##### 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 June 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




---



##### Table of Contents



2




---



##### 



FIRST BUSINESS FINANCIAL SERVICES, INC.
INDEX  FORM 10-Q
 PagePART I. FINANCIAL INFORMATIONItem 1. Financial Statements (Unaudited)Consolidated Balance Sheets as of June 30, 2009 and December 31, 2008
    
    
    1Consolidated Statements of Income for the Three Months and Six
Months Ended June 30, 2009 and 2008
    
    
    2Consolidated Statements of Changes in Stockholders Equity and
Comprehensive Income for the Six Months Ended June 30, 2009 and 2008
    
    
    3Consolidated Statements of Cash Flows for the Six Months Ended June
30, 2009 and 2008
    
    
    4Notes to Unaudited Consolidated Financial Statements
    
    
    5Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    20Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    37Item 4T. Controls and Procedures
    
    
    38PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    38Item 1A. Risk Factors
    
    
    38Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    38Item 3. Defaults upon Senior Securities
    
    
    39Item 4. Submission of Matters to a Vote of Security Holders
    
    
    39Item 5. Other information
    
    
    39Item 6. Exhibits
    
    
    39SIGNATURES
    
    
    40EX-31.1EX-31.2EX-32




---



##### Table of Contents



PART I. Financial Information
 
 Item 1. Financial Statements
 First
Business Financial Services, Inc.
 
 Consolidated Balance Sheets
 (Unaudited)June 30,
    
    
    December 31,2009
    
    
    2008(In Thousands, Except Share Data)AssetsCash and due from banks
    
    $
    9,469
    
    
    $
    19,216Short-term investments
    
    
    46,143
    
    
    
    4,468Cash and cash equivalents
    
    
    55,612
    
    
    
    23,684Securities available-for-sale, at fair value
    
    
    116,952
    
    
    
    109,124Loans and leases receivable, net of allowance for loan and lease losses of $12,690 and
$11,846, respectively
    
    
    845,745
    
    
    
    840,546Leasehold improvements and equipment, net
    
    
    1,380
    
    
    
    1,529Foreclosed properties and repossessed assets
    
    
    3,488
    
    
    
    3,011Cash surrender value of bank-owned life insurance
    
    
    15,886
    
    
    
    15,499Investment in Federal Home Loan Bank stock, at cost
    
    
    2,367
    
    
    
    2,367Goodwill and other intangibles
    
    
    2,751
    
    
    
    2,762Accrued interest receivable and other assets
    
    
    11,323
    
    
    
    12,264Total assets
    
    $
    1,055,504
    
    
    $
    1,010,786Liabilities and Stockholders EquityDeposits
    
    $
    922,331
    
    
    $
    838,874Federal Home Loan Bank and other borrowings
    
    
    57,521
    
    
    
    94,526Junior subordinated notes
    
    
    10,315
    
    
    
    10,315Accrued interest payable and other liabilities
    
    
    11,828
    
    
    
    14,065Total liabilities
    
    
    1,001,995
    
    
    
    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, 2,613,711 and 2,616,424
shares issued, 2,541,339 and 2,545,546 outstanding at 2009 and 2008, respectively
    
    
    26
    
    
    
    26Additional paid-in capital
    
    
    24,416
    
    
    
    24,088Retained earnings
    
    
    28,962
    
    
    
    29,252Accumulated other comprehensive income
    
    
    1,549
    
    
    
    1,065Treasury stock (72,372 and 70,878 shares in 2009 and 2008, respectively), at cost
    
    
    (1,444
    )
    
    
    (1,425
    )Total stockholders equity
    
    
    53,509
    
    
    
    53,006Total liabilities and stockholders equity
    
    $
    1,055,504
    
    
    $
    1,010,786
  1




---



##### Table of Contents



First
Business Financial Services, Inc.
 
 Consolidated Statements of Income (Unaudited)
 For the Three Months Ended
    
    
    For the Six Months Ended,June 30,
    
    
    June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008(In Thousands, Except Share Data)Interest income:Loans and leases
    
    $
    12,807
    
    
    $
    13,586
    
    
    $
    25,363
    
    
    $
    27,581Securities income, taxable
    
    
    1,206
    
    
    
    1,123
    
    
    
    2,445
    
    
    
    2,239Short-term investments
    
    
    18
    
    
    
    17
    
    
    
    28
    
    
    
    59Total interest income
    
    
    14,031
    
    
    
    14,726
    
    
    
    27,836
    
    
    
    29,879Interest expense:Deposits
    
    
    6,175
    
    
    
    7,203
    
    
    
    12,639
    
    
    
    15,229Notes payable and other borrowings
    
    
    734
    
    
    
    871
    
    
    
    1,312
    
    
    
    1,936Junior subordinated notes
    
    
    277
    
    
    
    
    
    
    
    552
    
    
    
    Total interest expense
    
    
    7,186
    
    
    
    8,074
    
    
    
    14,503
    
    
    
    17,165Net interest income
    
    
    6,845
    
    
    
    6,652
    
    
    
    13,333
    
    
    
    12,714Provision for loan and lease losses
    
    
    1,647
    
    
    
    743
    
    
    
    3,844
    
    
    
    1,296Net interest income after
provision for loan and
lease losses
    
    
    5,198
    
    
    
    5,909
    
    
    
    9,489
    
    
    
    11,418Non-interest income:Trust and investment services income
    
    
    471
    
    
    
    539
    
    
    
    905
    
    
    
    1,021Service charges on deposits
    
    
    378
    
    
    
    249
    
    
    
    712
    
    
    
    459Increase in cash surrender value of bank-owned life
insurance
    
    
    206
    
    
    
    180
    
    
    
    387
    
    
    
    357Loan fees
    
    
    192
    
    
    
    159
    
    
    
    464
    
    
    
    294Credit, merchant and debit card fees
    
    
    51
    
    
    
    64
    
    
    
    98
    
    
    
    109Other
    
    
    157
    
    
    
    76
    
    
    
    451
    
    
    
    119Total non-interest income
    
    
    1,455
    
    
    
    1,267
    
    
    
    3,017
    
    
    
    2,359Non-interest expense:Compensation
    
    
    3,079
    
    
    
    3,225
    
    
    
    6,252
    
    
    
    6,584Occupancy
    
    
    380
    
    
    
    319
    
    
    
    741
    
    
    
    649Equipment
    
    
    131
    
    
    
    148
    
    
    
    300
    
    
    
    304Data processing
    
    
    286
    
    
    
    256
    
    
    
    566
    
    
    
    530Marketing
    
    
    127
    
    
    
    212
    
    
    
    332
    
    
    
    476Professional fees
    
    
    422
    
    
    
    578
    
    
    
    936
    
    
    
    953Collateral liquidation costs
    
    
    293
    
    
    
    
    
    
    
    855
    
    
    
    FDIC Insurance
    
    
    926
    
    
    
    144
    
    
    
    1,260
    
    
    
    300(Gain) Loss on foreclosed properties and
repossessed assets
    
    
    (12
    )
    
    
    
    
    
    
    (12
    )
    
    
    5Other
    
    
    621
    
    
    
    556
    
    
    
    1,184
    
    
    
    983Total non-interest expense
    
    
    6,253
    
    
    
    5,438
    
    
    
    12,414
    
    
    
    10,784Income before income tax expense
    
    
    400
    
    
    
    1,738
    
    
    
    92
    
    
    
    2,993Income tax expense
    
    
    140
    
    
    
    670
    
    
    
    26
    
    
    
    1,156Net income
    
    $
    260
    
    
    $
    1,068
    
    
    $
    66
    
    
    $
    1,837Earnings per share:Basic
    
    $
    0.10
    
    
    $
    0.43
    
    
    $
    0.03
    
    
    $
    0.73Diluted
    
    
    0.10
    
    
    
