##### 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, 2008
 OR
 o
    
    Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 Commission file number 000-51028
 FIRST BUSINESS FINANCIAL SERVICES, INC.
 
 Wisconsin
    
    39-1576570(State or jurisdiction of incorporation or organization)
    
    (I.R.S. Employer Identification No.)401 Charmany Drive Madison, WI
    
    53719(Address of Principal Executive Offices)
    
    (Zip Code)
  
  þ o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer o
    
    Smaller reporting company þ(Do not check if a smaller reporting company)
  o þ




---



##### Table of Contents



2




---



##### 



FIRST BUSINESS FINANCIAL SERVICES, INC.
INDEX  FORM 10-Q
 PagePART I. FINANCIAL INFORMATION4Item 1. Financial Statements (Unaudited)
    
    
    4Consolidated Balance Sheets as of September 30,
2008 and December 31, 2007
    
    
    4Consolidated Statements of Income for the Three
Months and Nine Months Ended September 30, 2008 and
2007
    
    
    5Consolidated Statements of Changes in Stockholders
Equity and Comprehensive Income for the Nine Months
Ended September 30, 2008 and 2007
    
    
    6Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 2008 and 2007
    
    
    7Notes to Unaudited Consolidated Financial Statements
    
    
    8Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations
    
    
    18Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    34Item 4T. Controls and Procedures
    
    
    34PART II. OTHER INFORMATION
    
    
    35Item 1. Legal Proceedings
    
    
    35Item 1A. Risk Factors
    
    
    35Item 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
  3




---



##### Table of Contents








PART I. Financial Information





Item 1. Financial Statements


First Business Financial Services, Inc. 
 Consolidated Balance Sheets
 (Unaudited)September 30,
    
    
    December 31,2008
    
    
    2007(In Thousands, Except Share Data)AssetsCash and due from banks
    
    $
    23,494
    
    
    $
    17,421Short-term investments
    
    
    2,159
    
    
    
    203Cash and cash equivalents
    
    
    25,653
    
    
    
    17,624Securities available-for-sale, at fair value
    
    
    107,446
    
    
    
    97,378Loans and leases receivable, net of allowance for loan and lease losses of $10,816 and
$9,854, respectively
    
    
    828,357
    
    
    
    771,633Leasehold improvements and equipment, net
    
    
    1,551
    
    
    
    1,546Foreclosed properties
    
    
    3,490
    
    
    
    660Cash surrender value of bank-owned life insurance
    
    
    15,306
    
    
    
    14,757Investment in Federal Home Loan Bank stock, at cost
    
    
    2,367
    
    
    
    2,367Goodwill and other intangibles
    
    
    2,768
    
    
    
    2,787Accrued interest receivable and other assets
    
    
    11,449
    
    
    
    9,686Total assets
    
    $
    998,387
    
    
    $
    918,438Liabilities and Stockholders EquityDeposits
    
    $
    831,289
    
    
    $
    776,060Federal Home Loan Bank and other borrowings
    
    
    89,829
    
    
    
    81,986Junior subordinated notes
    
    
    10,315
    
    
    
    Accrued interest payable and other liabilities
    
    
    15,215
    
    
    
    11,840Total liabilities
    
    
    946,648
    
    
    
    869,886Commitments and contingenciesStockholders equity:Preferred stock, $10 par value, 10,000 Series A shares and 10,000 Series B shares
authorized, none issued or outstandingCommon stock, $0.01 par value, 8,000,000 shares authorized, 2,616,424 and 2,576,849
shares issued, 2,545,546 and 2,509,213 outstanding in 2008 and 2007, respectively
    
    
    26
    
    
    
    26Additional paid-in capital
    
    
    23,912
    
    
    
    23,462Retained earnings
    
    
    29,316
    
    
    
    26,836Accumulated other comprehensive loss
    
    
    (90
    )
    
    
    (399
    )Treasury stock (70,878 and 67,636 shares in 2008 and 2007, respectively), at cost
    
    
    (1,425
    )
    
    
    (1,373
    )Total stockholders equity
    
    
    51,739
    
    
    
    48,552Total liabilities and stockholders equity
    
    $
    998,387
    
    
    $
    918,438
  4




---



##### 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 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(In Thousands, Except Share Data)Interest income:Loans and leases
    
    $
    13,518
    
    
    $
    14,177
    
    
    $
    41,100
    
    
    $
    40,277Securities income, taxable
    
    
    1,205
    
    
    
    1,032
    
    
    
    3,444
    
    
    
    3,162Short-term investments
    
    
    16
    
    
    
    66
    
    
    
    74
    
    
    
    140Total interest income
    
    
    14,739
    
    
    
    15,275
    
    
    
    44,618
    
    
    
    43,579Interest expense:Deposits
    
    
    7,245
    
    
    
    8,464
    
    
    
    22,474
    
    
    
    23,962Notes payable and other borrowings
    
    
    965
    
    
    
    949
    
    
    
    2,901
    
    
    
    2,736Junior subordinated notes
    
    
    12
    
    
    
    
    
    
    
    12
    
    
    
    Total interest expense
    
    
    8,222
    
    
    
    9,413
    
    
    
    25,387
    
    
    
    26,698Net interest income
    
    
    6,517
    
    
    
    5,862
    
    
    
    19,231
    
    
    
    16,881Provision for loan and lease losses
    
    
    17
    
    
    
    596
    
    
    
    1,314
    
    
    
    1,873Net interest income after
provision for loan and
lease losses
    
    
    6,500
    
    
    
    5,266
    
    
    
    17,917
    
    
    
    15,008Non-interest income:Trust and investment services income
    
    
    489
    
    
    
    524
    
    
    
    1,510
    
    
    
    1,415Service charges on deposits
    
    
    282
    
    
    
    175
    
    
    
    742
    
    
    
    522Increase in cash surrender value of bank-owned life
insurance
    
    
    192
    
    
    
    175
    
    
    
    549
    
    
    
    515Loan fees
    
    
    176
    
    
    
    128
    
    
    
    471
    
    
    
    466Credit, merchant and debit card fees
    
    
    54
    
    
    
    51
    
    
    
    163
    
    
    
    154Other
    
    
    147
    
    
    
    48
    
    
    
    265
    
    
    
    187Total non-interest income
    
    
    1,340
    
    
    
    1,101
    
    
    
    3,700
    
    
    
    3,259Non-interest expense:Compensation
    
    
    3,137
    
    
    
    3,171
    
    
    
    9,721
    
    
    
    9,136Occupancy
    
    
    339
    
    
    
    262
    
    
    
    988
    
    
    
    783Equipment
    
    
    153
    
    
    
    130
    
    
    
    457
    
    
    
    367Data processing
    
    
    228
    
    
    
    264
    
    
    
    758
    
    
    
    760Marketing
    
    
    251
    
    
    
    260
    
    
    
    727
    
    
    
    788Professional fees
    
    
    380
    
    
    
    291
    
    
    
    1,333
    
    
    
    1,054Loss on foreclosed properties
    
    
    626
    
    
    
