##### 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 March 31, 2011
 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)
 Telephone number
 þ o
 o 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




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##### 



FIRST BUSINESS FINANCIAL SERVICES, INC.
INDEX  FORM 10-Q
 PART I. Financial Information
    
    
    1Item 1. Financial Statements
    
    
    1Consolidated Balance Sheets
    
    
    1Consolidated Statements of Income (Unaudited)
    
    
    2Consolidated Statements of Changes in Stockholders Equity and Comprehensive Income (Unaudited)
    
    
    3Consolidated Statements of Cash Flows (Unaudited)
    
    
    4Notes to Unaudited Consolidated Financial Statements
    
    
    5Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    24Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    38Item 4. Controls and Procedures
    
    
    38PART II. Other Information
    
    
    38Item 1. Legal Proceedings
    
    
    38Item 1A. Risk Factors
    
    
    39Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    39Item 3. Defaults Upon Senior Securities
    
    
    39Item 4. Reserved
    
    
    39Item 5. Other Information
    
    
    39Item 6. Exhibits
    
    
    39Signatures
    
    
    40EX-31.1EX-31.2EX-32




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PART I. Financial Information
 
 Item 1.
    
    Financial Statements
 First Business Financial Services, Inc.
 
 Consolidated Balance Sheets
 (Unaudited)March 31,
    
    
    December 31,2011
    
    
    2010(In Thousands, Except Share Data)AssetsCash and due from banks
    
    $
    8,761
    
    
    $
    9,450Short-term investments
    
    
    51,571
    
    
    
    41,369Cash and cash equivalents
    
    
    60,332
    
    
    
    50,819Securities available-for-sale, at fair value
    
    
    159,793
    
    
    
    153,379Loans and leases receivable, net of allowance for loan and lease losses of $16,802 and
$16,271, respectively
    
    
    851,104
    
    
    
    860,935Leasehold improvements and equipment, net
    
    
    951
    
    
    
    974Foreclosed properties
    
    
    2,327
    
    
    
    1,750Cash surrender value of bank-owned life insurance
    
    
    17,125
    
    
    
    16,950Investment in Federal Home Loan Bank stock, at cost
    
    
    2,367
    
    
    
    2,367Accrued interest receivable and other assets
    
    
    18,866
    
    
    
    19,883Total assets
    
    $
    1,112,865
    
    
    $
    1,107,057Liabilities and Stockholders EquityDeposits
    
    $
    996,080
    
    
    $
    988,298Federal Home Loan Bank and other borrowings
    
    
    39,501
    
    
    
    41,504Junior subordinated notes
    
    
    10,315
    
    
    
    10,315Accrued interest payable and other liabilities
    
    
    10,652
    
    
    
    11,605Total liabilities
    
    
    1,056,548
    
    
    
    1,051,722Commitments 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, 2,680,360 shares issued,
2,597,538 and 2,597,820 shares outstanding at 2011 and 2010, respectively
    
    
    27
    
    
    
    27Additional paid-in capital
    
    
    25,408
    
    
    
    25,253Retained earnings
    
    
    30,975
    
    
    
    29,808Accumulated other comprehensive income
    
    
    1,455
    
    
    
    1,792Treasury stock (82,822 and 82,540 shares at 2011 and 2010, respectively), at cost
    
    
    (1,548
    )
    
    
    (1,545
    )Total stockholders equity
    
    
    56,317
    
    
    
    55,335Total liabilities and stockholders equity
    
    $
    1,112,865
    
    
    $
    1,107,057
   1




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First Business Financial Services, Inc.
 
 Consolidated Statements of Income (Unaudited)
 For the Three Months EndedMarch 31,2011
    
    
    2010(In Thousands, Except Share Data)Interest income:Loans and leases
    
    $
    12,920
    
    
    $
    13,190Securities income, taxable
    
    
    1,117
    
    
    
    1,135Short-term investments
    
    
    33
    
    
    
    41Total interest income
    
    
    14,070
    
    
    
    14,366Interest expense:Deposits
    
    
    4,650
    
    
    
    5,511Notes payable and other borrowings
    
    
    662
    
    
    
    734Junior subordinated notes
    
    
    274
    
    
    
    274Total interest expense
    
    
    5,586
    
    
    
    6,519Net interest income
    
    
    8,484
    
    
    
    7,847Provision for loan and lease losses
    
    
    1,404
    
    
    
    1,344Net interest income after provision for loan and lease losses
    
    
    7,080
    
    
    
    6,503Non-interest income:Trust and investment services fee income
    
    
    641
    
    
    
    567Service charges on deposits
    
    
    373
    
    
    
    398Loan fees
    
    
    331
    
    
    
    291Increase in cash surrender value of bank-owned life insurance
    
    
    167
    
    
    
    161Credit, merchant and debit card fees
    
    
    52
    
    
    
    51Other
    
    
    108
    
    
    
    161Total non-interest income
    
    
    1,672
    
    
    
    1,629Non-interest expense:Compensation
    
    
    3,737
    
    
    
    3,495Occupancy
    
    
    341
    
    
    
    372Professional fees
    
    
    427
    
    
    
    519Data processing
    
    
    310
    
    
    
    299Marketing
    
    
    279
    
    
    
    195Equipment
    
    
    114
    
    
    
    145FDIC insurance
    
    
    759
    
    
    
    782Collateral liquidation costs
    
    
    242
    
    
    
    224Loss on foreclosed properties
    
    
    51
    
    
    
    113Other
    
    
    500
    
    
    
    400Total non-interest expense
    
    
    6,760
    
    
    
    6,544Income before income tax expense
    
    
    1,992
    
    
    
    1,588Income tax expense
    
    
    643
    
    
    
    689Net income
    
    $
    1,349
    
    
    $
    899Earnings per share:Basic
    
    $
    0.52
    
    
    $
    0.35Diluted
    
    
    0.52
    
    
    
    0.35Dividends declared per share
    
    
    0.07
    
    
    
    0.07
   2




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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
    
    
    stock
    
    
    Total(In Thousands, Except Share Data)Balance at December 31, 2009
    
    $
    26
    
    
    $
    24,731
    
    
    $
    29,582
    
    
    $
    1,544
    
    
    $
    (1,490
    )
    
    $
    54,393Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    899
    
    
    
    
    
    
    
    
    
    
    
    899Unrealized securities
gains arising during
the period
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    423
    
    
    
    
    
    
    
    423Income tax effect
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (171
    )
    
    
    
    
    
    
    (171
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,151Share-based compensation  restricted shares
    
    
    
    
    
    
    136
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    136Cash dividends ($0.07 per share)
    
    
    
    
    
    
    
    
    
    
    (179
    )
    
    
    
    
    
    
    
    
    
    
    (179
    )Treasury stock purchased (1,165 shares)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (11
    )
    
    
    (11
    )Balance at March 31, 2010
    
    $
    26
    
    
    $
    24,867
    
    
    $
    30,302
    
    
    $
    1,796
    
    
    $
    (1,501
    )
    
    $
    55,490
  AccumulatedAdditional
    
    
    
    
    
    
    otherCommon
    
    
    paid-in
    
    
    Retained
    
    
    comprehensive
    
    
    Treasurystock
    
    
    capital
    
    
    earnings
    
    
    income
    
    
    stock
    
    
    Total(In Thousands, Except Share Data)Balance at December 31, 2010
    
    $
    27
    
    
    $
    25,253
    
    
    $
    29,808
    
    
    $
    1,792
    
    
    $
    (1,545
    )
    
    $
    55,335Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    1,349
    
    
    
    
    
    
    
    
    
    
    
    1,349Unrealized securities losses arising during the period
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (537
    )
    
    
    
    
    
    
    (537
    )Income tax effect
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    200
    
    
    
    
    
    
    
    200Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,012Share-based compensation  restricted shares
    
    
    
    
    
    
    155
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    155Cash dividends ($0.07 per share)
    
    
    
    
    
    
    
    
    
    
    (182
    )
    
    
    
    
    
    
    
    
    
    
    (182
    )Treasury stock purchased (282 shares)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3
    )
    
    
    (3
    )Balance at March 31, 2011
    
    $
    27
    
    
    $
    25,408
    
    
    $
    30,975
    
    
    $
    1,455
    
    
    $
    (1,548
    )
    
    $
    56,317
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First Business Financial Services, Inc.
 
