##### 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, 2010
 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
 Yes o No o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer o
(Do not check if a smaller reporting company)
    
    Smaller reporting company þ
 o þ




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2




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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 (Loss) (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
    
    
    19Item 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
    
    
    35Item 3.   Defaults Upon Senior Securities
    
    
    35Item 4.   Submission of Matters to a Vote of Security Holders
    
    
    35Item 5.   Other Information
    
    
    36Item 6.   Exhibits
    
    
    36Signatures
    
    
    36Exhibit 31.1Exhibit 31.2Exhibit 32
   1




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##### Table of Contents



PART I. Financial Information
 
 Item 1.
    
    Financial Statements
 First Business Financial Services, Inc.
 
 Consolidated Balance Sheets
 (Unaudited)March 31,
    
    
    December 31,2010
    
    
    2009(In Thousands, Except Share Data)AssetsCash and due from banks
    
    $
    8,031
    
    
    $
    8,566Short-term investments
    
    
    79,077
    
    
    
    104,171Cash and cash equivalents
    
    
    87,108
    
    
    
    112,737Securities available-for-sale, at fair value
    
    
    131,869
    
    
    
    122,286Loans and leases receivable, net of allowance for loan and lease losses of $15,342 and $14,124, respectively
    
    
    839,382
    
    
    
    839,807Leasehold improvements and equipment, net
    
    
    1,143
    
    
    
    1,189Foreclosed properties
    
    
    1,333
    
    
    
    1,671Cash surrender value of bank-owned life insurance
    
    
    16,423
    
    
    
    16,254Investment in Federal Home Loan Bank stock, at cost
    
    
    2,367
    
    
    
    2,367Goodwill and other intangibles
    
    
    2,735
    
    
    
    2,740Accrued interest receivable and other assets
    
    
    19,422
    
    
    
    18,385Total assets
    
    $
    1,101,782
    
    
    $
    1,117,436Liabilities and Stockholders EquityDeposits
    
    $
    964,547
    
    
    $
    984,374Federal Home Loan Bank and other borrowings
    
    
    57,513
    
    
    
    57,515Junior subordinated notes
    
    
    10,315
    
    
    
    10,315Accrued interest payable and other liabilities
    
    
    13,917
    
    
    
    10,839Total liabilities
    
    
    1,046,292
    
    
    
    1,063,043Commitments 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, 2,618,010 and 2,616,010 shares issued, 2,540,141 and
2,539,306 outstanding at 2010 and 2009, respectively
    
    
    26
    
    
    
    26Additional paid-in capital
    
    
    24,867
    
    
    
    24,731Retained earnings
    
    
    30,302
    
    
    
    29,582Accumulated other comprehensive income
    
    
    1,796
    
    
    
    1,544Treasury stock (77,869 and 76,704 shares at 2010 and 2009, respectively), at cost
    
    
    (1,501
    )
    
    
    (1,490
    )Total stockholders equity
    
    
    55,490
    
    
    
    54,393Total liabilities and stockholders equity
    
    $
    1,101,782
    
    
    $
    1,117,436
   1




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First Business Financial Services, Inc.
 
 Consolidated Statements of Income (Loss) (Unaudited)
 For the Three Months EndedMarch 31,2010
    
    
    2009(In Thousands, Except Share Data)Interest income:Loans and leases
    
    $
    13,190
    
    
    $
    12,555Securities
    
    
    1,135
    
    
    
    1,239Short-term investments
    
    
    41
    
    
    
    11Total interest income
    
    
    14,366
    
    
    
    13,805Interest expense:Deposits
    
    
    5,511
    
    
    
    6,464Notes payable and other borrowings
    
    
    734
    
    
    
    579Junior subordinated notes
    
    
    274
    
    
    
    274Total interest expense
    
    
    6,519
    
    
    
    7,317Net interest income
    
    
    7,847
    
    
    
    6,488Provision for loan and lease losses
    
    
    1,344
    
    
    
    2,197Net interest income after
provision for loan and
lease losses
    
    
    6,503
    
    
    
    4,291Non-interest income:Trust and investment services income
    
    
    567
    
    
    
    434Service charges on deposits
    
    
    398
    
    
    
    334Increase in cash surrender value of bank-owned life
insurance
    
    
    162
    
    
    
    181Loan fees
    
    
    250
    
    
    
    273Credit, merchant and debit card fees
    
    
    51
    
    
    
    47Other
    
    
    201
    
    
    
    293Total non-interest income
    
    
    1,629
    
    
    
    1,562Non-interest expense:Compensation
    
    
    3,495
    
    
    
    3,173Occupancy
    
    
    372
    
    
    
    361Equipment
    
    
    145
    
    
    
    169Data processing
    
    
    299
    
    
    
    280Marketing
    
    
    195
    
    
    
    205Professional fees
    
    
    519
    
    
    
    513FDIC Insurance
    
    
    782
    
    
    
    335Collateral liquidation costs
    
    
    224
    
    
    
    562Loss on foreclosed properties, net
    
    
    113
    
    
    
    Other
    
    
    400
    
    
    
    563Total non-interest expense
    
    
    6,544
    
    
    
    6,161Income (loss) before income tax expense (benefit)
    
    
    1,588
    
    
    
    (308
    )Income tax expense (benefit)
    
    
    689
    
    
    
    (115
    )Net income (loss)
    
    $
    899
    
    
    $
    (193
    )Earnings (loss) per common share:Basic
    
    $
    0.35
    
    
    $
    (0.08
    )Diluted
    
    
    0.35
    
    
    
    (0.08
    )Dividends declared per share
    
    
    0.07
    
    
    
    0.07
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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, 2008
    
    $
    26
    
    
    $
    24,088
    
    
    $
    29,252
    
    
    $
    1,065
    
    
    $
    (1,425
    )
    
    $
    53,006Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    (193
    )
    
    
    
    
    
    
    
    
    
    
    (193
    )Unrealized securities
gains arising during
the period
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    985
    
    
    
    
    
    
    
    985Unrealized derivative
losses arising during
the period
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1
    )
    
    
    
    
    
    
    (1
    )Reclassification
adjustment for
realized losses on
derivatives
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3
    
    
    
    
    
    
    
    3Income tax effect
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (388
    )
    
    
    
    
    
    
    (388
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    406Share-based compensation  restricted shares
    
    
    
    
    
    
    172
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    172Cash dividends ($0.07 per share)
    
    
    
    
    
    
    
    
    
    
    (178
    )
    
    
    
    
    
    
    
    
    
    
    (178
    )Treasury stock purchased (1,027 shares)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (13
    )
    
    
    (13
    )Balance at March 31, 2009
    
    $
    26
    
    
    $
    24,260
    
    
    $
    28,881
    
    
    $
    1,664
    
    
    $
    (1,438
    )
    
    $
    53,393
 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
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First Business Financial Services, Inc.
 
