UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

(Mark One)

þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

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.

(Exact name of registrant as specified in its charter)

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)

Registrant’s telephone number, including area code (608) 238-8008

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class		Name of each exchange on which registered
Common Stock, $0.01 par value		NASDAQ Stock Exchange
Common Share Purchase Rights		NASDAQ Stock Exchange

Securities registered pursuant to section 12(g) of the Act

None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes o No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.

Yes o No þ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.)

Yes o No o

Indicate by check mark if the disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this From 10-K or any amendment to this Form 10-K. o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o		Accelerated filer o		Non-accelerated filer o		Smaller reporting company þ
				(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).

Yes o No þ

The aggregate market value of the common equity held by non-affiliates computed by reference to the closing price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter was approximately $27.8 million.

As of March 4, 2010, 2,540,141 shares of common stock were outstanding.

Part III – Portions of the Proxy Statement for the Annual Meeting of Stockholders to be held on May 17, 2010 are incorporated by reference into Part III hereof.

 

 

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Table of Contents

PART I			4
Item 1. Business			4
Item 1A. Risk Factors			13
Item 1B. Unresolved Staff Comments			18
Item 2. Properties			18
Item 3. Legal Proceedings			19
Item 4. Reserved			19
PART II			19
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities			19
Item 6. Selected Consolidated Financial Data			21
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations			22
Item 7A. Quantitative and Qualitative Disclosures about Market Risk			53
Item 8. Financial Statements and Supplementary Data			56
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure			104
Item 9A(T). Controls and Procedures			104
Item 9B. Other Information			104
PART III			105
Item 10. Directors, Executive Officers and Corporate Governance			105
Item 11. Executive Compensation			105
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters			105
Item 13. Certain Relationships and Related Transactions, and Director Independence			105
Item 14. Principal Accountant Fees and Services			105
PART IV			105
Item 15. Exhibits, Financial Statements Schedules			105
Signatures			106
Exhibit 23
Exhibit 31.1
Exhibit 31.2
Exhibit 32

PART I.

Item 1.		Business

General

First Business Financial Services, Inc. (FBFS or the Corporation) is a registered bank holding company incorporated under the laws of the State of Wisconsin and is engaged in the commercial banking business through its wholly-owned banking subsidiaries First Business Bank and First Business Bank – Milwaukee (referred to as “the Banks”). All of the operations of FBFS are conducted through the Banks and certain subsidiaries of First Business Bank. The Banks operate as business banks focusing on delivering a full line of commercial banking products and services tailored to meet the specific needs of small and medium-sized businesses, business owners, executives, professionals and high net worth individuals. The Banks do not utilize a branch network to attract retail clients. The Banks generally target businesses with sales between $2 million and $50 million. For a more detailed discussion of loans, leases and the underwriting criteria of the Banks, see Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations – Loans and Leases. To supplement its business banking deposit base, the Banks utilize wholesale funding alternatives to fund a portion of their assets.

First Business Bank (FBB) is a state bank that was chartered in 1909 under the name Kingston State Bank. In 1990, FBB relocated its home office to Madison, Wisconsin, opened a banking facility in University Research Park, and began focusing on providing high-quality banking services to small and medium-sized businesses located in Madison, Wisconsin and the surrounding area. FBB’s product lines include commercial and consumer treasury management services, commercial lending, commercial real estate lending, equipment financing and a variety of deposit accounts and personal loans to business owners, executives and high net worth individuals. FBB also offers trust and investment services through First Business Trust & Investments (FBTI), a division of FBB. FBB has three loan production offices in the Northeast Region of Wisconsin to serve Appleton, Wisconsin, Oshkosh, Wisconsin and Green Bay, Wisconsin and their surrounding areas.

FBB has four wholly-owned subsidiaries. First Business Capital Corp. (FBCC) operates as an asset-based commercial lending company specializing in providing secured lines of credit as well as term loans on equipment and real estate assets primarily to manufacturers and wholesale distribution companies located throughout the United States. First Business Equipment Finance, LLC (FBEF) operates as a commercial equipment finance company specializing in financing of general equipment to small and middle market companies. First Business Real Estate LLC (FBBRE) is a limited liability company established for the purpose of holding and liquidating real estate and other assets acquired through foreclosure or other legal proceedings. First Madison Investment Corp. (FMIC) is located in and formed under the laws of the state of Nevada. FMIC was organized for the purpose of managing a portion of the Bank’s investment portfolio. FMIC invests in marketable securities and loans purchased from FBB. FBB also has one indirect subsidiary, First Madison Capital Corp Nevada Corp (FMCCNC), a wholly-owned subsidiary of FBCC located in and formed under the laws of the state of Nevada, organized for the purpose of investing in loans purchased from FBCC.

First Business Bank – Milwaukee (FBB – Milwaukee) is a state bank that was chartered in 2000 in Wisconsin. Like FBB, FBB – Milwaukee’s product lines include commercial and consumer treasury management services, commercial lending and commercial real estate lending for similar sized businesses as FBB. FBB – Milwaukee also offers trust and investment services through a trust service office agreement with FBB. FBB – Milwaukee offers business owners, executives, professionals and high net worth individuals, consumer services which include a variety of deposit accounts and personal loans. FBB – Milwaukee has one wholly owned subsidiary, First Business – Milwaukee Real Estate LLC (FBBMRE). FBBMRE is a limited liability company established for the purpose of holding and liquidating real estate and other assets acquired through foreclosure or other legal proceedings.

In September 2008, FBFS formed FBFS Statutory Trust II, (Trust II), a Delaware business trust wholly owned by the Corporation. In 2008, Trust II completed the sale of $10.0 million of 10.5% fixed rate trust preferred securities. Trust II also issued common securities in the amount of $315,000 to the Corporation. Trust II used the proceeds from the offering to purchase $10.3 million of 10.5% junior subordinated notes (the Notes) of the Corporation. The Corporation has the right to redeem the Notes at any time on or after September 26, 2013. The preferred securities are mandatorily redeemable upon the maturity of the Notes on September 26, 2038. See Note 10 to the Consolidated Financial Statements for additional information.

Available Information

The Corporation maintains a web site at www.firstbusiness.com. This Form 10-K and all of the Corporation’s filings under the Securities Exchange Act of 1934, as amended, including the Corporation’s proxy statement, are available through that web site, free of charge, including copies of annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports, on the date that the Corporation files those materials with, or furnishes them to, the Securities and Exchange Commission (SEC). These filings are also available to the public on the internet at the SEC’s website at www.sec.gov. Shareholders may also read and copy any document that we file at the SEC’s public reference rooms located at 100 F Street, NE, Washington, DC 20549. Shareholders may call the SEC at 1-800-SEC-0300 for further information on the public reference room.