 Consolidated Statements of Cash Flows (Unaudited)
 For the Three Months EndedMarch 31,2011
    
    
    2010(In Thousands)Operating activitiesNet income
    
    $
    1,349
    
    
    $
    899Adjustments to reconcile net income to net cash provided by
operating activities:Deferred income taxes, net
    
    
    (45
    )
    
    
    (1,052
    )Provision for loan and lease losses
    
    
    1,404
    
    
    
    1,344Depreciation, amortization and accretion, net
    
    
    463
    
    
    
    318Share-based compensation
    
    
    155
    
    
    
    136Increase in cash surrender value of bank-owned life insurance
    
    
    (167
    )
    
    
    (161
    )Origination of loans for sale
    
    
    (811
    )
    
    
    (250
    )Sale of loans originated for sale
    
    
    814
    
    
    
    250Gain on sale of loans originated for sale
    
    
    (3
    )
    
    
    Loss on foreclosed properties
    
    
    51
    
    
    
    113Decrease (increase) in accrued interest receivable and other assets
    
    
    1,492
    
    
    
    (175
    )(Decrease) increase in accrued interest payable and other liabilities
    
    
    (969
    )
    
    
    3,078Net cash provided by operating activities
    
    
    3,733
    
    
    
    4,500Investing activitiesProceeds from maturities of available-for-sale securities
    
    
    10,914
    
    
    
    9,492Purchases of available-for-sale securities
    
    
    (18,243
    )
    
    
    (18,842
    )Proceeds from sale of foreclosed properties
    
    
    307
    
    
    
    368Net decrease (increase) in loans and leases
    
    
    7,492
    
    
    
    (1,062
    )Investment in Aldine Capital Fund, L.P.
    
    
    (210
    )
    
    
    Purchases of leasehold improvements and equipment, net
    
    
    (66
    )
    
    
    (58
    )Premium payment on bank owned life insurance policies
    
    
    (8
    )
    
    
    (8
    )Net cash provided by (used in) investing activities
    
    
    186
    
    
    
    (10,110
    )Financing activitiesNet increase (decrease) in deposits
    
    
    7,782
    
    
    
    (19,827
    )Repayment of FHLB advances
    
    
    (2,003
    )
    
    
    (2
    )Cash dividends paid
    
    
    (182
    )
    
    
    (179
    )Purchase of treasury stock
    
    
    (3
    )
    
    
    (11
    )Net cash provided by (used in) financing activities
    
    
    5,594
    
    
    
    (20,019
    )Net increase (decrease) in cash and cash equivalents
    
    
    9,513
    
    
    
    (25,629
    )Cash and cash equivalents at the beginning of the period
    
    
    50,819
    
    
    
    112,737Cash and cash equivalents at the end of the period
    
    $
    60,332
    
    
    $
    87,108Supplementary cash flow informationInterest paid on deposits and borrowings
    
    $
    5,360
    
    
    $
    5,960Income taxes paid
    
    
    890
    
    
    
    33Transfer to foreclosed properties
    
    
    935
    
    
    
    143
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Notes to Unaudited Consolidated Financial Statements
 Note 1  Principles of Consolidation
  Note 2  Basis of Presentation
   Note 3  Recent Accounting Pronouncements
 Allowance for Credit Losses. . Note 7  Loan Lease Receivables, Impaired Loans, and Allowance for Loan and Lease Losses
 Troubled Debt Restructuring.
  5




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Note 4  Earnings Per Share
  For the Three MonthsEnded March 31,2011
    
    
    2010Distributed earnings allocated to common stockholders
    
    $
    174,849
    
    
    $
    173,177Undistributed earnings allocated to common stockholders
    
    
    1,122,814
    
    
    
    702,253Income available to common stockholders for basic earnings per share
    
    
    1,297,663
    
    
    
    875,430Reallocation of undistributed earnings for diluted earnings per share
    
    
    
    
    
    
    Income available to common stockholders for diluted earnings per share
    
    $
    1,297,663
    
    
    $
    875,430Basic average shares
    
    
    2,497,918
    
    
    
    2,473,557Dilutive effect of share-based awards
    
    
    
    
    
    
    Dilutive average shares
    
    
    2,497,918
    
    
    
    2,473,557Earnings per common share:Basic
    
    $
    0.52
    
    
    $
    0.35Diluted
    
    
    0.52
    
    
    
    0.35
 Note 5  Share-Based Compensation
  Stock Options
   6




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WeightedAverageWeighted
    
    
    RemainingAverage
    
    
    ContractualOptions
    
    
    Exercise Price
    
    
    Life (Years)Outstanding at December 31, 2009
    
    
    142,790
    
    
    $
    22.01
    
    
    
    3.66Granted
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    Expired
    
    
    (4,024
    )
    
    
    19.38Forfeited
    
    
    
    
    
    
    Outstanding at December 31, 2010
    
    
    138,766
    
    
    
    22.09
    
    
    
    2.75Exercisable at December 31, 2010
    
    
    138,766
    
    
    
    
    
    
    
    2.75Outstanding as of December 31, 2010
    
    
    138,766
    
    
    $
    22.09
    
    
    
    2.75Granted
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    Expired
    
    
    
    
    
    
    Forfeited
    
    
    
    
    
    
    Outstanding at March 31, 2011
    
    
    138,766
    
    
    $
    22.09
    
    
    
    2.50Exercisable at March 31, 2011
    
    
    138,766
    
    
    $
    22.09
    
    
    
    2.50
 Restricted Shares
   7




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Weighted AverageNumber of
    
    
    Grant-DateRestricted Shares
    
    
    Fair ValueNonvested balance as of December 31, 2009
    
    
    70,262
    
    
    $
    17.88Granted
    
    
    64,725
    
    
    
    13.97Vested
    
    
    (33,430
    )
    
    
    19.28Forfeited
    
    
    (375
    )
    
    
    14.55Nonvested balance as of December 31, 2010
    
    
    101,182
    
    
    $
    14.93Granted
    
    
    
    
    
    
    Vested
    
    
    (2,378
    )
    
    
    18.15Forfeited
    
    
    
    
    
    
    Nonvested balance as of March 31, 2011
    
    
    98,804
    
    
    $
    14.85
  Note 6  Securities
  As of March 31, 2011Gross
    
    
    Grossunrealized
    
    
    unrealized
    
    
    EstimatedAmortized cost
    
    
    holding gains
    
    
    holding losses
    
    
    fair value(In Thousands)Collateralized
mortgage obligations
 government
agencies
    
    $
    157,073
    
    
    $
    2,810
    
    
    $
    (514
    )
    
    $
    159,369Collateralized
mortgage obligations  government-sponsored
enterprises
    
    
    417
    
    
    
    7
    
    
    
    
    
    
    
    424$
    157,490
    
    
    $
    2,817
    
    
    $
    (514
    )
    
    $
    159,793
 As of December 31, 2010Gross
    
    
    Grossunrealized
    
    
    unrealized
    
    
    EstimatedAmortized cost
    
    
    holding gains
    
    
    holding losses
    
    
    fair value(In Thousands)Collateralized
mortgage obligations
 government
agencies
    
    $
    149,948
    
    
    $
    3,255
    
    
    $
    (427
    )
    
    $
    152,776Collateralized
mortgage obligations
 government-sponsored
enterprises
    
    
    591
    
    
    
    12
    
    
    
    
    
    
    
    603$
    150,539
    
    
    $
    3,267
    
    
    $
    (427
    )
    
    $
    153,379
   8




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EstimatedAmortized Cost
    
    
    Fair Value(In Thousands)Due in one year or less
    
    $
    
    
    
    $
    Due in one year through five years
    
    
    526
    
    
    
    546Due in five through ten years
    
    
    1,802
    
    
    
    1,855Due in over ten years
    
    
    155,162
    
    
    
    157,392$
    157,490
    
    
    $
    159,793
   As of March 31, 2011Less 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
    
    $
    47,612
    
    
    $
    514
    
    
    $
    
    
    
    $
    
    
    
    $
    47,612
    
    
    $
    514$
    47,612
    
    
    $
    514
    
    
    $
    
    
    
    $
    
    
    
    $
    47,612
    
    
    $
    514
 As of December 31, 2010Less than 12 months
    
    
    12 months or longer
    
    
    TotalUnrealized
    
    
    
    
    
    
    Unrealized
    
    
    
    
    
    
    UnrealizedFair value
    
    
    losses
    
    
    Fair value
    
    
    losses
    
    
    Fair value
    
    
    losses(In Thousands)Collateralized
mortgage
obligations 
government issued
    
    $
    31,862
    
    
    $
    427
    
    
    $
    
    
    
    $
    
    
    
    $
    31,862
    
    
    $
    427$
    31,862
    
    
    $
    427
    
    
    $
    
    
    
    $
    
    
    
    $
    31,862
    
    
    $
    427
  9




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Note 7  Loan and Lease Receivables, Impaired Loans and Leases and Allowance for Loan and Lease
Losses
  March 31,
    
    
    December 31,2011
    
    
    2010(In Thousands)Commercial real estate loansCommercial real estate  owner occupied
    
    $
    154,775
    
    
    $
    152,560Commercial real estate  non-owner occupied
    
    
    308,917
    
    
    
    307,307Construction and land development
    
    
    60,229
    
    
    
    61,645Multi-family
    
    
    44,001
    
    
    