    
    
    
    
    631
    
    
    
    Other
    
    
    701
    
    
    
    566
    
    
    
    1,985
    
    
    
    1,719Total non-interest expense
    
    
    5,815
    
    
    
    4,944
    
    
    
    16,600
    
    
    
    14,607Income before income tax expense
    
    
    2,025
    
    
    
    1,423
    
    
    
    5,017
    
    
    
    3,660Income tax expense
    
    
    853
    
    
    
    538
    
    
    
    2,007
    
    
    
    1,318Net income
    
    $
    1,172
    
    
    $
    885
    
    
    $
    3,010
    
    
    $
    2,342Earnings per share:Basic
    
    $
    0.48
    
    
    $
    0.36
    
    
    $
    1.24
    
    
    $
    0.95Diluted
    
    
    0.48
    
    
    
    0.36
    
    
    
    1.24
    
    
    
    0.95Dividends declared per share
    
    
    0.07
    
    
    
    0.065
    
    
    
    0.21
    
    
    
    0.195
  5




---



##### 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
    
    
    loss
    
    
    stock
    
    
    Total(In Thousands, Except Share Data)Balance at December 31, 2006
    
    $
    25
    
    
    $
    23,029
    
    
    $
    24,237
    
    
    $
    (1,005
    )
    
    $
    (530
    )
    
    $
    45,756Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    2,342
    
    
    
    
    
    
    
    
    
    
    
    2,342Unrealized securities
gains arising during
the period
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    875
    
    
    
    
    
    
    
    875Unrealized derivative
losses arising during
the period
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4
    )
    
    
    
    
    
    
    (4
    )Reclassification
adjustment for
realized losses on
derivatives
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    2Income tax effect
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (302
    )
    
    
    
    
    
    
    (302
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,913Share-based compensation  restricted shares
    
    
    1
    
    
    
    270
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    271Cash dividends ($0.195 per share)
    
    
    
    
    
    
    
    
    
    
    (491
    )
    
    
    
    
    
    
    
    
    
    
    (491
    )Treasury stock purchased (1,021 shares)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (21
    )
    
    
    (21
    )Stock options exercised (3,128 shares)
    
    
    
    
    
    
    37
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    37Balance at September 30, 2007
    
    $
    26
    
    
    $
    23,336
    
    
    $
    26,088
    
    
    $
    (434
    )
    
    $
    (551
    )
    
    $
    48,465
 AccumulatedAdditional
    
    
    
    
    
    
    otherCommon
    
    
    paid-in
    
    
    Retained
    
    
    comprehensive
    
    
    Treasurystock
    
    
    capital
    
    
    earnings
    
    
    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
  6




---



##### Table of Contents



First Business Financial Services, Inc.
 
 Consolidated Statements of Cash Flows (Unaudited)
 For the Nine Months EndedSeptember 30,2008
    
    
    2007(In Thousands)Operating activitiesNet income
    
    $
    3,010
    
    
    $
    2,342Adjustments to reconcile net income to net cash provided by
operating activities:Deferred income taxes, net
    
    
    (612
    )
    
    
    (782
    )Provision for loan and lease losses
    
    
    1,314
    
    
    
    1,873Depreciation, amortization and accretion, net
    
    
    391
    
    
    
    354Share-based compensation
    
    
    450
    
    
    
    271Increase in cash surrender value of bank-owned life insurance
    
    
    (549
    )
    
    
    (515
    )Origination of loans for sale
    
    
    (586
    )
    
    
    (1,340
    )Sale of loans originated for sale
    
    
    588
    
    
    
    1,346Gain on sale of loans originated for sale
    
    
    (2
    )
    
    
    (6
    )Loss on foreclosed properties
    
    
    631
    
    
    
    Increase in accrued interest receivable and other assets
    
    
    (1,247
    )
    
    
    (938
    )Increase in accrued interest payable and other liabilities
    
    
    3,362
    
    
    
    3,071Net cash provided by operating activities
    
    
    6,750
    
    
    
    5,676Investing activitiesProceeds from maturities of available-for-sale securities
    
    
    22,340
    
    
    
    16,488Purchases of available-for-sale securities
    
    
    (31,947
    )
    
    
    (8,811
    )Proceeds from sale of foreclosed property
    
    
    655
    
    
    
    Purchases of FHLB stock
    
    
    
    
    
    
    (343
    )Net increase in loans and leases
    
    
    (62,155
    )
    
    
    (110,569
    )Purchases of leasehold improvements and equipment, net
    
    
    (434
    )
    
    
    (319
    )Purchase of bank-owned life insurance
    
    
    
    
    
    
    (590
    )Net cash used in investing activities
    
    
    (71,541
    )
    
    
    (104,144
    )Financing activitiesNet increase in deposits
    
    
    55,229
    
    
    
    109,648Net decrease in FHLB line of credit
    
    
    
    
    
    
    (17,048
    )Repayment of FHLB advances
    
    
    (41,007
    )
    
    
    (7
    )Proceeds from FHLB advances
    
    
    50,000
    
    
    
    15,000Net increase (decrease) in short-term borrowed funds
    
    
    (9,150
    )
    
    
    (24,276
    )Proceeds from subordinated notes payable
    
    
    39,000
    
    
    
    10,000Repayment of subordinated notes payable
    
    
    (31,000
    )
    
    
    Proceeds from junior subordinated notes
    
    
    10,315
    
    
    
    Exercise of stock options
    
    
    
    
    
    
    37Cash dividends paid
    
    
    (515
    )
    
    
    (475
    )Purchase of treasury stock
    
    
    (52
    )
    
    
    (21
    )Net cash provided by financing activities
    
    
    72,820
    
    
    
    92,858Net increase (decrease) in cash and cash equivalents
    
    
    8,029
    
    
    
    (5,610
    )Cash and cash equivalents at the beginning of the period
    
    
    17,624
    
    
    
    19,461Cash and cash equivalents at the end of the period
    
    $
    25,653
    
    
    $
    13,851Supplementary cash flow informationInterest paid on deposits and borrowings
    
    $
    23,260
    
    
    $
    24,726Income taxes paid
    
    
    896
    
    
    
    1,885Transfer to foreclosed properties
    
    
    4,117
    
    
    
    660
  7




---



##### Table of Contents



NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 Note 1  Principles of Consolidation
  Note 2  Basis of Presentation
 Fair Value Measurements . Note 3
 Recent Accounting Pronouncements
  Note 3  Recent Accounting Pronouncements
 Fair Value Disclosures. Accounting for the Impairment or
Disposal of Long-Lived Assets,
 Note 11  Fair Value Disclosure (SFAS 157 Disclosure)
 Fair Value Option for Financial Assets and Financial Liabilities. The Fair Value Option for Financial Assets and Liabilities 
Including an Amendment of SFAS No. 115 Accounting for Certain
Investments in Debt and Equity Securities,
  8




---



##### Table of Contents



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.
 Note 4  Share-Based Compensation
  Stock Options
  9