Employees

At December 31, 2009, FBFS had 137 employees which equates to 121.5 full-time equivalent employees. No employee is covered by a collective bargaining agreement, and we believe our relationship with our employees to be very good.

Competition

The Banks encounter strong competition in attracting commercial loan, equipment finance and deposit clients as well as trust and investment clients. Such competition includes banks, savings institutions, mortgage banking companies, credit unions, finance companies, equipment finance companies, mutual funds, insurance companies, brokerage firms and investment banking firms. The Banks’ market areas include branches of several commercial banks that are substantially larger in terms of loans and deposits. Furthermore, tax exempt credit unions operate in most of the Banks’ market areas and aggressively price their products and services to a large portion of the market. The Banks also compete with regional and national financial institutions, many of which have greater liquidity, higher lending limits, greater access to capital, more established market recognition and more resources and collective experience than the Banks. Our profitability depends upon the Banks’ ability to successfully maintain and increase market share.

Supervision and Regulation

Below is a brief description of certain laws and regulations that relate to the Corporation and the Banks. This narrative does not purport to be complete and is qualified in its entirety by reference to applicable laws and regulations.

General

The Banks are chartered in the State of Wisconsin and are subject to regulation and supervision by the Division of Banking of the Wisconsin Department of Financial Institutions (WDFI), and are subject to periodic examinations. Review of fiduciary operations is included in the periodic examinations. The Banks’ deposits are insured by the Deposit Insurance Fund (DIF). The DIF is administered by the Federal Deposit Insurance Corporation (FDIC), and therefore the Banks are also subject to regulation by the FDIC. Periodic examinations of the Banks are also conducted by the FDIC. The Banks must file periodic reports with the FDIC concerning their activities and financial condition and must obtain regulatory approval prior to entering into certain transactions such as mergers with or acquisitions of other depository institutions and opening or acquiring branch offices. This regulatory structure gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies regarding the classification of assets and the establishment of adequate loan and lease loss reserves.

Wisconsin banking laws restrict the payment of cash dividends by the Banks by providing that (i) dividends may be paid only out of the Banks’ undivided profits, and (ii) prior consent of the WDFI is required for the payment of a dividend which exceeds current year income if dividends declared have exceeded net profits in either of the two immediately preceding years. The various bank regulatory agencies have authority to prohibit the banks under their jurisdiction from engaging in an unsafe or unsound practice. Under certain circumstances, the payment of a dividend by the Banks could be considered an unsafe or unsound practice. In the event that (i) the FDIC or the WDFI should increase minimum required levels of capital; (ii) the total assets of the Banks increase significantly; (iii) the income of the Banks decrease significantly; or (iv) any combination of the foregoing occurs, then the Boards of Directors of the Banks may decide or be required by the FDIC or the WDFI to retain a greater portion of the Banks’ earnings, thereby reducing dividends.

The Banks are subject to certain restrictions imposed by the Federal Reserve Act on any extensions of credit to their parent holding company, FBFS. Also included in this Act are restrictions on investments in the capital stock or other securities of FBFS and on taking of such stock or securities as collateral for loans to any borrower. Under this Act and regulations of the Federal Reserve Board, FBFS and its Banks are prohibited from engaging in certain tie-in arrangements in connection with any extension of credit or any property or service.

The Corporation

FBFS is a financial holding company registered under the Bank Holding Company Act of 1956 (the BHCA), as amended, and is subject to regulation, supervision, and examination by the Board of Governors of the Federal Reserve System (the FRB). The Corporation is required to file an annual report with the FRB and such other reports as the FRB may require. Prior approval must be obtained before the Corporation may merge with or consolidate into another bank holding company, acquire substantially all the assets of any bank or bank holding company, or acquire ownership or control of any voting shares of any bank or bank holding company if after such acquisition it would own or control, directly or indirectly, more than 5% of the voting shares of such bank or bank holding company.

In reviewing applications for such transactions, the FRB considers managerial, financial, capital and other factors, including financial performance of the bank or banks to be acquired under the Community Reinvestment Act of 1977 (the CRA), as amended. Also, under the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, as amended, state laws governing interstate banking acquisitions subject bank holding companies to some limitations in acquiring banks outside of their home state without regard to local law.

The Gramm-Leach Bliley Act of 1999 (the GLBA) eliminates many of the restrictions placed on the activities of bank holding companies. Bank holding companies such as FBFS can expand into a wide variety of financial services, including securities activities, insurance, and merchant banking without the prior approval of the FRB.

Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act (SOX) was enacted by the United States Congress to improve the accuracy and reliability of corporate disclosures made pursuant to securities laws, and for other purposes. A primary focus of SOX is to improve the quality and transparency in financial reporting and independent auditor services for public companies. As directed by SOX, the SEC adopted rules that require conformance with specific sections of SOX. Section 302 of SOX and related SEC rules require the Corporation’s CEO and CFO to certify that they (i) are responsible for establishing, maintaining, and regularly evaluating the effectiveness of the Corporation’s internal controls; (ii) have made certain disclosures to the Corporation’s auditors and the audit committee of the Corporation’s board of directors about the Corporation’s internal controls; and (iii) have included information in the Corporation’s quarterly and annual reports about their evaluation and whether there have been significant changes in the Corporation’s internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect the Corporation.

Section 404 of SOX requires public companies’ annual reports to (i) include the company’s own assessment of internal control over financial reporting, and (ii) include an auditor’s attestation regarding the company’s internal control over financial reporting. The primary purpose of internal control over financial reporting is to foster the preparation of reliable and accurate financial statements. Since SOX was enacted, however, both requirements of SOX 404 have been postponed for smaller public companies such as the Corporation. The Corporation is required to assess, and has assessed, its internal control over financial reporting. Refer to Item 9A(T) Controls and Procedures for the Corporation’s assessment. The requirement of an auditor’s attestation per the second part of Section 404 of SOX continues to be postponed per temporary Item 308T of SEC Regulation S-K. Consequently, no auditor attestation accompanies Management’s Annual Report on Internal Control over Financial Reporting in this Annual Report on Form 10-K.

Emergency Economic Stabilization Act of 2008. The Emergency Economic Stabilization Act of 2008 (EESA), gives the U.S. Department of Treasury (UST) authority to take certain actions to restore liquidity and stability to the U.S. Banking markets. Based upon its authority in the EESA, a number of programs to implement EESA have been announced. Those programs include the following:

•

Capital Purchase Program (CPP). Pursuant to this program, the UST, on behalf of the U.S. government, was authorized to purchase preferred stock, along with warrants to purchase common stock, from certain financial institutions, including bank holding companies, savings and loan holding companies and banks or savings associations not controlled by a holding company. We received approval from the UST to participate in this program. We chose not to participate in the program. Refer to Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources for further discussion.