    43,0121-4 family
    
    
    51,099
    
    
    
    53,849Total commercial real estate loans
    
    
    619,021
    
    
    
    618,373Commercial and industrial loans
    
    
    212,780
    
    
    
    225,921Direct financing leases, net
    
    
    17,516
    
    
    
    19,288Consumer and otherHome equity loans and second mortgage loans
    
    
    5,690
    
    
    
    5,091Consumer and other
    
    
    13,679
    
    
    
    9,31519,369
    
    
    
    14,406Total gross loans and lease receivables
    
    
    868,686
    
    
    
    877,988Less:Allowance for loan and lease losses
    
    
    16,802
    
    
    
    16,271Deferred loan fees
    
    
    780
    
    
    
    782Loans and lease receivables, net
    
    $
    851,104
    
    
    $
    860,935
   10




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##### Table of Contents



CategoryAs of March 31, 2011
    
    I
    
    
    II
    
    
    III
    
    
    IV
    
    
    Total(Dollars in Thousands)Commercial real estate:Commercial real estate  owner occupied
    
    $
    118,584
    
    
    $
    16,262
    
    
    $
    13,175
    
    
    $
    6,754
    
    
    $
    154,775Commercial real estate  non-owner occupied
    
    
    225,890
    
    
    
    45,042
    
    
    
    32,682
    
    
    
    5,303
    
    
    
    308,917Construction and land development
    
    
    34,891
    
    
    
    6,788
    
    
    
    9,051
    
    
    
    9,499
    
    
    
    60,229Multi-family
    
    
    32,543
    
    
    
    6,090
    
    
    
    815
    
    
    
    4,553
    
    
    
    44,0011-4 family
    
    
    28,270
    
    
    
    13,094
    
    
    
    5,145
    
    
    
    4,591
    
    
    
    51,100Commercial and industrial
    
    
    165,896
    
    
    
    28,199
    
    
    
    13,121
    
    
    
    5,564
    
    
    
    212,780Direct financing leases, net
    
    
    11,162
    
    
    
    6,057
    
    
    
    297
    
    
    
    
    
    
    
    17,516Consumer and other:Home equity and second mortgages
    
    
    4,094
    
    
    
    75
    
    
    
    460
    
    
    
    1,060
    
    
    
    5,689Other
    
    
    11,663
    
    
    
    150
    
    
    
    
    
    
    
    1,866
    
    
    
    13,679Total portfolio
    
    $
    632,993
    
    
    $
    121,757
    
    
    $
    74,746
    
    
    $
    39,190
    
    
    $
    868,686Rating as a % of total portfolio
    
    
    72.87
    %
    
    
    14.02
    %
    
    
    8.60
    %
    
    
    4.51
    %
    
    
    100.00
    %
  11




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##### Table of Contents



CategoryAs of December 31, 2010
    
    I
    
    
    II
    
    
    III
    
    
    IV
    
    
    Total(Dollars in Thousands)Commercial real estate:Commercial real estate  owner occupied
    
    $
    113,002
    
    
    $
    25,777
    
    
    $
    6,780
    
    
    $
    7,001
    
    
    $
    152,560Commercial real estate  non-owner occupied
    
    
    232,868
    
    
    
    36,128
    
    
    
    33,167
    
    
    
    5,144
    
    
    
    307,307Construction and land development
    
    
    39,662
    
    
    
    7,838
    
    
    
    4,870
    
    
    
    9,275
    
    
    
    61,645Multi-family
    
    
    31,472
    
    
    
    6,049
    
    
    
    1,305
    
    
    
    4,186
    
    
    
    43,0121-4 family
    
    
    33,310
    
    
    
    11,973
    
    
    
    4,329
    
    
    
    4,237
    
    
    
    53,849Commercial and industrial
    
    
    183,051
    
    
    
    24,460
    
    
    
    11,974
    
    
    
    6,436
    
    
    
    225,921Direct financing leases, net
    
    
    12,666
    
    
    
    6,403
    
    
    
    219
    
    
    
    
    
    
    
    19,288Consumer and other:Home equity and second mortgages
    
    
    3,726
    
    
    
    134
    
    
    
    292
    
    
    
    939
    
    
    
    5,091Other
    
    
    7,359
    
    
    
    50
    
    
    
    
    
    
    
    1,906
    
    
    
    9,315Total portfolio
    
    $
    657,116
    
    
    $
    118,812
    
    
    $
    62,936
    
    
    $
    39,124
    
    
    $
    877,988Rating as a % of total portfolio
    
    
    74.84
    %
    
    
    13.53
    %
    
    
    7.17
    %
    
    
    4.46
    %
    
    
    100.00
    %
      12




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##### Table of Contents



Greater30-59
    
    
    60-89
    
    
    than 90days past
    
    
    days past
    
    
    days past
    
    
    Total
    
    
    
    
    
    
    TotalAs of March 31, 2011
    
    due(1)
    
    
    due(2)
    
    
    due(3)
    
    
    past due
    
    
    Current(4)
    
    
    loans(Dollars In Thousands)Commercial Real Estate:Owner occupied
    
    $
    942
    
    
    $
    
    
    
    $
    2,923
    
    
    $
    3,865
    
    
    $
    150,910
    
    
    $
    154,775Non-owner occupied
    
    
    
    
    
    
    
    
    
    
    2,214
    
    
    
    2,214
    
    
    
    306,703
    
    
    
    308,917Construction and land development
    
    
    249
    
    
    
    
    
    
    
    1,729
    
    
    
    1,978
    
    
    
    58,251
    
    
    
    60,229Multi-family
    
    
    1,185
    
    
    
    485
    
    
    
    993
    
    
    
    2,663
    
    
    
    41,338
    
    
    
    44,0011-4 family
    
    
    230
    
    
    
    
    
    
    
    1,113
    
    
    
    1,343
    
    
    
    49,757
    
    
    
    51,100Commercial & Industrial
    
    
    6,045
    
    
    
    493
    
    
    
    695
    
    
    
    7,233
    
    
    
    205,547
    
    
    
    212,780Direct financing leases, net
    
    
    
    
    
    
    117
    
    
    
    
    
    
    
    117
    
    
    
    17,399
    
    
    
    17,516Consumer and other:Home equity and second mortgages
    
    
    70
    
    
    
    
    
    
    
    345
    
    
    
    415
    
    
    
    5,274
    
    
    
    5,689Other
    
    
    64
    
    
    
    
    
    
    
    1,815
    
    
    
    1,879
    
    
    
    11,800
    
    
    
    13,679Total
    
    $
    8,785
    (5)
    
    $
    1,095
    
    
    $
    11,827
    
    
    $
    21,707
    
    
    $
    846,979
    
    
    $
    868,686Percent of portfolio
    
    
    1.01
    %
    
    
    0.13
    %
    
    
    1.36
    %
    
    
    2.50
    %
    
    
    97.50
    %
    
    
    100.00
    %
 (1)
    
    As of March 31, 2011, $2.4 million of loans and leases in this
category were considered impaired.(2)
    
    As of March 31, 2011, $978,000 of loans and lease in this category were
considered impaired.(3)
    
    As of March 31, 2011, all of the loans in this category were considered
impaired.(4)
    
    As of March 31, 2011, $24.0 million of the loans and leases in this
category were considered impaired.(5)
    
    Approximately $5.9 million of this past due balance was associated with one borrower. This credit was specifically evaluated and not considered impaired as of March 31, 2011.  13




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##### Table of Contents



Greater30-59
    
    
    60-89
    
    
    than 90days past
    
    
    days past
    
    
    days past
    
    
    Total
    
    
    
    
    
    
    TotalAs of December 31, 2010
    
    due(1)
    
    
    due(2)
    
    
    due(3)
    
    
    past due
    
    
    Current(4)
    
    
    loans(Dollars In Thousands)Commercial Real Estate:Owner occupied
    
    $
    
    
    
    $
    
    
    
    $
    2,949
    
    
    $
    2,949
    
    
    $
    149,611
    
    
    $
    152,560Non-owner occupied
    
    
    
    
    
    
    448
    
    
    
    2,222
    
    
    
    2,670
    
    
    
    304,637
    
    
    
    307,307Construction and land development
    
    
    850
    
    
    
    421
    
    
    
    1,136
    
    
    
    2,407
    
    
    
    59,238
    
    
    
    61,645Multi-family
    
    
    
    
    
    
    
    
    
    
    1,041
    
    
    
    1,041
    
    
    
    41,971
    
    
    
    43,0121-4 family
    
    
    678
    
    
    
    
    
    
    
    1,900
    
    
    
    2,578
    
    
    
    51,271
    
    
    
    53,849Commercial & Industrial
    
    
    180
    
    
    
    1,304
    
    
    
    1,702
    
    
    
    3,186
    
    
    
    222,735
    
    
    