---



##### Table of Contents



WeightedAverageRemainingWeighted
    
    ContractualOptions
    
    Average Price
    
    Life (Years)Outstanding at December 31, 2007
    
    
    159,540
    
    
    $
    22.10
    
    
    
    5.65Granted
    
    
    Exercised
    
    
    Forfeited
    
    
    (2,250
    )
    
    
    24.56Outstanding at September 30, 2008
    
    
    157,290
    
    
    
    22.07
    
    
    
    4.92Options exercisable at September 30, 2008
    
    
    142,415
    
    
    
    
    
    
    
    4.80
 Restricted Shares
  WeightedNumber of
    
    AverageRestricted
    
    Grant-DateShares
    
    Fair ValueNonvested balance as of December 31, 2007
    
    
    91,379
    
    
    $
    21.16Granted
    
    
    40,950
    
    
    
    16.00Vested
    
    
    (23,505
    )
    
    
    21.40Forfeited
    
    
    (1,375
    )
    
    
    20.59Nonvested balance as of September 30, 2008
    
    
    107,449
    
    
    
    19.14
  Note 5  Earnings Per Share.
  10




---



##### Table of Contents



For the Three Months
    
    
    For the Nine MonthsEnded September 30,
    
    
    Ended September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Income available to common
stockholders
    
    $
    1,172,472
    
    
    $
    885,021
    
    
    $
    3,009,891
    
    
    $
    2,342,185Basic average shares
    
    
    2,435,188
    
    
    
    2,457,885
    
    
    
    2,428,271
    
    
    
    2,455,005Dilutive effect of share-based awards
    
    
    1,050
    
    
    
    2,970
    
    
    
    1,402
    
    
    
    6,004Dilutive average shares
    
    
    2,436,238
    
    
    
    2,460,855
    
    
    
    2,429,673
    
    
    
    2,461,009Earnings per share:Basic
    
    $
    0.48
    
    
    $
    0.36
    
    
    $
    1.24
    
    
    $
    0.95Diluted
    
    $
    0.48
    
    
    $
    0.36
    
    
    $
    1.24
    
    
    $
    0.95
 Note 6  Shareholder Rights Plan.
  Note 7  Securities.
  As of September 30, 2008Gross
    
    
    GrossAmortized
    
    
    unrealized
    
    
    unrealized
    
    
    Estimatedcost
    
    
    holding gains
    
    
    holding losses
    
    
    fair value(In Thousands)Securities available-for-saleCollateralized mortgage
obligations  government
agencies
    
    $
    78,137
    
    
    $
    445
    
    
    $
    (456
    )
    
    $
    78,126Collateralized mortgage
obligations -
government-sponsored
enterprises
    
    
    29,438
    
    
    
    25
    
    
    
    (143
    )
    
    
    29,320$
    107,575
    
    
    $
    470
    
    
    $
    (599
    )
    
    $
    107,446
  11




---



##### Table of Contents



As of December 31, 2007Gross
    
    
    GrossAmortized
    
    
    unrealized
    
    
    unrealized
    
    
    Estimatedcost
    
    
    holding gains
    
    
    holding losses
    
    
    fair value(In Thousands)U.S. Government
corporations and
agencies
    
    $
    1,500
    
    
    $
    
    
    
    $
    (3
    )
    
    $
    1,497Municipals
    
    
    85
    
    
    
    
    
    
    
    
    
    
    
    85Collateralized
mortgage obligations 
government agencies
    
    
    52,755
    
    
    
    282
    
    
    
    (379
    )
    
    
    52,658Collateralized
mortgage obligations
- government-sponsored
enterprises
    
    
    43,631
    
    
    
    2
    
    
    
    (495
    )
    
    
    43,138$
    97,971
    
    
    $
    284
    
    
    $
    (877
    )
    
    $
    97,378
   As of September 30, 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
    
    $
    32,992
    
    
    $
    456
    
    
    $
    
    
    
    $
    
    
    
    $
    32,992
    
    
    $
    456Collateralized
mortgage obligations
- government-sponsored
enterprises
    
    
    20,060
    
    
    
    137
    
    
    
    655
    
    
    
    6
    
    
    
    20,715
    
    
    
    143$
    53,052
    
    
    $
    593
    
    
    $
    655
    
    
    $
    6
    
    
    $
    53,707
    
    
    $
    599
 12




---



##### Table of Contents



As of December 31, 2007Less than 12 months
    
    
    12 months or longer
    
    
    TotalUnrealized
    
    
    
    
    
    
    Unrealized
    
    
    
    
    
    
    UnrealizedFair value
    
    
    losses
    
    
    Fair value
    
    
    losses
    
    
    Fair value
    
    
    losses(In Thousands)U.S. Government
corporations and
agencies
    
    $
    
    
    
    $
    
    
    
    $
    1,497
    
    
    $
    3
    
    
    $
    1,497
    
    
    $
    3Collateralized
mortgage obligations 
government agencies
    
    
    13,054
    
    
    
    374
    
    
    
    579
    
    
    
    5
    
    
    
    13,633
    
    
    
    379Collateralized
mortgage obligations 
government-sponsored
enterprises
    
    
    6,463
    
    
    
    66
    
    
    
    35,317
    
    
    
    429
    
    
    
    41,780
    
    
    
    495$
    19,517
    
    
    $
    440
    
    
    $
    37,393
    
    
    $
    437
    
    
    $
    56,910
    
    
    $
    877
   Note 8 Loans, Leases and Allowance for Loan and Lease Losses
  September 30,
    
    
    December 31,2008
    
    
    2007(In Thousands)First mortgage loans:Commercial real estate
    
    $
    381,220
    
    
    $
    336,153Construction
    
    
    78,342
    
    
    
    90,545Multi-family
    
    
    42,742
    
    
    
    41,8211-4 family
    
    
    49,050
    
    
    
    48,437551,354
    
    
    
    516,956Commercial and industrial loans
    
    
    238,868
    
    
    
    213,786Direct financing leases, net
    
    
    27,806
    
    
    
    29,383Home equity loans
    
    
    7,626
    
    
    
    9,784Credit card and other
    
    
    13,969
    
    
    
    11,725839,623
    
    
    
    781,634Less:Allowance for loan and lease losses
    
    
    10,816
    
    
    
    9,854Deferred loan fees
    
    
    450
    
    
    
    147Loans and lease receivables, net
    
    $
    828,357
    
    
    $
    771,633
 13




---



##### Table of Contents



NineMonths Ended
    
    
    Year EndedSeptember 30,
    
    
    December 31,2008
    
    
    2007(In Thousands)Allowance at beginning of period
    
    $
    9,854
    
    
    $
    8,296Charge-offs:Commercial real estate and other mortgage
    
    
    (417
    )
    
    
    (571
    )Commercial
    
    
    (24
    )
    
    
    (778
    )Lease
    
    
    
    
    
    
    (25
    )Consumer
    
    
    
    
    
    
    Total charge-offs
    
    
    (441
    )
    
    
    (1,374
    )Recoveries:Commercial real estate and other mortgage
    
    
    87
    
    
    