•

Temporary Liquidity Guarantee Program. The original program contained both (i) a debt guarantee component, whereby FDIC will guarantee until June 30, 2012, the senior unsecured debt issued by eligible financial institutions between October 14, 2008 and June 30, 2009; and (ii) an account transaction guarantee component, whereby the FDIC will insure 100% of non-interest bearing deposit transaction accounts held at eligible financial institutions through December 31, 2009. We elected to fully participate in this program. These programs have been extended to June 30, 2010.

•

Temporary increase in deposit insurance coverage. Pursuant to the EESA, the FDIC temporarily raised the basic limit on federal deposit insurance coverage from $100,000 to $250,000 per depositor. The EESA provides that the basic deposit insurance limit will return to $100,000 after December 31, 2013.

The Banks

As state-chartered DIF-insured banks, the Banks are subject to extensive regulation by the WDFI and the FDIC. Lending activities, fiduciary activities and other investments must comply with federal statutory and regulatory requirements. This federal regulation establishes a comprehensive framework of activities in which an institution can engage and is intended primarily for the protection of the DIF, the FDIC, and depositors.

Insurance of Deposits. The Banks’ deposits are insured under the DIF of the FDIC. On December 3, 2008, the Banks elected to participate in the Transaction Account Guarantee (TAG) which is a component of the FDIC Temporary Liquidity Guarantee Program (TLGP) and therefore the basic deposit insurance coverage has temporarily increased to $250,000 for interest bearing accounts. There is an unlimited guarantee on non-interest bearing transaction accounts and NOW accounts that have an interest rate of less than or equal to 0.50%. The unlimited guarantee on non-interest bearing transaction accounts and NOW accounts that have an interest rate of less than or equal to 0.50% will be in place until June 30, 2010. Increased FDIC insurance limits will be in place until December 31, 2013. The cost for participating in this plan was a 0.10% annualized fee assessed quarterly on balances of noninterest-bearing transaction accounts that exceed the existing deposit insurance limit of $250,000. Depositors may qualify for additional coverage if the deposit accounts are in different ownership categories. In addition, federal law provides up to $250,000 in coverage for self-directed retirement accounts.

The Banks also elected to participate in the Debt Guarantee Program that temporarily guarantees all newly-issued senior unsecured debt, up to 2% of the Corporation’s liabilities, issued by the participating entities on or after October 14, 2008 through and including June 30, 2009. The guarantee expires on June 30, 2012. At December 31, 2009, the Banks did not have any debt guaranteed under this program. The cost for this program upon participation is based on an annualized basis points weighted by the maturity of the debt multiplied by the amount of debt issued, and calculated for the maturity period of that debt or June 30, 2012, whichever is earlier.

The FDIC assigns each institution it regulates to a particular risk category based on the levels of the institution’s capital – “well-capitalized,” “adequately capitalized,” or “undercapitalized” and the varying levels of supervisory concern, ranging from those institutions considered to be healthy to those that represent substantial supervisory concern. The result is four risk categories with well-capitalized, financially sound institutions paying lower rates than those paid by undercapitalized institutions with substantial supervisory concern that pose a risk to the insurance fund. The Banks’ assessment rate depends on the risk category to which they are assigned. Assessment rates for deposit insurance currently range from 7 to 77.5 basis points. The Banks are well capitalized. The supervisory risk category to which the Banks are assigned by the FDIC is confidential and may not be disclosed.

FDIC insurance premium rates increased for all financial institutions in 2009 based upon enacted regulations. During the second quarter of 2009, the FDIC issued a special assessment to all banks of which approximately $481,000 was assessed to our Banks. In December 2009, all banks, including our Banks, received a notice requiring the prepayment of the 2010-2012 FDIC insurance premiums. The payment was required on or before December 30, 2009 in an effort to strengthen the cash position of the DIF immediately without immediately impacting earnings of the banking industry. The prepaid assessment was based upon the Banks’ assessment rate in effect on September 30, 2009 and will be subject to adjustments on a quarterly basis throughout the prepayment period based upon actual levels of deposits and related risk ratings. The Banks’ share of the prepayment was a cash payment of approximately $5.4 million at December 30, 2009. In general, any increase in insurance assessment, including special assessments, would have an adverse affect on the earnings of the Banks. The prepaid FDIC insurance prepayment will have a negative impact on our net interest margin throughout 2010 – 2012 because the prepaid asset will be considered a non-earning asset for us as the FDIC will not pay interest on the prepaid amounts nor will we have the ability to use that cash for higher yielding alternatives.

Regulatory Capital Requirements

The FRB monitors the capital adequacy of the Banks because on a consolidated basis they have assets in excess of $500.0 million. A combination of risk-based and leverage ratios are determined by the FRB. Failure to meet these capital guidelines could result in supervisory or enforcement actions by the FRB. Under the risk-based capital guidelines, different categories of assets, including certain off-balance sheet items, such as loan commitments in excess of one year and letters of credit, are assigned different risk weights, based on the perceived credit risk of the asset. These risk-weighted assets are calculated by assigning risk weights to corresponding asset balances to determine the risk weight of the entire asset base. Total capital, under this definition, is defined as the sum of “Tier 1” and “Tier 2” capital elements, with Tier 2 capital being limited to 100% of Tier 1 capital. Tier 1 capital, with some restrictions, includes common stockholders’ equity, any perpetual preferred stock, qualifying trust preferred securities and minority interests in any unconsolidated subsidiaries. Tier 2 capital, with certain restrictions, includes any perpetual preferred stock not included in Tier 1 capital, subordinated debt, any trust preferred securities not qualifying as Tier 1 capital, specific maturing capital instruments and the allowance for loan and lease losses (limited to 1.25% of risk-weighted assets). The regulatory guidelines require a minimum total capital to risk-weighted assets of 8%, of which at least 4% must be in the form of Tier 1 capital. The FRB also has a leverage ratio requirement which is defined as Tier 1 capital divided by average total consolidated assets. The minimum leverage ratio required is 3%. We have consistently maintained regulatory capital ratios at or above the well capitalized standards. For further detail on capital and capital ratios see discussion under Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources.

Prompt Corrective Action

The Banks are also subject to capital adequacy requirements under the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA), whereby either Bank could be required to guarantee a capital restoration plan, should it become “undercapitalized” as defined by FDICIA. The maximum liability under such a guarantee would be the lesser of 5% of the Bank’s total assets at the time it became undercapitalized or the amount necessary to bring the Banks into compliance with the capital restoration plan. The Corporation is also subject to the “source of strength doctrine” of the FRB, which requires that holding companies serve as a source of “financial and managerial” strength to their subsidiary banks.