 Consolidated Statements of Cash Flows (Unaudited)
 For the Three Months EndedMarch 31,2010
    
    
    2009(In Thousands)Operating activitiesNet income (loss)
    
    $
    899
    
    
    $
    (193
    )Adjustments to reconcile net income (loss) to net cash provided by operating activities:Deferred income taxes, net
    
    
    (1,052
    )
    
    
    (266
    )Provision for loan and lease losses
    
    
    1,344
    
    
    
    2,197Depreciation, amortization and accretion, net
    
    
    318
    
    
    
    147Share-based compensation
    
    
    136
    
    
    
    172Increase in cash surrender value of bank-owned life insurance
    
    
    (161
    )
    
    
    (173
    )Origination of loans for sale
    
    
    (250
    )
    
    
    (1,279
    )Sale of loans originated for sale
    
    
    250
    
    
    
    1,281Gain on sale of loans originated for sale
    
    
    
    
    
    
    (2
    )Loss on foreclosed properties and repossessed assets
    
    
    113
    
    
    
    Increase in accrued interest receivable and other assets
    
    
    (175
    )
    
    
    (476
    )Increase in accrued interest payable and other liabilities
    
    
    3,078
    
    
    
    381Net cash provided by operating activities
    
    
    4,500
    
    
    
    1,789Investing activitiesProceeds from maturities of available-for-sale securities
    
    
    9,492
    
    
    
    7,013Purchases of available-for-sale securities
    
    
    (18,842
    )
    
    
    (5,286
    )Proceeds from sale of foreclosed properties and repossessed assets
    
    
    368
    
    
    
    Net increase in loans and leases
    
    
    (1,062
    )
    
    
    (10,160
    )Purchases of leasehold improvements and equipment, net
    
    
    (58
    )
    
    
    (151
    )Purchase of cash surrender value of life insurance
    
    
    (8
    )
    
    
    (8
    )Net cash used in investing activities
    
    
    (10,110
    )
    
    
    (8,592
    )Financing activitiesNet (decrease) increase in deposits
    
    
    (19,827
    )
    
    
    51,496Repayment of FHLB advances
    
    
    (2
    )
    
    
    (15,003
    )Net decrease in short-term borrowed funds
    
    
    
    
    
    
    (22,000
    )Cash dividends paid
    
    
    (179
    )
    
    
    (178
    )Purchase of treasury stock
    
    
    (11
    )
    
    
    (13
    )Net cash (used in) provided by financing activities
    
    
    (20,019
    )
    
    
    14,302Net (decrease) increase in cash and cash equivalents
    
    
    (25,629
    )
    
    
    7,499Cash and cash equivalents at the beginning of the period
    
    
    112,737
    
    
    
    23,684Cash and cash equivalents at the end of the period
    
    $
    87,108
    
    
    $
    31,183Supplementary cash flow informationInterest paid on deposits and borrowings
    
    $
    5,960
    
    
    $
    7,192Income taxes paid
    
    
    33
    
    
    
    15Transfer to foreclosed properties and repossessed assets
    
    
    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
 Transfers
and Servicing of Financial Assets. Note 7  Loans and Leases
 Consolidation of Variable Interest Entities.
 
    
    The power to direct the activities of a variable interest entity that most
significantly impact the entitys economic performance; and
  5




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
    
    The obligation to absorb losses of the entity that could potentially be significant to
the variable interest entity or the right to receive benefits from the entity that could
potentially be significant to the variable interest entity.
  Consolidation.
 Note 4  Earnings Per Share.
  For the Three MonthsEnded March 31,2010
    
    
    2009Distributed earnings allocated to common stockholders
    
    $
    173,177
    
    
    $
    171,187Undistributed earnings allocated to common stockholders
    
    
    702,253
    
    
    
    (357,067
    )Income (loss) available to common stockholders for basic earnings per share
    
    
    875,430
    
    
    
    (185,880
    )Reallocation of undistributed earnings for diluted earnings per share
    
    
    
    
    
    
    Income (loss) available to common stockholders for diluted earnings per share
    
    $
    875,430
    
    
    $
    (185,880
    )Basic average shares
    
    
    2,473,557
    
    
    
    2,445,880Dilutive effect of share-based awards
    
    
    
    
    
    
    Dilutive average shares
    
    
    2,473,557
    
    
    
    2,445,880Earnings per common share:Basic
    
    $
    0.35
    
    
    $
    (0.08
    )Diluted
    
    
    0.35
    
    
    
    (0.08
    )
  6




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Note 5  Share-Based Compensation
  Stock Options
   WeightedAverageRemainingWeighted
    
    
    ContractualOptions
    
    
    Average Price
    
    
    Life (Years)Outstanding at December 31, 2008
    
    
    157,290
    
    
    $
    22.07
    
    
    
    4.67Granted
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    Forfeited
    
    
    (14,500
    )
    
    
    22.63Outstanding at December 31, 2009
    
    
    142,790
    
    
    
    22.01
    
    
    
    3.66Options exercisable at December 31, 2009
    
    
    142,790
    
    
    
    
    
    
    
    3.66Outstanding as of December 31, 2009
    
    
    142,790
    
    
    $
    22.01
    
    
    
    3.66Granted
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    Forfeited
    
    
    
    
    
    
    Outstanding at March 31, 2010
    
    
    142,790
    
    
    
    22.01
    
    
    
    3.41Options exercisable at March 31, 2010
    
    
    142,790
    
    
    
    22.01
    
    
    
    3.41
 Restricted Shares
   7




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Weighted AverageNumber of
    
    
    Grant-DateRestricted Shares
    
    
    Fair ValueNonvested balance as of December 31, 2008
    
    
    104,949
    
    
    $
    19.12Granted
    
    
    6,500
    
    
    
    10.07Vested
    
    
    (34,273
    )
    
    
    19.77Forfeited
    
    
    (6,914
    )
    
    
    19.99Nonvested balance as of December 31, 2009
    
    
    70,262
    
    
    $
    17.88Granted
    
    
    2,000
    
    
    
    10.15Vested
    
    
    (7,773
    )
    
    
    22.46Forfeited
    
    
    
    
    
    
    Nonvested balance as of March 31, 2010
    
    
    64,489
    
    
    $
    17.08
  Note 6  Securities
  As of March 31, 2010Gross
    
    
    Grossunrealized
    
    
    unrealized
    
    
    EstimatedAmortized cost
    
    
    holding gains
    
    
    holding losses
    
    
    fair value(In Thousands)Collateralized
mortgage obligations 
government agencies
    
    $
    126,508
    
    
    $
    3,062
    
    
    $
    (228
    )
    