    5Commercial
    
    
    2
    
    
    
    23Lease
    
    
    
    
    
    
    Consumer
    
    
    
    
    
    
    Total recoveries
    
    
    89
    
    
    
    28Net charge-offs
    
    
    (352
    )
    
    
    (1,346
    )Provision for loan and lease losses
    
    
    1,314
    
    
    
    2,904Allowance at end of period
    
    $
    10,816
    
    
    $
    9,854Allowance to gross loans and leases
    
    
    1.29
    %
    
    
    1.26
    %
 Note 9  Deposits
  September 30, 2008
    
    
    December 31, 2007Weighted
    
    
    
    
    
    
    WeightedBalance
    
    
    average rate
    
    
    Balance
    
    
    average rate(In Thousands)Transaction accounts:Demand deposits
    
    $
    57,995
    
    
    
    0.00
    %
    
    $
    47,124
    
    
    
    0.00
    %Negotiable order of
withdrawal (NOW)
accounts
    
    
    58,993
    
    
    
    1.81
    
    
    
    65,035
    
    
    
    4.22116,988
    
    
    
    
    
    
    
    112,159Money market accounts
    
    
    142,479
    
    
    
    1.95
    
    
    
    162,585
    
    
    
    4.49Certificates of deposit
    
    
    571,822
    
    
    
    4.64
    
    
    
    501,316
    
    
    
    5.00$
    831,289
    
    
    
    
    
    
    $
    776,060
 14




---



##### Table of Contents



Note 10  Borrowings
  September 30, 2008
    
    
    December 31, 2007Weighted
    
    
    Weighted
    
    
    
    
    
    
    Weighted
    
    
    Weightedaverage
    
    
    average
    
    
    
    
    
    
    average
    
    
    averageBalance
    
    
    balance
    
    
    rate
    
    
    Balance
    
    
    balance
    
    
    rate(In Thousands)Fed funds purchased
and securities sold
under agreements to
repurchase
    
    $
    7,300
    
    
    $
    13,406
    
    
    
    2.75
    %
    
    $
    14,250
    
    
    $
    10,394
    
    
    
    5.35
    %FHLB advances
    
    
    43,519
    
    
    
    31,874
    
    
    
    4.71
    
    
    
    34,526
    
    
    
    25,776
    
    
    
    4.87Line of credit
    
    
    10
    
    
    
    1,949
    
    
    
    4.86
    
    
    
    2,210
    
    
    
    2,556
    
    
    
    7.20Subordinated notes
payable
    
    
    39,000
    
    
    
    33,905
    
    
    
    5.60
    
    
    
    31,000
    
    
    
    23,630
    
    
    
    7.73Junior subordinated
notes
    
    
    10,315
    
    
    
    188
    
    
    
    10.64
    
    
    
    
    
    
    
    
    
    
    
    Other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    25
    
    
    
    7.00$
    100,144
    
    
    $
    81,322
    
    
    
    4.78
    
    
    $
    81,986
    
    
    $
    62,381
    
    
    
    6.13Short-term
borrowings
    
    $
    32,318
    
    
    
    
    
    
    
    
    
    
    $
    32,470Long-term borrowings
    
    
    67,826
    
    
    
    
    
    
    
    
    
    
    
    49,516$
    100,144
    
    
    
    
    
    
    
    
    
    
    $
    81,986
    15




---



##### Table of Contents



Note 11  Fair Value Disclosures (SFAS 157 Disclosure)
    Quoted Pricesin Active
    
    SignificantMarkets for
    
    Other
    
    SignificantIdentical
    
    Observable
    
    UnobservableAssets
    
    Inputs
    
    Inputs(Level 1)
    
    (Level 2)
    
    (Level 3)
    
    Total(In Thousands)Assets:Securities available for sale
    
    $
    
    
    
    $
    107,446
    
    
    $
    
    
    
    $
    107,446Interest rate swaps  non-hedge
    
    
    
    
    
    
    114
    
    
    
    
    
    
    
    114Liabilities:Interest rate swaps  non-hedge
    
    $
    
    
    
    $
    114
    
    
    $
    
    
    
    $
    114Interest rate swaps  hedge
    
    
    
    
    
    
    4
    
    
    
    
    
    
    
    4
 16




---



##### Table of Contents



Quoted Pricesin Active
    
    SignificantMarkets for
    
    Other
    
    SignificantBalance at
    
    Identical
    
    Observable
    
    Unobservable
    
    TotalSeptember 30,
    
    Assets
    
    Inputs
    
    Inputs
    
    Gains2008
    
    (Level 1)
    
    (Level 2)
    
    (Level 3)
    
    (Losses)(In Thousands)Impaired loans
    
    $
    4,381
    
    
    $
    
    
    
    $
    945
    
    
    $
    3,436
    
    
    $
    
  Note 12  Derivative Financial Instruments
   17




---



##### Table of Contents



Item 2.  Managements Discussion and Analysis of Financial Condition and Results of Operations
 General
  Item 1A. Risk Factors
  Overview
  Results of Operations
 General.
 18




---



##### Table of Contents



Top Line Revenue
  For the Three Months Ended
    
    
    For the Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    Change
    
    
    2008
    
    
    2007
    
    
    Change(In Thousands)Net interest income
    
    $
    6,517
    
    
    $
    5,862
    
    
    
    11.2
    %
    
    $
    19,231
    
    
    $
    16,881
    
    
    
    13.9
    %Non-interest income
    
    
    1,340
    
    
    
    1,101
    
    
    
    21.7
    
    
    
    3,700
    
    
    
    3,259
    
    
    
    13.5Total top line revenue
    
    $
    7,857
    
    
    $
    6,963
    
    
    
    12.8
    
    
    $
    22,931
    
    
    $
    20,140
    
    
    
    13.9
 Adjusted Net Income
  19




---



##### Table of Contents



For the Three Months Ended
    
    
    For the Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    Change
    
    
    2008
    
    
    2007
    
    
    Change(In Thousands)Net income,
presented underUS
GAAP
    
    $
    1,172
    
    
    $
    885
    
    
    
    32.4
    %
    
    $
    3,010
    
    
    $
    2,342
    
    
    
    28.5
    %Add back:Provision for
loan and lease
losses, after tax
    
    
    10
    
    
    
    362
    
    
    
    (97.2
    )
    
    
    799
    
    
    
    1,138
    
    
    
    (29.8
    )Less:Net charge-offs
(recoveries),
after tax
    
    
    (46
    )
    
    
    (1
    )
    
    
    
    *
    
    
    214
    
    
    
    (16
    )
    
    
    
    *Adjusted net income
    
    $
    1,228
    
    
    $
    1,248
    
    
    
    (1.6
    )
    
    $
    3,595
    
    
    $
    3,496
    
    
    
    2.8
 
 *
    
    Not meaningful Return on Equity
  20




---



##### Table of Contents



Net Interest Income.
 For the three months ended September 30
    
    
    For the nine months ended September 30Rate/
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Rate/Rate
    