Under the guidance, if a bank would fail to submit an acceptable restoration plan, if required, it is then considered “significantly undercapitalized,” and would thus be subject to a wider range of regulatory requirements and restrictions. Such restrictions would include activities involving asset growth, acquisitions, branch establishment, establishment of new lines of business and also prohibitions on capital distributions, dividends and payment of management fees to control persons, if such payments and distributions would cause undercapitalization.

The following table sets forth the FDIC’s definition of the five capital categories, in the absence of a specific capital directive.

Total Capital to Risk

Tier 1 Capital to Risk

Category

Weighted Assets

Weighted Assets

Tier 1 Leverage Ratio

Well capitalized

≥ 10

%

≥ 6

%

≥ 5

%

Adequately capitalized

≥ 8

%

≥ 4

%

≥ 4

%*

Undercapitalized

< 8

%

< 4

%

< 4

%*

Significantly undercapitalized

< 6

%

< 3

%

< 3

%

Critically undercapitalized

Ratio of tangible equity to total assets ≤ 2%

Limitations on Dividends and Other Capital Distributions

Federal and state regulations impose various restrictions or requirements on state-chartered banks with respect to their ability to pay dividends or make various other distributions of capital. Generally, such laws restrict dividends to undivided profits or profits earned during preceding periods. Also, FDIC insured institutions may not pay dividends while undercapitalized or if such a payment would cause undercapitalization. The FDIC also has authority to prohibit the payment of dividends if such a payment constitutes an unsafe or unsound practice in light of the financial condition of a particular bank. At December 31, 2009, considering such limitations, subsidiary unencumbered retained earnings of approximately $45.4 million could be transferred to the Corporation in the form of cash dividends, subject to the capital needs of each subsidiary.

Liquidity

The Banks are required by federal regulation to maintain sufficient liquidity to ensure safe and sound operations. We believe that the Banks have an acceptable liquidity percentage to match the balance of net withdrawable deposits and short-term borrowings in light of present economic conditions and deposit flows. Refer to Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources for additional information.

Federal Reserve System

The Banks are required to maintain reserves at specified levels against their transaction accounts and non-personal time deposits. As of December 31, 2009, the Banks were in compliance with these requirements.

Federal Home Loan Bank System

The Banks are members of the Federal Home Loan Bank of Chicago (FHLB). The FHLB serves as a central credit facility for its members. The FHLB is funded primarily from proceeds from the sale of obligations of the FHLB system. It makes loans to member banks in the form of FHLB advances. All advances from the FHLB are required to be fully collateralized as determined by the FHLB.

As a member, each Bank is required to own shares of capital stock in the FHLB in an amount equal to the greatest of $500, 1% of its aggregate unpaid residential mortgage loans, home purchase contracts or similar obligations at the beginning of each year or 20% of its outstanding advances. The FHLB also imposes various limitations on advances relating to the amount and type of collateral, the amount of advances and other items. At December 31, 2009, the Banks owned a total of $2.4 million in FHLB stock and both were in compliance with FHLB requirements. The Banks received no dividends from the FHLB for the years ended December 31, 2009, and 2008. Outstanding FHLB advances as of December 31, 2009 and 2008 were $18.5 million and $33.5 million, respectively.

Since October 2007, the FHLB has been under a consensual cease and desist order with its regulator, the Federal Housing Finance Board. Under the terms of the order, capital stock repurchases and redemptions, including redemptions upon membership withdrawal or other termination, are prohibited unless FHLB has received approval of the Director of the Office of Supervision of the Finance Board. FHLB has not declared or paid a dividend since the third quarter of 2007. As a result of this consensual cease and desist order, the Banks do not expect dividend income from their holdings of FHLB stock to be a significant source of income for the foreseeable future. The Banks currently hold $2.4 million, at cost, of FHLB stock, of which $1.2 million is deemed voluntary stock. We believe we will ultimately recover the value of this stock. Refer to Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources for further discussion relating to the impact of this order on our ability to obtain resources from the FHLB to meet the liquidity needs of the Banks.

Transactions with Affiliates

The Banks’ loans to their own and the Corporation’s executive officers, directors and owners of greater than 10% of any of their respective stock (so-called “insiders”) and any entities affiliated with such insiders are subject to the conditions and limitations under Section 23A of the Federal Reserve Act and the Federal Reserve Bank’s Regulation O. In general, the provisions of Section 23A require that transactions between a banking institution or its subsidiaries and such institution’s affiliates be on terms as favorable to the institution as transactions with non-affiliates. In addition, these provisions contain certain restrictions on loans to affiliates, restricting such loans to a percentage of the institution’s capital. A covered “affiliate,” for purposes of these provisions, would include the Corporation and any other company that is under our common control. Certain transactions with our directors, officers or controlling persons are also subject to conflict of interest regulations. Among other things, these regulations require that loans to such persons and their related interests be made on terms substantially the same as for loans to unaffiliated individuals and must not create an abnormal risk of repayment or other unfavorable features for the Banks in accordance with Regulation O. The Banks can make exceptions to the foregoing procedures if they offer extensions of credit that are widely available to employees of the Banks and that do not give any preference to insiders over other employees of the Banks.

Privacy

Financial institutions are required by statute and regulation to disclose their privacy policies. In addition, such financial institutions must appropriately safeguard their clients’ nonpublic, personal information.

Community Reinvestment Act Requirements

The Community Reinvestment Act (CRA) requires each Bank to have a continuing and affirmative obligation in a safe and sound manner to help meet the credit needs of its entire community, including low and moderate income neighborhoods. Federal regulators regularly assess the Banks’ record of meeting the credit needs of their respective communities. Applications for additional acquisitions would be affected by the evaluation of the Banks’ effectiveness in meeting its CRA requirements.

Anti – Money Laundering

The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the Patriot Act) is designed to deny terrorists and criminals the ability to obtain access to the United States financial system and has significant implications for depository institutions, brokers, dealers and other businesses involved in the transfer of money. The Patriot Act mandates financial services companies to implement additional policies and procedures with respect to additional measures designed to address any or all of the following matters: customer identification programs, money laundering, terrorist financing, identifying and reporting suspicious activities and currency transactions, currency crimes, and cooperation between financial institutions and law enforcement authorities.

Commercial Real Estate Guidance

The FDIC’s Concentrations in Commercial Real Estate Lending, Sound Risk Management Practices (CRE Guidance) provides supervisory criteria, including the following numerical indicators, to assist bank examiners in identifying banks with potentially significant commercial real estate loan concentrations that may warrant greater supervisory scrutiny: (1) commercial real estate loans exceed 300% of capital and increased 50% or more in the preceding three years or (2) construction and land development loans exceed 100% of capital. The CRE Guidance does not limit banks’ levels of commercial real estate lending activities but rather guides institutions in developing risk management practices and levels of capital that are commensurate with the level and nature of their commercial real estate concentrations. Based on our current loan portfolio, our Banks do not exceed these guidelines. Eventhough the banks do not exceed these regulatory guidelines, we believe that we have taken appropriate precautions to address the risks associated with our concentrations in commercial real estate lending. We do not expect the CRE Guidance to adversely affect our operations or our ability to execute our growth strategy.