    $
    129,342Collateralized
mortgage obligations
 government-sponsored
enterprises
    
    
    2,490
    
    
    
    37
    
    
    
    
    
    
    
    2,527$
    128,998
    
    
    $
    3,099
    
    
    $
    (228
    )
    
    $
    131,869
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As of December 31, 2009Gross
    
    
    Grossunrealized
    
    
    unrealized
    
    
    EstimatedAmortized cost
    
    
    holding gains
    
    
    holding losses
    
    
    fair value(In Thousands)Collateralized
mortgage obligations 
government agencies
    
    $
    116,109
    
    
    $
    2,615
    
    
    $
    (215
    )
    
    $
    118,509Collateralized
mortgage obligations
 government-sponsored
enterprises
    
    
    3,729
    
    
    
    48
    
    
    
    
    
    
    
    3,777$
    119,838
    
    
    $
    2,663
    
    
    $
    (215
    )
    
    $
    122,286
   EstimatedAmortized Cost
    
    
    Fair Value(In Thousands)Due in one year or less
    
    $
    
    
    
    $
    Due in one year through five years
    
    
    934
    
    
    
    977Due in five through ten years
    
    
    3,870
    
    
    
    3,941Due in over ten years
    
    
    124,194
    
    
    
    126,951$
    128,998
    
    
    $
    131,869
   9




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As of March 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 agencies
    
    $
    27,612
    
    
    $
    228
    
    
    $
    
    
    
    $
    
    
    
    $
    27,612
    
    
    $
    228$
    27,612
    
    
    $
    228
    
    
    $
    
    
    
    $
    
    
    
    $
    27,612
    
    
    $
    228
 As of December 31, 2009Less than 12 months
    
    
    12 months or longer
    
    
    TotalUnrealized
    
    
    
    
    
    
    Unrealized
    
    
    
    
    
    
    UnrealizedFair value
    
    
    losses
    
    
    Fair value
    
    
    losses
    
    
    Fair value
    
    
    losses(In Thousands)Collateralized
mortgage obligations
 government agencies
    
    $
    17,220
    
    
    $
    215
    
    
    $
    
    
    
    $
    
    
    
    $
    17,220
    
    
    $
    215$
    17,220
    
    
    $
    215
    
    
    $
    
    
    
    $
    
    
    
    $
    17,220
    
    
    $
    215
   Note 7  Loans and Leases
  March 31,
    
    
    December 31,2010
    
    
    2009(In Thousands)First mortgage loans:Commercial real estate
    
    $
    442,754
    
    
    $
    441,806Construction and land development
    
    
    57,909
    
    
    
    64,194Multi-family
    
    
    43,833
    
    
    
    43,9591-4 family
    
    
    56,418
    
    
    
    56,131Total first mortgage loans
    
    
    600,914
    
    
    
    606,090Commercial and industrial loans
    
    
    211,407
    
    
    
    199,661Direct financing leases, net
    
    
    25,524
    
    
    
    27,607Home equity loans and second mortgage
    
    
    6,369
    
    
    
    7,879Consumer and other
    
    
    10,973
    
    
    
    13,260Loans and leases receivable, gross
    
    
    855,187
    
    
    
    854,497Less:Allowance for loan and lease losses
    
    
    15,342
    
    
    
    14,124Deferred loan fees
    
    
    463
    
    
    
    566Loans and leases receivable, net
    
    $
    839,382
    
    
    $
    839,807
  10




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##### Table of Contents



March 31,
    
    
    December 31,2010
    
    
    2009(Dollars In Thousands)Non-accrual loans and leasesFirst mortgage loans:Commercial real estate
    
    $
    8,087
    
    
    $
    8,482Construction and land development
    
    
    3,751
    
    
    
    3,317Multi-family
    
    
    3,534
    
    
    
    1,7601-4 family
    
    
    4,361
    
    
    
    3,015Total first mortgage loans
    
    
    19,733
    
    
    
    16,574Commercial and industrial
    
    
    7,638
    
    
    
    7,086Direct financing leases, net
    
    
    
    
    
    
    1Home equity and second mortgage
    
    
    955
    
    
    
    872Consumer and other
    
    
    3,292
    
    
    
    3,292Total non-accrual loans and leases
    
    
    31,618
    
    
    
    27,825Foreclosed properties and repossessed assets, net
    
    
    1,333
    
    
    
    1,671Total non-performing assets
    
    $
    32,951
    
    
    $
    29,496Performing troubled debt restructurings
    
    $
    
    
    
    $
    Total non-accrual loans and leases to
gross loans and leases
    
    
    3.70
    %
    
    
    3.26
    %Total non-performing assets to total assets
    
    
    2.99
    
    
    
    2.64Allowance for loan and lease losses
to non-accrual loans and leases
    
    
    48.52
    
    
    
    50.76
  11




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##### Table of Contents



Note 8  Allowance for Loan and Lease Losses
  ThreeMonths Ended
    
    
    Year EndedMarch 31,
    
    
    December 31,2010
    
    
    2009(Dollars In Thousands)Allowance at beginning of period
    
    $
    14,124
    
    
    $
    11,846Charge-offs:Commercial real estate and other first mortgage
    
    
    (125
    )
    
    
    (3,647
    )Commercial and industrial
    
    
    (2
    )
    
    
    (2,031
    )Direct financing leases
    
    
    
    
    
    
    (231
    )Home equity loans and second mortgage
    
    
    
    
    
    
    (157
    )Consumer and other
    
    
    
    
    
    
    (36
    )Total charge-offs
    
    
    (127
    )
    
    
    (6,102
    )Recoveries:Commercial real estate and other mortgage
    
    
    
    
    
    
    Commercial and industrial
    
    
    1
    
    
    
    147Direct financing leases
    
    
    
    
    
    
    Home equity loans and second mortgage
    
    
    
    
    
    
    8Consumer and other
    
    
    
    
    
    
    Total recoveries
    
    
    1
    
    
    
    155Net charge-offs
    
    
    (126
    )
    
    
    (5,947
    )Provision for loan and lease losses
    
    
    1,344
    
    
    
    8,225Allowance at end of period
    
    $
    15,342
    
    
    $
    14,124Allowance to gross loans and leases
    
    
    1.79
    %
    
    
    1.65
    %
  As of and for
    
    
    As of and forthe Three
    
    
    the YearMonths Ended
    
    
    EndedMarch 31,
    
    
    December 31,2010
    
    
    2009(In Thousands)Impaired loans and leases with no impairment reserves required
    
    $
    11,160
    
    
    $
    13,243Impaired loans and leases with impairment reserves required
    
    
    20,458
    
    
    