    225,921Direct financing leases, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    19,288
    
    
    
    19,288Consumer and other:Home equity and second mortgages
    
    
    
    
    
    
    
    
    
    
    257
    
    
    
    257
    
    
    
    4,834
    
    
    
    5,091Other
    
    
    4
    
    
    
    
    
    
    
    1,857
    
    
    
    1,861
    
    
    
    7,454
    
    
    
    9,315Total
    
    $
    1,712
    
    
    $
    2,173
    
    
    $
    13,064
    
    
    $
    16,949
    
    
    $
    861,039
    
    
    $
    877,988Percent of portfolio
    
    
    0.19
    %
    
    
    0.25
    %
    
    
    1.49
    %
    
    
    1.93
    %
    
    
    98.07
    %
    
    
    100.00
    %
 (1)
    
    As of December 31, 2010, $1.0 million of loans and leases in this
category were considered impaired.(2)
    
    As of December 31, 2010, $1.7 million of loans and lease in this category
were considered impaired.(3)
    
    As of December 31, 2010, all of the loans in this category were considered
impaired.(4)
    
    As of December 31, 2010, $23.3 million of the loans and leases in this
category were considered impaired.   March 31,
    
    
    December 31,2011
    
    
    2010(Dollars In Thousands)Non-accrual loans and leasesCommercial real estate:Commercial real estate  owner occupied
    
    $
    6,754
    
    
    $
    6,283Commercial real estate  non-owner occupied
    
    
    5,303
    
    
    
    5,144Construction and land development
    
    
    9,499
    
    
    
    9,275Multi-family
    
    
    4,553
    
    
    
    4,1861-4 family
    
    
    4,591
    
    
    
    4,237Total non-accrual commercial real estate
    
    
    30,700
    
    
    
    29,125Commercial and industrial
    
    
    5,564
    
    
    
    6,436Direct financing leases, net
    
    
    
    
    
    
    Consumer and other:Home equity and second mortgage
    
    
    1,060
    
    
    
    939Other
    
    
    1,866
    
    
    
    1,906Total non-accrual consumer and other loans
    
    
    2,926
    
    
    
    2,845Total non-accrual loans and leases
    
    
    39,190
    
    
    
    38,406Foreclosed properties, net
    
    
    2,327
    
    
    
    1,750Total non-performing assets
    
    $
    41,517
    
    
    $
    40,156Performing troubled debt restructurings
    
    $
    
    
    
    $
    718March 31,
    
    
    December 31,2011
    
    
    2010Total non-accrual loans and leases to gross loans and leases
    
    
    4.51
    %
    
    
    4.37
    %Total non-performing assets to total assets
    
    
    3.73
    
    
    
    3.63Allowance for loan and lease losses to gross loans and leases
    
    
    1.93
    
    
    
    1.85Allowance for loan and lease losses to non-accrual loans and
leases
    
    
    42.87
    
    
    
    42.37
  14




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##### Table of Contents



Impaired Loans and LeasesAs of and for the Three Months Ended March 31, 2011NetUnpaid
    
    
    
    
    
    
    Average
    
    
    Foregone
    
    
    Interest
    
    
    ForegoneRecorded
    
    
    principal
    
    
    Impairment
    
    
    recorded
    
    
    interest
    
    
    income
    
    
    Interestinvestment
    
    
    balance
    
    
    reserve
    
    
    investment(1)
    
    
    income
    
    
    recognized
    
    
    Income(In Thousands)With no impairment reserve recorded:Commercial real estate:Owner occupied
    
    $
    5,686
    
    
    $
    6,056
    
    
    $
    
    
    
    $
    5,098
    
    
    $
    111
    
    
    $
    86
    
    
    $
    25Non-owner occupied
    
    
    501
    
    
    
    501
    
    
    
    
    
    
    
    334
    
    
    
    8
    
    
    
    
    
    
    
    8Construction and land development
    
    
    2,783
    
    
    
    3,809
    
    
    
    
    
    
    
    2,115
    
    
    
    73
    
    
    
    
    
    
    
    73Multi-family
    
    
    1,670
    
    
    
    2,226
    
    
    
    
    
    
    
    1,231
    
    
    
    41
    
    
    
    
    
    
    
    411-4 family
    
    
    3,573
    
    
    
    3,761
    
    
    
    
    
    
    
    3,186
    
    
    
    78
    
    
    
    
    
    
    
    78Commercial and industrial
    
    
    3,115
    
    
    
    4,033
    
    
    
    
    
    
    
    3,782
    
    
    
    106
    
    
    
    38
    
    
    
    68Direct financing leases, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Consumer and other:Home equity loans and second mortgages
    
    
    565
    
    
    
    565
    
    
    
    
    
    
    
    588
    
    
    
    12
    
    
    
    
    
    
    
    12Other
    
    
    1,859
    
    
    
    2,099
    
    
    
    
    
    
    
    1,886
    
    
    
    37
    
    
    
    
    
    
    
    37Total
    
    
    19,752
    
    
    
    23,050
    
    
    
    
    
    
    
    18,220
    
    
    
    466
    
    
    
    124
    
    
    
    342With impairment reserve recorded:Commercial real estate:Owner occupied
    
    $
    1,068
    
    
    $
    1,068
    
    
    $
    63
    
    
    $
    1,552
    
    
    $
    23
    
    
    $
    
    
    
    $
    23Non-owner occupied
    
    
    4,802
    
    
    
    4,802
    
    
    
    1,546
    
    
    
    4,763
    
    
    
    72
    
    
    
    
    
    
    
    72Construction and land development
    
    
    6,716
    
    
    
    8,137
    
    
    
    295
    
    
    
    6,956
    
    
    
    51
    
    
    
    
    
    
    
    51Multi-family
    
    
    2,883
    
    
    
    3,711
    
    
    
    529
    
    
    
    2,912
    
    
    
    82
    
    
    
    
    
    
    
    821-4 family
    
    
    1,018
    
    
    
    1,018
    
    
    
    334
    
    
    
    1,041
    
    
    
    15
    
    
    
    
    
    
    
    15Commercial and industrial
    
    
    2,449
    
    
    
    2,449
    
    
    
    919
    
    
    
    2,087
    
    
    
    39
    
    
    
    
    
    
    
    39Direct financing leases, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Consumer and other:Home equity loans and second mortgages
    
    
    495
    
    
    
    495
    
    
    
    85
    
    
    
    475
    
    
    
    8
    
    
    
    
    
    
    
    8Other
    
    
    7
    
    
    
    7
    
    
    
    7
    
    
    
    8
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    19,438
    
    
    
    21,687
    
    
    
    3,778
    
    
    
    19,794
    
    
    
    290
    
    
    
    
    
    
    
    290Total:Commercial real estate:Owner occupied
    
    $
    6,754
    
    
    $
    7,124
    
    
    $
    63
    
    
    $
    6,650
    
    
    $
    134
    
    
    $
    86
    
    
    $
    48Non-owner occupied
    
    
    5,303
    
    
    
    5,303
    
    
    
    1,546
    
    
    
    5,097
    
    
    
    80
    
    
    
    
    
    
    
    80Construction and land development
    
    
    9,499
    
    
    
    11,946
    
    
    
    295
    
    
    
    9,071
    
    
    
    124
    
    
    
    
    
    
    
    124Multi-family
    
    
    4,553
    
    
    
    5,937
    
    
    
    529
    
    
    
    4,143
    
    
    
    123
    
    
    
    
    
    
    
    1231-4 family
    
    
    4,591
    
    
    
    4,779
    
    
    
    334
    
    
    
    4,227
    
    
    
    93
    
    
    
    
    
    
    
    93Commercial and industrial
    
    
    5,564
    
    
    
    6,482
    
    
    
    919
    
    
    
    5,869
    
    
    
    145
    
    
    
    38
    
    
    
    107Direct financing leases, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Consumer and other:Home equity loans and second mortgages
    
    
    1,060
    
    
    
    1,060
    
    
    
    85
    
    
    
    1,063
    
    
    
    20
    
    
    
    
    
    
    
    20Other
    
    
    1,866
    
    
    
    2,106
    
    
    
    7
    
    
    
    1,894
    
    
    
    37
    
    
    
    
    
    
    
    37Grand total
    
    $
    39,190
    
    
    $
    44,737
    
    
    $
    3,778
    
    
    $
    38,014
    
    
    $
    756
    
    
    $
    124
    
    
    $
    632
 (1)
    
    Average recorded investment is calculated primarily using daily average
balances.  15




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##### Table of Contents



As of and for the Three Months Ended March 31, 2011Commercial
    
    
    
    
    
    
    DirectCommercial
    
    
    and
    
    
    Consumer
    
    
    Financingreal estate
    
    
    industrial
    
    
    and other
    
    
    Lease, Net
    
    
    Total(Dollars in Thousands)Allowance for credit losses:Beginning balance
    
    $
    11,267
    
    
    $
    4,277
    
    
    $
    482
    
    
    $
    245
    
    
    $
    16,271Charge-offs
    
    
    (801
    )
    