Processing of Deposit Accounts in the Event of an Insured Depository Institution Failure

The FDIC issued a final rule establishing practices for determining deposit and other liability account balances at a failed insured depository institution. The final rule requires institutions to prominently disclose to sweep account clients whether the swept funds are deposits and the status of the swept funds if the institution were to fail. The final rule became effective on March 4, 2009; however, the effective date of the sweep account disclosure requirements was July 1, 2009. We do not transfer deposit funds to sweep investments outside of the Banks, and therefore, the deposit funds would be FDIC insured under their established limits.

Other Regulations

The Banks are also subject to a variety of other regulations with respect to the operation of their businesses, including but not limited to Fair and Accurate Transactions Act, Truth in Lending Act, Truth in Savings Act, the Equal Credit Opportunity Act, the Electronic Funds Transfer Act, Funds Availability Act, Privacy of Consumer Financial Information Act, the Fair Housing Act, the Home Mortgage Disclosure Act, the Fair Debt Collection Practices Act and the Fair Credit Reporting Act.

Changing Regulatory Structure

Regulation of the activities of national and state banks and their holding companies imposes a heavy burden on the banking industry. The FRB, FDIC, and WDFI all have extensive authority to police unsafe or unsound practices and violations of applicable laws and regulations by depository institutions and their holding companies. These agencies can assess civil monetary penalties, issue cease and desist or removal orders, seek injunctions, and publicly disclose such actions. Moreover, the authority of these agencies has expanded in recent years, and the agencies have not yet fully tested the limits of their powers.

The laws and regulations affecting banks and financial or bank holding companies have changed significantly in recent years, and there is reason to expect changes will continue in the future, although it is difficult to predict the outcome of these changes. From time to time, various bills are introduced in the United States Congress with respect to the regulation of financial institutions. Certain of those proposals, if adopted, could significantly change the regulation of banks and the financial services industry.

Monetary Policy

The monetary policy of the FRB has a significant effect on the operating results of financial or bank holding companies and their subsidiaries. Among the means available to the FRB to affect the money supply are open market transactions in U.S. government securities, changes in the discount rate on member bank borrowings and changes in reserve requirements against member bank deposits. These means are used in varying combinations to influence overall growth and distribution of bank loans, investments and deposits, and their use may affect interest rates charged on loans or paid on deposits.

Executive Officers of the Registrant

The following contains certain information about the executive officers of FBFS. There are no family relationships between any directors or executive officers of FBFS.

Corey A. Chambas, age 47, has served as the President and Chief Executive Officer of First Business Financial Services, Inc. since December 2006. Mr. Chambas joined the Corporation in 1993 and has held various positions including Chief Operating Officer, Executive Vice President, and Chief Executive Officer of First Business Bank. Mr. Chambas has over 25 years of commercial banking experience. Prior to joining the Corporation, he was a Vice President of Commercial Lending with M&I Bank in Madison, Wisconsin.

James F. Ropella, age 50, has served as Senior Vice President and Chief Financial Officer of the Corporation since September 2000. Mr. Ropella also serves as the Chief Financial Officer of the subsidiaries of the Corporation. Mr. Ropella has 22 years of experience in finance and accounting, primarily in the banking industry. Prior to joining First Business Financial Services, Inc., Mr. Ropella was Treasurer of a consumer products company. Prior to that, he was Treasurer of Firstar Corporation, now known as US Bank.

Michael J. Losenegger, age 52, has served as Chief Operating Officer of First Business Financial Services, Inc. since September 2006. Mr. Losenegger joined the Corporation in 2003 and has held various positions with First Business Bank including Chief Executive Officer, Chief Operating Officer and Senior Vice President of Business Development. Mr. Losenegger has over 23 years of experience in commercial lending. Prior to joining the Corporation, Mr. Losenegger was Senior Vice President of Lending at M&I Bank in Madison, Wisconsin.

Barbara M. Conley, age 56, joined First Business Financial Services, Inc. in December 2007 as Senior Vice President, General Counsel and Corporate Secretary. Ms. Conley has over 25 years of experience in commercial banking. Directly prior to joining the Corporation in 2007, Ms. Conley was a Senior Vice President in Corporate Banking with Associated Bank. She had been employed at Associated Bank since May 1976.

Mark J. Meloy, age 48, has served as President and Chief Executive Officer of First Business Bank since December 2007. Mr. Meloy joined the Corporation in 2000 and has held various positions including Executive Vice President of First Business Bank and President and Chief Executive Officer of First Business Bank – Milwaukee. Mr. Meloy has over 25 years of commercial lending experience. Prior to joining the Corporation, Mr. Meloy was a Vice President and Senior Relationship Manager with Firstar Bank, NA, Cedar Rapids, Iowa and Milwaukee, Wisconsin, working in their financial institutions group with mergers and acquisition financing.

Joan A. Burke, age 58, has served as President of First Business Bank’s Trust Division since September 2001. Ms. Burke has over 30 years of experience in providing trust and investment advice. Prior to joining the Corporation, Ms. Burke was the President, Chief Executive Officer and Chairperson of the Board of Johnson Trust Company and certain of its affiliates.

Charles H. Batson, age 56, has served as the President and Chief Executive Officer of First Business Capital Corp since January 2006. Mr. Batson has 32 years of experience in asset-based lending. Directly prior to joining First Business Capital Corp., Mr. Batson served as Vice President and Business Development Manager for Wells Fargo Business Credit, Inc. since 1990.

David J. Vetta, age 55, has served as President and Chief Executive Officer of First Business Bank-Milwaukee since January 2007. Directly prior to joining First Business Bank – Milwaukee, Mr. Vetta was Managing Director at JP Morgan Chase since 1992 and affiliated with JP Morgan Chase and its predecessor companies since 1976.

Item 1A.		Risk Factors

You should carefully read and consider the following risks and uncertainties because they could materially and adversely affect our business, financial condition and results of operations.

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 success depends on the economic conditions in the U.S. and general economic conditions in the specific local markets in which we operate, principally in Dane County, Wisconsin and to a lesser extent, Waukesha County, Wisconsin, and Outagamie County, Wisconsin. The origination of loans secured by real estate and business assets of those businesses is our primary business and our principal source of profits. Client demand for loans could be reduced further by a continued weakening economy, further increase in unemployment or an increase in interest rates in these areas. The duration and severity of the economic decline, including the decline in real estate and equipment values, that is prevailing in these areas could reduce our growth rate, impair our ability to collect loans or attract deposits, cause loans to become inadequately collateralized and generally have an adverse impact on our results of operations and financial condition.