    
    Volume
    
    
    Volume
    
    
    Net
    
    
    Rate
    
    
    Volume
    
    
    Volume
    
    
    Net(In Thousands)Interest-Earning AssetsCommercial real estate and
other mortgage loans
    
    $
    (1,497
    )
    
    $
    969
    
    
    $
    (157
    )
    
    $
    (685
    )
    
    $
    (3,301
    )
    
    $
    4,105
    
    
    $
    (524
    )
    
    $
    280Commercial loans
    
    
    (853
    )
    
    
    634
    
    
    
    (121
    )
    
    
    (340
    )
    
    
    (2,251
    )
    
    
    2,140
    
    
    
    (366
    )
    
    
    (477
    )Leases
    
    
    17
    
    
    
    64
    
    
    
    3
    
    
    
    84
    
    
    
    (6
    )
    
    
    241
    
    
    
    (1
    )
    
    
    234Consumer loans
    
    
    (6
    )
    
    
    330
    
    
    
    (42
    )
    
    
    282
    
    
    
    (24
    )
    
    
    961
    
    
    
    (151
    )
    
    
    786Total loans and leases
receivable
    
    
    (2,339
    )
    
    
    1,997
    
    
    
    (317
    )
    
    
    (659
    )
    
    
    (5,582
    )
    
    
    7,447
    
    
    
    (1,042
    )
    
    
    823Mortgage-related securities
    
    
    17
    
    
    
    169
    
    
    
    3
    
    
    
    189
    
    
    
    64
    
    
    
    249
    
    
    
    5
    
    
    
    318Investment securities
    
    
    
    
    
    
    (16
    )
    
    
    
    
    
    
    (16
    )
    
    
    2
    
    
    
    (36
    )
    
    
    (2
    )
    
    
    (36
    )Other investments
    
    
    (16
    )
    
    
    
    
    
    
    
    
    
    
    (16
    )
    
    
    (46
    )
    
    
    4
    
    
    
    (4
    )
    
    
    (46
    )Fed funds sold and other
    
    
    
    
    
    
    (28
    )
    
    
    
    
    
    
    (28
    )
    
    
    (17
    )
    
    
    20
    
    
    
    (10
    )
    
    
    (7
    )Short-term investments
    
    
    (13
    )
    
    
    19
    
    
    
    (12
    )
    
    
    (6
    )
    
    
    (31
    )
    
    
    40
    
    
    
    (21
    )
    
    
    (12
    )Total net change in
income on
interest-earning assets
    
    $
    (2,351
    )
    
    $
    2,141
    
    
    $
    (326
    )
    
    $
    (536
    )
    
    $
    (5,610
    )
    
    $
    7,724
    
    
    $
    (1,075
    )
    
    $
    1,039Interest-Bearing LiabilitiesNOW accounts
    
    $
    (486
    )
    
    $
    (57
    )
    
    $
    39
    
    
    $
    (504
    )
    
    $
    (1,333
    )
    
    $
    (71
    )
    
    $
    42
    
    
    $
    (1,362
    )Money market
    
    
    (1,299
    )
    
    
    (327
    )
    
    
    217
    
    
    
    (1,409
    )
    
    
    (3,518
    )
    
    
    (856
    )
    
    
    499
    
    
    
    (3,875
    )Certificates  regular
    
    
    (485
    )
    
    
    1,384
    
    
    
    (131
    )
    
    
    768
    
    
    
    (574
    )
    
    
    4,131
    
    
    
    (169
    )
    
    
    3,388Certificates  large
    
    
    (244
    )
    
    
    272
    
    
    
    (102
    )
    
    
    (74
    )
    
    
    (416
    )
    
    
    1,035
    
    
    
    (258
    )
    
    
    361Total deposits
    
    
    (2,514
    )
    
    
    1,272
    
    
    
    23
    
    
    
    (1,219
    )
    
    
    (5,841
    )
    
    
    4,239
    
    
    
    114
    
    
    
    (1,488
    )FHLB advances
    
    
    (19
    )
    
    
    58
    
    
    
    (4
    )
    
    
    35
    
    
    
    (28
    )
    
    
    331
    
    
    
    (11
    )
    
    
    292Other borrowings
    
    
    (225
    )
    
    
    334
    
    
    
    (116
    )
    
    
    (7
    )
    
    
    (591
    )
    
    
    690
    
    
    
    (214
    )
    
    
    (115
    )Total net change in
expense on
interest-bearing
liabilities
    
    $
    (2,758
    )
    
    $
    1,664
    
    
    $
    (97
    )
    
    $
    (1,191
    )
    
    $
    (6,460
    )
    
    $
    5,260
    
    
    $
    (111
    )
    
    $
    (1,311
    )Net change in net
interest income
    
    $
    407
    
    
    $
    477
    
    
    $
    (229
    )
    
    $
    655
    
    
    $
    850
    
    
    $
    2,464
    
    
    $
    (964
    )
    
    $
    2,350
    21




---



##### Table of Contents



22




---



##### Table of Contents



23




---



##### Table of Contents



Average Interest-Earning Assets, Average Interest-Bearing Liabilities and Interest Rate Spread.
 For the Three Months Ended September 30,2008
    
    
    2007Average
    
    
    
    
    
    
    Average
    
    
    Average
    
    
    
    
    
    
    Averagebalance
    
    
    Interest
    
    
    yield/cost
    
    
    balance
    
    
    Interest
    
    
    yield/cost(In Thousands)Interest-Earning AssetsCommercial real estate and other
mortgage loans(1)
    
    $
    545,096
    
    
    $
    8,594
    
    
    
    6.31
    %
    
    $
    493,953
    
    
    $
    9,279
    
    
    
    7.51
    %Commercial and industrial
loans(1)
    
    
    232,153
    
    
    
    4,150
    
    
    
    7.15
    
    
    
    203,071
    
    
    
    4,490
    
    
    
    8.84Leases
    
    
    28,200
    
    
    
    445
    
    
    
    6.31
    
    
    
    23,935
    
    
    
    361
    
    
    
    6.03Consumer loans
    
    
    23,626
    
    
    
    329
    
    
    
    5.57
    
    
    
    2,949
    
    
    
    47
    
    
    
    6.38Total loans and leases
receivable(1)
    
    
    829,075
    
    
    
    13,518
    
    
    
    6.52
    
    
    
    723,908
    
    
    
    14,177
    
    
    
    7.83Mortgage-related securities(2)
    
    
    103,869
    
    
    
    1,205
    
    
    
    4.64
    
    
    
    89,048
    
    
    
    1,016
    
    
    
    4.56Investment securities(2)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,701
    
    
    
    16
    
    
    
    3.76Federal Home Loan Bank stock
    
    
    2,367
    
    
    
    
    
    
    
    
    
    
    
    2,328
    
    
    
    16
    
    
    
    2.75Fed funds sold and other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,104
    
    
    
    28
    
    
    
    5.32Short-term investments
    
    
    3,306
    
    
    
    16
    
    
    
    1.94
    
    
    
    1,760
    
    
    
    22
    
    
    