    0.42
    
    
    
    0.03
    
    
    
    0.73Dividends declared per share
    
    
    0.07
    
    
    
    0.07
    
    
    
    0.14
    
    
    
    0.14
  2




---



##### 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
    
    
    
    
    
    
    
    
    
    
    1,837
    
    
    
    
    
    
    
    
    
    
    
    1,837Unrealized securities
gains arising during
the period
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    642
    
    
    
    
    
    
    
    642Unrealized derivative
losses arising during
the period
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3
    )
    
    
    
    
    
    
    (3
    )Reclassification
adjustment for
realized losses on
derivatives
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6
    
    
    
    
    
    
    
    6Income tax effect
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (221
    )
    
    
    
    
    
    
    (221
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,261Share-based compensation  restricted
shares
    
    
    
    
    
    
    283
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    283Cash dividends ($0.14 per share)
    
    
    
    
    
    
    
    
    
    
    (352
    )
    
    
    
    
    
    
    
    
    
    
    (352
    )Treasury stock purchased (805 shares)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (14
    )
    
    
    (14
    )Balance at June 30, 2008
    
    $
    26
    
    
    $
    23,745
    
    
    $
    28,321
    
    
    $
    25
    
    
    $
    (1,383
    )
    
    $
    50,730
 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
    
    
    
    
    
    
    
    
    
    
    66
    
    
    
    
    
    
    
    
    
    
    
    66Unrealized securities
gains arising during
the period
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    794
    
    
    
    
    
    
    
    794Unrealized
derivative losses arising during
the period
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1
    )
    
    
    
    
    
    
    (1
    )Reclassification adjustment for
realized losses on
derivatives
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3
    
    
    
    
    
    
    
    3Income tax effect
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (312
    )
    
    
    
    
    
    
    (312
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    550Share-based compensation  restricted
shares
    
    
    
    
    
    
    328
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    328Cash dividends ($0.14 per share)
    
    
    
    
    
    
    
    
    
    
    (356
    )
    
    
    
    
    
    
    
    
    
    
    (356
    )Treasury stock purchased (1,494 shares)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (19
    )
    
    
    (19
    )Balance at June 30, 2009
    
    $
    26
    
    
    $
    24,416
    
    
    $
    28,962
    
    
    $
    1,549
    
    
    $
    (1,444
    )
    
    $
    53,509
  3




---



##### Table of Contents



First
Business Financial Services, Inc.
 
 Consolidated Statements of Cash Flows (Unaudited)
 For the Six Months EndedJune 30,2009
    
    
    2008(In Thousands)Operating activitiesNet income
    
    $
    66
    
    
    $
    1,837Adjustments to reconcile net income to net cash provided by
operating activities:Deferred income taxes, net
    
    
    (472
    )
    
    
    (329
    )Provision for loan and lease losses
    
    
    3,844
    
    
    
    1,296Depreciation, amortization and accretion, net
    
    
    324
    
    
    
    260Share-based compensation
    
    
    328
    
    
    
    283Increase in cash surrender value of bank-owned life insurance
    
    
    (387
    )
    
    
    (357
    )Origination of loans for sale
    
    
    (2,756
    )
    
    
    (586
    )Sale of loans originated for sale
    
    
    2,762
    
    
    
    588Gain on sale of loans originated for sale
    
    
    (6
    )
    
    
    (2
    )(Gain) Loss on sale of foreclosed properties and repossessed assets
    
    
    (12
    )
    
    
    5Increase (decrease) in accrued interest receivable and other assets
    
    
    1,139
    
    
    
    (748
    )(Decrease) increase in accrued interest payable and other liabilities
    
    
    (2,235
    )
    
    
    1,126Net cash provided by operating activities
    
    
    2,595
    
    
    
    3,373Investing activitiesProceeds from maturities of available-for-sale securities
    
    
    15,644
    
    
    
    15,075Purchases of available-for-sale securities
    
    
    (22,715
    )
    
    
    (21,134
    )Proceeds from sale of foreclosed properties and repossessed assets
    
    
    175
    
    
    
    655Net increase in loans and leases
    
    
    (9,683
    )
    
    
    (54,321
    )Purchases of leasehold improvements and equipment, net
    
    
    (165
    )
    
    
    (268
    )Net cash used in investing activities
    
    
    (16,744
    )
    
    
    (59,993
    )Financing activitiesNet increase in deposits
    
    
    83,457
    
    
    
    57,896Repayment of FHLB advances
    
    
    (15,005
    )
    
    
    (6,005
    )Net (decrease) increase in short-term borrowed funds
    
    
    (22,000
    )
    
    
    300Proceeds from other borrowings
    
    
    31,000
    
    
    
    8,000Repayment of other borrowings
    
    
    (31,000
    )
    
    
    Cash dividends paid
    
    
    (356
    )
    
    
    (339
    )Purchase of treasury stock
    
    
    (19
    )
    
    
    (14
    )Net cash provided by financing activities
    
    
    46,077
    
    
    
    59,838Net increase in cash and cash equivalents
    
    
    31,928
    
    
    
    3,218Cash and cash equivalents at the beginning of the period
    
    
    23,684
    
    
    
    17,624Cash and cash equivalents at the end of the period
    
    $
    55,612
    
    
    $
    20,842Supplementary cash flow informationInterest paid on deposits and borrowings
    
    $
    16,178
    
    
    $
    16,487Income taxes paid
    
    
    169
    
    
    
    267Transfer to foreclosed properties and repossessed assets
    
    
    640
    
    
    
    3,896
  4




---



##### Table of Contents



NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 Note 1  Principles of Consolidation
  Note 2  Basis of Presentation
   Note 3  Recent Accounting Pronouncements
 Fair Value Disclosures. Fair Value Measurements Accounting
for the Impairment or Disposal of Long-Lived Assets,
  
    
    FASB Staff Position FAS 157-4 (FSP FAS 157-4), Determining Whether a Market Is Not
Active and a Transaction is Not Distressed. FSP FAS 157-4 provides guidance for making
fair value measurements more consistent with the principles presented in FAS 157. FSP
157-4 provides additional authoritative guidance in determining whether a market is active
or inactive, and whether a transaction is distressed. FSP 157-4 is applicable to all
assets and liabilities (i.e. financial and nonfinancial) and requires enhanced
disclosures.
    
    FASB Staff Position FAS 115-2, FAS 124-2, and EITF 99-20-2 (FSP FAS 115-2, FAS 124-2,
and EITF 99-20-2), Recognition and Presentation of Other-Than-Temporary Impairments. FSP
FAS 115-2, FAS 124-2, and EITF 99-20-2 provides additional guidance to provide greater
clarity about the credit and noncredit component of an other-than-temporary impairment
event and to more
 5




---



##### Table of Contents



effectively communicate when an other-than-temporary impairment event has occurred. This
FSP applies to debt securities.
    