    
    (1
    )
    
    
    (99
    )
    
    
    
    
    
    
    (901
    )Recoveries
    
    
    
    
    
    
    9
    
    
    
    11
    
    
    
    8
    
    
    
    28Provision
    
    
    1,309
    
    
    
    77
    
    
    
    49
    
    
    
    (31
    )
    
    
    1,404Ending Balance
    
    $
    11,775
    
    
    $
    4,362
    
    
    $
    443
    
    
    $
    222
    
    
    $
    16,802Ending balance: individually evaluated for impairment
    
    $
    2,767
    
    
    $
    919
    
    
    $
    92
    
    
    $
    
    
    
    $
    3,778Ending balance: collectively evaluated for impairment
    
    $
    9,008
    
    
    $
    3,443
    
    
    $
    351
    
    
    $
    222
    
    
    $
    13,024Ending balance: loans acquired with deteriorated
credit quality
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Loans and lease receivables:Ending balance, gross
    
    $
    619,021
    
    
    $
    212,780
    
    
    $
    19,369
    
    
    $
    17,516
    
    
    $
    868,686Ending balance: individually evaluated for impairment
    
    $
    30,700
    
    
    $
    5,564
    
    
    $
    2,926
    
    
    $
    
    
    
    $
    39,190Ending balance: collectively evaluated for impairment
    
    $
    588,321
    
    
    $
    207,216
    
    
    $
    16,443
    
    
    $
    17,516
    
    
    $
    829,496Ending balance: loans acquired with deteriorated
credit quality
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Allowance as % of gross loans
    
    
    1.90
    %
    
    
    2.05
    %
    
    
    2.29
    %
    
    
    1.27
    %
    
    
    1.93
    %
  16




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##### Table of Contents



Note 8  Deposits
  March 31, 2011
    
    
    December 31, 2010Weighted
    
    
    Weighted
    
    
    
    
    
    
    Weightedaverage
    
    
    average
    
    
    
    
    
    
    average
    
    
    WeightedBalance
    
    
    balance
    
    
    rate
    
    
    Balance
    
    
    balance
    
    
    average rate(Dollars In Thousands)Transaction accounts:Demand deposits
    
    $
    106,862
    
    
    $
    102,302
    
    
    
    
    %
    
    $
    88,529
    
    
    
    68,430
    
    
    
    
    %NOW accounts
    
    
    25,813
    
    
    
    30,584
    
    
    
    0.27
    
    
    
    44,428
    
    
    
    74,784
    
    
    
    0.35Total transaction accounts:
    
    
    132,675
    
    
    
    132,886
    
    
    
    
    
    
    
    132,957
    
    
    
    143,214Money market accounts
    
    
    287,201
    
    
    
    294,434
    
    
    
    0.98
    
    
    
    276,748
    
    
    
    258,569
    
    
    
    1.08Certificates of deposit
    
    
    85,170
    
    
    
    82,177
    
    
    
    1.55
    
    
    
    79,491
    
    
    
    84,828
    
    
    
    2.03Brokered certificates of
deposit
    
    
    491,034
    
    
    
    495,028
    
    
    
    2.90
    
    
    
    499,102
    
    
    
    480,709
    
    
    
    3.32Total deposits
    
    $
    996,080
    
    
    $
    1,004,525
    
    
    
    
    
    
    $
    988,298
    
    
    
    967,320
 Note 9  FHLB Advances, Other Borrowings and Junior Subordinated Notes Payable
  March 31, 2011
    
    
    December 31, 2010Weighted
    
    
    Weighted
    
    
    
    
    
    
    Weighted
    
    
    WeightedAverage
    
    
    Average
    
    
    
    
    
    
    Average
    
    
    AverageBalance
    
    
    Balance
    
    
    Rate
    
    
    Balance
    
    
    Balance
    
    
    Rate(Dollars In Thousands)Federal funds purchased
    
    $
    
    
    
    
    512
    
    
    
    0.85
    %
    
    $
    
    
    
    $
    
    
    
    
    
    %FHLB advances
    
    
    491
    
    
    
    1,159
    
    
    
    5.44
    
    
    
    2,494
    
    
    
    13,414
    
    
    
    4.78Line of credit
    
    
    10
    
    
    
    8,868
    
    
    
    4.00
    
    
    
    10
    
    
    
    10
    
    
    
    4.06Subordinated notes payable
    
    
    39,000
    
    
    
    39,000
    
    
    
    5.70
    
    
    
    39,000
    
    
    
    39,000
    
    
    
    5.55Junior subordinated notes
    
    
    10,315
    
    
    
    10,315
    
    
    
    10.63
    
    
    
    10,315
    
    
    
    10,315
    
    
    
    10.78$
    49,816
    
    
    
    59,854
    
    
    
    
    
    
    $
    51,819
    
    
    $
    62,739
    
    
    
    6.26Short-term borrowings
    
    $
    10
    
    
    
    
    
    
    
    
    
    
    $
    2,010Long-term borrowings
    
    
    49,806
    
    
    
    
    
    
    
    
    
    
    
    49,809$
    49,816
    
    
    
    
    
    
    
    
    
    
    $
    51,819
  Note 10  Fair Value Disclosures
   17




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##### Table of Contents



Level 1
 Level 2
 Level 3 
   Fair Value Measurements UsingLevel 1
    
    
    Level 2
    
    
    Level 3
    
    
    Total(In Thousands)March 31, 2011Assets:Collateralized
mortgage
obligations 
government agencies
    
    $
    
    
    
    $
    159,369
    
    
    $
    
    
    
    $
    159,369Collateralized
mortgage
obligations 
government
sponsored
enterprises
    
    
    
    
    
    
    424
    
    
    
    
    
    
    
    424Interest rate swaps
    
    
    
    
    
    
    2,372
    
    
    
    
    
    
    
    2,372Liabilities:Interest rate swaps
    
    $
    
    
    
    $
    2,372
    
    
    $
    
    
    
    $
    2,372
 Fair Value Measurements UsingLevel 1
    
    
    Level 2
    
    
    Level 3
    
    
    Total(In Thousands)December 31, 2010Assets:Collateralized
mortgage
obligations 
government agencies
    
    $
    
    
    
    $
    152,776
    
    
    $
    
    
    
    $
    152,776Collateralized
mortgage
obligations 
government
sponsored
enterprises
    
    
    
    
    
    
    603
    
    
    
    
    
    
    
    603Interest rate swaps
    
    
    
    
    
    
    2,841
    
    
    
    
    
    
    
    2,841Liabilities:Interest rate swaps
    
    $
    
    
    
    $
    2,841
    
    
    $
    
    
    
    $
    2,841
   18




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##### Table of Contents



As of and for the Three Months Ended March 31, 2011TotalBalance at
    
    
    Fair Value Measurements Using
    
    
    GainsMarch 31, 2011
    
    
    Level 1
    
    
    Level 2
    
    
    Level 3
    
    
    (Losses)(In Thousands)Impaired loans
    
    $
    22,175
    
    
    $
    
    
    
    $
    19,935
    
    
    $
    2,240
    
    
    $
    Foreclosed properties
    
    
    2,327
    
    
    
    
    
    
    
    2,243
    
    
    
    84
    
    
    
    (69
    )As of and for the year ended December 31, 2010TotalBalance at
    
    
    Fair Value Measurements Using
    
    
    GainsDecember 31, 2010
    
    
    Level 1
    
    
    Level 2
    
    
    Level 3
    
    
    (Losses)(In Thousands)Impaired loans
    
    $
    22,241
    
    
    $
    
    
    
    $
    18,112
    
    
    $
    4,129
    
    
    $
    Foreclosed properties
    
    
    1,750
    
    
    
    
    
    
    
    1,660
    
    
    
    90
    
    
    
    (326
    )Goodwill
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,689
    )
    19




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##### Table of Contents



Fair Value of Financial Instruments
  March 31, 2011
    
    
    December 31, 2010Carrying
    
    
    
    
    
    
    CarryingAmount
    
    
    Fair Value
    
    
    Amount
    
    
    Fair Value(In Thousands)Financial assets:Cash and cash equivalents
    
    $
    60,332
    
    
    $
    60,332
    
    
    $
    50,819
    
    
    $
    50,819Securities available-for-sale
    
    
    159,793
    
    
    
    159,793
    
    
    
    153,379
    
    
    
    153,379Loans and lease receivables, net
    
    
    851,104
    
    
    
    842,171
    
    
    
    860,935
    
    
    
    852,790Federal Home Loan Bank stock
    
    
    2,367
    
    
    
    2,367
    
    
    
    2,367
    
    
    