    5.00Total interest-earning assets
    
    
    938,617
    
    
    
    14,739
    
    
    
    6.28
    
    
    
    820,849
    
    
    
    15,275
    
    
    
    7.44Non-interest-earning assets
    
    
    38,261
    
    
    
    
    
    
    
    
    
    
    
    32,947Total assets
    
    $
    976,878
    
    
    
    
    
    
    
    
    
    
    $
    853,796Interest-Bearing LiabilitiesNOW accounts
    
    $
    60,585
    
    
    
    213
    
    
    
    1.41
    
    
    $
    65,806
    
    
    
    717
    
    
    
    4.36
    %Money market
    
    
    141,808
    
    
    
    551
    
    
    
    1.55
    
    
    
    170,170
    
    
    
    1,960
    
    
    
    4.61Certificates  regular
    
    
    513,654
    
    
    
    5,907
    
    
    
    4.60
    
    
    
    404,661
    
    
    
    5,139
    
    
    
    5.08Certificates  large
    
    
    71,268
    
    
    
    574
    
    
    
    3.22
    
    
    
    50,217
    
    
    
    648
    
    
    
    5.16Total deposits
    
    
    787,315
    
    
    
    7,245
    
    
    
    3.68
    
    
    
    690,854
    
    
    
    8,464
    
    
    
    4.90FHLB advances
    
    
    29,203
    
    
    
    335
    
    
    
    4.59
    
    
    
    24,471
    
    
    
    300
    
    
    
    4.90Other borrowings
    
    
    54,804
    
    
    
    642
    
    
    
    4.69
    
    
    
    36,171
    
    
    
    649
    
    
    
    7.18Total interest-bearing liabilities
    
    
    871,322
    
    
    
    8,222
    
    
    
    3.77
    
    
    
    751,496
    
    
    
    9,413
    
    
    
    5.01Non-interest-bearing liabilities
    
    
    54,206
    
    
    
    
    
    
    
    
    
    
    
    54,757Total liabilities
    
    
    925,528
    
    
    
    
    
    
    
    
    
    
    
    806,253Stockholders equity
    
    
    51,350
    
    
    
    
    
    
    
    
    
    
    
    47,543Total liabilities and stockholders
equity
    
    $
    976,878
    
    
    
    
    
    
    
    
    
    
    $
    853,796Net interest income/interest rate spread
    
    
    
    
    
    $
    6,517
    
    
    
    2.51
    %
    
    
    
    
    
    $
    5,862
    
    
    
    2.43
    %Net interest-earning assets
    
    $
    67,295
    
    
    
    
    
    
    
    
    
    
    $
    69,353Net interest margin
    
    
    
    
    
    
    
    
    
    
    2.78
    %
    
    
    
    
    
    
    
    
    
    
    2.86
    %Average interest-earning assets to
average interest-bearing liabilities
    
    
    107.72
    %
    
    
    
    
    
    
    
    
    
    
    109.23
    %Return on average assets
    
    
    0.48
    
    
    
    
    
    
    
    
    
    
    
    0.41Return on average equity
    
    
    9.14
    
    
    
    
    
    
    
    
    
    
    
    7.45Average equity to average assets
    
    
    5.26
    
    
    
    
    
    
    
    
    
    
    
    5.57Non-interest expense to average assets
    
    
    2.38
    
    
    
    
    
    
    
    
    
    
    
    2.32
 
 (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. 24




---



##### Table of Contents



For the Nine Months Ended September 30,2008
    
    
    2007Average
    
    
    
    
    
    
    Average
    
    
    Average
    
    
    
    
    
    
    Averagebalance
    
    
    Interest
    
    
    yield/cost
    
    
    balance
    
    
    Interest
    
    
    yield/cost(In Thousands)Interest-Earning AssetsCommercial real estate and other
mortgage loans(1)
    
    $
    541,809
    
    
    $
    26,125
    
    
    
    6.43
    %
    
    $
    467,544
    
    
    $
    25,845
    
    
    
    7.37
    %Commercial loans(1)
    
    
    226,051
    
    
    
    12,687
    
    
    
    7.48
    
    
    
    194,431
    
    
    
    13,164
    
    
    
    9.03Leases
    
    
    28,455
    
    
    
    1,352
    
    
    
    6.34
    
    
    
    23,434
    
    
    
    1,118
    
    
    
    6.36Consumer loans
    
    
    22,918
    
    
    
    936
    
    
    
    5.45
    
    
    
    3,093
    
    
    
    150
    
    
    
    6.47Total loans and leases
receivable(1)
    
    
    819,233
    
    
    
    41,100
    
    
    
    6.69
    
    
    
    688,502
    
    
    
    40,277
    
    
    
    7.80Mortgage-related
securities(2)
    
    
    99,736
    
    
    
    3,434
    
    
    
    4.59
    
    
    
    92,350
    
    
    
    3,116
    
    
    
    4.50Investment securities(2)
    
    
    348
    
    
    
    10
    
    
    
    3.83
    
    
    
    1,661
    
    
    
    46
    
    
    
    3.69Federal Home Loan Bank stock
    
    
    2,367
    
    
    
    
    
    
    
    
    
    
    
    2,184
    
    
    
    46
    
    
    
    2.81Fed funds sold and other
    
    
    1,387
    
    
    
    29
    
    
    
    2.79
    
    
    
    895
    
    
    
    36
    
    
    
    5.36Short-term investments
    
    
    2,675
    
    
    
    45
    
    
    
    2.29
    
    
    
    1,582
    
    
    
    58
    
    
    
    4.89Total interest-earning assets
    
    
    925,746
    
    
    
    44,618
    
    
    
    6.43
    
    
    
    787,174
    
    
    
    43,579
    
    
    
    7.38Non-interest-earning assets
    
    
    33,873
    
    
    
    
    
    
    
    
    
    
    
    32,263Total assets
    
    $
    959,619
    
    
    
    
    
    
    
    
    
    
    $
    819,437Interest-Bearing LiabilitiesNOW accounts
    
    $
    66,109
    
    
    
    895
    
    
    
    1.81
    
    
    $
    68,250
    
    
    
    2,257
    
    
    
    4.41
    %Money market
    
    
    148,145
    
    
    
    2,164
    
    
    
    1.95
    
    
    
    172,617
    
    
    
    6,039
    
    
    
    4.66Certificates  regular
    
    
    487,980
    
    
    
    17,388
    
    
    
    4.75
    
    
    
    376,800
    
    
    
    14,000
    
    
    
    4.95Certificates  large
    
    
    70,466
    
    
    
    2,027
    
    
    
    3.84
    
    
    
    43,466
    
    
    
    1,666
    
    
    
    5.11Total deposits
    
    
    772,700
    
    
    
    22,474
    
    
    
    3.88
    
    
    
    661,133
    
    
    
    23,962
    
    
    
    4.83FHLB advances
    
    
    31,874
    
    
    
    1,126
    
    
    
    4.71
    
    
    
    22,827
    
    
    
    834
    
    
    
    4.87Other borrowings
    
    
    49,448
    
    
    