    FASB Staff Position FAS 107-1 and APB 28-1 (FSP FAS 107-1 and APB 28-1), Interim
Disclosures about Fair Value of Financial Instruments. FSP FAS 107-1 and APB 28-1 amend
SFAS No 107, Disclosures about Fair Value of Financial Instruments, to require disclosures
about fair value of financial instruments in interim as well as in annual financial
statements. This FSP also amends APB Opinion No. 28, Interim Financial Reporting, to
require those fair value disclosures in all interim financial statements.
 Note 10  Fair Value Disclosure
  Derivative Instruments and Hedging Activities. Disclosures about Derivative Instruments and Hedging Activities  an Amendment of Statement No.
133
 Instruments Granted in Share-Based Payment Transactions as Participating Securities Determining Whether Instruments Granted in
Share-Based Payment Transactions are Participating Securities Earnings Per Share .
 Consolidation of Variable Interest Entities. Amendments to FASB Interpretation No. 46(R), 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.
 6




---



##### Table of Contents



Note 4  Earnings Per Share.
   For the Three Months
    
    
    For the Six MonthsEnded June 30,
    
    
    Ended June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Distributed earnings allocated to common stockholders
    
    $
    171,282
    
    
    $
    169,846
    
    
    $
    342,586
    
    
    $
    339,620Undistributed earnings (losses) allocated to common
stockholders
    
    
    78,872
    
    
    
    861,167
    
    
    
    (278,687
    )
    
    
    1,434,387Income available to common stockholders for basic
earnings per share
    
    
    250,154
    
    
    
    1,031,013
    
    
    
    63,899
    
    
    
    1,774,007Reallocation of undistributed earnings for diluted
earnings per share
    
    
    
    
    
    
    10
    
    
    
    
    
    
    
    16Income available to common stockholders for diluted
earnings per share
    
    $
    250,154
    
    
    $
    1,031,023
    
    
    $
    63,899
    
    
    $
    1,774,023Basic average shares
    
    
    2,448,659
    
    
    
    2,426,093
    
    
    
    2,447,276
    
    
    
    2,424,775Dilutive effect of share-based awards
    
    
    
    
    
    
    868
    
    
    
    
    
    
    
    757Dilutive average shares
    
    
    2,448,659
    
    
    
    2,426,961
    
    
    
    2,447,276
    
    
    
    2,425,532Earnings per share:Basic
    
    $
    0.10
    
    
    $
    0.43
    
    
    $
    0.03
    
    
    $
    0.73Diluted
    
    
    0.10
    
    
    
    0.42
    
    
    
    0.03
    
    
    
    0.73
 Note 5  Share-Based Compensation
  7




---



##### Table of Contents



Stock Options
  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
    
    
    Outstanding at June 30, 2009
    
    
    157,290
    
    
    $
    22.07
    
    
    
    4.17Options exercisable at June 30, 2009
    
    
    157,290
    
    
    
    
    
    
    
    4.17
 Restricted Shares
  8




---



##### Table of Contents



WeightedNumber of
    
    
    AverageRestricted
    
    
    Grant-DateShares
    
    
    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
    
    
    
    
    
    
    Vested
    
    
    (9,964
    )
    
    
    22.25Forfeited
    
    
    (2,713
    )
    
    
    20.79Nonvested balance as of June 30, 2009
    
    
    92,272
    
    
    $
    18.73
  Note 6  Securities.
  As of June 30, 2009Gross
    
    
    Grossunrealized
    
    
    unrealized
    
    
    EstimatedAmortized cost
    
    
    holding gains
    
    
    holding losses
    
    
    fair value(In Thousands)Securities available-for-saleCollateralized mortgage
obligations  government
agencies
    
    $
    92,278
    
    
    $
    2,220
    
    
    $
    (328
    )
    
    $
    94,170Collateralized mortgage
obligations 
government-sponsored
enterprises
    
    
    22,252
    
    
    
    530
    
    
    
    
    
    
    
    22,782$
    114,530
    
    
    $
    2,750
    
    
    $
    (328
    )
    
    $
    116,952
 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
 9




---



##### Table of Contents



EstimatedAmortized Cost
    
    
    Fair Value(In Thousands)Due in one year or less
    
    $
    
    
    
    $
    Due in one year through five years
    
    
    1,736
    
    
    
    1,798Due in five through ten years
    
    
    15,761
    
    
    
    16,143Due in over ten years
    
    
    97,033
    
    
    
    99,011$
    114,530
    
    
    $
    116,952
   As of June 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
    
    $
    12,356
    
    
    $
    328
    
    
    $
    
    
    
    $
    
    
    
    $
    12,356
    
    
    $
    328$
    12,356
    
    
    $
    328
    
    
    $
    
    
    
    $
    
    
    
    $
    12,356
    
    
    $
    328
 10




---



##### 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
  June 30,
    
    
    December 31,2009
    
    
    2008(In Thousands)First mortgage loans:Commercial real estate
    
    $
    408,735
    
    
    $
    390,094Construction
    
    
    82,618
    
    
    
    84,778Multi-family
    
    
    48,344
    
    
    
    42,5141-4 family
    
    
    52,335
    
    
    
    51,542Total first mortgage loans
    
    
    592,032
    
    
    
    568,928Commercial and industrial loans
    
    
    213,930
    
    
    
    232,350Direct financing leases, net
    
    
    30,001
    
    
    
    29,722Home equity loans and second mortgage
    
    
    6,549
    
    
    
    7,386Credit card and other
    
    
    16,433
    
    
    
    14,445Loans and leases receivable, gross
    
    
    858,945
    
    
    
    852,831Less:Allowance for loan and lease losses
    
    
    12,690
    
    
    
    11,846Deferred loan fees
    
    
    510
    
    
    
    439Loans and leases receivable, net
    
    $
    845,745
    
    
    $
    840,546
 11




---



##### Table of Contents



Six
    
    
    SixMonths Ended
    
    
    Months EndedJune 30,
    
    
    June 30,2009
    
    
    2008(Dollars In Thousands)Allowance at beginning of period
    
    $
    11,846
    
    
    $
    9,854Charge-offs:Commercial real estate and other first mortgage
    
    
    (909
    )
    
    
    (407
    )Commercial and industrial
    
    
    (1,810
    )
    
    
    (24
    )Direct financing leases
    
    
    (231
    )
    
    
    Home equity loans and second mortgage
    
    
    (46
    )Consumer
    
    
    (8
    )
    
    
    Total charge-offs
    
    
    (3,004
    )
    
    
    (431
    )Recoveries:Commercial real estate and other mortgage
    
    
    2
    
    
    
    3Commercial and industrial
    
    
    2
    
    
    
    1Direct financing leases
    
    
    
    
    
    
    Consumer
    
    
    
    
    
    
    Total recoveries
    
    
    4
    
    
    
    4Net charge-offs
    
    
    (3,000
    )
    
    
    (427
    )Provision for loan and lease losses
    
    
    3,844
    
    
    
    1,296Allowance at end of period
    
    $
    12,690
    
    
    $
    10,723Allowance to gross loans and leases
    
    
    1.48
    %
    
    
    1.29
    %
  June 30,
    
    
    December 31,2009
    
    
    2008(Dollars In Thousands)Non-accrual loans and leasesFirst mortgage loans:Commercial real estate
    
    $
    6,805
    
    
    $
    2,979Construction and land development
    
    
    5,808
    
    
    
    5,279Multi-family
    
    
    16
    
    
    
    1-4 family
    
    
    3,270
    
    
    
    2,082Total first mortgage loans
    
    
    15,899
    
    
    
    10,340Commercial and industrial
    
    
    3,468
    
    
    
    5,412Direct financing leases, net
    
    
    16
    
    
    
    24Home equity and second mortgage
    
    
    695
    
    
    
    379Consumer
    
    
    125
    
    
    
    130Total non-accrual loans and leases
    
    
    20,203
    
    
    
    16,285Foreclosed properties and repossessed assets, net
    
    
    3,488
    
    
    
    3,011Total non-performing assets
    
    $
    23,691
    
    
    $
    19,296Performing troubled debt restructurings
    
    $
    
    
    
    $
    Total non-accrual loans and leases to gross
loans and leases
    
    
    2.35
    %
    
    
    1.91
    %Total non-performing assets to total assets
    
    
    2.24
    
    
    
    1.91Allowance for loan and lease losses to gross
loans and leases
    
    
    1.48
    
    
    
