    
    24.56Outstanding at December 31, 2008
    
    
    157,290
    
    
    
    22.07
    
    
    
    4.67Options exercisable at December 31, 2008
    
    
    154,290
    
    
    
    
    
    
    
    4.58Outstanding as of December 31, 2008
    
    
    157,290
    
    
    $
    22.07
    
    
    
    4.67Granted
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    Forfeited
    
    
    (5,200
    )
    
    
    22.42Outstanding at September 30, 2009
    
    
    152,090
    
    
    
    22.06
    
    
    
    3.92Options exercisable at September 30, 2009
    
    
    152,090
    
    
    
    
    
    
    
    3.92
 Restricted Shares
  9




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##### Table of Contents



Weighted AverageNumber of
    
    
    Grant-DateRestricted Shares
    
    
    Fair ValueNonvested balance as of December 31, 2007
    
    
    91,379
    
    
    $
    21.16Granted
    
    
    40,950
    
    
    
    16.00Vested
    
    
    (26,005
    )
    
    
    21.29Forfeited
    
    
    (1,375
    )
    
    
    20.59Nonvested balance as of December 31, 2008
    
    
    104,949
    
    
    $
    19.12Granted
    
    
    2,500
    
    
    
    9.52Vested
    
    
    (31,773
    )
    
    
    19.73Forfeited
    
    
    (6,914
    )
    
    
    19.99Nonvested balance as of September 30, 2009
    
    
    68,762
    
    
    $
    18.40
  Note 6  Securities.
  As of September 30, 2009Gross
    
    
    GrossUnrealized
    
    
    unrealized
    
    
    EstimatedAmortized cost
    
    
    holding gains
    
    
    holding losses
    
    
    fair value(In Thousands)Collateralized mortgage obligations  government agencies
    
    $
    112,567
    
    
    $
    2,928
    
    
    $
    (155
    )
    
    $
    115,340Collateralized mortgage obligations   government-sponsored enterprises
    
    
    5,024
    
    
    
    84
    
    
    
    
    
    
    
    5,108$
    117,591
    
    
    $
    3,012
    
    
    $
    (155
    )
    
    $
    120,448
 As of December 31, 2008Gross
    
    
    Grossunrealized
    
    
    unrealized
    
    
    EstimatedAmortized cost
    
    
    holding gains
    
    
    holding losses
    
    
    fair value(In Thousands)Collateralized mortgage obligations  government agencies
    
    $
    81,406
    
    
    $
    1,485
    
    
    $
    (32
    )
    
    $
    82,859Collateralized mortgage obligations   government-sponsored enterprises
    
    
    26,090
    
    
    
    179
    
    
    
    (4
    )
    
    
    26,265$
    107,496
    
    
    $
    1,664
    
    
    $
    (36
    )
    
    $
    109,124
 10




---



##### Table of Contents



EstimatedAmortized Cost
    
    
    Fair Value(In Thousands)Due in one year or less
    
    $
    
    
    
    $
    Due in one year through five years
    
    
    1,112
    
    
    
    1,169Due in five through ten years
    
    
    4,579
    
    
    
    4,682Due in over ten years
    
    
    111,900
    
    
    
    114,597$
    117,591
    
    
    $
    120,448
   As of September 30, 2009Less than 12 months
    
    
    12 months or longer
    
    
    TotalUnrealized
    
    
    
    
    
    
    Unrealized
    
    
    
    
    
    
    UnrealizedFair value
    
    
    losses
    
    
    Fair value
    
    
    losses
    
    
    Fair value
    
    
    losses(In Thousands)Collateralized mortgage obligations  government agencies
    
    $
    12,676
    
    
    $
    155
    
    
    $
    
    
    
    $
    
    
    
    $
    12,676
    
    
    $
    155$
    12,676
    
    
    $
    155
    
    
    $
    
    
    
    $
    
    
    
    $
    12,676
    
    
    $
    155
 11




---



##### Table of Contents



As of December 31, 2008Less than 12 months
    
    
    12 months or longer
    
    
    TotalUnrealized
    
    
    
    
    
    
    Unrealized
    
    
    
    
    
    
    UnrealizedFair value
    
    
    losses
    
    
    Fair value
    
    
    losses
    
    
    Fair value
    
    
    losses(In Thousands)Collateralized
mortgage obligations
 government agencies
    
    $
    9,803
    
    
    $
    32
    
    
    $
    
    
    
    $
    
    
    
    $
    9,803
    
    
    $
    32Collateralized
mortgage obligations 
government-sponsored
enterprises
    
    
    1,394
    
    
    
    2
    
    
    
    534
    
    
    
    2
    
    
    
    1,928
    
    
    
    4$
    11,197
    
    
    $
    34
    
    
    $
    534
    
    
    $
    2
    
    
    $
    11,731
    
    
    $
    36
   Note 7 Loans, Leases and Allowance for Loan and Lease Losses
  September 30,
    
    
    December 31,2009
    
    
    2008(In Thousands)First mortgage loans:Commercial real estate
    
    $
    422,143
    
    
    $
    390,094Construction
    
    
    84,318
    
    
    
    84,778Multi-family
    
    
    47,105
    
    
    
    42,5141-4 family
    
    
    58,173
    
    
    
    51,542Total first mortgage loans
    
    
    611,739
    
    
    
    568,928Commercial and industrial loans
    
    
    209,751
    
    
    
    232,350Direct financing leases, net
    
    
    29,019
    
    
    
    29,722Home equity loans and second mortgage
    
    
    7,085
    
    
    
    7,386Credit card and other
    
    
    13,511
    
    
    
    14,445Loans and leases receivable, gross
    
    
    871,105
    
    
    
    852,831Less:Allowance for loan and lease losses
    
    
    12,805
    
    
    
    11,846Deferred loan fees
    
    
    564
    
    
    
    439Loans and leases receivable, net
    
    $
    857,736
    
    
    $
    840,546
 12




---



##### Table of Contents



Nine Months EndedSeptember 30,2009
    
    
    2008(Dollars In Thousands)Allowance at beginning of period
    
    $
    11,846
    
    
    $
    9,854Charge-offs:Commercial real estate and other first mortgage
    
    
    (2,062
    )
    
    
    (417
    )Commercial and industrial
    
    
    (1,813
    )
    
    
    (24
    )Direct financing leases
    
    
    (231
    )
    
    
    Home equity loans and second mortgage
    
    
    (154
    )
    
    
    Consumer
    
    
    (8
    )
    
    
    Total charge-offs
    
    
    (4,268
    )
    
    
    (441
    )Recoveries:Commercial real estate and other mortgage
    
    
    
    
    
    
    87Commercial and industrial
    
    
    3
    
    
    