    2,367Cash surrender value of life insurance
    
    
    17,125
    
    
    
    17,125
    
    
    
    16,950
    
    
    
    16,950Accrued interest receivable
    
    
    3,343
    
    
    
    3,343
    
    
    
    3,405
    
    
    
    3,405Interest rate swaps
    
    
    2,372
    
    
    
    2,372
    
    
    
    2,841
    
    
    
    2,841Financial liabilities:Deposits
    
    $
    996,080
    
    
    $
    1,003,575
    
    
    $
    988,298
    
    
    $
    998,713Federal Home Loan Bank and other borrowings
    
    
    39,501
    
    
    
    39,549
    
    
    
    41,504
    
    
    
    41,567Junior subordinated notes
    
    
    10,315
    
    
    
    5,917
    
    
    
    10,315
    
    
    
    7,224Interest rate swaps
    
    
    2,372
    
    
    
    2,372
    
    
    
    2,841
    
    
    
    2,841Accrued interest payable
    
    
    3,869
    
    
    
    3,689
    
    
    
    3,643
    
    
    
    3,643Off balance sheet items:Standby letters of credit
    
    
    31
    
    
    
    31
    
    
    
    41
    
    
    
    41Commitments to extend credit
    
    
    
    
    
    
    *
    
    
    
    
    
    
    
    *
 *
    
    Not meaningful   Securities:
  20




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##### Table of Contents



Loans and Leases:
 Federal Home Loan Bank Stock:
 Cash Surrender Value of Life Insurance:
 Deposits:
 Borrowed Funds:
 Financial Instruments with Off-Balance Sheet Risks:
 Interest Rate Swaps:
 Limitations:
   21




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##### Table of Contents



Note 11  Derivative Financial Instruments
    Interest Rate Swap ContractsAsset Derivatives
    
    
    Liability DerivativesBalance Sheet
    
    
    
    
    
    
    Balance SheetLocation
    
    
    Fair Value
    
    
    Location

    
    Fair Value(In Thousands)Derivatives not designated as hedging instrumentsMarch 31, 2011
    
    Other assets
    
    $
    2,372
    
    
    Other liabilities
    
    $
    2,372December 31, 2010
    
    Other assets
    
    $
    2,841
    
    
    Other liabilities
    
    $
    2,841
  Note 12  Regulatory Capital
   22




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##### Table of Contents



Minimum Required to be WellCapitalized Under PromptMinimum Required for Capital
    
    
    Corrective ActionActual
    
    
    Adequacy Purposes
    
    
    RequirementsAmount
    
    
    Ratio
    
    
    Amount
    
    
    Ratio
    
    
    Amount
    
    
    Ratio(Dollars In Thousands)As of March 31, 2011Total capital
(to risk-weighted assets)Consolidated
    
    $
    109,020
    
    
    
    11.64
    %
    
    $
    74,907
    
    
    
    8.00
    %
    
    
    N/A
    
    
    
    N/AFirst Business Bank
    
    
    102,021
    
    
    
    12.21
    
    
    
    66,863
    
    
    
    8.00
    
    
    $
    83,579
    
    
    
    10.00
    %First Business Bank  Milwaukee
    
    
    14,456
    
    
    
    14.60
    
    
    
    7,919
    
    
    
    8.00
    
    
    
    9,899
    
    
    
    10.00Tier 1 capital
(to risk-weighted assets)Consolidated
    
    $
    64,835
    
    
    
    6.92
    %
    
    $
    37,453
    
    
    
    4.00
    %
    
    
    N/A
    
    
    
    N/AFirst Business Bank
    
    
    91,527
    
    
    
    10.95
    
    
    
    33,432
    
    
    
    4.00
    
    
    $
    50,148
    
    
    
    6.00
    %First Business Bank  Milwaukee
    
    
    13,202
    
    
    
    13.34
    
    
    
    3,960
    
    
    
    4.00
    
    
    
    5,939
    
    
    
    6.00Tier 1 capital
(to average assets)Consolidated
    
    $
    64,835
    
    
    
    5.74
    %
    
    $
    45,142
    
    
    
    4.00
    %
    
    
    N/A
    
    
    
    N/AFirst Business Bank
    
    
    91,527
    
    
    
    9.36
    
    
    
    39,095
    
    
    
    4.00
    
    
    $
    48,868
    
    
    
    5.00
    %First Business Bank  Milwaukee
    
    
    13,202
    
    
    
    8.80
    
    
    
    6,001
    
    
    
    4.00
    
    
    
    7,502
    
    
    
    5.00
  23




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##### Table of Contents



Minimum Required to be WellCapitalized Under PromptMinimum Required for Capital
    
    
    Corrective ActionActual
    
    
    Adequacy Purposes
    
    
    RequirementsAmount
    
    
    Ratio
    
    
    Amount
    
    
    Ratio
    
    
    Amount
    
    
    Ratio(Dollars In Thousands)As of December 31, 2010Total capital(to risk-weighted assets)Consolidated
    
    $
    107,263
    
    
    
    11.23
    %
    
    $
    76,438
    
    
    
    8.00
    %
    
    
    N/A
    
    
    
    N/AFirst Business Bank
    
    
    100,203
    
    
    
    11.72
    
    
    
    68,390
    
    
    
    8.00
    
    
    $
    85,488
    
    
    
    10.00
    %First Business Bank 
Milwaukee
    
    
    14,496
    
    
    
    14.62
    
    
    
    7,930
    
    
    
    8.00
    
    
    
    9,913
    
    
    
    10.00Tier 1 capital(to risk-weighted assets)Consolidated
    
    $
    63,511
    
    
    
    6.65
    
    
    $
    38,219
    
    
    
    4.00
    %
    
    
    N/A
    
    
    
    N/AFirst Business Bank
    
    
    89,478
    
    
    
    10.47
    
    
    
    34,195
    
    
    
    4.00
    
    
    $
    51,293
    
    
    
    6.00
    %First Business Bank 
Milwaukee
    
    
    13,243
    
    
    
    13.36
    
    
    
    3,965
    
    
    
    4.00
    
    
    
    5,948
    
    
    
    6.00Tier 1 capital(to average assets)Consolidated
    
    $
    63,511
    
    
    
    5.68
    
    
    $
    44,732
    
    
    
    4.00
    %
    
    
    N/A
    
    
    
    N/AFirst Business Bank
    
    
    89,748
    
    
    
    9.34
    
    
    
    38,335
    
    
    
    4.00
    
    
    $
    47,918
    
    
    
    5.00
    %First Business Bank 
Milwaukee
    
    
    13,243
    
    
    
    8.30
    
    
    
    6,381
    
    
    
    4.00
    
    
    
    7,976
    
    
    
    5.00
 
 Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
 Forward-Looking Statements
 Item 1A  Risk Factors
   24




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##### Table of Contents



General
  Overview
  General Overview
 
    
    Total assets were $1.113 billion as of March 31, 2011 compared to $1.107 billion as of
December 31, 2010.
 
    
    Net income for the three months ended March 31, 2011 was $1.3 million compared to net
income of $899,000 for the three months ended March 31, 2010.
 
    
    Diluted earnings per common share for the three months ended March 31, 2011 was $0.52
compared to diluted earnings per common share of $0.35 for the three months ended March
31, 2010.
 
    
    Net interest margin increased to 3.14% for the three months ended March 31, 2011
compared to 3.00% for the three months ended March 31, 2010.
 
    
    Top line revenue increased 7.2% to $10.2 million for the three months ended March 31,
2011 compared to $9.5 million for the three months ended March 31, 2010.
 
    
    Loan and lease loss provision was $1.4 million for the three months ended March 31,
2011 compared to $1.3 million for same time period in the prior year. Allowance for loan
and lease loss as a percentage of gross loans and leases was 1.93% at March 31, 2011
compared to 1.85% at December 31, 2010.
 