    1.39Allowance for loan and lease losses to
non-accrual loans and leases
    
    
    62.81
    
    
    
    72.75
 12




---



##### Table of Contents



As of and for
    
    
    As of and forthe Six Months
    
    
    the YearEnded
    
    
    EndedJune 30,
    
    
    December 31,2009
    
    
    2008(In Thousands)Impaired loans and leases with no impairment reserves required
    
    $
    12,864
    
    
    $
    9,986Impaired loans and leases with impairment reserves required
    
    
    7,339
    
    
    
    6,299Total impaired loans and leases
    
    
    20,203
    
    
    
    16,285Less:Impairment reserve (included in allowance for loan and lease
losses)
    
    
    1,587
    
    
    
    1,417Net impaired loans and leases
    
    $
    18,616
    
    
    $
    14,868Average impaired loans and leases
    
    $
    17,407
    
    
    $
    8,375Foregone interest income attributable to impaired loans and leases
    
    $
    777
    
    
    $
    752Interest income recognized on impaired loans and leases
    
    
    (46
    )
    
    
    (49
    )Net foregone interest income on impaired loans and leases
    
    $
    731
    
    
    $
    703
  Note 8  Deposits
  June 30, 2009
    
    
    December 31, 2008Weighted
    
    
    
    
    
    
    WeightedBalance
    
    
    average rate
    
    
    Balance
    
    
    average rate(Dollars In Thousands)Transaction accounts:Demand deposits
    
    $
    55,830
    
    
    
    0.00
    %
    
    $
    55,388
    
    
    
    0.00
    %Negotiable order of withdrawal
(NOW) accounts
    
    
    81,063
    
    
    
    0.41
    
    
    
    51,547
    
    
    
    1.61Total transaction accounts
    
    
    136,893
    
    
    
    
    
    
    
    106,935Money market accounts
    
    
    210,970
    
    
    
    1.26
    
    
    
    148,366
    
    
    
    1.79Certificates of deposit
    
    
    139,934
    
    
    
    2.69
    
    
    
    105,876
    
    
    
    3.57Brokered certificates of deposit
    
    
    434,534
    
    
    
    4.16
    
    
    
    477,697
    
    
    
    4.71Total deposits
    
    $
    922,331
    
    
    
    
    
    
    $
    838,874
 13




---



##### Table of Contents



Note 9  Borrowings
  June 30, 2009
    
    
    December 31, 2008Weighted
    
    
    Weighted
    
    
    
    
    
    
    Weighted
    
    
    Weightedaverage
    
    
    average
    
    
    
    
    
    
    average
    
    
    averageBalance
    
    
    balance
    
    
    rate
    
    
    Balance
    
    
    balance
    
    
    rate(Dollars In Thousands)Fed funds purchased
    
    $
    
    
    
    $
    3,429
    
    
    
    0.61
    %
    
    $
    22,000
    
    
    $
    12,888
    
    
    
    2.38
    %FHLB advances
    
    
    18,511
    
    
    
    19,245
    
    
    
    4.54
    
    
    
    33,516
    
    
    
    31,840
    
    
    
    4.34Line of credit
    
    
    10
    
    
    
    10
    
    
    
    3.30
    
    
    
    10
    
    
    
    1,461
    
    
    
    4.87Subordinated notes
payable
    
    
    39,000
    
    
    
    39,000
    
    
    
    4.43
    
    
    
    39,000
    
    
    
    35,570
    
    
    
    5.70Junior subordinated
notes
    
    
    10,315
    
    
    
    10,315
    
    
    
    10.70
    
    
    
    10,315
    
    
    
    2,734
    
    
    
    10.83$
    67,836
    
    
    $
    71,999
    
    
    
    5.18
    
    
    $
    104,841
    
    
    $
    84,493
    
    
    
    4.83Short-term borrowings
    
    $
    10
    
    
    
    
    
    
    
    
    
    
    $
    37,010Long-term borrowings
    
    
    67,826
    
    
    
    
    
    
    
    
    
    
    
    67,831$
    67,836
    
    
    
    
    
    
    
    
    
    
    $
    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.
 14




---



##### Table of Contents



Quoted Pricesin Active
    
    SignificantMarkets for
    
    Other
    
    SignificantIdentical
    
    Observable
    
    UnobservableBalances as of
    
    Assets
    
    Inputs
    
    InputsJune 30, 2009
    
    (Level 1)
    
    (Level 2)
    
    (Level 3)(In Thousands)Assets:Securities available for sale
    
    $
    116,771
    
    
    $
    
    
    
    $
    116,771
    
    
    $
    Interest rate swaps
    
    
    961
    
    
    
    
    
    
    
    961
    
    
    
    Liabilities:Interest rate swaps
    
    $
    961
    
    
    $
    
    
    
    $
    961
    
    
    $
    
 Quoted Pricesin Active
    
    SignificantMarkets for
    
    Other
    
    SignificantBalances as of
    
    Identical
    
    Observable
    
    UnobservableDecember 31,
    
    Assets
    
    Inputs
    
    Inputs2008
    
    (Level 1)
    
    (Level 2)
    
    (Level 3)(In Thousands)Assets:Securities available for sale
    
    $
    109,124
    
    
    $
    
    
    
    $
    109,124
    
    
    $
    Interest rate swaps
    
    
    1,797
    
    
    
    
    
    
    
    1,797
    
    
    
    Liabilities:Interest rate swaps
    
    $
    1,799
    
    
    $
    
    
    
    $
    1,799
    
    
    $
    
  Quoted Pricesin Active
    
    SignificantMarkets for
    
    Other
    
    SignificantIdentical
    
    Observable
    
    Unobservable
    
    TotalBalance at
    
    Assets
    
    Inputs
    
    Inputs
    
    GainsJune 30, 2009
    
    (Level 1)
    
    (Level 2)
    
    (Level 3)
    
    (Losses)(In Thousands)Impaired loans
    
    $
    10,787
    
    
    $
    
    
    
    $
    4,206
    
    
    $
    6,581
    
    
    $
    
   15




---



##### Table of Contents



June 30, 2009
    
    December 31, 2008Carrying
    
    
    
    
    
    CarryingAmount
    
    Fair Value
    
    Amount
    
    Fair Value(In Thousands)Financial assets:Cash and cash equivalents
    
    $
    55,612
    
    
    $
    55,612
    
    
    $
    23,684
    
    
    $
    23,684Securities available-for-sale
    
    
    116,952
    
    
    
    116,952
    
    
    
    109,124
    
    
    
    109,124Loans and lease receivables
    
    
    845,745
    
    
    
    789,992
    
    
    
    840,546
    
    
    
    892,142Federal Home Loan Bank stock
    
    
    2,367
    
    
    
    2,367
    
    
    
    2,367
    
    
    
    2,367Cash surrender value of life
insurance
    
    
    15,886
    
    
    
    15,886
    
    
    
    15,499
    
    
    
    15,499Accrued interest receivable
    
    
    3,310
    
    
    
    3,310
    
    
    
    3,331
    
    
    
    3,331Interest rate swaps
    
    
    961
    
    
    
    961
    
    
    
    1,797
    
    
    
    1,797Financial liabilities:Deposits
    
    $
    922,331
    
    
    $
    939,306
    
    
    $
    838,874
    
    
    $
    863,102Federal funds purchased
    
    
    
    
    
    
    
    
    
    
    22,000
    
    
    
    22,000Federal Home Loan Bank and
other borrowings
    
    
    57,521
    
    
    
    58,503
    
    
    
    72,526
    
    
    
    73,841Junior subordinated notes
    
    
    10,315
    
    
    
    7,077
    
    
    
    10,315
    
    
    