    1,787
    
    
    
    4.82
    
    
    
    36,290
    
    
    
    1,902
    
    
    
    6.99Total interest-bearing
liabilities
    
    
    854,022
    
    
    
    25,387
    
    
    
    3.96
    
    
    
    720,250
    
    
    
    26,698
    
    
    
    4.94Non-interest-bearing liabilities
    
    
    54,785
    
    
    
    
    
    
    
    
    
    
    
    52,260Total liabilities
    
    
    908,807
    
    
    
    
    
    
    
    
    
    
    
    772,510Stockholders equity
    
    
    50,812
    
    
    
    
    
    
    
    
    
    
    
    46,927Total liabilities and
stockholders equity
    
    $
    959,619
    
    
    
    
    
    
    
    
    
    
    $
    819,437Net interest income/interest rate
spread
    
    
    
    
    
    $
    19,231
    
    
    
    2.47
    %
    
    
    
    
    
    $
    16,881
    
    
    
    2.44
    %Net interest-earning assets
    
    $
    71,724
    
    
    
    
    
    
    
    
    
    
    $
    66,924Net interest margin
    
    
    
    
    
    
    
    
    
    
    2.77
    %
    
    
    
    
    
    
    
    
    
    
    2.86
    %Average interest-earning assets to
average interest-earning
liabilities
    
    
    108.40
    %
    
    
    
    
    
    
    
    
    
    
    109.29
    %Return on average assets
    
    
    0.42
    
    
    
    
    
    
    
    
    
    
    
    0.38Return on average equity
    
    
    7.90
    
    
    
    
    
    
    
    
    
    
    
    6.65Average equity to average assets
    
    
    5.30
    
    
    
    
    
    
    
    
    
    
    
    5.73Non-interest expense to average
assets
    
    
    2.31
    
    
    
    
    
    
    
    
    
    
    
    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 held and available for sale. Provision for Loan and Lease Losses.
 25




---



##### Table of Contents



Asset Quality
 Non-Interest Income.
    Non-Interest Expense.
 26




---



##### Table of Contents



Income Taxes.
 Financial Condition
 General.
 Securities.
 27




---



##### Table of Contents



Loans and Leases Receivable.
 Asset Quality
 Deposits.
 28




---



##### Table of Contents



Borrowings.
  Asset Quality
 Non-performing Assets.
  29




---



##### Table of Contents



September 30,
    
    
    December 31,2008
    
    
    2007(In Thousands)Non-accrual loans
    
    $
    7,439
    
    
    $
    8,805Non-accrual leases
    
    
    
    
    
    
    59Total non-accrual loans and leases
    
    
    7,439
    
    
    
    8,864Foreclosed properties
    
    
    3,490
    
    
    
    660Total non-performing assets
    
    $
    10,929
    
    
    $
    9,524Performing troubled debt restructurings
    
    $
    
    
    
    $
    Total non-accrual loans and leases to total loans and leases
    
    
    0.89
    %
    
    
    1.13
    %Total non-performing assets to total assets
    
    
    1.09
    
    
    
    1.04Allowance for loan and lease losses to total loans and leases
    
    
    1.29
    
    
    
    1.26Allowance for loan and lease losses to non-accrual loans and leases
    
    
    145.40
    
    
    
    111.17
  As of and for
    
    
    As of and forthe Nine
    
    
    the YearMonths Ended
    
    
    EndedSeptember 30,
    
    
    December 31,2008
    
    
    2007(In Thousands)Impaired loans and leases with no impairment reserves required
    
    $
    3,569
    
    
    $
    6,500Impaired loans and leases with impairment reserves required
    
    
    3,870
    
    
    
    2,617Total impaired loans and leases
    
    
    7,439
    
    
    
    9,117Less:Impairment reserve (included in allowance for loan and lease
losses)
    
    
    695
    
    
    
    834Net impaired loans and leases
    
    $
    6,744
    
    
    $
    8,283Average impaired loans and leases
    
    $
    7,565
    
    
    $
    3,439Foregone interest income attributable to impaired loans and leases
    
    $
    442
    
    
    $
    365Interest income recognized on impaired loans and leases
    
    
    (49
    )
    
    
    (41
    )Net foregone interest income on impaired loans and leases
    
    $
    393
    
    
    $
    324
  30




---



##### Table of Contents



For the Three Months Ended
    
    
    For the Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(In Thousands)Allowance at beginning of period
    
    $
    10,723
    
    
    $
    9,598
    
    
    $
    9,854
    
    
    $
    8,296Charge-offs:Mortgage
    
    
    (9
    )
    
    
    
    
    
    
    (417
    )
    
    
    Commercial
    
    
    
    
    
    
    
    
    
    
    (24
    )
    
    
    Lease
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Consumer
    
    
    
    
    
    
    
    
    
    
    Total charge-offs
    
    
    (9
    )
    
    
    
    
    
    
    (441
    )
    
    
    Recoveries:Mortgage
    
    
    84
    
    
    
    2
    
    
    
    87
    
    
    
    4Commercial
    
    
    1
    
    
    
    
    
    
    
    2
    
    
    
    23Lease
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Consumer
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total recoveries
    
    
    85
    
    
    
    2
    
    
    
    89
    
    
    
    27Net (charge-offs) recoveries
    
    
    76
    
    
    
    2
    
    
    
    (352
    )
    
    
    27Provision for loan and lease losses
    
    
    17
    
    
    
    596
    
    
    
    1,314
    
    
    
    1,873Allowance at end of period
    
    $
    10,816
    
    
    $
    10,196
    
    
    $
    10,816
    
    
    $
    10,196Allowance to average loans and leases
    
    
    1.30
    %
    
    
    1.41
    %
    
    
    1.32
    %
    
    
    1.48
    %
 Liquidity and Capital Resources
    31




---



##### Table of Contents



32




---



##### Table of Contents



Minimum Required to be WellCapitalized Under PromptMinimum Required for Capital
    
    Corrective ActionActual
    
    Adequacy Purposes
    
    RequirementsAmount
    
    Ratio
    
    Amount
    
    Ratio
    
    Amount
    
    Ratio(In Thousands)As of September 30, 2008Total capital
(to risk-weighted assets)Consolidated
    
    $
    108,876
    
    
    
    12.03
    %
    
    $
    72,419
    
    
    
    8.00
    %
    
    
    N/A
    
    
    
    N/AFirst Business Bank
    
    
    88,965
    
    
    
    11.02
    
    
    
    64,582
    
    
    
    8.00
    
    
    $
    80,728
    
    
    
    10.00
    %First Business Bank 
Milwaukee
    
    
    12,461
    
    
    
    12.74
    
    
    
    7,825
    
    
    
    8.00
    
    
    
    9,781
    
    
    
    10.00Tier 1 capital
(to risk-weighted assets)Consolidated
    
    $
    59,060
    
    
    
    6.52
    %
    
    $
    36,209
    
    
    
    4.00
    %
    
    
    N/A
    
    
    
    N/AFirst Business Bank
    
    
    79,958
    
    
    
