UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
 For the quarterly period ended June 30, 2008
 OR
 o
    
    Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 Commission file number 000-51028
 FIRST BUSINESS FINANCIAL SERVICES, INC.
  Wisconsin
    
    39-1576570(State or jurisdiction of incorporation or organization)
    
    (I.R.S. Employer Identification No.)401 Charmany Drive Madison, WI
    
    53719(Address of Principal Executive Offices)
    
    (Zip Code)
 
   þ o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer o
    
    Smaller reporting company þ(Do not check if a smaller reporting company)
  o þ




---



##### 



2




---



##### 



FIRST BUSINESS FINANCIAL SERVICES, INC.
INDEX  FORM 10-Q
 PagePART I. FINANCIAL INFORMATIONItem 1. Financial Statements (Unaudited)Consolidated Balance Sheets as of June 30, 2008 and December 31, 2007
    
    4Consolidated Statements of Income for the Three Months and Six Months Ended June 30, 2008 and 2007
    
    5Consolidated Statements of Changes in Stockholders Equity and Comprehensive Income for the Six Months Ended June 30, 2008 and 2007
    
    6Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2008 and 2007
    
    7Notes to Unaudited Consolidated Financial Statements
    
    8Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    17Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    32Item 4T. Controls and Procedures
    
    32PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    33Item 1A. Risk Factors
    
    33Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    37Item 3. Defaults upon Senior Securities
    
    37Item 4. Submission of Matters to a Vote of Security Holders
    
    37Item 5. Other information
    
    37Item 6. Exhibits
    
    37SIGNATURES
    
    38
  3




---



##### 



PART I. Financial Information
 
 Item 1. Financial Statements
 First Business Financial Services, Inc.
 
 Consolidated Balance Sheets
 (Unaudited)June 30,
    
    
    December 31,2008
    
    
    2007(In Thousands, Except Share Data)AssetsCash and due from banks
    
    $
    20,824
    
    
    $
    17,421Short-term investments
    
    
    18
    
    
    
    203Cash and cash equivalents
    
    
    20,842
    
    
    
    17,624Securities available-for-sale, at fair value
    
    
    104,076
    
    
    
    97,378Loans and leases receivable, net of allowance for loan and lease losses of $10,723 and
$9,854, respectively
    
    
    820,761
    
    
    
    771,633Leasehold improvements and equipment, net
    
    
    1,506
    
    
    
    1,546Foreclosed properties
    
    
    3,896
    
    
    
    660Cash surrender value of bank-owned life insurance
    
    
    15,114
    
    
    
    14,757Investment in Federal Home Loan Bank stock, at cost
    
    
    2,367
    
    
    
    2,367Goodwill and other intangibles
    
    
    2,774
    
    
    
    2,787Accrued interest receivable and other assets
    
    
    10,607
    
    
    
    9,686Total assets
    
    $
    981,943
    
    
    $
    918,438Liabilities and Stockholders EquityDeposits
    
    $
    833,956
    
    
    $
    776,060Federal Home Loan Bank and other borrowings
    
    
    84,281
    
    
    
    81,986Accrued interest payable and other liabilities
    
    
    12,976
    
    
    
    11,840Total liabilities
    
    
    931,213
    
    
    
    869,886Commitments and contingenciesStockholders equity:Preferred stock, $10 par value, 10,000 Series A shares and 10,000 Series B shares
authorized, none issued or outstandingCommon stock, $0.01 par value, 8,000,000 shares authorized, 2,581,349 and 2,576,849
shares issued, 2,512,908 and 2,509,213 outstanding in 2008 and 2007, respectively
    
    
    26
    
    
    
    26Additional paid-in capital
    
    
    23,745
    
    
    
    23,462Retained earnings
    
    
    28,321
    
    
    
    26,836Accumulated other comprehensive income (loss)
    
    
    25
    
    
    
    (399
    )Treasury stock (68,441 and 67,636 shares in 2008 and 2007, respectively), at cost
    
    
    (1,387
    )
    
    
    (1,373
    )Total stockholders equity
    
    
    50,730
    
    
    
    48,552Total liabilities and stockholders equity
    
    $
    981,943
    
    
    $
    918,438
  4




---



##### 



First Business Financial Services, Inc.
 
 Consolidated Statements of Income (Unaudited)
 For the Three Months Ended
    
    
    For the Six Months Ended,June 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(In Thousands, Except Share Data)Interest income:Loans and leases
    
    $
    13,586
    
    
    $
    13,407
    
    
    $
    27,581
    
    
    $
    26,100Securities income, taxable
    
    
    1,123
    
    
    
    1,044
    
    
    
    2,239
    
    
    
    2,130Short-term investments
    
    
    17
    
    
    
    37
    
    
    
    59
    
    
    
    74Total interest income
    
    
    14,726
    
    
    
    14,488
    
    
    
    29,879
    
    
    
    28,304Interest expense:Deposits
    
    
    7,203
    
    
    
    7,914
    
    
    
    15,229
    
    
    
    15,498Notes payable and other borrowings
    
    
    871
    
    
    
    936
    
    
    
    1,936
    
    
    
    1,787Total interest expense
    
    
    8,074
    
    
    
    8,850
    
    
    
    17,165
    
    
    
    17,285Net interest income
    
    
    6,652
    
    
    
    5,638
    
    
    
    12,714
    
    
    
    11,019Provision for loan and lease losses
    
    
    743
    
    
    
    701
    
    
    
    1,296
    
    
    
    1,277Net interest income after provision for loan and lease
losses
    
    
    5,909
    
    
    
    4,937
    
    
    
    11,418
    
    
    
    9,742Non-interest income:Trust and investment services income
    
    
    539
    
    
    
    500
    
    
    
    1,021
    
    
    
    891Service charges on deposits
    
    
    249
    
    
    
    167
    
    
    
    459
    
    
    
    347Increase in cash surrender value of bank-owned life insurance
    
    
    180
    
    
    
    177
    
    
    
    357
    
    
    
    340Loan fees
    
    
    159
    
    
    
    195
    
    
    
    294
    
    
    
    338Credit, merchant and debit card fees
    
    
    64
    
    
    
    52
    
    
    
    109
    
    
    
    103Other
    
    
    76
    
    
    
    66
    
    
    
    114
    
    
    
    139Total non-interest income
    
    
    1,267
    
    
    
    1,157
    
    
    
    2,354
    
    
    
    2,158Non-interest expense:Compensation
    
    
    3,225
    
    
    
    3,055
    
    
    
    6,584
    
    
    
    5,965Occupancy
    
    
    319
    
    
    
    259
    
    
    
    649
    
    
    
    521Equipment
    
    
    148
    
    
    
    115
    
    
    
    304
    
    
    
    237Data processing
    
    
    256
    
    
    
    252
    
    
    
    530
    
    
    
    496Marketing
    
    
    212
    
    
    
    248
    
    
    
    476
    
    
    
    528Professional fees
    
    
    578
    
    
    
    308
    
    
    
    953
    
    
    
    763Other
    
    
    700
    
    
    
    550
    
    
    
    1,283
    
    
    
    1,153Total non-interest expense
    
    
    5,438
    
    
    
    4,787
    
    
    
    10,779
    
    
    
    9,663Income before income tax expense
    
    
    1,738
    
    
    
    1,307
    
    
    
    2,993
    
    
    
    2,237Income tax expense
    
    
    670
    
    
    
    448
    
    
    
    1,156
    
    
    
    780Net income
    
    $
    1,068
    
    
    $
    859
    
    
    $
    1,837
    
    
    $
    1,457Earnings per share:Basic
    
    $
    0.44
    
    
    $
    0.35
    
    
    $
    0.76
    
    
    $
    0.59Diluted
    
    
    0.44
    
    
    
    0.35
    
    
    
    0.76
    
    
    
    0.59Dividends declared per share
    
    
    0.07
    
    
    
    0.065
    
    
    
    0.14
    
    
    
    0.13
  5




---



##### 



First Business Financial Services, Inc.
 