    2Direct financing leases
    
    
    
    
    
    
    Home equity loans and second mortgage
    
    
    2
    
    
    
    Consumer
    
    
    
    
    
    
    Total recoveries
    
    
    5
    
    
    
    89Net charge-offs
    
    
    (4,263
    )
    
    
    (352
    )Provision for loan and lease losses
    
    
    5,222
    
    
    
    1,314Allowance at end of period
    
    $
    12,805
    
    
    $
    10,816Allowance to gross loans and leases
    
    
    1.47
    %
    
    
    1.29
    %
  September 30,
    
    
    December 31,2009
    
    
    2008(Dollars In Thousands)Non-accrual loans and leasesFirst mortgage loans:Commercial real estate
    
    $
    6,811
    
    
    $
    2,979Construction and land development
    
    
    5,245
    
    
    
    5,279Multi-family
    
    
    1,778
    
    
    
    1-4 family
    
    
    1,887
    
    
    
    2,082Total first mortgage loans
    
    
    15,721
    
    
    
    10,340Commercial and industrial
    
    
    4,556
    
    
    
    5,412Direct financing leases, net
    
    
    8
    
    
    
    24Home equity and second mortgage
    
    
    720
    
    
    
    379Consumer
    
    
    117
    
    
    
    130Total non-accrual loans and leases
    
    
    21,122
    
    
    
    16,285Foreclosed properties and repossessed assets, net
    
    
    3,174
    
    
    
    3,011Total non-performing assets
    
    $
    24,296
    
    
    $
    19,296Performing troubled debt restructurings
    
    $
    
    
    
    $
    Total non-accrual loans and leases to gross loans and leases
    
    
    2.42
    %
    
    
    1.91
    %Total non-performing assets to total assets
    
    
    2.26
    
    
    
    1.91Allowance for loan and lease losses to gross loans and leases
    
    
    1.47
    
    
    
    1.39Allowance for loan and lease losses to non-accrual loans and leases
    
    
    60.62
    
    
    
    72.75
 13




---



##### Table of Contents



As of and for
    
    
    As of and forthe Nine
    
    
    the YearMonths Ended
    
    
    EndedSeptember 30,
    
    
    December 31,2009
    
    
    2008(In Thousands)Impaired loans and leases with no impairment reserves required
    
    $
    14,418
    
    
    $
    9,986Impaired loans and leases with impairment reserves required
    
    
    6,704
    
    
    
    6,299Total impaired loans and leases
    
    
    21,122
    
    
    
    16,285Less:Impairment reserve (included in allowance for loan and lease
losses)
    
    
    1,139
    
    
    
    1,417Net impaired loans and leases
    
    $
    19,983
    
    
    $
    14,868Average net impaired loans and leases
    
    $
    17,810
    
    
    $
    8,375Foregone interest income attributable to impaired loans and leases
    
    $
    1,310
    
    
    $
    752Interest income recognized on impaired loans and leases
    
    
    (108
    )
    
    
    (49
    )Net foregone interest income on impaired loans and leases
    
    $
    1,202
    
    
    $
    703
  Note 8  Deposits
  September 30, 2009
    
    
    December 31, 2008Weighted

    
    
    
    
    
    WeightedBalance
    
    
    average rate

    
    Balance
    
    
    average rate(Dollars In Thousands)Transaction accounts:Demand deposits
    
    $
    52,018
    
    
    
    0.00
    %
    
    $
    55,388
    
    
    
    0.00
    %Negotiable order of withdrawal
(NOW) accounts
    
    
    56,652
    
    
    
    0.40
    
    
    
    51,547
    
    
    
    1.61Total transaction accounts
    
    
    108,670
    
    
    
    
    
    
    
    106,935Money market accounts
    
    
    230,489
    
    
    
    1.32
    
    
    
    148,366
    
    
    
    1.79Certificates of deposit
    
    
    139,811
    
    
    
    2.40
    
    
    
    105,876
    
    
    
    3.57Brokered certificates of deposit
    
    
    457,702
    
    
    
    4.07
    
    
    
    477,697
    
    
    
    4.71Total deposits
    
    $
    936,672
    
    
    
    
    
    
    $
    838,874
 14




---



##### Table of Contents



Note 9  Borrowings
  September 30, 2009
    
    
    December 31, 2008Weighted
    
    
    Weighted

    
    
    
    
    
    Weighted
    
    
    Weightedaverage
    
    
    average

    
    
    
    
    
    average
    
    
    averageBalance
    
    
    balance
    
    
    rate
    

    Balance
    
    
    balance
    
    
    rate(Dollars In Thousands)Fed funds purchased
    
    $
    
    
    
    $
    2,273
    
    
    
    0.61
    %
    
    $
    22,000
    
    
    $
    12,888
    
    
    
    2.38
    %FHLB advances
    
    
    18,508
    
    
    
    18,997
    
    
    
    4.62
    
    
    
    33,516
    
    
    
    31,840
    
    
    
    4.34Line of credit
    
    
    10
    
    
    
    47
    
    
    
    4.42
    
    
    
    10
    
    
    
    1,461
    
    
    
    4.87Subordinated notes
payable
    
    
    39,000
    
    
    
    39,000
    
    
    
    4.75
    
    
    
    39,000
    
    
    
    35,570
    
    
    
    5.70Junior subordinated
notes
    
    
    10,315
    
    
    
    10,315
    
    
    
    10.76
    
    
    
    10,315
    
    
    
    2,734
    
    
    
    10.83$
    67,833
    
    
    $
    70,632
    
    
    
    5.46
    
    
    $
    104,841
    
    
    $
    84,493
    
    
    
    4.83Short-term borrowings
    
    $
    16,010
    
    
    
    
    
    
    
    
    
    
    $
    37,010Long-term borrowings
    
    
    51,823
    
    
    
    
    
    
    
    
    
    
    
    67,831$
    67,833
    
    
    
    
    
    
    
    
    
    
    $
    104,841
  Note 10  Fair Value Disclosures
  Level 1 Level 1 inputs are unadjusted quoted prices in active markets for identical assets
or liabilities that the Corporation has the ability to access at the measurement date.
 Level 2 Level 2 inputs are inputs other than quoted prices included with Level 1 that
are observable for the asset or liability either directly or indirectly, such as quoted
prices for similar assets or liabilities; quoted prices in markets that are not active; or
other inputs that are observable or can be corroborated by observable market data for
substantially the full term of the assets or liabilities.
 Level 3 Level 3 inputs are inputs that are supported by little or no market activity and
that are significant to the fair value of the assets or liabilities.
 15