    
    Annualized return on average equity and return on average assets were 9.62% and 0.48%,
respectively, for the three month period ended March 31, 2011, compared to 6.46% and
0.33%, respectively, for the same time period in 2010.
  25




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##### Table of Contents



Results of Operations
 Top Line Revenue
 For the Three Months Ended March 31,2011
    
    
    2010
    
    
    Change(Dollars In Thousands)Net interest income
    
    $
    8,484
    
    
    $
    7,847
    
    
    
    8.1
    %Non-interest income
    
    
    1,672
    
    
    
    1,629
    
    
    
    2.6Total top line revenue
    
    $
    10,156
    
    
    $
    9,476
    
    
    
    7.2
 Core Earnings
  For the three months ended March 31,2011
    
    
    2010
    
    
    Change(Dollars in Thousands)Income before income tax expense
    
    $
    1,992
    
    
    $
    1,588
    
    
    
    25.4
    %Add back:Provision for loan and lease loss
    
    
    1,404
    
    
    
    1,344
    
    
    
    4.5Loss on foreclosed properties
    
    
    51
    
    
    
    113
    
    
    
    (54.9
    )Core earnings
    
    $
    3,447
    
    
    $
    3,045
    
    
    
    13.2
 Return on Equity and Return on Assets
 Net Interest Income.
  26




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##### Table of Contents



Increase (Decrease) for the Three Months Ended March 31,2011 Compared to 2010Rate/Rate
    
    
    Volume
    
    
    Volume
    
    
    Net(In Thousands)Interest-Earning AssetsCommercial real estate and other
mortgage loans
    
    $
    (324
    )
    
    $
    155
    
    
    $
    (6
    )
    
    $
    (175
    )Commercial and industrial loans
    
    
    (248
    )
    
    
    275
    
    
    
    (17
    )
    
    
    10Direct financing leases
    
    
    (11
    )
    
    
    (127
    )
    
    
    3
    
    
    
    (135
    )Other loans
    
    
    26
    
    
    
    3
    
    
    
    1
    
    
    
    30Total loans and leases receivable
    
    
    (557
    )
    
    
    306
    
    
    
    (19
    )
    
    
    (270
    )Mortgage-related securities
    
    
    (216
    )
    
    
    244
    
    
    
    (46
    )
    
    
    (18
    )FHLB Stock
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    1Short-term investments
    
    
    (3
    )
    
    
    (7
    )
    
    
    1
    
    
    
    (9
    )Total net change in income on
interest-earning assets
    
    
    (775
    )
    
    
    543
    
    
    
    (64
    )
    
    
    (296
    )Interest-Bearing LiabilitiesNOW accounts
    
    
    (22
    )
    
    
    (42
    )
    
    
    13
    
    
    
    (51
    )Money market
    
    
    (212
    )
    
    
    87
    
    
    
    (22
    )
    
    
    (147
    )Certificates of deposit
    
    
    (119
    )
    
    
    (32
    )
    
    
    8
    
    
    
    (143
    )Brokered certificates of deposit
    
    
    (740
    )
    
    
    269
    
    
    
    (49
    )
    
    
    (520
    )Total deposits
    
    
    (1,093
    )
    
    
    282
    
    
    
    (50
    )
    
    
    (861
    )FHLB advances
    
    
    39
    
    
    
    (202
    )
    
    
    (37
    )
    
    
    (200
    )Other borrowings
    
    
    3
    
    
    
    124
    
    
    
    1
    
    
    
    128Junior subordinated notes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total net change in expense on
interest-bearing liabilities
    
    
    (1,051
    )
    
    
    204
    
    
    
    (86
    )
    
    
    (933
    )Net change in net interest income
    
    $
    276
    
    
    $
    339
    
    
    $
    (22
    )
    
    $
    637
  27




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##### Table of Contents



For the Three Months Ended March 31,2011
    
    
    2010Average
    
    
    
    
    
    
    Average
    
    
    Average
    
    
    
    
    
    
    Averagebalance
    
    
    Interest
    
    
    yield/cost
    
    
    balance
    
    
    Interest
    
    
    yield/cost(Dollars In Thousands)Interest-Earning AssetsCommercial real estate and other
mortgage loans(1)
    
    $
    615,327
    
    
    $
    8,292
    
    
    
    5.39
    %
    
    $
    604,287
    
    
    $
    8,467
    
    
    
    5.60
    %Commercial and industrial
loans(1)
    
    
    217,375
    
    
    
    4,166
    
    
    
    7.67
    
    
    
    203,904
    
    
    
    4,156
    
    
    
    8.15Direct financing leases(1)
    
    
    18,439
    
    
    
    280
    
    
    
    6.07
    
    
    
    26,576
    
    
    
    415
    
    
    
    6.25Other loans
    
    
    19,062
    
    
    
    182
    
    
    
    3.82
    
    
    
    18,659
    
    
    
    152
    
    
    
    3.26Total loans and leases
receivable(1)
    
    
    870,203
    
    
    
    12,920
    
    
    
    5.94
    
    
    
    853,426
    
    
    
    13,190
    
    
    
    6.18Mortgage-related securities(2)
    
    
    152,823
    
    
    
    1,117
    
    
    
    2.92
    
    
    
    125,775
    
    
    
    1,135
    
    
    
    3.61Federal Home Loan Bank stock
    
    
    2,367
    
    
    
    1
    
    
    
    0.10
    
    
    
    2,367
    
    
    
    
    
    
    
    Short-term investments
    
    
    55,189
    
    
    
    32
    
    
    
    0.23
    
    
    
    66,398
    
    
    
    41
    
    
    
    0.25Total interest-earning assets
    
    
    1,080,582
    
    
    
    14,070
    
    
    
    5.21
    
    
    
    1,047,966
    
    
    
    14,366
    
    
    
    5.48Non-interest-earning assets
    
    
    50,370
    
    
    
    
    
    
    
    
    
    
    
    47,327Total assets
    
    $
    1,130,952
    
    
    
    
    
    
    
    
    
    
    $
    1,095,293Interest-Bearing LiabilitiesNOW accounts
    
    $
    30,584
    
    
    
    21
    
    
    
    0.27
    
    
    $
    72,629
    
    
    
    72
    
    
    
    0.40Money market
    
    
    294,434
    
    
    
    722
    
    
    
    0.98
    
    
    
    267,756
    
    
    
    869
    
    
    
    1.30Certificates of deposits
    
    
    82,177
    
    
    
    318
    
    
    
    1.55
    
    
    
    88,253
    
    
    
    461
    
    
    
    2.09Brokered certificates of deposit
    
    
    495,028
    
    
    
    3,589
    
    
    
    2.90
    
    
    
    464,657
    
    
    
    4,109
    
    
    
    3.54Total interest-bearing deposits
    
    
    902,223
    
    
    
    4,650
    
    
    
    2.06
    
    
    
    893,295
    
    
    
    5,511
    
    
    
    2.47FHLB advances
    
    
    1,159
    
    
    
    16
    
    
    
    5.44
    
    
    
    18,503
    
    
    
    216
    
    
    
    4.67Other borrowings
    
    
    48,380
    
    
    
    646
    
    
    
    5.34
    
    
    
    39,010
    
    
    
    518
    
    
    
    5.31Junior subordinated notes
    
    
    10,315
    
    
    
    274
    
    
    
    10.63
    
    
    
    10,315
    
    
    
    274
    
    
    
    10.63Total interest-bearing liabilities
    
    
    962,077
    
    
    
    5,586
    
    
    
    2.32
    
    
    
    961,123
    
    
    
    6,519
    
    
    
    2.71Non-interest-bearing demand deposit
accounts
    
    
    102,302
    
    
    
    
    
    
    
    
    
    
    
    67,136Other non-interest-bearing liabilities
    
    
    10,504
    
    
    
    
    
    
    
    
    
    
    
    11,374Total liabilities
    
    
    1,074,883
    
    
    
    
    
    
    
    
    
    
    
    1,039,633Stockholders equity
    
    
    56,069
    
    
    
    
    
    
    
    
    
    
    
    55,660Total liabilities and stockholders
equity
    
    $
    1,130,952
    
    
    
    
    
    
    
    
    
    
    $
    1,095,293Net interest income
    
    
    
    
    
    $
    8,484
    
    
    
    
    
    
    
    
    
    
    $
    7,847Interest rate spread
    
    
    
    
    
    
    
    
    
    
    2.89
    %
    
    
    
    
    
    
    
    
    
    
    2.77
    %Net interest-earning assets
    
    $
    118,505
    
    
    
    
    
    
    
    
    
    
    $
    86,843Net interest margin
    
    
    
    
    
    
    
    
    
    
    3.14
    %
    
    
    
    
    
    
    
    
    
    
    3.00
    %Average interest-earning assets to
average interest-bearing liabilities
    
    
    112.32
    %
    
    
    
    
    
    
    
    
    
    
    109.04
    %Return on average assets
    
    
    0.48
    
    
    
    
    
    
    
    
    
    
    
    0.33Return on average equity
    
    
    9.62
    
    
    
    
    
    
    
    
    
    
    
    6.46Average equity to average assets
    
    
    4.96
    
    
    
    
    
    
    
    
    
    
    
    5.08Non-interest expense to average assets
    
    
    2.39
    
    
    
    
    
    
    
    
    
    
    
    2.39
 (1)
    
    The average balances of loans and leases include non-performing loans and leases. Interest
income related to non-performing loans and leases is recognized when collected.(2)
    
    Includes amortized cost basis of assets available for sale.  28




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##### Table of Contents



Provision for Loan and Lease Losses.
  29




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##### Table of Contents



For the three months endedMarch 31,2011
    
    
    2010Changes in the provision for loan and lease losses associated with:Establishment/modification of specific reserves on impaired loans, net
    
    $
    406
    
    
    $
    1,268Increase in allowance for loan and lease loss reserve due to
subjective factor changes
    