    14,582Total impaired loans and leases
    
    
    31,618
    
    
    
    27,825Less:Impairment reserve (included in allowance for loan and lease
losses)
    
    
    3,114
    
    
    
    1,846Net impaired loans and leases
    
    $
    28,504
    
    
    $
    25,979Average net impaired loans and leases
    
    $
    26,708
    
    
    $
    20,395Foregone interest income attributable to impaired loans and leases
    
    $
    495
    
    
    $
    1,758Interest income recognized on impaired loans and leases
    
    
    (9
    )
    
    
    (149
    )Net foregone interest income on impaired loans and leases
    
    $
    486
    
    
    $
    1,609
   12




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##### Table of Contents



Note 9  Deposits
  March 31, 2010
    
    
    December 31, 2009Weighted
    
    
    
    
    
    
    WeightedBalance
    
    
    average rate
    
    
    Balance
    
    
    average rate(Dollars In Thousands)Transaction accounts:Demand deposits
    
    $
    54,733
    
    
    
    0.00
    %
    
    $
    87,687
    
    
    
    0.00
    %Negotiable order of withdrawal
(NOW) accounts
    
    
    83,363
    
    
    
    0.40
    
    
    
    65,191
    
    
    
    0.40Total transaction accounts
    
    
    138,096
    
    
    
    
    
    
    
    152,878Money market accounts
    
    
    273,077
    
    
    
    1.30
    
    
    
    262,276
    
    
    
    1.38Certificates of deposit
    
    
    79,991
    
    
    
    2.09
    
    
    
    98,431
    
    
    
    2.34Brokered certificates of deposit
    
    
    473,383
    
    
    
    3.54
    
    
    
    470,789
    
    
    
    3.98Total deposits
    
    $
    964,547
    
    
    
    
    
    
    $
    984,374
 Note 10  Borrowings
  March 31, 2010
    
    
    December 31, 2009Weighted
    
    
    Weighted
    
    
    
    
    
    
    Weighted
    
    
    Weightedaverage
    
    
    average
    
    
    
    
    
    
    average
    
    
    averageBalance
    
    
    balance
    
    
    rate
    
    
    Balance
    
    
    balance
    
    
    rate(Dollars In Thousands)Fed funds purchased
    
    $
    
    
    
    $
    
    
    
    
    0.00
    %
    
    $
    
    
    
    $
    1,700
    
    
    
    0.61
    %FHLB advances
    
    
    18,503
    
    
    
    18,504
    
    
    
    4.67
    
    
    
    18,505
    
    
    
    18,873
    
    
    
    4.66Senior line of credit
    
    
    10
    
    
    
    10
    
    
    
    4.00
    
    
    
    10
    
    
    
    38
    
    
    
    4.41Subordinated notes payable
    
    
    39,000
    
    
    
    39,000
    
    
    
    5.30
    
    
    
    39,000
    
    
    
    39,000
    
    
    
    4.92Junior subordinated notes
    
    
    10,315
    
    
    
    10,315
    
    
    
    10.63
    
    
    
    10,315
    
    
    
    10,315
    
    
    
    10.78$
    67,828
    
    
    $
    67,829
    
    
    
    5.95
    
    
    $
    67,830
    
    
    $
    69,926
    
    
    
    5.61Short-term borrowings
    
    $
    18,010
    
    
    
    
    
    
    
    
    
    
    $
    16,010Long-term borrowings
    
    
    49,818
    
    
    
    
    
    
    
    
    
    
    
    51,820$
    67,828
    
    
    
    
    
    
    
    
    
    
    $
    67,830
   13




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##### Table of Contents



Note 11  Fair Value Disclosures
  Level 1 Level 1 inputs are unadjusted quoted prices in active markets for identical
assets or liabilities that the Corporation has the ability to access at the measurement
date.
 Level 2 Level 2 inputs are inputs other than quoted prices included with Level 1 that are
observable for the asset or liability either directly or indirectly, such as quoted prices
for similar assets or liabilities; quoted prices in markets that are not active; or other
inputs that are observable or can be corroborated by observable market data for
substantially the full term of the assets or liabilities.
 Level 3  Level 3 inputs are inputs that are supported by little or no market activity and
that are significant to the fair value of the assets or liabilities.
   Fair Value Measurements UsingLevel 1
    
    
    Level 2
    
    
    Level 3
    
    
    Total(In Thousands)March 31, 2010Assets:Collateralized
mortgage
obligations 
government agencies
    
    $
    
    
    
    $
    129,342
    
    
    $
    
    
    
    $
    129,342Collateralized
mortgage
obligations 
government
sponsored
enterprises
    
    
    
    
    
    
    2,527
    
    
    
    
    
    
    
    2,527Interest rate swaps
    
    
    
    
    
    
    1,844
    
    
    
    
    
    
    
    1,844Liabilities:Interest rate swaps
    
    $
    
    
    
    $
    1,844
    
    
    $
    
    
    
    $
    1,844
 Fair Value Measurements UsingLevel 1
    
    
    Level 2
    
    
    Level 3
    
    
    Total(In Thousands)December 31, 2009Assets:Collateralized
mortgage
obligations 
government agencies
    
    $
    
    
    
    $
    118,509
    
    
    $
    
    
    
    $
    118,509Collateralized
mortgage
obligations 
government
sponsored
enterprises
    
    
    
    
    
    
    3,777
    
    
    
    
    
    
    
    3,777Interest rate swaps
    
    
    
    
    
    
    1,297
    
    
    
    
    
    
    
    1,297Liabilities:Interest rate swaps
    
    $
    
    
    
    $
    1,297
    
    
    $
    
    
    
    $
    1,297
   14




---



##### Table of Contents



As of and for the three months ended March 31, 2010TotalBalance at
    
    
    Fair Value Measurements Using
    
    
    GainsMarch 31, 2010
    
    
    Level 1
    
    
    Level 2
    
    
    Level 3
    
    
    (Losses)(In Thousands)Impaired loans
    
    $
    21,861
    
    
    $
    
    
    
    $
    17,621
    
    
    $
    4,240
    
    
    $
    Foreclosed properties
    
    
    1,333
    
    
    
    
    
    
    
    1,333
    
    
    
    
    
    
    
    (121
    )
 As of and
for the year ended December 31, 2009TotalBalance at
    
    
    Fair Value Measurements Using
    
    
    GainsDecember 31, 2009
    
    
    Level 1
    
    
    Level 2
    
    
    Level 3
    
    
    (Losses)(In Thousands)Impaired loans
    
    $
    17,596
    
    
    $
    
    
    