    6,925Interest rate swaps
    
    
    961
    
    
    
    961
    
    
    
    1,799
    
    
    
    1,799Accrued interest payable
    
    
    5,027
    
    
    
    5,027
    
    
    
    6,911
    
    
    
    6,911Off balance sheet items:Standby letters of credit
    
    
    23
    
    
    
    23
    
    
    
    28
    
    
    
    28Commitments to extend credit
    
    
    
    
    
    
    *
    
    
    
    
    
    
    
    *
 
 *
    
    Not meaningful 16




---



##### Table of Contents



Securities:
 Loans and Leases:
 Federal Home Loan Bank stock:
 Cash surrender value of life insurance:
 Deposits:
  17




---



##### Table of Contents



Securities sold under agreement to repurchase:
 Borrowed funds:
 Financial instruments with off-balance sheet risks:
  Interest rate swaps:
 Note 11  Derivative Financial Instruments
    18




---



##### Table of Contents



Interest Rate Swap ContractsAsset Derivatives
    
    Liability DerivativesBalance Sheet
    
    
    
    
    
    Balance SheetLocation
    
    Fair Value
    
    Location
    
    Fair Value(In Thousands)Derivatives
designated as
hedging instrumentsJune 30, 2009
    
    
    
    
    
    
    
    
    
    Other liabilities
    
    $
    December 31, 2008
    
    
    
    
    
    
    
    
    
    Other liabilities
    
    $
    2Derivatives not
designated as
hedging instrumentsJune 30, 2009
    
    Other assets
    
    $
    1,178
    
    
    Other liabilities
    
    $
    1,178December 31, 2008
    
    Other assets
    
    $
    1,797
    
    
    Other liabilities
    
    $
    1,797
  For the six months ended June 30, 2009AmountRecognized in
    
    
    
    
    
    AmountOther
    
    
    
    
    
    reclassified fromComprehensive
    
    
    
    
    
    AccumulatedIncome on
    
    Income
    
    Other
    
    Income
    
    Amount ofDerivative
    
    Statement
    
    Comprehensive
    
    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
    
    $
    (1,053
    )Interest rate swaps non-hedge
    
    $
    
    
    
    N/A
    
    
    $
    
    
    
    Other noninterest income
    
    $
    1,332
 For the six months ended June 30, 2008AmountRecognized in
    
    
    
    
    
    AmountOther
    
    
    
    
    
    reclassified fromComprehensive
    
    
    
    
    
    AccumulatedIncome on
    
    Income
    
    Other
    
    Income
    
    Amount ofDerivative
    
    Statement
    
    Comprehensive
    
    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
    
    
    $
    
 19




---



##### Table of Contents



Item 2.   Managements Discussion and Analysis of Financial Condition and Results of
Operations
 General
  Item 1A. Risk Factors
  Overview
  General Overview
 
    
    Total assets were $1.06 billion as of June 30, 2009 compared to $1.01 billion as of
December 31, 2008.
    
    Net income for the three months ended June 30, 2009 was $260,000 compared to net income
of $1.1 million for the three months ended June 30, 2008. Net income for the six months
ended June
30, 2009 was $66,000 compared to net income of $1.8 million for the six months ended June
30, 2008.
 20




---



##### Table of Contents




    
    Net interest margin decreased to 2.72% for the three months ended June 30, 2009 from
2.85% for the three months ended June 30, 2008. Net interest margin decreased to 2.69%
for the six months ended June 30, 2009 compared to 2.77% for the six months ended June 30,
2008.
    
    Top line revenue increased 8.5% to $16.4 million for the six months ended June 30, 2009
compared to $15.1 million for the comparable period of the prior year.
    
    Loan and lease loss provision was $1.6 million for the three months ended June 30, 2009
compared to $743,000 for same time period in the prior year. Loan and lease loss
provision was $3.8 million for the six months ended June 30, 2009 compared to $1.3 million
for the six months ended June 30, 2008. Allowance for loan and lease loss as a percentage
of gross loans and leases was 1.48% at June 30, 2009 compared to 1.39% at December 31,
2008.
    
    Diluted earnings per share for the three months ended June 30, 2009 were $0.10 compared
to $0.42 for the three months ended June 30, 2008. Diluted earnings per share were $0.03
and $0.73 for the six months ended June 30, 2009 and 2008, respectively.
    
    Annualized return on average equity and return on average assets were 1.91% and 0.10%,
respectively for the three month period ended June 30, 2009, compared to 8.31% and 0.44%,
respectively, for the same time period in 2008. Return on average equity and return on
average assets were 0.24% and 0.01%, respectively, for the six months ended June 30, 2009
compared to 7.27% and 0.39%, respectively, for the six months ended June 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 Six Months EndedJune 30,
    
    
    June 30,2009
    
    
    2008
    
    
    Change
    
    
    2009
    
    
    2008
    
    
    Change(Dollars In Thousands)Net interest income
    
    $
    6,845
    
    
    $
    6,652
    
    
    
    2.9
    %
    
    $
    13,333
    
    
    $
    12,714
    
    
    
    4.9
    %Non-interest income
    
    
    1,455
    
    
    
    1,267
    
    
    
    14.8
    
    
    
    3,017
    
    
    
    2,359
    
    
    
    27.9Total top line revenue
    
    $
    8,300
    
    
    $
    7,919
    
    
    
    4.8
    
    
    $
    16,350
    
    
    $
    15,073
    
    
    
    8.5
 Adjusted Net Income
  21




---



##### Table of Contents



For the Three Months Ended
    
    
    For the Six Months EndedJune 30,
    
    
    June 30,2009
    
    
    2008
    
    
    Change
    
    
    2009
    
    
    2008
    
    
    Change(Dollars In Thousands)Net income, presented under US GAAP
    
    $
    260
    
    
    $
    1,068
    
    
    
    (75.7
    )%
    
    $
    66
    
    
    $
    1,837
    
    
    
    (96.4
    )%Add back:Provision
for loan and lease losses, after tax
    
    
    1,001
    
    
    
    452
    
    
    
    121.5
    
    
    
    2,337
    
    
    
    788
    
    
    
    196.6Less:Net charge-offs, after tax
    
    
    1,150
    
    
    
    127
    
    
    
    805.5
    
    
    
    1,824
    
    
    
    260
    
    
    
    601.5Adjusted net income
    
    $
    111
    
    
    $
    1,393
    
    
    
    (92.0
    )
    
    $
    579
    
    
    $
    2,365
    
    
    
    (75.5
    )
 Return on Equity
  Net Interest Income.
 22




---



##### Table of Contents



Three Months
    
    
    Six MonthsRate/
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Rate/Rate
    
    
    Volume
    
    
    Volume
    
    
    Net
    
    
    Rate
    
    
    Volume
    
    
    Volume
    
    
    Net(In Thousands)Interest-Earning AssetsCommercial real estate and
other mortgage loans
    
    $
    (1,035
    )
    
    $
    701
    
    
    $
    (84
    )
    
    $
    (418
    )
    
    $
    (2,665
    )
    
    $
    1,417
    
    
    $
    (215
    )
    
    $
    (1,463
    )Commercial loans
    
    
    (79
    )
    
    
    (247
    )
    
    
    5
    
    
    
    (321
    )
    
    
    (660
    )
    
    
    (66
    )
    
    
    5
    
    
    
    (721
    )Direct financing leases
    
    
    (12
    )
    
    
    36
    
    
    
    (1
    )
    
    
    23
    
    
    
    (18
    )
    
    
    64
    
    
    
    (1
    )
    
    
    45Consumer loans
    
    
    (46
    )
    
    
    (19
    )
    
    
    2
    
    
    
    (63
    )
    
    
    (67
    )
    
    
    (13
    )
    