    
    53
    
    
    
    Charge-offs in excess of specific reserves
    
    
    815
    
    
    
    126Recoveries
    
    
    (28
    )
    
    
    Change in inherent risk of the loan and lease portfolio
    
    
    158
    
    
    
    (50
    )Total provision for loan and lease losses
    
    $
    1,404
    
    
    $
    1,344
 Asset Quality
 Non-interest income.
     30




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##### Table of Contents



Non-interest expense.
    Income Taxes.
 For the three months ended March 31,2011
    
    
    2010Statutory federal tax rate
    
    
    34.0
    %
    
    
    34.0
    %State taxes, net of federal benefit
    
    
    4.1
    
    
    
    4.2FIN 48 interest, net of federal benefit
    
    
    
    
    
    
    2.6Bank owned life insurance
    
    
    (2.9
    )
    
    
    (3.5
    )Tax exempt income
    
    
    (3.4
    )
    
    
    (0.1
    )Discrete items
    
    
    (0.3
    )
    
    
    3.7Other
    
    
    0.8
    
    
    
    2.532.3
    %
    
    
    43.4
    %
   31




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##### Table of Contents



Financial Condition
 General.
 Short-term investments. Liquidity and Capital Resources
 Securities.
  Loans and Leases Receivable.
   32




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##### Table of Contents



Asset Quality
 Deposits.
   Asset Quality
 Non-performing Assets.
  33




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##### Table of Contents



March 31,
    
    
    December 31,2011
    
    
    2010(Dollars In Thousands)Non-accrual loans and leasesCommercial real estate:Commercial real estate  owner occupied
    
    $
    6,754
    
    
    $
    6,283Commercial real estate  non-owner occupied
    
    
    5,303
    
    
    
    5,144Construction and land development
    
    
    9,499
    
    
    
    9,275Multi-family
    
    
    4,553
    
    
    
    4,1861-4 family
    
    
    4,591
    
    
    
    4,237Total non-accrual commercial real estate
    
    
    30,700
    
    
    
    29,125Commercial and industrial
    
    
    5,564
    
    
    
    6,436Direct financing leases, net
    
    
    
    
    
    
    Consumer and other:Home equity and second mortgage
    
    
    1,060
    
    
    
    939Other
    
    
    1,866
    
    
    
    1,906Total non-accrual consumer and other loans
    
    
    2,926
    
    
    
    2,845Total non-accrual loans and leases
    
    
    39,190
    
    
    
    38,406Foreclosed properties, net
    
    
    2,327
    
    
    
    1,750Total non-performing assets
    
    $
    41,517
    
    
    $
    40,156Performing troubled debt restructurings
    
    $
    
    
    
    $
    718Total non-accrual loans and leases to gross loans and leases
    
    
    4.51
    %
    
    
    4.37
    %Total non-performing assets to total assets
    
    
    3.73
    
    
    
    3.63Allowance for loan and lease losses to gross loans and leases
    
    
    1.93
    
    
    
    1.85Allowance for loan and lease losses to non-accrual loans and leases
    
    
    42.87
    
    
    
    42.37
  34




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##### Table of Contents



Non-accrual loans and leases as of December 31, 2010
    
    $
    38,406Loans and leases transferred into non-accrual status
    
    
    5,887Loans and leases returned to accrual status
    
    
    Loans and leases transferred to foreclosed properties
    
    
    (935
    )Loans and leases partially or fully charged-off
    
    
    (901
    )Loans and leases fully paid-off
    
    
    (1,548
    )Principal payments applied to non-accrual loans and leases
    
    
    (1,719
    )Non-accrual loans and leases as of March 31, 2011
    
    $
    39,190
  Foreclosed properties as of December 31, 2010
    
    $
    1,750Loans transferred to foreclosed properties
    
    
    935Proceeds from sale of foreclosed properties
    
    
    (307
    )Gain on sale of foreclosed properties
    
    
    18Impairment valuation
    
    
    (69
    )Foreclosed properties as of March 31, 2011
    
    $
    2,327
  As of and for
    
    
    As of and forthe Three
    
    
    the YearMonths Ended
    
    
    EndedMarch 31,
    
    
    December 31,2011
    
    
    2010(In Thousands)Impaired loans and leases with no impairment reserves required
    
    $
    19,752
    
    
    $
    19,749Impaired loans and leases with impairment reserves required
    
    
    19,438
    
    
    
    19,375Total impaired loans and leases
    
    
    39,190
    
    
    
    39,124Less:Impairment reserve (included in allowance for loan and lease
losses)
    
    
    3,778
    
    
    
    3,459Net impaired loans and leases
    
    $
    35,412
    
    
    $
    35,665Average impaired loans and leases
    
    $
    38,014
    
    
    $
    29,714Foregone interest income attributable to impaired loans and leases
    
    $
    756
    
    
    $
    2,702Interest income recognized on impaired loans and leases
    
    
    (124
    )
    
    
    (102
    )Net foregone interest income on impaired loans and leases
    
    $
    632
    
    
    $
    2,600
    35




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##### Table of Contents



For the Three Months EndedMarch 31,2011
    
    
    2010(Dollars In Thousands)Allowance at beginning of period
    
    $
    16,271
    
    
    $
    14,124Charge-offs:Commercial real estateCommercial real estate  owner occupied
    
    
    (186
    )
    
    
    Construction and land development
    
    
    (458
    )
    
    
    (15
    )Multi-family
    
    
    (3
    )
    
    
    1-4 family
    
    
    (154
    )
    
    
    (110
    )Commercial and industrial
    
    
    (1
    )
    
    
    (2
    )Consumer and otherHome equity and second mortgage
    
    
    (90
    )
    
    
    Other
    
    
    (9
    )
    
    
    Total charge-offs
    
    
    (901
    )
    
    
    (127
    )Recoveries:Commercial and industrial
    
    
    9
    
    
    
    1Direct financing leases
    
    
    8
    
    
    
    Consumer and otherHome equity and second mortgage
    
    
    11
    
    
    
    Total recoveries
    
    
    28
    
    
    
    1Net charge-offs
    
    
    (873
    )
    
    
    (126
    )Provision for loan and lease losses
    
    
    1,404
    
    
    
    1,344Allowance at end of period
    
    $
    16,802
    
    
    $
    15,342Annualized net charge-offs as a % of average
gross loans and leases
    
    
    0.40
    %
    
    
    0.06
    %
 Liquidity and Capital Resources
    36




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##### Table of Contents



Contractual Obligations and Off-balance Sheet Arrangements
   37




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##### Table of Contents



Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
     
 Item 4.
    
    Controls and Procedures
   
 PART II. Other Information
 
 Item 1.
    
    Legal Proceedings
   38




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##### Table of Contents



Item 1A.
    
    Risk Factors
  
 Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
 (a)
 (b)
 (c)
 ApproximateTotal Number of
    
    
    Dollar Value ofShares Purchased
    
    
    Shares that MayTotal
    
    
    
    
    
    
    as Part of
    
    
    Yet BeNumber of
    
    
    Average
    
    
    Publicly
    
    
    Purchased UnderShares
    
    
    Price Paid
    
    
    Announced Plans
    
    
    the Plans orPeriod
    
    Purchased(1)
    
    
    Per Share
    
    
    or Programs
    
    
    Programs(2)January 1, 2011  January 31, 2011
    
    
    282
    
    
    $
    12.13
    
    
    
    
    
    
    $
    177,150February 1, 2011  February 28, 2011
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    177,150March 1, 2011  March 31, 2011
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    177,150
 (1)
    
    The shares in this column represent the 282 shares that were surrendered to us to
satisfy income tax withholding obligations in connection with the vesting of restricted
shares during the three months ended March 31, 2011.(2)
    
    On November 20, 2007, the Corporation publicly announced a stock repurchase program
whereby the Corporation may repurchase up to $1,000,000 of the Corporations outstanding
stock. As of March 31, 2011, approximately $177,150 remains available to repurchase the
Corporations outstanding stock. There currently is no expiration date to this stock
repurchase program. 
 Item 3.
    
    Defaults Upon Senior Securities
  
 Item 4.
    
    Reserved
 
 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




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##### Table of Contents



Signatures
  FIRST BUSINESS FINANCIAL SERVICES, INC.April 29, 2011
    /s/ Corey A. ChambasCorey A. ChambasChief Executive OfficerApril 29, 2011
    /s/ James F. RopellaJames F. RopellaChief Financial Officer  40




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##### Table of Contents



FIRST BUSINESS FINANCIAL SERVICES, INC.
Exhibit Index to Quarterly Report on Form 10-Q
 Exhibit Number31.1
    
    
    Certification of the Chief Executive Officer31.2
    
    
    Certification of the Chief Financial Officer32
    
    
    Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18
U.S.C. paragraph 1350
  41