The national and global economic downturn has resulted in unprecedented levels of financial market volatility which has depressed the overall market value of financial institutions, limited access to capital, and has had a material adverse effect on the financial condition or results of banking companies in general and our Corporation. UST and FDIC programs were initiated to address economic stabilization. There can be no assurance that the actions taken by the U.S. Government, FRB and other governmental and regulatory bodies for the purpose of stabilizing the financial markets, or market responses to those actions, will achieve their intended effect or will be continued. Actions included the CPP, the temporary liquidity guarantee program, and temporary increases in FDIC insurance levels.

Declines in fair market values of commercial real estate or equipment provided as collateral could increase our exposure to future probable losses.

The market value of real estate can fluctuate significantly in a short period of time as a result of economic conditions. Adverse developments affecting real estate values in one or more of our markets could impact collateral coverage associated with our commercial real estate portfolio possibly leading to increased specific reserves or charge-offs. We also provide lending collateralized by general business assets including accounts receivable, inventory, and business equipment. Significant adverse changes in various industries could cause rapid declines in values and collectibility associated with those business assets resulting in inadequate collateral coverage that may expose us to future losses. An increase in specific reserves and charge-offs may have a material adverse impact on our results of operation.

Our loan portfolio has a concentration of commercial real estate loans.

We have a concentration of commercial real estate in the primary markets we service. Commercial real estate lending typically involves larger loan principal amounts than that for residential mortgage loans or consumer loans. Commercial real estate loans have historically been viewed as having more inherent risk of default implying a higher potential loss on an individual loan basis. The repayment of these loans generally is dependent on sufficient income from the properties securing the loans to cover operating expenses and debt service. Payments on loans secured by commercial real estate are often dependent upon the successful operation and management of the properties. Therefore repayment of these loans may be affected by factors outside the borrower’s control, including adverse conditions in the real estate market or the economy. In the event that the cash flow from the property is reduced, the borrower’s ability to repay the loan could be impacted. The deterioration of one or a few of these loans could cause a significant increase in our percentage of non-performing loans. An increase in non-performing loans results in a loss of earnings from these loans and could result in an increase in the provision for loan and lease loss and an increase in charge-offs, all of which could have a material adverse impact on our net income.

Our loan and lease loss allowance may not be adequate to cover actual losses.

We are exposed to the risk that our loan and lease clients may not repay their loans and leases according to their terms and that the collateral securing the payment of these loans and leases may be insufficient to assure repayment. We may experience significant loan and lease losses which could have a material adverse impact on operating results. There is a risk that some of our assumptions and judgments about the collectibility of the loan and lease portfolios could be formed from inaccurately assessed conditions. Those assumptions and judgments are based, in part, on assessment of the following conditions:

•

current economic conditions and their estimated effects on specific borrowers and collateral values;

•

an evaluation of the existing relationships among loans and leases, probable loan and lease losses and the present level of the allowance for loan and lease losses;

•

results of examinations of our loan and lease portfolios by regulatory agencies; and

•

Management’s internal review of the loan and lease portfolios.

We maintain an allowance for loan and lease losses to cover probable losses inherent in the loan and lease portfolios. Additional loan and lease losses will likely occur in the future and may occur at a rate greater than that experienced to date. An analysis of the loan and lease portfolios, historical loss experience and an evaluation of general economic conditions are all utilized in determining the size of the allowance. Additional adjustments may be necessary to allow for unexpected volatility or deterioration in the local or national economy. If significant additions are made to the allowance for loan and leases losses, this would materially decrease net income. Additionally, regulators periodically review our allowance for loan and lease losses or identify further loan or lease charge-offs to be recognized based on judgments different from ours. Any increase in the loan or lease allowance for loan and lease charge-offs, including as required by regulatory agencies could have a material adverse impact on net income.

Capital may not be available or may not be on terms acceptable to us when it is needed.

We are required by regulatory authorities to maintain adequate levels of capital to support our operations. We may decide to raise additional capital to support growth, either internally or through acquisitions. Our ability to raise additional capital, if needed, will depend on conditions in the capital markets at that time, which are outside our control, and on our financial performance. Accordingly, we cannot be certain of our ability to raise additional capital on acceptable terms or at all in the future if needed. If we cannot raise additional capital when needed, our ability to further expand our operations through internal growth, deposit gathering and acquisitions could be materially impacted. The current economic environment, the significant decline of financial institution stock prices and the overall condition of capital markets provide for uncertainty of when capital on acceptable terms will be available.

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 operations.

Our ability to implement our business strategy will depend on our ability to obtain funding for loan originations, working capital and other general corporate purposes. If our core banking and commercial deposits are not sufficient to meet our funding needs, we may increase our utilization of brokered deposits, FHLB advances and other wholesale funding sources necessary to fund desired growth levels. Because these funds generally are more sensitive to interest rate changes than our core deposits, they are more likely to move to the highest rate available. In addition, the use of brokered deposits without regulatory approval is limited to banks that are “well capitalized” according to regulation. If our Banks are unable to maintain their capital levels at “well capitalized” minimums, we could lose a significant source of funding, which would force us to utilize additional wholesale funding or potentially sell loans at a time when loan sales pricing may be unfavorable. To the extent we are not successful in obtaining such funding, we will be unable to implement our strategy as planned, which would have a material adverse effect on our financial condition, results of operations and cash flows.

Our financial condition and results of operations could be negatively affected if we fail to effectively execute our strategic plan.

Our ability to increase profitability will depend on a variety of factors including the identification of desirable business opportunities, competitive responses from financial institutions in our market areas and our ability to manage liquidity and funding sources. While we believe we have the management resources and internal systems in place to successfully manage our strategic plan, there can be no assurances that opportunities will be available and that the strategic plan will be successfully managed.

Competition from other financial institutions could adversely affect our profitability.

We encounter heavy competition in attracting commercial loan, equipment finance and deposit clients as well as trust and investment clients. We believe the principal factors that are used to attract core deposit accounts and that distinguish one financial institution from another include value-added relationships, rates of return, types of accounts, service fees, convenience of office locations and hours and quality of service to the depositors. We believe the primary factors in competing for commercial loans are interest rates, loan fee charges, loan structure and timeliness and quality of service to the borrower.

Our competition includes banks, savings institutions, mortgage banking companies, credit unions, finance companies, equipment finance companies, mutual funds, insurance companies, brokerage firms and investment banking firms. Our market areas include branches of several commercial banks that are substantially larger in terms of loans and deposits. Furthermore, tax exempt credit unions operate in most of our market areas and aggressively price their products and services to a large portion of the market. We also compete with regional and national financial institutions, many of which have greater liquidity, higher lending limits, greater access to capital, more established market recognition and more resources and collective experience than us. Our profitability depends, in part, upon our ability to successfully maintain and increase market share.