 Consolidated Statements of Changes in Stockholders Equity and Comprehensive Income (Unaudited)
 AccumulatedAdditional
    
    
    
    
    
    
    otherCommon
    
    
    paid-in
    
    
    Retained
    
    
    comprehensive
    
    
    Treasurystock
    
    
    capital
    
    
    earnings
    
    
    loss
    
    
    stock
    
    
    Total(In Thousands, Except Share Data)Balance at December 31, 2006
    
    $
    25
    
    
    $
    23,029
    
    
    $
    24,237
    
    
    $
    (1,005
    )
    
    $
    (530
    )
    
    $
    45,756Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    1,457
    
    
    
    
    
    
    
    
    
    
    
    1,457Unrealized securities
losses arising during
the period
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (563
    )
    
    
    
    
    
    
    (563
    )Unrealized derivative
gains arising during
the period
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    2Reclassification
adjustment for
realized losses on
derivatives
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    1Income tax effect
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    194
    
    
    
    
    
    
    
    194Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,091Share-based compensation  restricted
shares
    
    
    
    
    
    
    143
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    143Cash dividends ($0.13 per share)
    
    
    
    
    
    
    
    
    
    
    (325
    )
    
    
    
    
    
    
    
    
    
    
    (325
    )Treasury stock purchased (467 shares)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10
    )
    
    
    (10
    )Balance at June 30, 2007
    
    $
    25
    
    
    $
    23,172
    
    
    $
    25,369
    
    
    $
    (1,371
    )
    
    $
    (540
    )
    
    $
    46,655
 AccumulatedAdditional
    
    
    
    
    
    
    otherCommon
    
    
    paid-in
    
    
    Retained
    
    
    comprehensive
    
    
    Treasurystock
    
    
    capital
    
    
    earnings
    
    
    income loss
    
    
    stock
    
    
    Total(In Thousands, Except Share Data)Balance at December 31, 2007
    
    $
    26
    
    
    $
    23,462
    
    
    $
    26,836
    
    
    $
    (399
    )
    
    $
    (1,373
    )
    
    $
    48,552Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    1,837
    
    
    
    
    
    
    
    
    
    
    
    1,837Unrealized securities
gains arising during
the period
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    642
    
    
    
    
    
    
    
    642Unrealized derivative
losses arising during
the period
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3
    )
    
    
    
    
    
    
    (3
    )Reclassification
adjustment for
realized losses on
derivatives
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6
    
    
    
    
    
    
    
    6Income tax effect
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (221
    )
    
    
    
    
    
    
    (221
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,261Share-based compensation  restricted
shares
    
    
    
    
    
    
    283
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    283Cash dividends ($0.14 per share)
    
    
    
    
    
    
    
    
    
    
    (352
    )
    
    
    
    
    
    
    
    
    
    
    (352
    )Treasury stock purchased (805 shares)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (14
    )
    
    
    (14
    )Balance at June 30, 2008
    
    $
    26
    
    
    $
    23,745
    
    
    $
    28,321
    
    
    $
    25
    
    
    $
    (1,387
    )
    
    $
    50,730
  6




---



##### 



First Business Financial Services, Inc.
 
 Consolidated Statements of Cash Flows (Unaudited)
 For the Six Months EndedJune 30,2008
    
    
    2007(In Thousands)Operating activitiesNet income
    
    $
    1,837
    
    
    $
    1,457Adjustments to reconcile net income to net cash provided by
operating activities:Deferred income taxes, net
    
    
    (329
    )
    
    
    (740
    )Provision for loan and lease losses
    
    
    1,296
    
    
    
    1,277Depreciation, amortization and accretion, net
    
    
    260
    
    
    
    239Share-based compensation
    
    
    283
    
    
    
    143Increase in cash surrender value of bank-owned life insurance
    
    
    (357
    )
    
    
    (340
    )Origination of loans for sale
    
    
    (586
    )
    
    
    (1,340
    )Sale of loans originated for sale
    
    
    588
    
    
    
    1,346Gain on sale of loans originated for sale
    
    
    (2
    )
    
    
    (6
    )Loss on sale of foreclosed property
    
    
    5
    
    
    
    Increase in accrued interest receivable and other assets
    
    
    (748
    )
    
    
    (1,049
    )Increase in accrued interest payable and other liabilities
    
    
    1,126
    
    
    
    1,088Net cash provided by operating activities
    
    
    3,373
    
    
    
    2,075Investing activitiesProceeds from maturities of available-for-sale securities
    
    
    15,075
    
    
    
    10,244Purchases of available-for-sale securities
    
    
    (21,134
    )
    
    
    (1,001
    )Proceeds from sale of foreclosed property
    
    
    655
    
    
    
    Purchases of FHLB stock
    
    
    
    
    
    
    (289
    )Net increase in loans and leases
    
    
    (54,321
    )
    
    
    (63,760
    )Purchases of leasehold improvements and equipment, net
    
    
    (268
    )
    
    
    (256
    )Purchase of bank-owned life insurance
    
    
    
    
    
    
    (590
    )Net cash used in investing activities
    
    
    (59,993
    )
    
    
    (55,652
    )Financing activitiesNet increase in deposits
    
    
    57,896
    
    
    
    96,229Net decrease in FHLB line of credit
    
    
    
    
    
    
    (17,048
    )Repayment of FHLB advances
    
    
    (6,005
    )
    
    
    (5
    )Net increase (decrease) in short-term borrowed funds
    
    
    300
    
    
    
    (30,196
    )Proceeds from other borrowings
    
    
    8,000
    
    
    
    Cash dividends paid
    
    
    (339
    )
    
    
    (312
    )Purchase of treasury stock
    
    
    (14
    )
    
    
    (10
    )Net cash provided by financing activities
    
    
    59,838
    
    
    
    48,658Net increase (decrease) in cash and cash equivalents
    
    
    3,218
    
    
    
    (4,919
    )Cash and cash equivalents at the beginning of the period
    
    
    17,624
    
    
    
    19,461Cash and cash equivalents at the end of the period
    
    $
    20,842
    
    
    $
    14,542Supplementary cash flow informationInterest paid on deposits and borrowings
    