    
    1
    
    
    
    (79
    )Total loans and leases
receivable
    
    
    (1,172
    )
    
    
    471
    
    
    
    (78
    )
    
    
    (779
    )
    
    
    (3,410
    )
    
    
    1,402
    
    
    
    (210
    )
    
    
    (2,218
    )Mortgage-related securities
    
    
    (45
    )
    
    
    135
    
    
    
    (6
    )
    
    
    84
    
    
    
    (51
    )
    
    
    273
    
    
    
    (6
    )
    
    
    216Investment securities
    
    
    
    
    
    
    (1
    )
    
    
    
    
    
    
    (1
    )
    
    
    
    
    
    
    (10
    )
    
    
    
    
    
    
    (10
    )Federal Home Loan Bank Stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Short-term investments
    
    
    (15
    )
    
    
    140
    
    
    
    (124
    )
    
    
    1
    
    
    
    (53
    )
    
    
    227
    
    
    
    (205
    )
    
    
    (31
    )Total net change in
income on
interest-earning assets
    
    
    (1,232
    )
    
    
    745
    
    
    
    (208
    )
    
    
    (695
    )
    
    
    (3,514
    )
    
    
    1,892
    
    
    
    (421
    )
    
    
    (2,043
    )Interest-Bearing LiabilitiesNOW accounts
    
    
    (177
    )
    
    
    55
    
    
    
    (39
    )
    
    
    (161
    )
    
    
    (541
    )
    
    
    (2
    )
    
    
    2
    
    
    
    (541
    )Money market
    
    
    (62
    )
    
    
    252
    
    
    
    (28
    )
    
    
    162
    
    
    
    (657
    )
    
    
    446
    
    
    
    (182
    )
    
    
    (393
    )Certificates  regular
    
    
    (150
    )
    
    
    355
    
    
    
    (88
    )
    
    
    117
    
    
    
    (425
    )
    
    
    824
    
    
    
    (251
    )
    
    
    148Certificates  large
    
    
    (745
    )
    
    
    (460
    )
    
    
    59
    
    
    
    (1,146
    )
    
    
    (1,695
    )
    
    
    (128
    )
    
    
    19
    
    
    
    (1,804
    )Total deposits
    
    
    (1,134
    )
    
    
    202
    
    
    
    (96
    )
    
    
    (1,028
    )
    
    
    (3,318
    )
    
    
    1,140
    
    
    
    (412
    )
    
    
    (2,590
    )FHLB advances
    
    
    (2
    )
    
    
    (133
    )
    
    
    1
    
    
    
    (134
    )
    
    
    (37
    )
    
    
    (333
    )
    
    
    16
    
    
    
    (354
    )Other borrowings
    
    
    116
    
    
    
    (97
    )
    
    
    (22
    )
    
    
    (3
    )
    
    
    (181
    )
    
    
    (105
    )
    
    
    16
    
    
    
    (270
    )Junior subordinated notes
    
    
    277
    
    
    
    277
    
    
    
    (277
    )
    
    
    277
    
    
    
    552
    
    
    
    552
    
    
    
    (552
    )
    
    
    552Total net change in
expense on
interest-bearing
liabilities
    
    
    (743
    )
    
    
    249
    
    
    
    (394
    )
    
    
    (888
    )
    
    
    (2,984
    )
    
    
    1,254
    
    
    
    (932
    )
    
    
    (2,662
    )Net change in net
interest income
    
    $
    (489
    )
    
    $
    496
    
    
    $
    186
    
    
    $
    193
    
    
    $
    (530
    )
    
    $
    638
    
    
    $
    511
    
    
    $
    619
  23




---



##### Table of Contents



24




---



##### Table of Contents



25




---



##### Table of Contents



Average Interest-Earning Assets, Average Interest-Bearing Liabilities and Interest Rate Spread.
 For the Three Months Ended June 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)
    
    $
    592,222
    
    
    $
    8,178
    
    
    
    5.52
    %
    
    $
    547,544
    
    
    $
    8,596
    
    
    
    6.28
    %Commercial and industrial
loans(1)
    
    
    214,798
    
    
    
    3,896
    
    
    
    7.26
    
    
    
    228,148
    
    
    
    4,217
    
    
    
    7.39Direct financing leases(1)
    
    
    30,731
    
    
    
    474
    
    
    
    6.17
    
    
    
    28,433
    
    
    
    451
    
    
    
    6.34Consumer loans
    
    
    21,921
    
    
    
    259
    
    
    
    4.73
    
    
    
    23,333
    
    
    
    322
    
    
    
    5.52Total loans and leases
receivable(1)
    
    
    859,672
    
    
    
    12,807
    
    
    
    5.96
    
    
    
    827,458
    
    
    
    13,586
    
    
    
    6.57Mortgage-related securities(2)
    
    
    110,928
    
    
    
    1,206
    
    
    
    4.35
    
    
    
    99,038
    
    
    
    1,122
    
    
    
    4.53Investment securities(2)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    58
    
    
    
    1
    
    
    
    5.62Federal Home Loan Bank stock
    
    
    2,367
    
    
    
    
    
    
    
    
    
    
    
    2,367
    
    
    
    
    
    
    
    Short-term investments
    
    
    31,994
    
    
    
    18
    
    
    
    0.23
    
    
    
    3,466
    
    
    
    17
    
    
    
    1.96Total interest-earning assets
    
    
    1,004,961
    
    
    
    14,031
    
    
    
    5.58
    
    
    
    932,387
    
    
    
    14,726
    
    
    
    6.32Non-interest-earning assets
    
    
    38,784
    
    
    
    
    
    
    
    
    
    
    
    31,128Total assets
    
    $
    1,043,745
    
    
    
    
    
    
    
    
    
    
    $
    963,515Interest-Bearing LiabilitiesNOW accounts
    
    $
    83,357
    
    
    
    87
    
    
    
    0.42
    
    
    $
    68,133
    
    
    
    248
    
    
    
    1.46Money market
    
    
    209,313
    
    
    
    723
    
    
    
    1.38
    
    
    
    144,380
    
    
    
    561
    
    
    
    1.55Certificates of deposits
    
    
    113,004
    
    
    
    719
    
    
    
    2.55
    
    
    
    71,062
    
    
    
    602
    
    
    
    3.39Brokered certificates of deposit
    
    
    455,656
    
    
    
    4,646
    
    
    
    4.08
    
    
    
    494,937
    
    
    
    5,792
    
    
    
    4.68Total deposits
    
    
    861,330
    
    
    
    6,175
    
    
    
    2.87
    
    
    
    778,512
    
    
    
    7,203
    
    
    
    3.70FHLB advances
    
    
    18,512
    
    
    
    219
    
    
    
    4.73
    
    
    
    29,654
    
    
    
    353
    
    
    
    4.76Other borrowings
    
    
    39,010
    
    
    
    515
    
    
    
    5.28
    
    
    
    48,012
    
    
    
    518
    
    
    
    4.32Junior subordinated notes
    
    
    10,315
    
    
    
    277
    
    
    
    10.74
    
    
    
    
    
    
    
    
    
    
    
    Total interest-bearing liabilities
    
    
    929,167
    
    
    
    7,186
    
    
    
    3.09
    
    
    
    856,178
    
    
    
    8,074
    
    
    
    3.77Non-interest-bearing liabilities
    
    
    60,419
    
    
    
    
    
    
    
    
    
    
    
    55,916Total liabilities
    
    
    989,586
    
    
    
    
    
    
    
    
    
    
    
    912,094Stockholders equity
    
    
    54,159
    
    
    
    
    
    
    
    
    
    
    
    51,421Total liabilities and stockholders
equity
    
    $
    1,043,745
    
    
    