    $
    14,820
    
    
    $
    2,775
    
    
    $
    Foreclosed
properties
    
    $
    1,671
    
    
    $
    
    
    
    $
    1,671
    
    
    $
    
    
    
    $
    (525
    )
     15




---



##### Table of Contents



Fair Value of Financial Instruments
  March 31, 2010
    
    
    December 31, 2009Carrying
    
    
    
    
    
    
    CarryingAmount
    
    
    Fair Value
    
    
    Amount
    
    
    Fair Value(In Thousands)Financial assets:Cash and cash equivalents
    
    $
    87,108
    
    
    $
    87,108
    
    
    $
    112,737
    
    
    $
    112,737Securities available-for-sale
    
    
    131,869
    
    
    
    131,869
    
    
    
    122,286
    
    
    
    122,286Loans and lease receivables
    
    
    839,382
    
    
    
    820,042
    
    
    
    839,807
    
    
    
    820,286Federal Home Loan Bank stock
    
    
    2,367
    
    
    
    2,367
    
    
    
    2,367
    
    
    
    2,367Cash surrender value of life
insurance
    
    
    16,423
    
    
    
    16,423
    
    
    
    16,254
    
    
    
    16,254Accrued interest receivable
    
    
    3,302
    
    
    
    3,302
    
    
    
    3,212
    
    
    
    3,212Interest rate swaps
    
    
    1,844
    
    
    
    1,844
    
    
    
    1,297
    
    
    
    1,297Financial liabilities:Deposits
    
    $
    964,547
    
    
    $
    977,997
    
    
    $
    984,374
    
    
    $
    1,000,027Federal Home Loan Bank and
other borrowings
    
    
    57,513
    
    
    
    57,978
    
    
    
    57,515
    
    
    
    58,125Junior subordinated notes
    
    
    10,315
    
    
    
    7,225
    
    
    
    10,315
    
    
    
    7,237Interest rate swaps
    
    
    1,844
    
    
    
    1,844
    
    
    
    1,297
    
    
    
    1,297Accrued interest payable
    
    
    
    
    
    
    
    
    
    
    4,359
    
    
    
    4,359Off balance sheet items:Standby letters of credit
    
    
    30
    
    
    
    30
    
    
    
    38
    
    
    
    38Commitments to extend credit
    
    
    
    
    
    
    *
    
    
    
    
    
    
    
    *
 *
    
    Not meaningful    16




---



##### Table of Contents



Securities:
 Loans and Leases:
 Federal Home Loan Bank Stock:
 Cash Surrender Value of Life Insurance:
 Deposits:
 Borrowed Funds:
 Financial Instruments with Off-Balance Sheet Risks:
  Interest Rate Swaps:
 Limitations:
  17




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##### Table of Contents



Note 12  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, 2010
    
    Other assets
    
    
    $
    1,844
    
    
    Other liabilities
    
    
    $
    1,844December 31, 2009
    
    Other assets
    
    
    $
    1,297
    
    
    Other liabilities
    
    
    $
    1,297
  18




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##### Table of Contents



For the three months ended March 31, 2010AmountRecognized in
    
    
    
    
    
    
    AmountOther
    
    
    
    
    
    
    reclassified fromComprehensive
    
    
    
    
    
    
    AccumulatedIncome on
    
    
    Income
    
    
    Other
    
    
    Income
    
    
    Amount ofDerivative
    
    
    Statement
    
    
    Comprehensive
    
    
    Statement
    
    
    Gain/(Loss)Gain/(Loss)
    
    
    Location
    
    
    Income
    
    
    Location
    
    
    RecordedInstrument
    
    Effective Portion
    
    
    Effective Portion
    
    
    Effective Portion
    
    
    Ineffective Portion
    
    
    Ineffective Portion(In Thousands)Interest rate swaps
 non hedge
    
    $
    
    
    
    N/A
    
    
    
    $
    
    
    
    Other noninterest income
    
    
    $
    333Interest rate swaps
nonhedge
    
    $
    
    
    
    N/A
    
    
    
    $
    
    
    
    Other noninterest income
    
    
    $
    (333
    )
 For the three months ended March 31, 2009AmountRecognized in
    
    
    
    
    
    
    AmountOther
    
    
    
    
    
    
    reclassified fromComprehensive
    
    
    
    
    
    
    AccumulatedIncome on
    
    
    Income
    
    
    Other
    
    
    Income
    
    
    Amount ofDerivative
    
    
    Statement
    
    
    Comprehensive
    
    
    Statement
    
    
    Gain/(Loss)Gain/(Loss)
    
    
    Location
    
    
    Income
    
    
    Location
    
    
    RecordedInstrument
    
    Effective Portion
    
    
    Effective Portion
    
    
    Effective Portion
    
    
    Ineffective Portion
    
    
    Ineffective Portion(In Thousands)Interest rate swaps
hedge
    
    $
    (1
    )
    
    Interest expense
    
    
    $
    (3
    )
    

    N/A
    
    
    $
    Interest rate swaps
 non hedge
    
    
    
    
    
    N/A
    
    
    
    
    
    
    
    Other noninterest income
    
    
    690Interest rate swaps
 non hedge
    
    
    
    
    
    N/A
    
    
    
    
    
    
    
    Other noninterest income
    
    
    (467
    )
 
 Item 2.
    
    - Managements Discussion and Analysis of Financial Condition and Results of
Operations
 Forward-Looking Statements
 Item 1A  Risk Factors
  19




---



##### Table of Contents



General
  Overview
  General Overview
 
    
    Total assets were $1.102 billion as of March 31, 2010 compared to $1.117 billion as of
December 31, 2009.
    
    Net income for the three months ended March 31, 2010 was $899,000 compared to a net
loss of $193,000 for the three months ended March 31, 2009.
    
    Net interest margin increased to 3.00% for the three months ended March 31, 2010
compared to 2.65% for the three months ended March 31, 2009.
    
    Top line revenue increased 17.7% to $9.5 million for the three months ended March 31,
2010 compared to $8.1 million for the comparable period of the prior year.
    
    Loan and lease loss provision was $1.3 million for the three months ended March 31,
2010 compared to $2.2 million for same time period in the prior year. Allowance for loan
and lease loss as a percentage of gross loans and leases was 1.79% at March 31, 2010
compared to 1.65% at December 31, 2009.
    
    Diluted earnings per common share for the three months ended March 31, 2010 was $0.35
compared to diluted loss per common share of $0.08 for the three months ended March 31,
2009.
    