---



##### Table of Contents



Quoted Prices in
    
    SignificantActive Markets
    
    Other
    
    SignificantBalances as of
    
    for Identical
    
    Observable
    
    UnobservableSeptember 30,
    
    Assets
    
    Inputs
    
    Inputs2009
    
    (Level 1)
    
    (Level 2)
    
    (Level 3)(In Thousands)Assets:Collateralized
mortgage
obligations 
government agencies
    
    $
    115,340
    
    
    $
    
    
    
    $
    115,340
    
    
    $
    Collateralized
mortgage
obligations 
government
sponsored
enterprises
    
    
    5,108
    
    
    
   
    
    
    
    5,108
    
    
    
    Interest rate swaps
    
    
    1,650
    
    
    
    
    
    
    
    1,650
    
    
    
    Liabilities:Interest rate swaps
    
    $
    1,650
    
    
    $
    
    
    
    $
    1,650
    
    
    $
    
 Quoted Prices in
    
    SignificantActive Markets
    
    Other
    
    SignificantBalances as of
    
    for Identical
    
    Observable
    
    UnobservableDecember 31,
    
    Assets
    
    Inputs
    
    Inputs2008
    
    (Level 1)
    
    (Level 2)
    
    (Level 3)(In Thousands)Assets:Collateralized
mortgage
obligations 
government agencies
    
    $
    82,859
    
    
    $
    
    
    
    $
    82,859
    
    
    $
    Collateralized mortgage
obligations 
government
sponsored
enterprises
    
    
    26,265
    
    
    
    
    
    
    
    26,265
    
    
    
    Interest rate swaps
    
    
    1,797
    
    
    
    
    
    
    
    1,797
    
    
    
    Liabilities:Interest rate swaps
    
    $
    1,799
    
    
    $
    
    
    
    $
    1,799
    
    
    $
    
 16




---



##### Table of Contents



Quoted Pricesin Active
    
    SignificantMarkets for
    
    Other
    
    SignificantBalance at
    
    Identical
    
    Observable
    
    Unobservable
    
    TotalSeptember 30,
    
    Assets
    
    Inputs
    
    Inputs
    
    Gains2009
    
    (Level 1)
    
    (Level 2)
    
    (Level 3)
    
    (Losses)(In Thousands)Impaired loans
    
    $
    12,775
    
    
    $
    
    
    
    $
    7,245
    
    
    $
    5,530
    
    
    $
    Foreclosed assets
    
    
    3,174
    
    
    
    
    
    
    
    100
    
    
    
    3,074
    
    
    
    (193
    )
    17




---



##### Table of Contents



September 30, 2009
    
    December 31, 2008Carrying Amount
    
    Fair Value
    
    Carrying Amount
    
    Fair Value(In Thousands)Financial assets:Cash and cash equivalents
    
    $
    57,687
    
    
    $
    57,687
    
    
    $
    23,684
    
    
    $
    23,684Securities available-for-sale
    
    
    120,448
    
    
    
    120,448
    
    
    
    109,124
    
    
    
    109,124Loans and lease receivables
    
    
    857,736
    
    
    
    850,167
    
    
    
    840,546
    
    
    
    892,142Federal Home Loan Bank stock
    
    
    2,367
    
    
    
    2,367
    
    
    
    2,367
    
    
    
    2,367Cash surrender value of life
insurance
    
    
    16,061
    
    
    
    16,061
    
    
    
    15,499
    
    
    
    15,499Accrued interest receivable
    
    
    3,206
    
    
    
    3,206
    
    
    
    3,331
    
    
    
    3,331Interest rate swaps
    
    
    1,650
    
    
    
    1,650
    
    
    
    1,797
    
    
    
    1,797Financial liabilities:Deposits
    
    $
    936,672
    
    
    $
    953,204
    
    
    $
    838,874
    
    
    $
    863,102Federal funds purchased
    
    
    
    
    
    
    
    
    
    
    22,000
    
    
    
    22,000Federal Home Loan Bank and
other borrowings
    
    
    57,518
    
    
    
    58,345
    
    
    
    72,526
    
    
    
    73,841Junior subordinated notes
    
    
    10,315
    
    
    
    7,220
    
    
    
    10,315
    
    
    
    6,925Interest rate swaps
    
    
    1,650
    
    
    
    1,650
    
    
    
    1,799
    
    
    
    1,799Accrued interest payable
    
    
    5,976
    
    
    
    5,976
    
    
    
    6,911
    
    
    
    6,911Off balance sheet items:Standby letters of credit
    
    
    40
    
    
    
    40
    
    
    
    28
    
    
    
    28Commitments to extend credit
    
    
    
    
    
    
    *
    
    
    
    
    
    
    
    *
 
 *
    
    Not meaningful   18




---



##### Table of Contents



Securities:
 Loans and Leases:
 Federal Home Loan Bank stock:
 Cash surrender value of life insurance:
 Deposits:
  Securities sold under agreement to repurchase:
 Borrowed funds:
 Financial instruments with off-balance sheet risks:
  Interest rate swaps:
 19




---



##### Table of Contents



Note 11  Derivative Financial Instruments
    Interest Rate Swap ContractsAsset Derivatives
    
    Liability DerivativesBalance Sheet
    
    
    
    
    
    Balance SheetLocation
    
    Fair Value
    
    Location
    
    Fair Value(In Thousands)Derivatives
designated as
hedging instrumentsSeptember 30, 2009
    
    
    
    
    
    
    
    
    
    Other liabilities
    
    $
    December 31, 2008
    
    
    
    
    
    
    
    
    
    Other liabilities
    
    $
    2Derivatives not
designated as
hedging instrumentsSeptember 30, 2009
    
    Other assets
    
    $
    1,650
    
    
    Other liabilities
    
    $
    1,650December 31, 2008
    
    Other assets
    
    $
    1,797
    
    
    Other liabilities
    
    $
    1,797
 20




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##### Table of Contents



For the nine months ended September 30, 2009Amount Recognized in
    
    
    
    
    
    
    Amount reclassifiedOther Comprehensive
    
    
    
    
    
    
    from Accumulated
    
    
    
    
    
    
    Amount ofIncome on Derivative
    
    
    Income Statement
    
    
    Other Comprehensive
    
    
    Income Statement
    
    
    Gain/(Loss)Gain/(Loss)
    
    
    Location
    
    
    Income
    
    
    Location
    
    
    RecordedInstrument
    
    Effective Portion
    
    
    Effective Portion
    
    
    Effective Portion
    
    
    Ineffective Portion
    
    
    Ineffective Portion(In Thousands)Interest rate
swaps -hedge
    
    $
    (1
    )
    
    Interest expense
    
    $
    (3
    )
    
    N/A
    
    
    $
    Interest
rate swaps - non hedge
    
    $
    
    
    