    
    
    
    
    
    
    
    $
    963,515Net interest income/interest rate spread
    
    
    
    
    
    $
    6,845
    
    
    
    2.49
    %
    
    
    
    
    
    $
    6,652
    
    
    
    2.55
    %Net interest-earning assets
    
    $
    75,794
    
    
    
    
    
    
    
    
    
    
    $
    76,209Net interest margin
    
    
    
    
    
    
    
    
    
    
    2.72
    %
    
    
    
    
    
    
    
    
    
    
    2.85
    %Average interest-earning assets to
average interest-bearing liabilities
    
    
    108.16
    %
    
    
    
    
    
    
    
    
    
    
    108.90
    %Return on average assets
    
    
    0.10
    
    
    
    
    
    
    
    
    
    
    
    0.44Return on average equity
    
    
    1.91
    
    
    
    
    
    
    
    
    
    
    
    8.31Average equity to average assets
    
    
    5.19
    
    
    
    
    
    
    
    
    
    
    
    5.34Non-interest expense to average assets
    
    
    2.40
    
    
    
    
    
    
    
    
    
    
    
    2.26
 
 (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. 26




---



##### Table of Contents



For the Six Months Ended June 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)
    
    $
    583,815
    
    
    $
    16,067
    
    
    
    5.50
    %
    
    $
    540,145
    
    
    $
    17,530
    
    
    
    6.49
    %Commercial and industrial
loans(1)
    
    
    221,243
    
    
    
    7,816
    
    
    
    7.07
    
    
    
    222,966
    
    
    
    8,537
    
    
    
    7.66Direct financing leases(1)
    
    
    30,595
    
    
    
    952
    
    
    
    6.22
    
    
    
    28,586
    
    
    
    907
    
    
    
    6.35Consumer loans
    
    
    22,072
    
    
    
    528
    
    
    
    4.78
    
    
    
    22,561
    
    
    
    607
    
    
    
    5.38Total loans and leases
receivable(1)
    
    
    857,725
    
    
    
    25,363
    
    
    
    5.91
    
    
    
    814,258
    
    
    
    27,581
    
    
    
    6.77Mortgage-related securities(2)
    
    
    109,616
    
    
    
    2,445
    
    
    
    4.46
    
    
    
    97,647
    
    
    
    2,229
    
    
    
    4.57Investment securities(2)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    524
    
    
    
    10
    
    
    
    3.82Federal Home Loan Bank stock
    
    
    2,367
    
    
    
    
    
    
    
    
    
    
    
    2,367
    
    
    
    
    
    
    
    Fed funds sold and other
    
    
    21,535
    
    
    
    28
    
    
    
    0.26
    
    
    
    4,444
    
    
    
    59
    
    
    
    2.66Total interest-earning assets
    
    
    991,243
    
    
    
    27,836
    
    
    
    5.62
    
    
    
    919,240
    
    
    
    29,879
    
    
    
    6.50Non-interest-earning assets
    
    
    38,352
    
    
    
    
    
    
    
    
    
    
    
    31,656Total assets
    
    $
    1,029,595
    
    
    
    
    
    
    
    
    
    
    $
    950,896Interest-Bearing LiabilitiesNOW accounts
    
    $
    68,682
    
    
    
    141
    
    
    
    0.41
    
    
    $
    68,901
    
    
    
    682
    
    
    
    1.98Money market
    
    
    193,152
    
    
    
    1,220
    
    
    
    1.26
    
    
    
    151,348
    
    
    
    1,613
    
    
    
    2.13Certificates of deposits
    
    
    114,732
    
    
    
    1,542
    
    
    
    2.69
    
    
    
    72,111
    
    
    
    1,394
    
    
    
    3.87Brokered certificates of deposit
    
    
    467,714
    
    
    
    9,736
    
    
    
    4.16
    
    
    
    472,953
    
    
    
    11,540
    
    
    
    4.88Total deposits
    
    
    844,280
    
    
    
    12,639
    
    
    
    2.99
    
    
    
    765,313
    
    
    
    15,229
    
    
    
    3.98FHLB advances
    
    
    19,245
    
    
    
    437
    
    
    
    4.54
    
    
    
    33,224
    
    
    
    791
    
    
    
    4.76Other borrowings
    
    
    42,439
    
    
    
    875
    
    
    
    4.12
    
    
    
    46,741
    
    
    
    1,145
    
    
    
    4.90Junior subordinated notes
    
    
    10,315
    
    
    
    552
    
    
    
    10.70
    
    
    
    
    
    
    
    
    
    
    
    Total interest-bearing liabilities
    
    
    916,279
    
    
    
    14,503
    
    
    
    3.17
    
    
    
    845,278
    
    
    
    17,165
    
    
    
    4.06Non-interest-bearing liabilities
    
    
    59,333
    
    
    
    
    
    
    
    
    
    
    
    55,077Total liabilities
    
    
    975,612
    
    
    
    
    
    
    
    
    
    
    
    900,355Stockholders equity
    
    
    53,983
    
    
    
    
    
    
    
    
    
    
    
    50,541Total liabilities and stockholders
equity
    
    $
    1,029,595
    
    
    
    
    
    
    
    
    
    
    $
    950,896Net interest income/interest rate spread
    
    
    
    
    
    $
    13,333
    
    
    
    2.45
    %
    
    
    
    
    
    $
    12,714
    
    
    
    2.44
    %Net interest-earning assets
    
    $
    74,964
    
    
    
    
    
    
    
    
    
    
    $
    73,962Net interest margin
    
    
    
    
    
    
    
    
    
    
    2.69
    %
    
    
    
    
    
    
    
    
    
    
    2.77
    %Average interest-earning assets to
average interest-bearing liabilities
    
    
    108.18
    %
    
    
    
    
    
    
    
    
    
    
    108.75
    %Return on average assets
    
    
    0.01
    
    
    
    
    
    
    
    
    
    
    
    0.39Return on average equity
    
    
    0.24
    
    
    
    
    
    
    
    
    
    
    
    7.27Average equity to average assets
    
    
    5.24
    
    
    
    
    
    
    
    
    
    
    
    5.32Non-interest expense to average assets
    
    
    2.41
    
    
    
    
    
    
    
    
    
    
    
    2.27
 
 (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. 27




---



##### Table of Contents



Provision for Loan and Lease Losses.
  Asset Quality
 Non-Interest Income.
    28




---



##### Table of Contents



Non-Interest Expense.
     29




---



##### Table of Contents



Income
Taxes.
    30




---



##### Table of Contents



Financial Condition
 General.
 Short-term investments.
 Securities.
  31




---



##### Table of Contents



Loans and Leases Receivable.
    Asset Quality
 Deposits.
 32




---



##### Table of Contents



Borrowings.
 Asset Quality
 Non-performing Assets.
  June 30,
    
    
    December 31,2009
    
    
    2008(Dollars In Thousands)Non-accrual loans and leasesFirst mortgage loans:Commercial real estate
    
    $
    6,805
    
    
    $
    2,979Construction and land development
    
    
    5,808
    
    
    
    5,279Multi-family
    
    
    16
    
    
    
    1-4 family
    
    
    3,270
    
    
    
    2,082Total first mortgage loans
    
    
    15,899
    
    
    
    10,340Commercial and industrial
    
    
    3,468
    
    
    
    5,412Direct financing leases, net
    
    
    16
    
    
    
    24Home equity and second mortgage
    
    
    695
    
    
    
    379Consumer
    
    
    125
    
    
    
    130Total non-accrual loans and leases
    
    
    20,203
    
    
    
    16,285Foreclosed properties and repossessed assets
    
    
    3,488
    
    
    