    Annualized return on average equity and return on average assets were 6.46% and
0.33%, respectively for the three month period ended March 31, 2010, compared to (1.43)%
and (0.08)%, respectively, for the same time period in 2009.
  20




---



##### Table of Contents



Results of Operations
 Top
Line Revenue.
 For the Three Months EndedMarch 31,2010
    
    
    2009
    
    
    Change(Dollars In Thousands)Net interest income
    
    $
    7,847
    
    
    $
    6,488
    
    
    
    20.9
    %Non-interest income
    
    
    1,629
    
    
    
    1,562
    
    
    
    4.3Total top line revenue
    
    $
    9,476
    
    
    $
    8,050
    
    
    
    17.7
 Adjusted Net Income
 For the Three Months EndedMarch 31,2010
    
    
    2009
    
    
    Change(Dollars In Thousands)Net income (loss), presented under US GAAP
    
    $
    899
    
    
    $
    (193
    )
    
    
    *Add back:Provision for loan and lease losses, after tax
    
    
    817
    
    
    
    1,335
    
    
    
    (38.8
    )%Less:Net charge-offs, after tax
    
    
    77
    
    
    
    674
    
    
    
    (88.6
    )Adjusted net income
    
    $
    1,639
    
    
    $
    468
    
    
    
    250.2
 *
    
    Not meaningful  21




---



##### Table of Contents



Return
on Equity.
 Net Interest Income.
      22




---



##### Table of Contents



Average Interest-Earning Assets, Average Interest-Bearing Liabilities and Interest Rate Spread.
 For the Three Months Ended March 31,2010
    
    
    2009Average
    
    
    
    
    
    
    Average
    
    
    Average
    
    
    
    
    
    
    Averagebalance
    
    
    Interest
    
    
    yield/cost
    
    
    balance
    
    
    Interest
    
    
    yield/cost(Dollars In Thousands)Interest-Earning AssetsCommercial real estate and other mortgage loans(1)
    
    $
    603,692
    
    
    $
    8,467
    
    
    
    5.61
    %
    
    $
    575,359
    
    
    $
    7,888
    
    
    
    5.48
    %Commercial and industrial loans(1)
    
    
    204,499
    
    
    
    4,156
    
    
    
    8.13
    
    
    
    227,716
    
    
    
    3,920
    
    
    
    6.89Direct financing leases(1)
    
    
    26,576
    
    
    
    415
    
    
    
    6.25
    
    
    
    30,457
    
    
    
    478
    
    
    
    6.29Consumer loans
    
    
    18,659
    
    
    
    152
    
    
    
    3.26
    
    
    
    22,225
    
    
    
    269
    
    
    
    4.84Total loans and leases receivable(1)
    
    
    853,426
    
    
    
    13,190
    
    
    
    6.18
    
    
    
    855,757
    
    
    
    12,555
    
    
    
    5.87Mortgage-related securities(2)
    
    
    125,775
    
    
    
    1,135
    
    
    
    3.61
    
    
    
    108,290
    
    
    
    1,239
    
    
    
    4.58Federal Home Loan Bank stock
    
    
    2,367
    
    
    
    
    
    
    
    
    
    
    
    2,367
    
    
    
    
    
    
    
    Short-term investments
    
    
    66,398
    
    
    
    41
    
    
    
    0.25
    
    
    
    11,296
    
    
    
    11
    
    
    
    3.90Total interest-earning assets
    
    
    1,047,966
    
    
    
    14,366
    
    
    
    5.48
    
    
    
    977,710
    
    
    
    13,805
    
    
    
    5.65Non-interest-earning assets
    
    
    47,327
    
    
    
    
    
    
    
    
    
    
    
    37,577Total assets
    
    $
    1,095,293
    
    
    
    
    
    
    
    
    
    
    $
    1,015,287Interest-Bearing LiabilitiesNOW accounts
    
    $
    72,629
    
    
    
    72
    
    
    
    0.40
    
    
    $
    53,844
    
    
    
    54
    
    
    
    0.40Money market
    
    
    267,756
    
    
    
    869
    
    
    
    1.30
    
    
    
    176,812
    
    
    
    497
    
    
    
    1.12Certificates of deposits
    
    
    88,253
    
    
    
    461
    
    
    
    2.09
    
    
    
    116,479
    
    
    
    823
    
    
    
    2.83Brokered certificates of deposit
    
    
    464,657
    
    
    
    4,109
    
    
    
    3.54
    
    
    
    479,905
    
    
    
    5,091
    
    
    
    4.24Total interest-bearing deposits
    
    
    893,295
    
    
    
    5,511
    
    
    
    2.47
    
    
    
    827,040
    
    
    
    6,465
    
    
    
    3.13FHLB advances
    
    
    18,503
    
    
    
    216
    
    
    
    4.67
    
    
    
    19,987
    
    
    
    218
    
    
    
    4.36Other borrowings
    
    
    39,010
    
    
    
    518
    
    
    
    5.31
    
    
    
    45,904
    
    
    
    360
    
    
    
    3.14Junior subordinated notes
    
    
    10,315
    
    
    
    274
    
    
    
    10.63
    
    
    
    10,315
    
    
    
    274
    
    
    
    10.63Total interest-bearing liabilities
    
    
    961,123
    
    
    
    6,519
    
    
    
    2.71
    
    
    
    903,246
    
    
    
    7,317
    
    
    
    3.24Non-interest-bearing liabilities
    
    
    78,510
    
    
    
    
    
    
    
    
    
    
    
    58,236Total liabilities
    
    
    1,039,633
    
    
    
    
    
    
    
    
    
    
    
    961,482Stockholders equity
    
    
    55,660
    
    
    
    
    
    
    
    
    
    
    
    53,805Total liabilities and stockholders equity
    
    $
    1,095,293
    
    
    
    
    
    
    
    
    
    
    $
    1,015,287Net interest income/interest rate spread
    
    
    
    
    
    $
    7,847
    
    
    
    2.77
    %
    
    
    
    
    
    $
    6,488
    
    
    
    2.41
    %Net interest-earning assets
    
    $
    86,843
    
    
    
    
    
    
    
    
    
    
    $
    74,464Net interest margin
    
    
    
    
    
    
    
    
    
    
    3.00
    %
    
    
    
    
    
    
    
    
    
    
    2.65
    %Average interest-earning assets to average interest-bearing
liabilities
    
    
    109.04
    %
    
    
    
    
    
    
    
    
    
    
    108.24
    %Return on average assets
    
    
    0.33
    
    
    
    
    
    
    
    
    
    
    
    (0.08
    )Return on average equity
    
    
    6.46
    
    
    
    
    
    
    
    
    
    
    
    (1.43
    )Average equity to average assets
    
    
    5.08
    
    
    
    
    
    
    
    
    
    
    
    5.30Non-interest expense to average assets
    
    
    2.39
    
    
    