    $
    16,487
    
    
    $
    16,194Income taxes paid
    
    
    267
    
    
    
    1,783Transfer to foreclosed properties
    
    
    3,896
    
    
    
    660
  7




---



##### 



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




---



##### 



Derivative Instruments and Hedging Activities. Disclosures about Derivative Instruments and Hedging Activities  an
Amendment of Statement No. 133
 Instruments Granted in Share-Based Payment Transactions as Participating Securities Determining Whether Instruments Granted in
Share-Based Payment Transactions are Participating Securities Earnings Per Share.
 Note 4  Share-Based Compensation.
  Stock Options
  9




---



##### 



WeightedAverageRemainingWeighted
    
    ContractualOptions
    
    Average Price
    
    Life (Years)Outstanding at December 31, 2007
    
    
    159,540
    
    
    $
    22.10
    
    
    
    5.65Granted
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    Forfeited
    
    
    (2,250
    )
    
    
    24.55Outstanding at June 30, 2008
    
    
    157,290
    
    
    
    22.07
    
    
    
    5.17Options exercisable at June 30, 2008
    
    
    142,012
 Restricted Shares
  WeightedNumber of
    
    AverageRestricted
    
    Grant-DateShares
    
    Fair ValueNonvested balance as of December 31, 2007
    
    
    91,379
    
    
    $
    21.16Granted
    
    
    4,500
    
    
    
    17.34Vested
    
    
    (9,466
    )
    
    
    22.62Forfeited
    
    
    
    
    
    
    Nonvested balance as of June 30, 2008
    
    
    86,413
    
    
    
    20.80
  Note 5  Earnings Per Share.
  10




---



##### 



For the Three Months
    
    
    For the Six MonthsEnded June 30,
    
    
    Ended June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Income available to common
stockholders
    
    $
    1,067,792
    
    
    $
    858,532
    
    
    $
    1,837,419
    
    
    $
    1,457,164Basic average shares
    
    
    2,426,093
    
    
    
    2,455,156
    
    
    
    2,424,775
    
    
    
    2,454,117Dilutive effect of share-based awards
    
    
    6,288
    
    
    
    6,611
    
    
    
    3,095
    
    
    
    7,329Dilutive average shares
    
    
    2,432,381
    
    
    
    2,461,767
    
    
    
    2,427,870
    
    
    
    2,461,446Earnings per share:Basic
    
    $
    0.44
    
    
    $
    0.35
    
    
    $
    0.76
    
    
    $
    0.59Diluted
    
    $
    0.44
    
    
    $
    0.35
    
    
    $
    0.76
    
    
    $
    0.59
 Note 6  Shareholder Rights Plan.
  Note 7  Securities.
  As of June 30, 2008Gross
    
    
    GrossAmortized
    
    
    unrealized
    
    
    unrealized
    
    
    Estimatedcost
    
    
    holding gains
    
    
    holdinglosses
    
    
    fair value(In Thousands)Securities available-for-saleCollateralized mortgage
obligations  government
agencies
    
    $
    70,017
    
    
    $
    585
    
    
    $
    (361
    )
    
    $
    70,241Collateralized mortgage
obligations 
government-sponsored
enterprises
    
    
    34,010
    
    
    
    41
    
    
    
    (216
    )
    
    
    33,835$
    104,027
    
    
    $
    626
    
    
    $
    (577
    )
    
    $
    104,076
  11




---



##### 



As of December 31, 2007Gross
    
    
    GrossAmortized
    
    
    unrealized
    
    
    unrealized
    
    
    Estimatedcost
    
    
    holding gains
    
    
    holding losses
    
    
    fair value(In Thousands)U.S. Government
corporations and
agencies
    
    $
    1,500
    
    
    $
    
    
    
    $
    (3
    )
    
    $
    1,497Municipals
    
    
    85
    
    
    
    
    
    
    
    
    
    
    
    85Collateralized
mortgage obligations 
government agencies
    
    
    52,755
    
    
    
    282
    
    
    
    (379
    )
    
    
    52,658Collateralized
mortgage obligations
 government-sponsored
enterprises
    
    
    43,631
    
    
    
    2
    
    
    
    (495
    )
    
    
    43,138$
    97,971
    
    
    $
    284
    
    
    $
    (877
    )
    
    $
    97,378
   As of June 30, 2008Less than 12 months
    
    
    12 months or longer
    
    
    TotalUnrealized
    
    
    
    
    
    
    Unrealized
    
    
    
    
    
    
    UnrealizedFair value
    
    
    losses
    
    
    Fair value
    
    
    losses
    
    
    Fair value
    
    
    losses(In Thousands)Collateralized
mortgage obligations 
government agencies
    
    $
    21,608
    
    
    $
    361
    
    
    $
    
    
    
    $
    
    
    
    $
    21,608
    
    
    $
    361Collateralized
mortgage obligations
 government-sponsored
enterprises
    
    
    23,926
    
    
    
    210
    
    
    
    249
    
    
    
    6
    
    
    
    24,175
    
    
    
    216$
    45,534
    
    
    $
    571
    
    
    $
    249
    
    
    $
    6
    
    
    $
    45,783
    
    
    $
    577
 12




---



##### 



As of December 31, 2007Less than 12 months
    
    
    12 months or longer
    
    
    TotalUnrealized
    
    
    
    
    
    
    Unrealized
    
    
    
    
    
    
    UnrealizedFair value
    
    
    losses
    
    
    Fair value
    
    
    losses
    
    
    Fair value
    
    
    losses(In Thousands)U.S. Government
corporations and
agencies
    
    $
    
    
    
    $
    
    
    
    $
    1,497
    
    
    $
    3
    
    
    $
    1,497
    
    
    $
    3Collateralized
mortgage obligations 
government agencies
    
    
    13,054
    
    
    
    374
    
    
    
    579
    
    
    
    5
    
    
    
    13,633
    
    
    
    379Collateralized
mortgage obligations 
government-sponsored
enterprises
    
    
    6,463
    
    
    
    66
    
    
    
    35,317
    
    
    
    429
    
    
    
    41,780
    
    
    
    495$
    19,517
    
    
    $
    440
    
    
    $
    37,393
    
    
    $
    437
    
    
    $
    56,910
    
    
    $
    877
   Note 8 Loans, Leases and Allowance for Loan and Lease Losses.
  June 30,
    
    
    December 31,2008
    
    
    2007(In Thousands)First mortgage loans:Commercial real estate
    
    $
    373,449
    
    
    $
    336,153Construction
    
    
    78,536
    
    
    
    90,545Multi-family
    
    
    41,663
    
    
    
    41,8211-4 family
    
    
    49,401
    
    
    
    48,437543,049
    
    
    
    516,956Commercial and industrial loans
    
    
    235,058
    
    
    
    213,786Direct financing leases, net
    
    
    28,706
    
    
    
    29,383Home equity loans
    
    
    10,316
    
    
    
    9,784Credit card and other
    
    
    14,798
    
    
    
    11,725831,927
    
    
    
    781,634Less:Allowance for loan and lease losses
    
    
    10,723
    
    
    