    N/A
    
    
    $
    
    
    
    Other noninterest income
    
    $
    (183
    )Interest
rate swaps non-hedge
    
    $
    
    
    

    N/A
    
    
    $
    
    
    
    Other noninterest income
    
    $
    462
 For the nine months ended September 30, 2008Amount Recognized in
    
    
    
    
    
    
    Amount reclassifiedOther Comprehensive
    
    
    
    
    
    
    from Accumulated
    
    
    
    
    
    
    Amount ofIncome on Derivative
    
    
    Income Statement
    
    
    Other Comprehensive
    
    
    Income Statement
    
    
    Gain/(Loss)Gain/(Loss)
    
    
    Location
    
    
    Income
    
    
    Location
    
    
    RecordedInstrument
    
    Effective Portion
    
    
    Effective Portion
    
    
    Effective Portion
    
    
    Ineffective Portion
    
    
    Ineffective Portion(In Thousands)Interest rate
swaps -hedge
    
    $
    (3
    )
    
    Interest expense
    
    $
    (6
    )
    
    N/A
    
    
    $
    Interest
rate swaps - non hedge
    
    
    
    
    

    N/A
    
    
    
    
    
    
    Other noninterest income
    
    
    114Interest
rate swaps - non hedge
    
    
    
    
    

    N/A
    
    
    
    
    
    
    Other noninterest income
    
    
    (60
    )
 
 Item 2.  Managements Discussion and Analysis of Financial Condition and Results of
Operations
 General
  21




---



##### Table of Contents



Item 1A. Risk Factors
  Overview
  General Overview
 
    
    Total assets were $1.07 billion as of September 30, 2009 compared to $1.01 billion as
of December 31, 2008.
    
    Net income for the three months ended September 30, 2009 was $1.4 million compared to
net income of $1.2 million for the three months ended September 30, 2008. Net income for
the nine months ended September 30, 2009 was $1.4 million compared to net income of $3.0
million for the nine months ended September 30, 2008.
    
    Net interest margin increased to 2.88% for the three months ended September 30, 2009
compared to 2.78% for the three months ended September 30, 2008. Net interest margin
remained relatively flat at 2.76% for the nine months ended September 30, 2009 compared to
2.77% for the nine months ended September 30, 2008.
    
    Top line revenue increased 11.5% to $25.6 million for the nine months ended September
30, 2009 compared to $22.9 million for the comparable period of the prior year.
Approximately $322,000 of gains on sales of available-for-sale securities were included in
top line revenue for the nine months ended September 30, 2009. There were no sales of
securities in the comparable period of the prior year.
    
    Loan and lease loss provision was $1.4 million for the three months ended September 30,
2009 compared to $17,000 for same time period in the prior year. Loan and lease loss
provision was $5.2 million for the nine months ended September 30, 2009 compared to $1.3
million for the nine months ended September 30, 2008. Allowance for loan and lease loss
as a percentage of gross loans and leases was 1.47% at September 30, 2009 compared to
1.39% at December 31, 2008.
 22




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##### Table of Contents




    
    Diluted earnings per share for the three months ended September 30, 2009 were $0.53
compared to $0.46 for the three months ended September 30, 2008. Diluted earnings per
share were $0.56 and $1.19 for the nine months ended September 30, 2009 and 2008,
respectively.
    
    Annualized return on average equity and return on average assets were 9.88% and 0.51%,
respectively for the three month period ended September 30, 2009, compared to 9.14% and
0.48%, respectively, for the same time period in 2008. Return on average equity and
return on average assets were 3.49% and 0.18%, respectively, for the nine months ended
September 30, 2009 compared to 7.90% and 0.42%, respectively, for the nine months ended
September 30, 2008.
    
    In March 2009, we elected not to participate in the U.S. Troubled Asset Relief Program
Capital Purchase Program.
    
    In the second quarter of 2009 we recorded a special FDIC assessment equivalent to 5
basis points of total assets less Tier 1 Capital of our subsidiary banks, or approximately
$481,000.
 Results of Operations
 Top Line Revenue
  For the Three Months Ended
    
    
    For the Nine Months EndedSeptember 30,
    
    
    September 30,2009
    
    
    2008
    
    
    Change

    
    2009
    
    
    2008
    
    
    Change(Dollars In Thousands)Net interest income
    
    $
    7,333
    
    
    $
    6,517
    
    
    
    12.5
    %
    
    $
    20,666
    
    
    $
    19,231
    
    
    
    7.5
    %Non-interest income
    
    
    1,889
    
    
    
    1,340
    
    
    
    41.0
    
    
    
    4,906
    
    
    
    3,700
    
    
    
    32.6Total top line revenue
    
    $
    9,222
    
    
    $
    7,857
    
    
    
    17.4
    
    
    $
    25,572
    
    
    $
    22,931
    
    
    
    11.5
 Adjusted Net Income
  23




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For the Three Months Ended
    
    
    For the Nine Months EndedSeptember 30,
    
    
    September 30,2009
    
    
    2008
    
    
    Change
    
    
    2009
    
    
    2008
    
    
    Change(Dollars In Thousands)Net income, presented under US GAAP
    
    $
    1,353
    
    
    $
    1,172
    
    
    
    15.4
    %
    
    $
    1,419
    
    
    $
    3,010
    
    
    
    (52.9
    )%Add back:Provision for loan and lease losses, after tax
    
    
    838
    
    
    
    10
    
    
    
    *
    
    
    
    3,174
    
    
    
    799
    
    
    
    297.2Less:Net charge-offs (recoveries), after tax
    
    
    768
    
    
    
    (46
    )
    
    
    *
    
    
    
    2,592
    
    
    
    214
    
    
    
    *Adjusted net income
    
    $
    1,423
    
    
    $
    1,228
    
    
    
    15.9
    
    
    $
    2,001
    
    
    $
    3,595
    
    
    
    (44.3
    )
 
  Return on Equity
  Net Interest Income.
 24




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##### Table of Contents



Three Months
    
    
    Nine MonthsRate/
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Rate/Rate
    
    
    Volume
    
    
    Volume
    
    
    Net
    
    
    Rate
    
    
    Volume
    
    
    Volume
    
    
    Net(In Thousands)}Interest-Earning AssetsCommercial real estate and
other mortgage loans
    
    $
    (1,171
    )
    
    $
    919
    
    
    $
    (125
    )
    
    $
    (377
    )
    
    $
    (3,841
    )
    
    $
    2,344
    
    
    $
    (345
    )
    
    $
    (1,842
    )Commercial loans
    
    
    374
    
    
    
    (394
    )
    
    
    (36
    )
    
    
    (56
    )
    