    
    
    
    
    
    
    
    
    2.43
 (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.  23




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##### Table of Contents



Rate/Rate
    
    
    Volume
    
    
    Volume
    
    
    Net(In Thousands)Interest-Earning AssetsCommercial real estate and other mortgage loans
    
    $
    181
    
    
    $
    389
    
    
    $
    9
    
    
    $
    579Commercial loans
    
    
    709
    
    
    
    (400
    )
    
    
    (73
    )
    
    
    236Direct financing leases
    
    
    (2
    )
    
    
    (61
    )
    
    
    
    
    
    
    (63
    )Consumer loans
    
    
    (88
    )
    
    
    (43
    )
    
    
    14
    
    
    
    (117
    )Total loans and leases receivable
    
    
    800
    
    
    
    (115
    )
    
    
    (50
    )
    
    
    635Mortgage-related securities
    
    
    (262
    )
    
    
    200
    
    
    
    (42
    )
    
    
    (104
    )Federal Home Loan Bank Stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Short-term investments
    
    
    (4
    )
    
    
    56
    
    
    
    (22
    )
    
    
    30Total net
change in income on interest-earning assets
    
    
    534
    
    
    
    141
    
    
    
    (114
    )
    
    
    561Interest-Bearing LiabilitiesNOW accounts
    
    
    (1
    )
    
    
    19
    
    
    
    
    
    
    
    18Money market
    
    
    77
    
    
    
    256
    
    
    
    39
    
    
    
    372Certificates of deposit
    
    
    (229
    )
    
    
    (203
    )
    
    
    56
    
    
    
    (376
    )Brokered certificates of deposit
    
    
    (833
    )
    
    
    (161
    )
    
    
    26
    
    
    
    (968
    )Total deposits
    
    
    (986
    )
    
    
    (89
    )
    
    
    121
    
    
    
    (954
    )FHLB advances
    
    
    15
    
    
    
    (16
    )
    
    
    (1
    )
    
    
    (2
    )Other borrowings
    
    
    250
    
    
    
    (54
    )
    
    
    (38
    )
    
    
    158Junior subordinated notes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total net
change in expense on interest-bearing liabilities
    
    
    (721
    )
    
    
    (159
    )
    
    
    82
    
    
    
    (798
    )Net change in net interest income
    
    $
    1,255
    
    
    $
    300
    
    
    $
    (196
    )
    
    $
    1,359
 Provision for Loan and Lease Losses.
 For the three months endedMarch 31, 2010
    
    
    March 31, 2009(In Thousands)Changes in the provision for loan and lease losses
associated with:Establishment/modification of specific reserves on impaired
loans, net
    
    $
    1,268
    
    
    $
    434Increase in allowance for loan and lease loss reserve due to
subjective factor changes
    
    
    
    
    
    
    594Amount necessary to cover higher than anticipated charge-offs
    
    
    126
    
    
    
    1,108Change in inherent risk of the loan and lease portfolio
    
    
    (50
    )
    
    
    61Total provision for loan and lease losses
    
    $
    1,344
    
    
    $
    2,197
 Asset Quality
  24




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Non-Interest Income.
     Non-Interest Expense.
   25




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Income Taxes.
   26




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##### Table of Contents



Financial Condition
 General.
 Short-term investments.
 Securities.
  Loans and Leases Receivable.
  27




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##### Table of Contents



Asset Quality
 Deposits.
 Asset Quality
 Non-performing Assets.
  28




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##### Table of Contents



March 31,
    
    
    December 31,2010
    
    
    2009(Dollars In Thousands)Non-accrual loans and leasesFirst mortgage loans:Commercial real estate
    
    $
    8,087
    
    
    $
    8,482Construction and land development
    
    
    3,751
    
    
    
    3,317Multi-family
    
    
    3,534
    
    
    
    1,7601-4 family
    
    
    4,361
    
    
    
    3,015Total first mortgage loans
    
    
    19,733
    
    
    
    16,574Commercial and industrial
    
    
    7,638
    
    
    
    7,086Direct financing leases, net
    
    
    
    
    
    
    1Home equity and second mortgage
    
    
    955
    
    
    
    872Consumer and other
    
    
    3,292
    
    
    
    3,292Total non-accrual loans and leases
    
    
    31,618
    
    
    
    27,825Foreclosed properties and repossessed assets
    
    
    1,333
    
    
    
    1,671Total non-performing assets
    
    $
    32,951
    
    
    $
    29,496Performing troubled debt restructurings
    
    $
    
    
    
    $
    Total non-accrual loans and leases
to gross loans and leases
    
    
    3.70
    %
    
    
    3.26
    %Total non-performing assets to
total assets
    
    
    2.99
    
    
    
    2.64Allowance for loan and lease losses
to gross loans and leases
    
    
    1.79
    
    
    
    1.65Allowance for loan and lease losses to
non-accrual loans and leases
    
    
    48.52
    
    
    
    50.76
  Non-accrual loans as of December 31, 2009
    
    $
    27,825Loans transferred into non-accrual status
    
    
    7,340Loans returned to accrual status
    
    
    (1,500
    )Loans transferred to foreclosed properties
    
    
    (143
    )Loans charged-off
    
    
    (126
    )Loans fully paid-off
    
    
    (211
    )Principal payments applied to non-accrual loans
    
    
    (1,567
    )Non-accrual loans as of March 31, 2010
    
    $
    31,618
  29




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##### Table of Contents



As of and for
    
    
    As of and forthe Three
    
    
    the YearMonths Ended
    
    
    EndedMarch 31,
    
    
    December 31,2010
    
    
    2009(In Thousands)Impaired loans and leases with no impairment reserves required
    
    $
    11,160
    
    
    $
    13,243Impaired loans and leases with impairment reserves required
    
    
    20,458
    
    
    
    14,582Total impaired loans and leases
    
    
    31,618
    
    
    
    27,825Less:Impairment reserve (included in allowance for loan and lease
losses)
    
    
    3,114
    
    
    
    1,846Net impaired loans and leases
    
    $
    28,504
    
    
    $
    25,979Average impaired loans and leases
    
    $
    26,708
    
    
    $
    20,395Foregone interest income attributable to impaired loans and leases
    
    $
    495
    
    
    $
    1,758Interest income recognized on impaired loans and leases
    
    
    (9
    )
    
    
    (149
    )Net foregone interest income on impaired loans and leases
    
    $
    486
    
    
    $
    1,609
    30




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##### Table of Contents



For the Three Months EndedMarch 31,2010
    
    
    2009(Dollars In Thousands)Allowance at beginning of period
    
    $
    14,124
    
    
    $
    11,846Charge-offs:Commercial real estate and
other mortgage
    
    
    (125
    )
    