    9,854Deferred loan fees
    
    
    443
    
    
    
    147Loans and lease receivables, net
    
    $
    820,761
    
    
    $
    771,633
 13




---



##### 



SixMonths Ended
    
    
    Year EndedJune 30,
    
    
    December 31,2008
    
    
    2007(In Thousands)Allowance at beginning of period
    
    $
    9,854
    
    
    $
    8,296Charge-offs:Commercial real estate and other mortgage
    
    
    (407
    )
    
    
    (571
    )Commercial
    
    
    (24
    )
    
    
    (778
    )Lease
    
    
    
    
    
    
    (25
    )Consumer
    
    
    
    
    
    
    Total charge-offs
    
    
    (431
    )
    
    
    (1,374
    )Recoveries:Commercial real estate and other mortgage
    
    
    3
    
    
    
    5Commercial
    
    
    1
    
    
    
    23Lease
    
    
    
    
    
    
    Consumer
    
    
    
    
    
    
    Total recoveries
    
    
    4
    
    
    
    28Net charge-offs
    
    
    (427
    )
    
    
    (1,346
    )Provision for loan and lease losses
    
    
    1,296
    
    
    
    2,904Allowance at end of period
    
    $
    10,723
    
    
    $
    9,854Allowance to gross loans and leases
    
    
    1.29
    %
    
    
    1.26
    %
 Note 9  Deposits.
  June 30, 2008
    
    
    December 31, 2007Weighted
    
    
    
    
    
    
    WeightedBalance
    
    
    average rate
    
    
    Balance
    
    
    average rate(In Thousands)Transaction accounts:Demand deposits
    
    $
    42,865
    
    
    
    0.00
    %
    
    $
    47,124
    
    
    
    0.00
    %Negotiable order of
withdrawal (NOW)
accounts
    
    
    65,244
    
    
    
    1.98
    
    
    
    65,035
    
    
    
    4.22108,109
    
    
    
    
    
    
    
    112,159Money market accounts
    
    
    134,967
    
    
    
    2.13
    
    
    
    162,585
    
    
    
    4.49Certificates of deposit
    
    
    590,880
    
    
    
    4.75
    
    
    
    501,316
    
    
    
    5.00$
    833,956
    
    
    
    
    
    
    $
    776,060
 14




---



##### 



Note 10  Borrowings.
  June 30, 2008
    
    
    December 31, 2007Weighted
    
    
    Weighted
    
    
    
    
    
    
    Weighted
    
    
    Weightedaverage
    
    
    average
    
    
    
    
    
    
    average
    
    
    averageBalance
    
    
    balance
    
    
    rate
    
    
    Balance
    
    
    balance
    
    
    rate(In Thousands)Fed funds purchased and
securities sold under
agreements to repurchase
    
    $
    16,750
    
    
    $
    12,610
    
    
    
    2.97
    %
    
    $
    14,250
    
    
    $
    10,394
    
    
    
    5.35
    %FHLB advances
    
    
    28,521
    
    
    
    33,224
    
    
    
    4.76
    
    
    
    34,526
    
    
    
    25,776
    
    
    
    4.87Line of credit
    
    
    10
    
    
    
    2,929
    
    
    
    4.85
    
    
    
    2,210
    
    
    
    2,556
    
    
    
    7.20Subordinated notes payable
    
    
    39,000
    
    
    
    31,202
    
    
    
    5.69
    
    
    
    31,000
    
    
    
    23,630
    
    
    
    7.73Other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    25
    
    
    
    7.00$
    84,281
    
    
    $
    79,965
    
    
    
    4.84
    
    
    $
    81,986
    
    
    $
    62,381
    
    
    
    6.13Short-term borrowings
    
    $
    26,770
    
    
    
    
    
    
    
    
    
    
    $
    32,470Long-term borrowings
    
    
    57,511
    
    
    
    
    
    
    
    
    
    
    
    49,516$
    84,281
    
    
    
    
    
    
    
    
    
    
    $
    81,986
  Note 11  Fair Value Disclosures (SFAS 157 Disclosure)
   15




---



##### 



Quoted Prices in
    
    SignificantActive Markets
    
    Other
    
    Significantfor Identical
    
    Observable
    
    UnobservableAssets
    
    Inputs
    
    Inputs(Level 1)
    
    (Level 2)
    
    (Level 3)
    
    Total(In Thousands)Assets:Securities available for sale
    
    $
    
    
    
    $
    104,076
    
    
    $
    
    
    
    $
    104,076Liabilities:Interest rate swap
    
    $
    
    
    
    $
    7
    
    
    $
    
    
    
    $
    7
  QuotedPrices inActive
    
    SignificantMarkets for
    
    Other
    
    SignificantBalance at
    
    Identical
    
    Observable
    
    Unobservable
    
    TotalJune 30,
    
    Assets
    
    Inputs
    
    Inputs
    
    Gains2008
    
    (Level 1)
    
    (Level 2)
    
    (Level 3)
    
    (Losses)(In Thousands)Impaired loans
    
    $
    3,400
    
    
    $
    
    
    
    $
    1,936
    
    
    $
    1,464
    
    
    $
    
  16




---



##### 



Item 2.  Managements Discussion and Analysis of Financial Condition and Results of Operations
 General
  Item 1A. Risk Factors
  Overview
  Results of Operations
 General.
 17




---



##### 



Top Line Revenue
  For the Three Months Ended
    
    
    For the Six Months EndedJune 30,
    
    
    June 30,2008
    
    
    2007
    
    
    Change
    
    
    2008
    
    
    2007
    
    
    Change(In Thousands)Net interest income
    
    $
    6,652
    
    
    $
    5,638
    
    
    
    18.0
    %
    
    $
    12,714
    
    
    $
    11,019
    
    
    
    15.4
    %Non-interest income
    
    
    1,267
    
    
    
    1,157
    
    
    
    9.5
    
    
    
    2,354
    
    
    
    2,158
    
    
    
    9.1Total top line revenue
    
    $
    7,919
    
    
    $
    6,795
    
    
    
    16.5
    
    
    $
    15,068
    
    
    $
    13,177
    
    
    
    14.4
 Adjusted Net Income
  18




---



##### 



For the Three Months Ended
    
    
    For the Six Months EndedJune 30,
    
    
    June 30,2008
    
    
    2007
    
    
    Change
    
    
    2008
    
    
    2007
    
    
    Change(In Thousands)Net income,
presented under US
GAAP
    
    $
    1,068
    
    
    $
    859
    
    
    
    24.3
    %
    
    $
    1,837
    
    
    $
    1,457
    
    
    
    26.1
    %Add back:Provision for
loan and lease
losses, after tax
    
    
    452
    
    
    
    426
    
    
    
    6.1
    
    
    
    788
    
    
    
    775
    
    
    
    1.7Less:Net charge-offs
(recoveries),
after tax
    
    
    127
    
    
    
    
    
    
    
    
    *
    
    
    260
    
    
    
    (15
    )
    
    
    
    *Adjusted net income
    
    $
    1,393
    
    
    $
    1,285
    
    
    