    
    (307
    )
    
    
    (481
    )
    
    
    11
    
    
    
    (777
    )Direct financing leases
    
    
    (4
    )
    
    
    15
    
    
    
    (1
    )
    
    
    10
    
    
    
    (21
    )
    
    
    78
    
    
    
    (1
    )
    
    
    56Consumer loans
    
    
    (44
    )
    
    
    (30
    )
    
    
    4
    
    
    
    (70
    )
    
    
    (111
    )
    
    
    (43
    )
    
    
    5
    
    
    
    (149
    )Total loans and leases
receivable
    
    
    (845
    )
    
    
    510
    
    
    
    (158
    )
    
    
    (493
    )
    
    
    (4,280
    )
    
    
    1,898
    
    
    
    (330
    )
    
    
    (2,712
    )Mortgage-related securities
    
    
    (144
    )
    
    
    147
    
    
    
    (17
    )
    
    
    (14
    )
    
    
    (195
    )
    
    
    421
    
    
    
    (24
    )
    
    
    202Investment securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10
    )
    
    
    
    
    
    
    (10
    )Federal Home Loan Bank Stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Short-term investments
    
    
    (14
    )
    
    
    152
    
    
    
    (135
    )
    
    
    3
    
    
    
    (67
    )
    
    
    399
    
    
    
    (358
    )
    
    
    (26
    )Total net change in
income on
interest-earning assets
    
    
    (1,003
    )
    
    
    809
    
    
    
    (310
    )
    
    
    (504
    )
    
    
    (4,542
    )
    
    
    2,708
    
    
    
    (712
    )
    
    
    (2,546
    )Interest-Bearing LiabilitiesNOW accounts
    
    
    (154
    )
    
    
    24
    
    
    
    (17
    )
    
    
    (147
    )
    
    
    (694
    )
    
    
    28
    
    
    
    (22
    )
    
    
    (688
    )Money market
    
    
    (43
    )
    
    
    292
    
    
    
    (23
    )
    
    
    226
    
    
    
    (694
    )
    
    
    775
    
    
    
    (248
    )
    
    
    (167
    )Certificates of deposit
    
    
    (273
    )
    
    
    576
    
    
    
    (258
    )
    
    
    45
    
    
    
    (717
    )
    
    
    1,418
    
    
    
    (507
    )
    
    
    194Brokered certificates of deposit
    
    
    (891
    )
    
    
    (712
    )
    
    
    108
    
    
    
    (1,495
    )
    
    
    (2,553
    )
    
    
    (875
    )
    
    
    129
    
    
    
    (3,299
    )Total deposits
    
    
    (1,361
    )
    
    
    180
    
    
    
    (190
    )
    
    
    (1,371
    )
    
    
    (4,658
    )
    
    
    1,346
    
    
    
    (648
    )
    
    
    (3,960
    )FHLB advances
    
    
    14
    
    
    
    (123
    )
    
    
    4
    
    
    
    265
    
    
    
    (22
    )
    
    
    (455
    )
    
    
    9
    
    
    
    817Other borrowings
    
    
    104
    
    
    
    (175
    )
    
    
    (5
    )
    
    
    (114
    )
    
    
    (101
    )
    
    
    (286
    )
    
    
    17
    
    
    
    (468
    )Junior subordinated notes
    
    
    
    
    
    
    261
    
    
    
    (29
    )
    
    
    (100
    )
    
    
    
    
    
    
    808
    
    
    
    9
    
    
    
    (370
    )Total net change in
expense on
interest-bearing
liabilities
    
    
    (1,243
    )
    
    
    143
    
    
    
    (220
    )
    
    
    (1,320
    )
    
    
    (4,781
    )
    
    
    1,413
    
    
    
    (613
    )
    
    
    (3,981
    )Net change in net
interest income
    
    $
    240
    
    
    $
    666
    
    
    $
    (90
    )
    
    $
    816
    
    
    $
    239
    
    
    $
    1,295
    
    
    $
    (99
    )
    
    $
    1,435
   25




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26




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27




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Average Interest-Earning Assets, Average Interest-Bearing Liabilities and Interest Rate Spread.
 For the Three Months Ended September 30,2009
    
    
    2008Average
    
    
    
    
    
    
    Average
    
    
    Average
    
    
    
    
    
    
    Averagebalance
    
    
    Interest
    
    
    yield/cost
    
    
    balance
    
    
    Interest
    
    
    yield/cost(Dollars In Thousands)Interest-Earning AssetsCommercial real estate and other
mortgage loans(1)
    
    $
    603,362
    
    
    $
    8,217
    
    
    
    5.45
    %
    
    $
    545,096
    
    
    $
    8,594
    
    
    
    6.31
    %Commercial and industrial
loans(1)
    
    
    210,102
    
    
    
    4,094
    
    
    
    7.79
    
    
    
    232,153
    
    
    
    4,150
    
    
    
    7.15Direct financing leases(1)
    
    
    29,124
    
    
    
    455
    
    
    
    6.25
    
    
    
    28,200
    
    
    
    445
    
    
    
    6.31Consumer loans
    
    
    21,487
    
    
    
    259
    
    
    
    4.82
    
    
    
    23,626
    
    
    
    329
    
    
    
    5.57Total loans and leases
receivable(1)
    
    
    864,075
    
    
    
    13,025
    
    
    
    6.03
    
    
    
    829,075
    
    
    
    13,518
    
    
    
    6.52Mortgage-related securities(2)
    
    
    116,550
    
    
    
    1,191
    
    
    
    4.09
    
    
    
    103,869
    
    
    
    1,205
    
    
    
    4.64Investment securities(2)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Federal Home Loan Bank stock
    
    
    2,367
    
    
    
    
    
    
    
    
    
    
    
    2,367
    
    
    
    
    
    
    
    Short-term investments
    
    
    34,615
    
    
    
    19
    
    
    
    0.22
    
    
    
    3,306
    
    
    
    16
    
    
    
    1.94Total interest-earning assets
    
    
    1,017,607
    
    
    
    14,235
    
    
    
    5.60
    
    
    
    938,617
    
    
    
    14,739
    
    
    
    6.28Non-interest-earning assets
    
    
    42,883
    
    
    
    
    
    
    
    
    
    
    
    38,261Total assets
    
    $
    1,060,490
    
    
    
    
    
    
    
    
    
    
    $
    976,878Interest-Bearing LiabilitiesNOW accounts
    
    $
    67,288
    
    
    
    66
    
    
    
    0.39
    
    
    $
    60,585
    
    
    
    213
    
    
    
    1.41Money market
    
    
    216,984
    
    
    
    777
    
    
    
    1.43
    
    
    
    141,808
    
    
    