    
    Commercial and industrial
    
    
    (2
    )
    
    
    (1,110
    )Direct financing leases
    
    
    
    
    
    
    Home equity and second mortgage
    
    
    
    
    
    
    Consumer and other
    
    
    
    
    
    
    Total charge-offs
    
    
    (127
    )
    
    
    (1,110
    )Recoveries:Commercial
real estate and other mortgage
    
    
    1
    
    
    
    2Commercial and industrial
    
    
    
    
    
    
    Direct financial leases
    
    
    
    
    
    
    Home equity and second mortgage
    
    
    
    
    
    
    Consumer and other
    
    
    
    
    
    
    Total recoveries
    
    
    1
    
    
    
    2Net charge-offs
    
    
    (126
    )
    
    
    (1,108
    )Provision for loan and lease losses
    
    
    1,344
    
    
    
    2,197Allowance at end of period
    
    $
    15,342
    
    
    $
    12,935
 Liquidity and Capital Resources
    31




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32




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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, 2010Total capital
(to risk-weighted assets)Consolidated
    
    $
    111,370
    
    
    
    12.25
    %
    
    $
    72,715
    
    
    
    8.00
    %
    
    
    N/A
    
    
    
    N/AFirst Business Bank
    
    
    95,984
    
    
    
    11.88
    
    
    
    64,644
    
    
    
    8.00
    
    
    $
    80,805
    
    
    
    10.00
    %First Business Bank  Milwaukee
    
    
    13,979
    
    
    
    14.06
    
    
    
    7,953
    
    
    
    8.00
    
    
    
    9,942
    
    
    
    10.00Tier 1 capital
(to risk-weighted assets)Consolidated
    
    $
    60,959
    
    
    
    6.71
    %
    
    $
    36,358
    
    
    
    4.00
    %
    
    
    N/A
    
    
    
    N/AFirst Business Bank
    
    
    85,846
    
    
    
    10.62
    
    
    
    32,322
    
    
    
    4.00
    
    
    $
    48,483
    
    
    
    6.00
    %First Business Bank  Milwaukee
    
    
    12,724
    
    
    
    12.80
    
    
    
    3,977
    
    
    
    4.00
    
    
    
    5,965
    
    
    
    6.00Tier 1 capital
(to average assets)Consolidated
    
    $
    60,959
    
    
    
    5.59
    %
    
    $
    43,588
    
    
    
    4.00
    %
    
    
    N/A
    
    
    
    N/AFirst Business Bank
    
    
    85,846
    
    
    
    9.28
    
    
    
    36,986
    
    
    
    4.00
    
    
    $
    46,232
    
    
    
    5.00
    %First Business Bank  Milwaukee
    
    
    12,724
    
    
    
    7.75
    
    
    
    6,571
    
    
    
    4.00
    
    
    
    8,213
    
    
    
    5.00
 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, 2009Total capital
(to risk-weighted assets)Consolidated
    
    $
    110,513
    
    
    
    12.15
    %
    
    $
    72,772
    
    
    
    8.00
    %
    
    
    N/A
    
    
    
    N/AFirst Business Bank
    
    
    94,251
    
    
    
    11.62
    
    
    
    64,906
    
    
    
    8.00
    
    
    $
    81,132
    
    
    
    10.00
    %First Business Bank  Milwaukee
    
    
    14,246
    
    
    
    14.69
    
    
    
    7,757
    
    
    
    8.00
    
    
    
    9,696
    
    
    
    10.00Tier 1 capital
(to risk-weighted assets)Consolidated
    
    $
    60,109
    
    
    
    6.61
    %
    
    $
    36,386
    
    
    
    4.00
    %
    
    
    N/A
    
    
    
    N/AFirst Business Bank
    
    
    84,082
    
    
    
    10.36
    
    
    
    32,453
    
    
    
    4.00
    
    
    $
    48,679
    
    
    
    6.00
    %First Business Bank  Milwaukee
    
    
    13,027
    
    
    
    13.44
    
    
    
    3,878
    
    
    
    4.00
    
    
    
    5,818
    
    
    
    6.00Tier 1 capital
(to average assets)Consolidated
    
    $
    60,109
    
    
    
    5.53
    %
    
    $
    43,485
    
    
    
    4.00
    %
    
    
    N/A
    
    
    
    N/AFirst Business Bank
    
    
    84,082
    
    
    
    9.08
    
    
    
    37,042
    
    
    
    4.00
    
    
    $
    46,302
    
    
    
    5.00
    %First Business Bank  Milwaukee
    
    
    13,027
    
    
    
    8.13
    
    
    
    6,406
    
    
    
    4.00
    
    
    
    8,007
    
    
    
    5.00
  33




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##### 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




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##### Table of Contents



Part II. Other Information
 
 Item 1.
    
    - Legal Proceedings
  
 Item 1A.
    
    - Risk Factors
  
 Item 2.
    
    - Unregistered Sales of Equity Securities and Use of Proceeds
 (a)
 (b)
 (c)
 ApproximateTotal Number of
    
    
    Dollar Value ofShares Purchased
    
    
    Shares that MayTotal
    
    
    
    
    
    
    as Part of
    
    
    Yet BeNumber of
    
    
    
    
    
    
    Publicly
    
    
    Purchased UnderShares
    
    
    Average Price Paid
    
    
    Announced Plans
    
    
    the Plans orPeriod
    
    Purchased(1)
    
    
    Per Share
    
    
    or Programs
    
    
    Programs(2)January 1  January 31, 2010
    
    
    691
    
    
    $
    9.76
    
    
    
    
    
    
    $
    177,150February 1  February 28, 2010
    
    
    474
    
    
    
    10.15
    
    
    
    
    
    
    
    177,150March 1  March 31, 2010
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    177,150
 (1)
    
    The shares in this column represent the 1,165 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, 2010.(2)
    
    On November 20, 2007, the Corporation publicly announced a stock repurchase program
whereby the Corporation would repurchase up to approximately $1,000,000 of the
Corporations outstanding stock. As of March 31, 2010, 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.
    
    - Submission of Matters to a Vote of Security Holders
   35




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##### Table of Contents



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.
 
 Signatures
  FIRST BUSINESS FINANCIAL
SERVICES, INC.April 30, 2010
    /s/ Corey A. ChambasCorey A. ChambasChief Executive OfficerApril 30, 2010
    /s/ James F. RopellaJames F. RopellaChief Financial Officer  36




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##### Table of Contents



FIRST BUSINESS FINANCIAL SERVICES, INC.
Exhibit Index to Quarterly Report on Form 10-Q
 Exhibit Number
 31.1
    
    
    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
  37