    8.4
    
    
    $
    2,365
    
    
    $
    2,247
    
    
    
    5.3
 
 *
    
    Not meaningful Return on Equity
  19




---



##### 



Net Interest Income.
 For the three months ended June 30, 2008
    
    
    For the six months ended June 30, 2008Rate/
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Rate/Rate
    
    
    Volume
    
    
    Volume
    
    
    Net
    
    
    Rate
    
    
    Volume
    
    
    Volume
    
    
    Net(In Thousands)Interest-Earning AssetsCommercial real estate
and other mortgage
loans
    
    $
    (1,187
    )
    
    $
    1,451
    
    
    $
    (202
    )
    
    $
    62
    
    
    $
    (1,828
    )
    
    $
    3,138
    
    
    $
    (346
    )
    
    $
    964Commercial loans
    
    
    (897
    )
    
    
    830
    
    
    
    (167
    )
    
    
    (234
    )
    
    
    (1,398
    )
    
    
    1,503
    
    
    
    (242
    )
    
    
    (137
    )Leases
    
    
    
    
    
    
    79
    
    
    
    
    
    
    
    79
    
    
    
    (22
    )
    
    
    177
    
    
    
    (5
    )
    
    
    150Consumer loans
    
    
    (7
    )
    
    
    326
    
    
    
    (47
    )
    
    
    272
    
    
    
    (18
    )
    
    
    631
    
    
    
    (109
    )
    
    
    504Total loans and
leases receivable
    
    
    (2,091
    )
    
    
    2,686
    
    
    
    (416
    )
    
    
    179
    
    
    
    (3,266
    )
    
    
    5,449
    
    
    
    (702
    )
    
    
    1,481Mortgage-related
securities
    
    
    14
    
    
    
    77
    
    
    
    1
    
    
    
    92
    
    
    
    46
    
    
    
    81
    
    
    
    2
    
    
    
    129Investment securities
    
    
    14
    
    
    
    (14
    )
    
    
    (13
    )
    
    
    (13
    )
    
    
    1
    
    
    
    (20
    )
    
    
    (1
    )
    
    
    (20
    )Other investments
    
    
    (14
    )
    
    
    1
    
    
    
    (1
    )
    
    
    (14
    )
    
    
    (30
    )
    
    
    4
    
    
    
    (4
    )
    
    
    (30
    )Fed funds sold and other
    
    
    (1
    )
    
    
    27
    
    
    
    (21
    )
    
    
    5
    
    
    
    (4
    )
    
    
    52
    
    
    
    (27
    )
    
    
    21Short-term investments
    
    
    (14
    )
    
    
    7
    
    
    
    (4
    )
    
    
    (11
    )
    
    
    (17
    )
    
    
    21
    
    
    
    (10
    )
    
    
    (6
    )Total net change in
income on
interest-earning
assets
    
    $
    (2,092
    )
    
    $
    2,784
    
    
    $
    (454
    )
    
    $
    238
    
    
    $
    (3,270
    )
    
    $
    5,587
    
    
    $
    (742
    )
    
    $
    1,575Interest-Bearing
LiabilitiesNOW accounts
    
    $
    (512
    )
    
    $
    (24
    )
    
    $
    16
    
    
    $
    (520
    )
    
    $
    (852
    )
    
    $
    (13
    )
    
    $
    7
    
    
    $
    (858
    )Money market
    
    
    (1,310
    )
    
    
    (306
    )
    
    
    203
    
    
    
    (1,413
    )
    
    
    (2,226
    )
    
    
    (528
    )
    
    
    288
    
    
    
    (2,466
    )Certificates
 regular
    
    
    (295
    )
    
    
    1,519
    
    
    
    (97
    )
    
    
    1,127
    
    
    
    (96
    )
    
    
    2,746
    
    
    
    (30
    )
    
    
    2,620Certificates
 large
    
    
    (150
    )
    
    
    339
    
    
    
    (94
    )
    
    
    95
    
    
    
    (188
    )
    
    
    763
    
    
    
    (140
    )
    
    
    435Total deposits
    
    
    (2,267
    )
    
    
    1,528
    
    
    
    28
    
    
    
    (711
    )
    
    
    (3,362
    )
    
    
    2,968
    
    
    
    125
    
    
    
    (269
    )FHLB advances
    
    
    (8
    )
    
    
    87
    
    
    
    (3
    )
    
    
    76
    
    
    
    (10
    )
    
    
    273
    
    
    
    (6
    )
    
    
    257Other borrowings
    
    
    (243
    )
    
    
    163
    
    
    
    (61
    )
    
    
    (141
    )
    
    
    (363
    )
    
    
    358
    
    
    
    (103
    )
    
    
    (108
    )Total net change in
expense on
interest-bearing
liabilities
    
    $
    (2,518
    )
    
    $
    1,778
    
    
    $
    (36
    )
    
    $
    (776
    )
    
    $
    (3,735
    )
    
    $
    3,599
    
    
    $
    16
    
    
    $
    (120
    )Net change in net
interest income
    
    $
    426
    
    
    $
    1,006
    
    
    $
    (418
    )
    
    $
    1,014
    
    
    $
    465
    
    
    $
    1,988
    
    
    $
    (758
    )
    
    $
    1,695
    20




---



##### 



21




---



##### 



22




---



##### 



Average Interest-Earning Assets, Average Interest-Bearing Liabilities and Interest Rate Spread.
 For the Three Months Ended June 30,2008
    
    
    2007Average
    
    
    
    
    
    
    Average
    
    
    Average
    
    
    
    
    
    
    Averagebalance
    
    
    Interest
    
    
    yield/cost
    
    
    balance
    
    
    Interest
    
    
    yield/cost(In Thousands)Interest-Earning AssetsCommercial real estate and other
mortgage loans(1)
    
    $
    547,544
    
    
    $
    8,596
    
    
    
    6.28
    %
    
    $
    467,957
    
    
    $
    8,534
    
    
    
    7.29
    %Commercial and industrial
loans(1)
    
    
    228,148
    
    
    
    4,217
    
    
    
    7.39
    
    
    
    192,297
    
    
    
    4,451
    
    
    
    9.26Leases
    
    
    28,433
    
    
    
    451
    
    
    
    6.34
    
    
    
    23,456
    
    
    
    372
    
    
    
    6.34Consumer loans
    
    
    23,333
    
    
    
    322
    
    
    
    5.52
    
    
    
    3,102
    
    
    
    50
    
    
    
    6.45Total loans and leases
receivable(1)
    
    
    827,458
    
    
    
    13,586
    
    
    
    6.57
    
    
    
    686,812
    
    
    
    13,407
    
    
    
    7.81Mortgage-related securities(2)
    
    
    99,038
    
    
    
    1,122
    
    
    
    4.53
    
    
    
    92,115
    
    
    
    1,030
    
    
    
    4.47Investment securities(2)
    
    
    58
    
    
    
    1
    
    
    
    5.62
    
    
    
    1,630
    
    
    
    14
    
    
    
    3.44Federal Home Loan Bank stock
    
    
    2,367
    
    
    