We rely on our management, and the loss of one or more of those managers may harm our business.

Our success has been and will be greatly influenced by our continuing ability to retain the services of our existing senior management and, as we expand, to attract and retain additional qualified senior and middle management. The unexpected loss of key management personnel or the inability to recruit and retain qualified personnel in the future could have an adverse effect on our business and financial results.

Variations in interest rates may harm our financial results.

We are subject to interest rate risk. Changes in the interest rate environment, whether as a result of changes in monetary policies of the FRB or otherwise, may reduce our profits. Net interest spreads are affected by the difference between the maturities and repricing characteristics of interest-earning assets and interest-bearing liabilities. They are also affected by the proportion of interest-earning assets that are funded by interest-bearing liabilities. Loan volume and yield are affected by market interest rates on loans, and increasing interest rates are generally associated with a lower volume of loan originations. There is no assurance that we can minimize our interest rate risk. In addition, an increase in the general level of interest rates may adversely affect the ability of certain borrowers to pay their obligations if the reason for that increase in rates is not a result of a general expansion of the economy. Accordingly, changes in levels of market interest rates could materially and adversely affect our net interest spread, asset quality, loan origination volume and overall profitability.

We are subject to extensive regulation, and changes in banking laws and regulations could adversely affect our business.

Our businesses are subject to extensive state and federal government supervision, regulation, and control. Existing state and federal banking laws subject us to substantial limitations with respect to loans, purchases of securities, payment of dividends and many other aspects of our businesses. There can be no assurance that future legislation or government policy will not adversely affect the banking industry and our operations by further restricting activities or increasing the cost of compliance. See Item 1, Business – Supervision and Regulation.

Our trust operations subject us to financial and reputational risks.

We are subject to trust operations risk related to performance of fiduciary responsibilities. Clients may make claims and take legal action pertaining to our performance of our fiduciary responsibilities. Whether client claims and legal action related to our performance of our fiduciary responsibilities are founded or unfounded, if such claims and legal actions are not resolved in a manner favorable to us, they may result in significant financial liability and/or adversely affect the market perception of us and our products and services, as well as impact client demand for those products and services. Any financial liability or reputational damage could have a material adverse affect on our business, which, in turn, could have a material adverse effect on our financial condition and results of operations.

If we are unable to keep pace with technological advances in our industry, our ability to attract and retain clients could be adversely affected.

The banking industry is constantly subject to technological changes with frequent introductions of new technology-driven products and services. In addition to better serving clients, the effective use of technology increases our efficiency and enables our financial institutions to reduce costs. Our future success will depend in part on our ability to address the needs of our clients by using technology to provide products and services that will satisfy client demands for convenience as well as create additional efficiencies in our operations. A number of our competitors have substantially greater resources to invest in technological improvements, as well as significant economies of scale. There can be no assurance that we will be able to implement new technology-driven products and services to our clients. If we fail to do so, our ability to attract and retain clients may 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 rely heavily on communications and information systems to conduct our business and our operations are dependent on our ability to protect our systems against damage from fire, power loss, or telecommunication failure. The computer systems and network infrastructure we use could be vulnerable to unforeseen problems. These problems may arise in both our internally developed systems and the systems of our third-party service providers. Any failure, interruption or breach in security of these systems, whether due to severe weather, natural disasters, acts of war or terrorism, criminal activity or other factors, could result in failures or disruptions in general ledger, deposit, loan, client relationship management and other systems. While we have a business continuity plan and other policies and procedures designed to prevent or limit the effect of the failure, interruption or security breach of our information systems, there can be no assurance that any such failures, interruptions or security breaches will not occur or, if they do occur, that they will be adequately addressed. The occurrence of any failures, interruptions or security breaches of our information systems could damage our reputation, result in a loss of clients, subject us to additional regulatory scrutiny, or expose us to civil litigation and possible financial liability, any of which could have a material adverse effect on our results of operations.

We are exposed to risks of environmental liabilities with respect to secured properties or properties to which we take title.

We encounter certain environmental risks in our lending activities. Under federal and state law, we may become liable for costs of cleaning up hazardous materials found on properties on which we have taken title. Certain states may also impose liens with higher priorities than first mortgages on properties to recover funds used in such efforts. We attempt to control our exposure to environmental risks with respect to loans secured by larger properties by monitoring available information on hazardous waste disposal sites and occasionally requiring environmental inspections of such properties prior to closing a loan, as warranted. No assurance can be given, however, that the value of properties securing loans in our portfolio will not be adversely affected by the presence of hazardous materials, increasing the risks of borrower default, or that future changes in federal or state laws will not increase our exposure to liability for environmental cleanup, which, in either case, may adversely affect our profitability.

Our stock is thinly traded.

Low volume of trading activity of our stock may make it difficult for investors to resell their common stock when they want at prices they find attractive. Our stock price can fluctuate significantly in response to a variety of factors and the volume of shares traded can be influenced by:

•

limited research analysis performed on our Corporation;

•

operating results and stock price performance of other companies that investors deem comparable to us;

•

news reports relating to trends, concerns and other issues in the financial services industry;

•

perceptions in the marketplace regarding us and/or our competitors; and

•

changes in government regulations.

General market fluctuations, industry factors and general economic and political conditions and events, such as economic slowdowns or recessions, interest rate changes or credit loss trends could also cause our stock price to decrease regardless of operating results.

Item 1B.		Unresolved Staff Comments

None.

Item 2.		Properties

The following table provides certain summary information with respect to the principal properties that we leased as of December 31, 2009:

						Expiration
Location		Function				Date
401 Charmany Drive, Madison, WI		Full service banking location of First Business Bank and office of First Business Financial Services, Inc.					2016
18500 W. Corporate Drive, Brookfield, WI		Full service banking location of First Business Bank – Milwaukee					2010
3913 West Prospect Avenue, Appleton, WI		Loan production office of First Business Bank					2017
230 Ohio Street, Oshkosh, WI		Loan production office of First Business Bank					2017

FBB also conducts trust and investment business from a limited purpose branch located at 3500 University Avenue, Madison, Wisconsin. Office space is also leased in Burnsville, Minnesota, Independence, Ohio, St. Louis, Missouri, Chicago, Illinois and Green Bay, WI under short-term lease agreements which have terms of less than one year. See Note 6 and Note 15 to the Consolidated Financial Statements for more information regarding leasehold improvements and equipment and operating lease agreements.

Item 3.		Legal Proceedings

We believe that no litigation is threatened or pending in which we face potential loss or exposure which could materially affect our consolidated financial position, consolidated results of operations or cash flows. Since our subsidiaries act as depositories of funds and trust agents, they are occasionally named as defendants in lawsuits involving claims to the ownership of funds in particular accounts. This and other litigation is incidental to our business.