    3,011Total non-performing assets
    
    $
    23,691
    
    
    $
    19,296Performing troubled debt restructurings
    
    $
    
    
    
    $
    Total non-accrual loans and leases to gross loans and leases
    
    
    2.35
    %
    
    
    1.91
    %Total non-performing assets to total assets
    
    
    2.24
    
    
    
    1.91Allowance for loan and lease losses to gross loans and leases
    
    
    1.48
    
    
    
    1.39Allowance for loan and lease losses to non-accrual loans and leases
    
    
    62.81
    
    
    
    72.75
 33




---



##### Table of Contents



As of and for
    
    
    As of and forthe Six Months
    
    
    the YearEnded
    
    
    EndedJune 30,
    
    
    December 31,2009
    
    
    2008(In Thousands)Impaired loans and leases with no impairment reserves required
    
    $
    12,864
    
    
    $
    9,986Impaired loans and leases with impairment reserves required
    
    
    7,339
    
    
    
    6,299Total impaired loans and leases
    
    
    20,203
    
    
    
    16,285Less:Impairment reserve (included in allowance for loan and lease
losses)
    
    
    1,587
    
    
    
    1,417Net impaired loans and leases
    
    $
    18,616
    
    
    $
    14,868Average impaired loans and leases
    
    $
    17,407
    
    
    $
    8,375Foregone interest income attributable to impaired loans and leases
    
    $
    777
    
    
    $
    752Interest income recognized on impaired loans and leases
    
    
    (46
    )
    
    
    (49
    )Net foregone interest income on impaired loans and leases
    
    $
    731
    
    
    $
    703
   For the Three Months Ended
    
    
    For the Six Months EndedJune 30,
    
    
    June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008(Dollars In Thousands)Allowance at beginning of period
    
    $
    12,935
    
    
    $
    10,188
    
    
    $
    11,846
    
    
    $
    9,854Charge-offs:Commercial real estate and
other mortgage
    
    
    (909
    )
    
    
    (184
    )
    
    
    (909
    )
    
    
    (407
    )Commercial and industrial
    
    
    (700
    )
    
    
    (24
    )
    
    
    (1,810
    )
    
    
    (24
    )Direct financing leases
    
    
    (231
    )
    
    
    
    
    
    
    (231
    )
    
    
    Home equity and second mortgage
    
    
    (46
    )
    
    
    
    
    
    
    (46
    )Consumer
    
    
    (8
    )
    
    
    
    
    
    
    (8
    )
    
    
    Total charge-offs
    
    
    (1,894
    )
    
    
    (208
    )
    
    
    (3,004
    )
    
    
    (431
    )Recoveries:Commercial real estate and
other mortgage
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3Commercial and industrial
    
    
    1
    
    
    
    
    
    
    
    2
    
    
    
    1Direct financial leases
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Home equity and second mortgage
    
    
    1
    
    
    
    
    
    
    
    2
    
    
    
    Consumer
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total recoveries
    
    
    2
    
    
    
    
    
    
    
    4
    
    
    
    4Net charge-offs
    
    
    (1,892
    )
    
    
    (208
    )
    
    
    (3,000
    )
    
    
    (427
    )Provision for loan and lease losses
    
    
    1,647
    
    
    
    743
    
    
    
    3,844
    
    
    
    1,296Allowance at end of period
    
    $
    12,690
    
    
    $
    10,723
    
    
    $
    12,690
    
    
    $
    10,723
 34




---



##### Table of Contents



Liquidity and Capital Resources
       35




---



##### 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 June 30, 2009Total capital(to risk-weighted assets)Consolidated
    
    $
    109,585
    
    
    
    12.06
    %
    
    $
    72,698
    
    
    
    8.00
    %
    
    
    N/A
    
    
    
    N/AFirst Business Bank
    
    
    92,070
    
    
    
    11.46
    
    
    
    64,296
    
    
    
    8.00
    
    
    $
    80,370
    
    
    
    10.00
    %First Business Bank 
Milwaukee
    
    
    14,556
    
    
    
    14.12
    
    
    
    8,245
    
    
    
    8.00
    
    
    
    10,307
    
    
    
    10.00Tier 1 capital(to risk-weighted assets)Consolidated
    
    $
    59,209
    
    
    
    6.52
    %
    
    $
    36,349
    
    
    
    4.00
    %
    
    
    N/A
    
    
    
    N/AFirst Business Bank
    
    
    82,014
    
    
    
    10.20
    
    
    
    32,148
    
    
    
    4.00
    
    
    $
    48,222
    
    
    
    6.00
    %First Business Bank 
Milwaukee
    
    
    13,259
    
    
    
    12.86
    
    
    
    4,123
    
    
    
    4.00
    
    
    
    6,184
    
    
    
    6.00Tier 1 capital(to average assets)Consolidated
    
    $
    59,209
    
    
    
    5.70
    %
    
    $
    41,520
    
    
    
    4.00
    %
    
    
    N/A
    
    
    
    N/AFirst Business Bank
    
    
    82,014
    
    
    
    9.11
    
    
    
    36,022
    
    
    
    4.00
    
    
    $
    45,027
    
    
    
    5.00
    %First Business Bank 
Milwaukee
    
    
    13,259
    
    
    
    9.03
    
    
    
    5,870
    
    
    
    4.00
    
    
    
    7,338
    
    
    
    5.00
 36




---



##### 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
    37




---



##### 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)
    
    None.
 (b)
    
    None.
 (c)
    
    Issuer Purchases of Equity Securities
 ApproximateTotal Number of
    
    Dollar Value ofShares Purchased
    
    Shares that Mayas Part of
    
    Yet BeTotal Number
    
    
    
    
    
    Publicly
    
    Purchased Underof Shares
    
    Average Price Paid
    
    Announced Plans
    
    the Plans orPeriod
    
    Purchased
    
    Per Share
    
    or Programs
    
    ProgramsApril 1  April 30, 2009
    
    
    417
    
    
    $
    11.99
    
    
    
    
    
    
    $
    177,150May 1  May 31, 2009
    
    
    50
    
    
    
    12.64
    
    
    
    
    
    
    
    177,150June 1  June 30, 2009
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    177,150
  38




---



##### Table of Contents



Item 3.
    
     Defaults Upon Senior Securities
  
 Item 4.
    
     Submission of Matters to a Vote of Security Holders
  Number of SharesFor
    
    Against
    
    Abstained
    
    Withheld
    
    Non-VotesElection of
Directors for a
three-year term
expiring 2012Mark D. Bugher
    
    
    2,045,037
    
    
    
    
    
    
    
    
    
    
    
    43,326
    
    
    
    Corey A. Chambas
    
    
    2,040,881
    
    
    
    
    
    
    
    
    
    
    
    47,482
    
    
    
    Gary E. Zimmerman
    
    
    2,035,585
    
    
    
    
    
    
    
    
    
    
    
    52,778
    
    
    
    
 
 Item 5.
    
     Other Information.
  
 Item 6.
    
     Exhibits.
     
 39




---



##### Table of Contents



Signatures
  FIRST BUSINESS FINANCIAL SERVICES, INC./s/ Corey A. ChambasCorey A. ChambasChief Executive OfficerJuly 30, 2009 40




---



##### Table of Contents



FIRST BUSINESS FINANCIAL SERVICES, INC.
Exhibit Index to Quarterly Report on Form 10-Q
 Exhibit Number
 10.1
    
    First Business Financial Services, Inc. Annual Incentive Bonus Plan, as amended.
(incorporated by reference to the Companys Current Report on Form 8-K dated April 10, 2009)
 31.1
    
    Certification of the Chief Executive Officer
 31.2
    
    Certification of the Chief Financial Officer
 32
    
    Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18
U.S.C. paragraph 1350
 41