    
    
    
    
    0.00
    
    
    
    2,195
    
    
    
    14
    
    
    
    2.55Fed funds sold and other
    
    
    1,236
    
    
    
    6
    
    
    
    1.94
    
    
    
    44
    
    
    
    1
    
    
    
    4.97Short-term investments
    
    
    2,230
    
    
    
    11
    
    
    
    1.97
    
    
    
    1,715
    
    
    
    22
    
    
    
    5.13Total interest-earning assets
    
    
    932,387
    
    
    
    14,726
    
    
    
    6.32
    
    
    
    784,511
    
    
    
    14,488
    
    
    
    7.39Non-interest-earning assets
    
    
    31,128
    
    
    
    
    
    
    
    
    
    
    
    32,140Total assets
    
    $
    963,515
    
    
    
    
    
    
    
    
    
    
    $
    816,651Interest-Bearing LiabilitiesNOW accounts
    
    $
    68,133
    
    
    
    248
    
    
    
    1.46
    
    
    $
    70,343
    
    
    
    768
    
    
    
    4.37Money market
    
    
    144,380
    
    
    
    561
    
    
    
    1.55
    
    
    
    170,849
    
    
    
    1,974
    
    
    
    4.62Certificates
 regular
    
    
    497,298
    
    
    
    5,759
    
    
    
    4.63
    
    
    
    374,515
    
    
    
    4,632
    
    
    
    4.95Certificates
 large
    
    
    68,701
    
    
    
    635
    
    
    
    3.70
    
    
    
    42,213
    
    
    
    540
    
    
    
    5.12Total deposits
    
    
    778,512
    
    
    
    7,203
    
    
    
    3.70
    
    
    
    657,920
    
    
    
    7,914
    
    
    
    4.81FHLB advances
    
    
    29,654
    
    
    
    353
    
    
    
    4.76
    
    
    
    22,581
    
    
    
    277
    
    
    
    4.91Other borrowings
    
    
    48,012
    
    
    
    518
    
    
    
    4.32
    
    
    
    38,512
    
    
    
    659
    
    
    
    6.84Total interest-bearing liabilities
    
    
    856,178
    
    
    
    8,074
    
    
    
    3.77
    
    
    
    719,013
    
    
    
    8,850
    
    
    
    4.92Non-interest-bearing liabilities
    
    
    55,916
    
    
    
    
    
    
    
    
    
    
    
    50,667Total liabilities
    
    
    912,094
    
    
    
    
    
    
    
    
    
    
    
    769,680Stockholders equity
    
    
    51,421
    
    
    
    
    
    
    
    
    
    
    
    46,971Total liabilities and stockholders
equity
    
    $
    963,515
    
    
    
    
    
    
    
    
    
    
    $
    816,651Net interest income/interest rate spread
    
    
    
    
    
    $
    6,652
    
    
    
    2.55
    %
    
    
    
    
    
    $
    5,638
    
    
    
    2.47
    %Net interest-earning assets
    
    $
    76,209
    
    
    
    
    
    
    
    
    
    
    $
    65,498Net interest margin
    
    
    
    
    
    
    
    
    
    
    2.85
    %
    
    
    
    
    
    
    
    
    
    
    2.87
    %Average interest-earning assets to
average interest-bearing liabilities
    
    
    108.90
    %
    
    
    
    
    
    
    
    
    
    
    109.11
    %Return on average assets
    
    
    0.44
    
    
    
    
    
    
    
    
    
    
    
    0.42Return on average equity
    
    
    8.31
    
    
    
    
    
    
    
    
    
    
    
    7.31Average equity to average assets
    
    
    5.34
    
    
    
    
    
    
    
    
    
    
    
    5.75Non-interest expense to average assets
    
    
    2.26
    
    
    
    
    
    
    
    
    
    
    
    2.34
 
 (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




---



##### 



For the Six Months Ended June 30,2008
    
    
    2007Average
    
    
    
    
    
    
    Average
    
    
    Average
    
    
    
    
    
    
    Averagebalance
    
    
    Interest
    
    
    yield/cost
    
    
    balance
    
    
    Interest
    
    
    yield/cost(In Thousands)Interest-Earning AssetsCommercial real estate and other
mortgage loans(1)
    
    $
    540,145
    
    
    $
    17,530
    
    
    
    6.49
    %
    
    $
    454,119
    
    
    $
    16,566
    
    
    
    7.30
    %Commercial loans(1)
    
    
    222,966
    
    
    
    8,537
    
    
    
    7.66
    
    
    
    190,040
    
    
    
    8,674
    
    
    
    9.13Leases
    
    
    28,586
    
    
    
    907
    
    
    
    6.35
    
    
    
    23,180
    
    
    
    757
    
    
    
    6.53Consumer loans
    
    
    22,561
    
    
    
    607
    
    
    
    5.38
    
    
    
    3,167
    
    
    
    103
    
    
    
    6.50Total loans and leases
receivable(1)
    
    
    814,258
    
    
    
    27,581
    
    
    
    6.77
    
    
    
    670,506
    
    
    
    26,100
    
    
    
    7.79Mortgage-related securities(2)
    
    
    97,647
    
    
    
    2,229
    
    
    
    4.57
    
    
    
    94,028
    
    
    
    2,100
    
    
    
    4.47Investment securities(2)
    
    
    524
    
    
    
    10
    
    
    
    3.82
    
    
    
    1,641
    
    
    
    30
    
    
    
    3.66Federal Home Loan Bank stock
    
    
    2,367
    
    
    
    
    
    
    
    0.00
    
    
    
    2,110
    
    
    
    30
    
    
    
    2.84Fed funds sold and other
    
    
    2,088
    
    
    
    29
    
    
    
    2.78
    
    
    
    280
    
    
    
    8
    
    
    
    5.24Short-term investments
    
    
    2,356
    
    
    
    30
    
    
    
    2.55
    
    
    
    1,492
    
    
    
    36
    
    
    
    4.83Total interest-earning assets
    
    
    919,240
    
    
    
    29,879
    
    
    
    6.50
    
    
    
    770,057
    
    
    
    28,304
    
    
    
    7.35Non-interest-earning assets
    
    
    31,656
    
    
    
    
    
    
    
    
    
    
    
    31,914Total assets
    
    $
    950,896
    
    
    
    
    
    
    
    
    
    
    $
    801,971Interest-Bearing LiabilitiesNOW accounts
    
    $
    68,901
    
    
    
    682
    
    
    
    1.98
    
    
    $
    69,492
    
    
    
    1,540
    
    
    
    4.43Money market
    
    
    151,348
    
    
    
    1,613
    
    
    
    2.13
    
    
    
    173,860
    
    
    
    4,079
    
    
    
    4.69Certificates
 regular
    
    
    475,003
    
    
    
    11,481
    
    
    
    4.83
    
    
    
    362,639
    
    
    
    8,861
    
    
    
    4.89Certificates
 large
    
    
    70,061
    
    
    
    1,453
    
    
    
    4.15
    
    
    
    40,035
    
    
    
    1,018
    
    
    