    9.90
    
    
    
    32,291
    
    
    
    4.00
    
    
    $
    48,437
    
    
    
    6.00
    %First Business Bank 
Milwaukee
    
    
    11,216
    
    
    
    11.47
    
    
    
    3,912
    
    
    
    4.00
    
    
    
    5,868
    
    
    
    6.00Tier 1 capital
(to average assets)Consolidated
    
    $
    59,060
    
    
    
    6.06
    %
    
    $
    38,967
    
    
    
    4.00
    %
    
    
    N/A
    
    
    
    N/AFirst Business Bank
    
    
    79,958
    
    
    
    9.37
    
    
    
    34,149
    
    
    
    4.00
    
    
    $
    42,686
    
    
    
    5.00
    %First Business Bank 
Milwaukee
    
    
    11,216
    
    
    
    9.33
    
    
    
    4,810
    
    
    
    4.00
    
    
    
    6,013
    
    
    
    5.00
 Minimum Required to be WellCapitalized Under PromptMinimum Required for Capital
    
    Corrective ActionActual
    
    Adequacy Purposes
    
    RequirementsAmount
    
    Ratio
    
    Amount
    
    Ratio
    
    Amount
    
    Ratio(In Thousands)As of December 31, 2007Total capital
(to risk-weighted assets)Consolidated
    
    $
    87,018
    
    
    
    10.22
    %
    
    $
    68,119
    
    
    
    8.00
    %
    
    
    N/A
    
    
    
    N/AFirst Business Bank
    
    
    79,072
    
    
    
    10.45
    
    
    
    60,528
    
    
    
    8.00
    
    
    $
    75,660
    
    
    
    10.00
    %First Business Bank 
Milwaukee
    
    
    9,847
    
    
    
    10.26
    
    
    
    7,679
    
    
    
    8.00
    
    
    
    9,599
    
    
    
    10.00Tier 1 capital
(to risk-weighted assets)Consolidated
    
    $
    46,164
    
    
    
    5.42
    %
    
    $
    34,060
    
    
    
    4.00
    %
    
    
    N/A
    
    
    
    N/AFirst Business Bank
    
    
    71,097
    
    
    
    9.40
    
    
    
    30,264
    
    
    
    4.00
    
    
    $
    45,396
    
    
    
    6.00
    %First Business Bank 
Milwaukee
    
    
    8,639
    
    
    
    9.00
    
    
    
    3,840
    
    
    
    4.00
    
    
    
    5,759
    
    
    
    6.00Tier 1 capital
(to average assets)Consolidated
    
    $
    46,164
    
    
    
    5.12
    %
    
    $
    36,065
    
    
    
    4.00
    %
    
    
    N/A
    
    
    
    N/AFirst Business Bank
    
    
    71,097
    
    
    
    9.04
    
    
    
    31,459
    
    
    
    4.00
    
    
    $
    39,324
    
    
    
    5.00
    %First Business Bank 
Milwaukee
    
    
    8,639
    
    
    
    7.39
    
    
    
    4,678
    
    
    
    4.00
    
    
    
    5,848
    
    
    
    5.00
 33




---



##### Table of Contents



Contractual Obligations and Off-balance Sheet Arrangements
  
 Item 3.  Quantitative and Qualitative Disclosures about Market Risk
     
 Item 4T.  Controls and Procedures
   34




---



##### Table of Contents



Part II. Other Information
 
 Item 1.  Legal Proceedings
  
 Item 1A.   Risk Factors
  Adverse changes in economic conditions, particularly a continuing or worsening slowdown in Dane,
Waukesha and Outagamie counties where our business is concentrated, could harm our business.
   Our commercial real estate loans involve higher principal amounts than other loans, and repayment
of these loans may be dependent on factors outside our control or the control of our borrowers.
  35




---



##### Table of Contents



Our loan and lease loss allowance may not be adequate to cover actual losses.
  
    
    Current economic conditions and their estimated effects on specific borrowers and
collateral values;
    
    An evaluation of the existing relationships among loans and leases, probable loan
and lease losses and the present level of the allowance for loan and lease losses;
    
    Results of examinations of our loan and lease portfolios by regulatory agencies;
and
    
    Managements internal review of the loan and lease portfolios.
  Our continued pace of growth may require us to raise additional capital in the future, but that
capital may not be available or may not be on terms acceptable to us when it is needed.
  We rely, in part, on external financing to fund our operations and the lack of availability of such
funds in the future could adversely affect our growth strategy.
  36




---



##### Table of Contents



Competition from other financial institutions could adversely affect our growth or profitability.
   We rely on our management, and the loss of one or more of those managers may harm our business.
  Variations in interest rates may harm our financial results.
  We are subject to extensive regulation, and changes in banking laws and regulations could adversely
affect our business.
  Our trust operations subject us to financial and reputational risks.
  37




---



##### Table of Contents



If we are unable to keep pace with technological advances in our industry, our ability to attract
and retain clients could be adversely affected.
  Our business continuity plans or data security systems could prove to be inadequate, resulting in a
material interruption in, or disruption to, our business and a negative impact on the results of
operations .
  We are exposed to risks of environmental liabilities with respect to secured properties or
properties for which we take title.
  
 Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds
 (a)
    
    On September 26, 2008 FBFS Statutory Trust II, a financing subsidiary of the
Corporation, issued and sold capital securities of the trust in the aggregate
principal amount of $10 million, in a private placement, and issued $315,000 in common
securities to the Corporation. On the same date, the trust used the proceeds from the
sale of all such securities to purchase $10.3 million of the Corporations Junior
Subordinated Notes due September 26, 2038. The Corporation also issued a guarantee of
the various obligations associated with the trust preferred securities. The trust
preferred securities were offered and sold to accredited investors in private
placement exempt from registration pursuant to Regulation D under the Securities Act.
 38




---



##### Table of Contents



(b)
    
    None.(c)
    
    Issuer Purchases of Equity Securities
 ApproximateTotal Number of
    
    Dollar Value ofShares Purchased
    
    Shares that Mayas Part of Publicly
    
    Yet Be PurchasedTotal Number of
    
    Average Price Paid
    
    Announced Plans
    
    Under the Plans orPeriod
    
    Shares Purchased
    
    Per Share
    
    or Programs
    
    ProgramsJuly 1  31, 2008
    
    
    1,844
    
    
    $
    15.52
    
    
    
    
    $
    177,150August 1  31, 2008
    
    
    166
    
    
    
    15.25
    
    
    
    
    
    177,150September 1  30, 2008
    
    
    427
    
    
    
    17.00
    
    
    
    
    
    177,150
  
 Item 3.  Defaults Upon Senior Securities
  
 Item 4.  Submission of Matters to a Vote of Security Holders
  
 Item 5.  Other Information.
  
 Item 6.  Exhibits.
 (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.
 39




---



##### Table of Contents



Signatures
  FIRST BUSINESS FINANCIAL SERVICES, INC./s/ Corey A. ChambasCorey A. ChambasChief Executive OfficerOctober 27, 2008
 40