    551
    
    
    
    1.55Certificates of deposits
    
    
    135,909
    
    
    
    655
    
    
    
    1.93
    
    
    
    69,911
    
    
    
    610
    
    
    
    3.49Brokered certificates of deposit
    
    
    452,552
    
    
    
    4,376
    
    
    
    3.87
    
    
    
    515,011
    
    
    
    5,871
    
    
    
    4.56Total interest-bearing deposits
    
    
    872,733
    
    
    
    5,874
    
    
    
    2.69
    
    
    
    787,315
    
    
    
    7,245
    
    
    
    3.68FHLB advances
    
    
    18,509
    
    
    
    221
    
    
    
    4.78
    
    
    
    29,203
    
    
    
    335
    
    
    
    4.59Other borrowings
    
    
    39,118
    
    
    
    527
    
    
    
    5.39
    
    
    
    54,243
    
    
    
    627
    
    
    
    4.62Junior subordinated notes
    
    
    10,315
    
    
    
    280
    
    
    
    10.86
    
    
    
    561
    
    
    
    15
    
    
    
    10.64Total interest-bearing liabilities
    
    
    940,675
    
    
    
    6,902
    
    
    
    2.93
    
    
    
    871,322
    
    
    
    8,222
    
    
    
    3.77Non-interest-bearing liabilities
    
    
    65,025
    
    
    
    
    
    
    
    
    
    
    
    54,206Total liabilities
    
    
    1,005,700
    
    
    
    
    
    
    
    
    
    
    
    925,528Stockholders equity
    
    
    54,790
    
    
    
    
    
    
    
    
    
    
    
    51,350Total liabilities and stockholders
equity
    
    $
    1,060,490
    
    
    
    
    
    
    
    
    
    
    $
    976,878Net interest income/interest rate spread
    
    
    
    
    
    $
    7,333
    
    
    
    2.67
    %
    
    
    
    
    
    $
    6,517
    
    
    
    2.51
    %Net interest-earning assets
    
    $
    76,932
    
    
    
    
    
    
    
    
    
    
    $
    67,295Net interest margin
    
    
    
    
    
    
    
    
    
    
    2.88
    %
    
    
    
    
    
    
    
    
    
    
    2.78
    %Average interest-earning assets to
average interest-bearing liabilities
    
    
    108.18
    %
    
    
    
    
    
    
    
    
    
    
    107.72
    %Return on average assets
    
    
    0.51
    
    
    
    
    
    
    
    
    
    
    
    0.48Return on average equity
    
    
    9.88
    
    
    
    
    
    
    
    
    
    
    
    9.14Average equity to average assets
    
    
    5.17
    
    
    
    
    
    
    
    
    
    
    
    5.26Non-interest expense to average assets
    
    
    2.08
    
    
    
    
    
    
    
    
    
    
    
    2.38
 
 (1)
    
    The average balances of loans and leases include non-performing loans and leases. Interest
income related to non-performing loans and leases is recognized when collected.(2)
    
    Includes amortized cost basis of assets available for sale. 28




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For the Nine Months Ended September 30,2009
    
    
    2008Average
    
    
    
    
    
    
    Average
    
    
    Average
    
    
    
    
    
    
    Averagebalance
    
    
    Interest
    
    
    yield/cost
    
    
    balance
    
    
    Interest
    
    
    yield/cost(Dollars In Thousands)Interest-Earning AssetsCommercial real estate and other
mortgage loans(1)
    
    $
    590,412
    
    
    $
    24,283
    
    
    
    5.48
    %
    
    $
    541,809
    
    
    $
    26,125
    
    
    
    6.43
    %Commercial and industrial
loans(1)
    
    
    217,476
    
    
    
    11,910
    
    
    
    7.30
    
    
    
    226,051
    
    
    
    12,687
    
    
    
    7.48Direct financing leases(1)
    
    
    30,102
    
    
    
    1,408
    
    
    
    6.24
    
    
    
    28,455
    
    
    
    1,352
    
    
    
    6.34Consumer loans
    
    
    21,875
    
    
    
    787
    
    
    
    4.80
    
    
    
    22,918
    
    
    
    936
    
    
    
    5.45Total loans and leases
receivable(1)
    
    
    859,865
    
    
    
    38,388
    
    
    
    5.95
    
    
    
    819,233
    
    
    
    41,100
    
    
    
    6.69Mortgage-related securities(2)
    
    
    111,953
    
    
    
    3,636
    
    
    
    4.33
    
    
    
    99,736
    
    
    
    3,434
    
    
    
    4.59Investment securities(2)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    348
    
    
    
    10
    
    
    
    3.83Federal Home Loan Bank stock
    
    
    2,367
    
    
    
    
    
    
    
    
    
    
    
    2,367
    
    
    
    
    
    
    
    Short-term investments
    
    
    25,943
    
    
    
    48
    
    
    
    0.25
    
    
    
    4,062
    
    
    
    74
    
    
    
    2.43Total interest-earning assets
    
    
    1,000,128
    
    
    
    42,072
    
    
    
    5.61
    
    
    
    925,746
    
    
    
    44,618
    
    
    
    6.43Non-interest-earning assets
    
    
    39,834
    
    
    
    
    
    
    
    
    
    
    
    33,873Total assets
    
    $
    1,039,962
    
    
    
    
    
    
    
    
    
    
    $
    959,619Interest-Bearing LiabilitiesNOW accounts
    
    $
    68,212
    
    
    
    207
    
    
    
    0.40
    
    
    $
    66,109
    
    
    
    895
    
    
    
    1.81Money market
    
    
    201,183
    
    
    
    1,997
    
    
    
    1.32
    
    
    
    148,145
    
    
    
    2,164
    
    
    
    1.95Certificates of deposits
    
    
    121,869
    
    
    
    2,198
    
    
    
    2.40
    
    
    
    71,372
    
    
    
    2,004
    
    
    
    3.74Brokered certificates of deposit
    
    
    462,604
    
    
    
    14,112
    
    
    
    4.07
    
    
    
    487,074
    
    
    
    17,411
    
    
    
    4.77Total interest bearing deposits
    
    
    853,868
    
    
    
    18,514
    
    
    
    2.89
    
    
    
    772,700
    
    
    
    22,474
    
    
    
    3.88FHLB advances
    
    
    18,997
    
    
    
    658
    
    
    
    4.62
    
    
    
    31,874
    
    
    
    1,126
    
    
    
    4.71Other borrowings
    
    
    41,320
    
    
    
    1,402
    
    
    
    4.52
    
    
    
    49,260
    
    
    
    1,772
    
    
    
    4.80Junior subordinated notes
    
    
    10,315
    
    
    
    832
    
    
    