    5.09Total deposits
    
    
    765,313
    
    
    
    15,229
    
    
    
    3.98
    
    
    
    646,026
    
    
    
    15,498
    
    
    
    4.80FHLB advances
    
    
    33,224
    
    
    
    791
    
    
    
    4.76
    
    
    
    21,991
    
    
    
    534
    
    
    
    4.86Other borrowings
    
    
    46,741
    
    
    
    1,145
    
    
    
    4.90
    
    
    
    36,351
    
    
    
    1,253
    
    
    
    6.89Total interest-bearing liabilities
    
    
    845,278
    
    
    
    17,165
    
    
    
    4.06
    
    
    
    704,368
    
    
    
    17,285
    
    
    
    4.91Non-interest-bearing liabilities
    
    
    55,077
    
    
    
    
    
    
    
    
    
    
    
    50,989Total liabilities
    
    
    900,355
    
    
    
    
    
    
    
    
    
    
    
    755,357Stockholders equity
    
    
    50,541
    
    
    
    
    
    
    
    
    
    
    
    46,614Total liabilities and stockholders
equity
    
    $
    950,896
    
    
    
    
    
    
    
    
    
    
    $
    801,971Net interest income/interest rate spread
    
    
    
    
    
    $
    12,714
    
    
    
    2.44
    %
    
    
    
    
    
    $
    11,019
    
    
    
    2.44
    %Net interest-earning assets
    
    $
    73,962
    
    
    
    
    
    
    
    
    
    
    $
    65,689Net interest margin
    
    
    
    
    
    
    
    
    
    
    2.77
    %
    
    
    
    
    
    
    
    
    
    
    2.86
    %Average interest-earning assets to
average interest-earning liabilities
    
    
    108.75
    %
    
    
    
    
    
    
    
    
    
    
    109.33
    %Return on average assets
    
    
    0.39
    
    
    
    
    
    
    
    
    
    
    
    0.36Return on average equity
    
    
    7.27
    
    
    
    
    
    
    
    
    
    
    
    6.25Average equity to average assets
    
    
    5.32
    
    
    
    
    
    
    
    
    
    
    
    5.81Non-interest expense to average assets
    
    
    2.27
    
    
    
    
    
    
    
    
    
    
    
    2.41
 
 (1)
    
    The average balances of loans and leases include non-performing loans and leases.
Interest income related to non-performing loans and leases is recognized when collected.(2)
    
    Includes amortized cost basis of assets held and available for sale. Provision for Loan and Lease Losses.
 24




---



##### 



Asset Quality
 Non-Interest Income.
  Non-Interest Expense.
 25




---



##### 



Income Taxes.
 Financial Condition
 General.
 Securities.
  26




---



##### 



Loans and Leases Receivable.
 Asset Quality
 Deposits.
 Borrowings.
 Asset Quality
 Non-performing Assets.
 27




---



##### 



June 30,
    
    
    December 31,2008
    
    
    2007(In Thousands)Non-accrual loans
    
    $
    6,679
    
    
    $
    8,805Non-accrual leases
    
    
    55
    
    
    
    59Total non-accrual loans and leases
    
    
    6,734
    
    
    
    8,864Foreclosed properties
    
    
    3,896
    
    
    
    660Total non-performing assets
    
    $
    10,630
    
    
    $
    9,524Performing troubled debt restructurings
    
    $
    
    
    
    $
    Total non-accrual loans and leases to total loans and leases
    
    
    0.81
    %
    
    
    1.13
    %Total non-performing assets to total assets
    
    
    1.08
    
    
    
    1.04Allowance for loan and lease losses to total loans and leases
    
    
    1.29
    
    
    
    1.26Allowance for loan and lease losses to non-accrual loans and leases
    
    
    159.24
    
    
    
    111.17
  As of and for
    
    
    As of and forthe Six Months
    
    
    the YearEnded
    
    
    EndedJune 30,
    
    
    December 31,2008
    
    
    2007(In Thousands)Impaired loans and leases with no impairment reserves required
    
    $
    4,962
    
    
    $
    6,500Impaired loans and leases with impairment reserves required
    
    
    1,772
    
    
    
    2,617Total impaired loans and leases
    
    
    6,734
    
    
    
    9,117Less:Impairment reserve (included in allowance for loan and lease
losses)
    
    
    818
    
    
    
    834Net impaired loans and leases
    
    $
    5,916
    
    
    $
    8,283Average impaired loans and leases
    
    $
    8,382
    
    
    $
    3,439Foregone interest income attributable to impaired loans and leases
    
    $
    384
    
    
    $
    365Interest income recognized on impaired loans and leases
    
    
    85
    
    
    
    41Net foregone interest income on impaired loans and leases
    
    $
    299
    
    
    $
    324
 28




---



##### 



For the Three Months Ended
    
    
    For the Six Months EndedJune 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(In Thousands)Allowance at beginning of period
    
    $
    10,188
    
    
    $
    8,896
    
    
    $
    9,854
    
    
    $
    8,296Charge-offs:Mortgage
    
    
    (184
    )
    
    
    
    
    
    
    (407
    )
    
    
    Commercial
    
    
    (24
    )
    
    
    
    
    
    
    (24
    )
    
    
    Lease
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Consumer
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total charge-offs
    
    
    (208
    )
    
    
    
    
    
    
    (431
    )
    
    
    Recoveries:Mortgage
    
    
    
    
    
    
    1
    
    
    
    3
    
    
    
    2Commercial
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    23Lease
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Consumer
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total recoveries
    
    
    
    
    
    
    1
    
    
    
    4
    
    
    
    25Net (charge-offs) recoveries
    
    
    (208
    )
    
    
    1
    
    
    
    (427
    )
    
    
    25Provision for loan and lease losses
    
    
    743
    
    
    
    701
    
    
    
    1,296
    
    
    
    1,277Allowance at end of period
    
    $
    10,723
    
    
    $
    9,598
    
    
    $
    10,723
    
    
    $
    9,598Allowance to average loans and leases
    
    
    1.30
    %
    
    
    1.40
    %
    
    
    1.32
    %
    
    
    1.43
    %
 Liquidity and Capital Resources
    29




---



##### 



30




---



##### 



Minimum Required to be WellCapitalized Under PromptMinimum Required for Capital
    
    Corrective ActionActual
    
    Adequacy Purposes
    
    RequirementsAmount
    
    Ratio
    
    Amount
    
    Ratio
    
    Amount
    
    Ratio(In Thousands)As of June 30, 2008Total capital
(to risk-weighted assets)Consolidated
    
    $
    97,802
    
    
    
    10.93
    %
    
    $
    71,556
    
    
    
    8.00
    %
    
    
    N/A
    
    
    
    N/AFirst Business Bank
    
    
    85,186
    
    
    
    10.71
    
    
    
    63,655
    
    
    
    8.00
    
    
    $
    79,568
    
    
    
    10.00
    %First Business Bank 
Milwaukee
    
    
    11,147
    
    
    
    11.48
    
    
    
    7,770
    
    
    
    8.00
    
    
    
    9,713
    
    
    
    10.00Tier 1 capital
(to risk-weighted assets)Consolidated
    
    $
    48,079
    
    
    
    5.38
    %
    
    $
    35,778
    
    
    
    4.00
    %
    
    
    N/A
    
    
    
    N/AFirst Business Bank
    
    
    76,272
    
    
    
    9.59
    
    
    
    31,827
    
    
    
    4.00
    
    
    $
    47,741
    
    
    
    6.00
    %First Business Bank 
Milwaukee
    
    
    9,926
    
    
    
    10.22
    
    
    
    3,885
    
    
    
    4.00
    
    
    
    5,828
    
    
    
    6.00Tier 1 capital
(to average assets)Consolidated
    
    $
    48,079
    
    
    
    5.01
    %
    
    $
    38,387
    
    
    
    4.00
    %
    
    
    N/A
    
    
    
    N/AFirst Business Bank
    
    
    76,272
    
    
    
    9.05
    
    
    
    33,698
    
    
    
    4.00
    
    
    $
    42,122
    
    
    
    5.00
    %First Business Bank 
Milwaukee
    
    
    9,926
    
    
    
    8.45
    
    
    
    4,701
    
    
    
    4.00
    
    
    
    5,877
    
    
    
    5.00
 Minimum Required to be WellCapitalized Under PromptMinimum Required for Capital
    
    Corrective ActionActual
    
    Adequacy Purposes
    
    RequirementsAmount
    
    Ratio
    
    Amount
    
    Ratio
    
    Amount
    
    Ratio(In Thousands)As of December 31, 2007Total capital
(to risk-weighted assets)Consolidated
    
    $
    87,018
    
    
    
    10.22
    %
    
    $
    68,119
    
    
    
    8.00
    %
    
    
    N/A
    
    
    
    N/AFirst Business Bank
    
    
    79,072
    
    
    
    10.45
    
    
    
    60,528
    
    
    
    8.00
    
    
    $
    75,660
    
    
    
    10.00
    %First Business Bank 
Milwaukee
    
    
    9,847
    
    
    
    10.26
    
    
    
    7,679
    
    
    
    8.00
    
    
    
    9,599
    
    
    
    10.00Tier 1 capital
(to risk-weighted assets)Consolidated
    
    $
    46,164
    
    
    
    5.42
    %
    
    $
    34,060
    
    
    
    4.00
    %
    
    
    N/A
    
    
    
    N/AFirst Business Bank
    
    
    71,097
    
    
    
    9.40
    
    
    
    30,264
    
    
    
    4.00
    
    
    $
    45,396
    
    
    
    6.00
    %First Business Bank 
Milwaukee
    
    
    8,639
    
    
    
    9.00
    
    
    
    3,840
    
    
    
    4.00
    
    
    
    5,759
    
    
    
    6.00Tier 1 capital
(to average assets)Consolidated
    
    $
    46,164
    
    
    
    5.12
    %
    
    $
    36,065
    
    
    
    4.00
    %
    
    
    N/A
    
    
    
    N/AFirst Business Bank
    
    
    71,097
    
    
    
    9.04
    
    
    
    31,459
    
    
    
    4.00
    
    
    $
    39,324
    
    
    
    5.00
    %First Business Bank 
Milwaukee
    
    
    8,639
    
    
    
    7.39
    
    
    
    4,678
    
    
    
    4.00
    
    
    
    5,848
    
    
    
    5.00
 31




---



##### 



Contractual Obligations and Off-balance Sheet Arrangements
  
 Item 3.  Quantitative and Qualitative Disclosures about Market Risk
     
 Item 4T.  Controls and Procedures
   32




---



##### 



Part II. Other Information
 
 Item 1.  Legal Proceedings
  
 Item 1A.
 Risk Factors
  Adverse changes in economic conditions, particularly a continuing or worsening slowdown in Dane,
Waukesha and Outagamie counties where our business is concentrated, could harm our business.
   Our commercial real estate loans involve higher principal amounts than other loans, and repayment
of these loans may be dependent on factors outside our control or the control of our borrowers.
  33




---



##### 



Our loan and lease loss allowance may not be adequate to cover actual losses.
  
    
    Current economic conditions and their estimated effects on specific borrowers;
    
    An evaluation of the existing relationships among loans and leases, probable loan
and lease losses and the present level of the allowance for loan and lease losses;
    
    Results of examinations of our loan and lease portfolios by regulatory agencies;
and
    
    Managements internal review of the loan and lease portfolios.
  Our continued pace of growth may require us to raise additional capital in the future, but that
capital may not be available or may not be on terms acceptable to us when it is needed.
  We rely, in part, on external financing to fund our operations and the lack of availability of such
funds in the future could adversely affect our growth strategy.
  34




---



##### 



Competition from other financial institutions could adversely affect our growth or profitability.
   We rely on our management, and the loss of one or more of those managers may harm our business.
  Variations in interest rates may harm our financial results.
  We are subject to extensive regulation, and changes in banking laws and regulations could adversely
affect our business.
  Our trust operations subject us to financial and reputational risks.
  35




---



##### 



If we are unable to keep pace with technological advances in our industry, our ability to attract
and retain clients could be adversely affected.
  Our business continuity plans or data security systems could prove to be inadequate, resulting in a
material interruption in, or disruption to, our business and a negative impact on the results of
operations .
  We are exposed to risks of environmental liabilities with respect to secured properties or
properties for which we take title.
  36




---



##### 



Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds
 (a)
    
    None.(b)
    
    None.(c)
    
    Issuer Purchases of Equity Securities
 ApproximateTotal Number of
    
    Dollar Value ofShares Purchased
    
    Shares that Mayas Part of Publicly
    
    Yet Be PurchasedTotal Number of
    
    Average Price Paid
    
    Announced Plans
    
    Under the Plans orPeriod
    
    Shares Purchased
    
    Per Share
    
    or Programs
    
    ProgramsApril 1  30, 2008
    
    
    199
    
    
    $
    17.27
    
    
    
    
    
    
    $
    177,150May 1  31, 2008
    
    
    50
    
    
    
    19.40
    
    
    
    
    
    
    
    177,150June 1  30, 2008
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    177,150
  
 Item 3.  Defaults Upon Senior Securities
  
 Item 4.  Submission of Matters to a Vote of Security Holders
  Number of SharesFor
    
    Against
    
    Abstained
    
    Withheld
    
    Non-VotesElection of
Directors for a
three-year term
expiring in 2011:Leland C. Bruce
    
    
    2,137,433
    
    
    
    
    
    
    
    7,257
    
    
    Loren D. Mortenson
    
    
    2,108,985
    
    
    
    
    
    
    
    35,705
    
    
    Jerome J. Smith
    
    
    2,076,381
    
    
    
    
    
    
    
    68,309
    
    
    
  
 Item 5.  Other Information.
  
 Item 6.  Exhibits.
    37




---



##### 



Signatures
  FIRST BUSINESS FINANCIAL SERVICES, INC./s/ Corey A. Chambas

Corey A. Chambas
Chief Executive OfficerAugust 4, 2008
 38