    10.75
    
    
    
    188
    
    
    
    15
    
    
    
    10.64Total interest-bearing liabilities
    
    
    924,500
    
    
    
    21,406
    
    
    
    3.09
    
    
    
    854,022
    
    
    
    25,387
    
    
    
    3.96Non-interest-bearing liabilities
    
    
    61,207
    
    
    
    
    
    
    
    
    
    
    
    54,785Total liabilities
    
    
    985,707
    
    
    
    
    
    
    
    
    
    
    
    908,807Stockholders equity
    
    
    54,255
    
    
    
    
    
    
    
    
    
    
    
    50,812Total liabilities and stockholders
equity
    
    $
    1,039,962
    
    
    
    
    
    
    
    
    
    
    $
    959,619Net interest income/interest rate spread
    
    
    
    
    
    $
    20,666
    
    
    
    2.52
    %
    
    
    
    
    
    $
    19,231
    
    
    
    2.47
    %Net interest-earning assets
    
    $
    75,628
    
    
    
    
    
    
    
    
    
    
    $
    71,724Net interest margin
    
    
    
    
    
    
    
    
    
    
    2.76
    %
    
    
    
    
    
    
    
    
    
    
    2.77
    %Average interest-earning assets to
average interest-bearing liabilities
    
    
    108.18
    %
    
    
    
    
    
    
    
    
    
    
    108.40
    %Return on average assets
    
    
    0.18
    
    
    
    
    
    
    
    
    
    
    
    0.42Return on average equity
    
    
    3.49
    
    
    
    
    
    
    
    
    
    
    
    7.90Average equity to average assets
    
    
    5.22
    
    
    
    
    
    
    
    
    
    
    
    5.32Non-interest expense to average assets
    
    
    2.30
    
    
    
    
    
    
    
    
    
    
    
    2.31
 
 (1)
    
    The average balances of loans and leases include non-performing loans and leases. Interest
income related to non-performing loans and leases is recognized when collected.(2)
    
    Includes amortized cost basis of assets available for sale. 29




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##### Table of Contents



Provision for Loan and Lease Losses.
  Asset Quality
 Non-Interest Income.
   30




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##### Table of Contents



Non-Interest
Expense.
 31




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##### Table of Contents



Income Taxes.
 32




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##### Table of Contents



Financial Condition
 General.
 Short-term investments.
 33




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##### Table of Contents



Securities.
  Loans and Leases Receivable.
  34




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##### Table of Contents



Asset Quality
 Deposits.
 Borrowings.
 Asset Quality
 Non-performing Assets.
 35




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##### Table of Contents



September 30,
    
    
    December 31,2009
    
    
    2008(Dollars In Thousands)Non-accrual loans and leasesFirst mortgage loans:Commercial real estate
    
    $
    6,811
    
    
    $
    2,979Construction and land development
    
    
    5,245
    
    
    
    5,279Multi-family
    
    
    1,778
    
    
    
    1-4 family
    
    
    1,887
    
    
    
    2,082Total first mortgage loans
    
    
    15,721
    
    
    
    10,340Commercial and industrial
    
    
    4,556
    
    
    
    5,412Direct financing leases, net
    
    
    8
    
    
    
    24Home equity and second mortgage
    
    
    720
    
    
    
    379Consumer
    
    
    117
    
    
    
    130Total non-accrual loans and leases
    
    
    21,122
    
    
    
    16,285Foreclosed properties and repossessed assets
    
    
    3,174
    
    
    
    3,011Total non-performing assets
    
    $
    24,296
    
    
    $
    19,296Performing troubled debt restructurings
    
    $
    
    
    
    $
    Total non-accrual loans and leases to gross loans and leases
    
    
    2.42
    %
    
    
    1.91
    %Total non-performing assets to total assets
    
    
    2.26
    
    
    
    1.91Allowance for loan and lease losses to gross loans and leases
    
    
    1.47
    
    
    
    1.39Allowance for loan and lease losses to non-accrual loans and leases
    
    
    60.62
    
    
    
    72.75
 36




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##### Table of Contents



As of and for
    
    
    As of and forthe Nine
    
    
    the YearMonths Ended
    
    
    EndedSeptember 30,
    
    
    December 31,2009
    
    
    2008(In Thousands)Impaired loans and leases with no impairment reserves required
    
    $
    14,418
    
    
    $
    9,986Impaired loans and leases with impairment reserves required
    
    
    6,704
    
    
    
    6,299Total impaired loans and leases
    
    
    21,122
    
    
    
    16,285Less:Impairment reserve (included in allowance for loan and lease losses)
    
    
    1,139
    
    
    
    1,417Net impaired loans and leases
    
    $
    19,983
    
    
    $
    14,868Average impaired loans and leases
    
    $
    17,810
    
    
    $
    8,375Foregone interest income attributable to impaired loans and leases
    
    $
    1,310
    
    
    $
    752Interest income recognized on impaired loans and leases
    
    
    (108
    )
    
    
    (49
    )Net foregone interest income on impaired loans and leases
    
    $
    1,202
    
    
    $
    703
   For the Three Months Ended
    
    
    For the Nine Months EndedSeptember 30,
    
    
    September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008(Dollars In Thousands)Allowance at beginning of period
    
    $
    12,690
    
    
    $
    10,723
    
    
    $
    11,846
    
    
    $
    9,854Charge-offs:Commercial real estate and other mortgage
    
    
    (1,126
    )
    
    
    (9
    )
    
    
    (2,062
    )
    
    
    (417
    )Commercial and industrial
    
    
    (3
    )
    
    
    
    
    
    
    (1,813
    )
    
    
    (24
    )Direct financing leases
    
    
    
    
    
    
    
    
    
    
    (231
    )
    
    
    Home equity and second mortgage
    
    
    (135
    )
    
    
    
    
    
    
    (154
    )Consumer
    
    
    
    
    
    
    
    
    
    
    (8
    )
    
    
    Total charge-offs
    
    
    (1,264
    )
    
    
    (9
    )
    
    
    (4,268
    )
    
    
    (441
    )Recoveries:Commercial real estate and other mortgage
    
    
    
    
    
    
    84
    
    
    
    
    
    
    
    87Commercial and industrial
    
    
    1
    
    
    
    1
    
    
    
    3
    
    
    
    2Direct financial leases
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Home equity and second mortgage
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    Consumer
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total recoveries
    
    
    1
    
    
    
    85
    
    
    
    5
    
    
    
    89Net charge-offs
    
    
    (1,263
    )
    
    
    76
    
    
    
    (4,263
    )
    
    
    (352
    )Provision for loan and lease losses
    
    
    1,378
    
    
    
    17
    
    
    
    5,222
    
    
    
    1,314Allowance at end of period
    
    $
    12,805
    
    
    $
    10,816
    
    
    $
    12,805
    
    
    $
    10,816
 37




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Liquidity and Capital Resources
       38




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##### Table of Contents



Minimum Required to be WellCapitalized Under PromptMinimum Required for Capital
    
    Corrective ActionActual
    
    Adequacy Purposes
    
    RequirementsAmount
    
    Ratio
    
    Amount
    
    Ratio
    
    Amount
    
    Ratio(Dollars In Thousands)As of September 30, 2009Total
capital 
(to risk-weighted assets)Consolidated
    
    $
    110,931
    
    
    
    12.15
    %
    
    $
    73,067
    
    
    
    8.00
    %
    
    
    N/A
    
    
    
    N/AFirst Business Bank
    
    
    94,190
    
    
    
    11.59
    
    
    
    65,036
    
    
    
    8.00
    
    
    $
    81,295
    
    
    
    10.00
    %First Business Bank  Milwaukee
    
    
    14,316
    
    
    
    14.50
    
    
    
    7,896
    
    
    
    8.00
    
    
    
    9,870
    
    
    
    10.00Tier 1
capital 
(to risk-weighted assets)Consolidated
    
    $
    60,497
    
    
    
    6.62
    %
    
    $
    36,534
    
    
    
    4.00
    %
    
    
    N/A
    
    
    
    N/AFirst Business Bank
    
    
    84,020
    
    
    
    10.34
    
    
    
    32,518
    
    
    
    4.00
    
    
    $
    48,777
    
    
    
    6.00
    %First Business Bank  Milwaukee
    
    
    13,074
    
    
    
    13.25
    
    
    
    3,948
    
    
    
    4.00
    
    
    
    5,922
    
    
    
    6.00Tier 1
capital 
(to average assets)Consolidated
    
    $
    60,497
    
    
    
    5.73
    %
    
    $
    42,213
    
    
    
    4.00
    %
    
    
    N/A
    
    
    
    N/AFirst Business Bank
    
    
    84,020
    
    
    
    9.24
    
    
    
    36,364
    
    
    
    4.00
    
    
    $
    45,455
    
    
    
    5.00
    %First Business Bank  Milwaukee
    
    
    13,074
    
    
    
    9.03
    
    
    
    5,794
    
    
    
    4.00
    
    
    
    7,242
    
    
    
    5.00
 39




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##### Table of Contents



Minimum Required to be WellCapitalized Under PromptMinimum Required for Capital
    
    Corrective ActionActual
    
    Adequacy Purposes
    
    RequirementsAmount
    
    Ratio
    
    Amount
    
    Ratio
    
    Amount
    
    Ratio(Dollars In Thousands)As of December 31, 2008Total capital
(to risk-weighted assets)Consolidated
    
    $
    110,005
    
    
    
    12.00
    %
    
    $
    73,088
    
    
    
    8.00
    %
    
    
    N/A
    
    
    
    N/AFirst Business Bank
    
    
    91,062
    
    
    
    11.13
    
    
    
    65,448
    
    
    
    8.00
    
    
    $
    81,810
    
    
    
    10.00
    %First Business Bank  Milwaukee
    
    
    14,590
    
    
    
    15.13
    
    
    
    7,714
    
    
    
    8.00
    
    
    
    9,642
    
    
    
    10.00Tier 1 capital
(to risk-weighted assets)Consolidated
    
    $
    59,178
    
    
    
    6.48
    %
    
    $
    36,544
    
    
    
    4.00
    %
    
    
    N/A
    
    
    
    N/AFirst Business Bank
    
    
    80,880
    
    
    
    9.89
    
    
    
    32,724
    
    
    
    4.00
    
    
    $
    49,086
    
    
    
    6.00
    %First Business Bank  Milwaukee
    
    
    13,375
    
    
    
    13.87
    
    
    
    3,857
    
    
    
    4.00
    
    
    
    5,785
    
    
    
    6.00Tier 1 capital
(to average assets)Consolidated
    
    $
    59,178
    
    
    
    5.94
    %
    
    $
    39,819
    
    
    
    4.00
    %
    
    
    N/A
    
    
    
    N/AFirst Business Bank
    
    
    80,880
    
    
    
    9.23
    
    
    
    35,064
    
    
    
    4.00
    
    
    $
    43,830
    
    
    
    5.00
    %First Business Bank  Milwaukee
    
    
    13,375
    
    
    
    10.61
    
    
    
    5,042
    
    
    
    4.00
    
    
    
    6,302
    
    
    
    5.00
 Contractual Obligations and Off-balance Sheet Arrangements
  
 Item 3.   Quantitative and Qualitative Disclosures about Market Risk
    40




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##### Table of Contents



Item 4T.   Controls and Procedures
   
 Part II. Other Information
 
 Item 1.   Legal Proceedings
  
 Item 1A.
 Risk Factors
  
 Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds
 (a)
 (b)
 (c)
 ApproximateTotal Number of
    
    
    Dollar Value ofShares Purchased
    
    
    Shares that MayTotal
    
    
    
    
    
    
    as Part of
    
    
    Yet BeNumber of
    
    
    
    
    
    
    Publicly
    
    
    Purchased UnderShares
    
    
    Average Price Paid
    
    
    Announced Plans
    
    
    the Plans orPeriod
    
    Purchased
    
    
    Per Share
    
    
    or Programs
    
    
    ProgramsJuly 1  July 31, 2009
    
    
    3,846
    
    
    $
    10.62
    
    
    
    
    
    
    $
    177,150August 1  August 31, 2009
    
    
    166
    
    
    
    11.40
    
    
    
    
    
    
    
    177,150September 1  September
30, 2009
    
    
    320
    
    
    
    9.90
    
    
    
    
    
    
    
    177,150
  41




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##### Table of Contents



Item 3.   Defaults Upon Senior Securities
  
 Item 4.   Submission of Matters to a Vote of Security Holders
  
 Item 5.   Other Information.
  
 Item 6.   Exhibits.
 
 
  42




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Signatures
  FIRST BUSINESS FINANCIAL SERVICES, INC.November 2, 2009
    /s/ Corey A. ChambasCorey A. ChambasChief Executive OfficerNovember 2, 2009
    /s/ James F. RopellaJames F. RopellaChief Financial Officer 43




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##### Table of Contents



FIRST BUSINESS FINANCIAL SERVICES, INC.
Exhibit Index to Quarterly Report on Form 10-Q
 Exhibit Number31.1
    
    Certification of the Chief Executive Officer31.2
    
    Certification of the Chief Financial Officer32
    
    Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18
U.S.C. paragraph 1350
 44