Item 4.		Reserved

PART II.

Item 5.		Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

The common stock of FBFS is traded on the Nasdaq National Market under the symbol “FBIZ”. As of January 31, 2010, there were 453 registered shareholders of record of FBFS common stock. Certain of the Corporation’s shares are held in “nominee” or “street” name and the number of beneficial owners of such shares is approximately 379.

The following table presents the range of high and low closing sale prices of our common stock for each quarter within the two most recent fiscal years, according to information available, and cash dividends declared for the years ended December 31, 2009 and 2008, respectively.

		High				Low				Dividend Declared
2009
1st Quarter		$	15.08			$	10.50			$	0.07
2nd Quarter			13.95				10.45				0.07
3rd Quarter			11.72				7.70				0.07
4th Quarter			10.42				9.10				0.07
2008
1st Quarter		$	17.94			$	15.90			$	0.07
2nd Quarter			19.64				15.53				0.07
3rd Quarter			17.48				14.01				0.07
4th Quarter			17.25				13.00				0.07

The timing and amount of future dividends are at the discretion of the Board of Directors of the Corporation (the Board) and will depend upon the consolidated earnings, financial condition, liquidity and capital requirements of the Corporation and its subsidiaries, the amount of cash dividends paid to the Corporation by its subsidiaries, applicable government regulations and policies and other factors considered relevant by the Board. Refer to Item 1, Business – Supervision and Regulation for additional discussion regarding the limitations on dividends and other capital contributions by the Banks to the Corporation. The Board anticipates it will continue to pay dividends in amounts determined based on the above factors.

The following table summarizes compensation plans under which equity securities of the registrant are authorized for issuance as of December 31, 2009.

Equity Compensation Plan Information

Number of securities

remaining available for

future issuance under

Number of securities to

Weighted-average

equity compensation

be issued upon exercise

exercise price of

plans (excluding

of outstanding options,

outstanding options,

securities reflected in

Plan category

warrants, and rights.

warrants, and rights

column (a))

(a)

(b)

(c)

Equity compensation plans approved by security holders

142,790

$

22.01

135,404

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. There currently is no expiration date to this stock repurchase program.

Issuer Purchases of Securities

Approximate

Total Number of

Dollar Value of

Shares Purchased

Shares that May

as Part of Publicly

Yet Be Purchased

Total Number of

Average Price Paid

Announced Plans

Under the Plans or

Period

Shares Purchased

Per Share

or Programs

Programs

October 1 – 31, 2009

—

—

—

$

177,150

November 1 – 30, 2009

—

—

—

177,150

December 1 – 31, 2009

—

—

—

177,150

Item 6.		Selected Consolidated Financial Data

Three Year Comparison of Selected Consolidated Financial Data

		As of and for the Year Ended December 31,
		2009				2008				2007
		(Dollars In Thousands, Except Share Data)
FOR THE YEAR:
Interest income		$	56,356			$	59,773			$	59,488
Interest expense			28,322				33,515				36,280
Net interest income			28,034				26,258				23,208
Provision for loan and lease losses			8,225				4,299				2,904
Non-interest income			6,450				5,105				4,383
Non-interest expense			23,810				20,841				19,624
Loss on foreclosed properties			691				1,043				—
Income tax expense			717				2,056				1,807
Net income		$	1,041			$	3,124			$	3,256
Yield on earning assets			5.57	%			6.39	%			7.36	%
Cost of funds			3.03				3.89				4.91
Interest rate spread			2.53				2.50				2.45
Net interest margin			2.77				2.81				2.87
Return on average assets			0.10				0.32				0.39
Return on average equity			1.90				6.11				6.86
ENDING BALANCE SHEET:
Total Assets		$	1,117,436			$	1,010,786			$	918,438
Securities			122,286				109,124				97,378
Loans and leases, net			839,807				840,546				771,633
Deposits			984,374				838,874				776,060
Borrowed funds			57,515				94,526				81,986
Junior subordinated notes			10,315				10,315				—
Stockholders’ equity			54,393				53,006				48,552
FINANCIAL CONDITION ANALYSIS:
Allowance for loan losses to year-end loans			1.65	%			1.39	%			1.26	%
Allowance to non-accrual loans			50.76				72.74				111.17
Net charge-offs to average loans			0.69				0.28				0.19
Non-accrual loans to gross loans			3.26				1.91				1.13
Average equity to average assets			5.19				5.27				5.64
STOCKHOLDERS’ DATA:
Basic earnings per share(1)		$	0.41			$	1.24			$	1.29
Diluted earnings per share(1)			0.41				1.24				1.29
Book value per share at end of period			21.42				20.82				19.35
Dividend declared per share			0.28				0.28				0.26
Dividend payout ratio			68.29	%			22.58	%			20.15	%
Shares outstanding			2,539,306				2,545,546				2,509,213

Item 7.		Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

When used in this report, and in any oral statements made with the approval of an authorized executive officer, the words or phrases “may,” “could,” “should,” “hope,” “might,” “believe,” “expect,” “plan,” “assume,” “intend,” “estimate,” “anticipate,” “project,” “likely,” or similar expressions are intended to identify “forward-looking statements.” Such statements are subject to risks and uncertainties, including, without limitation, changes in economic conditions in the market area of FBB or FBB – Milwaukee, changes in policies by regulatory agencies, fluctuation in interest rates, demand for loans in the market area of FBB or FBB – Milwaukee, borrowers defaulting in the repayment of loans and competition. These risks could cause actual results to differ materially from what FBFS has anticipated or projected. These risk factors and uncertainties should be carefully considered by potential investors. See Item 1A – Risk Factors for discussion relating to risk factors impacting the Corporation. Investors should not place undue reliance on any such forward-looking statements, which speak only as of the date made. The factors described within this Form 10-K could affect the financial performance of FBFS and could cause actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods.

Where any such forward-looking statement includes a statement of the assumptions or bases underlying such forward-looking statement, FBFS cautions that, while its management believes such assumptions or bases are reasonable and are made in good faith, assumed facts or bases can vary from actual results, and the differences between assumed facts or bases and actual results can be material, depending on the circumstances. Where, in any forward-looking statement, an expectation or belief is expressed as to future results, such expectation or belief is expressed in good faith and believed to have a reasonable basis, but there can be no assurance that the statement of expectation or belief will result in, or be achieved or accomplished.

FBFS does not intend to, and specifically disclaims any obligation to, update any forward-looking statements.

The following discussion and analysis is intended as a review of significant events and factors affecting the financial condition and results of operations of FBFS for the periods indicated. The discussion should be read in conjunction with the Consolidated Financial Statements and the Notes thereto and the Selected Consolidated Financial Data presented in this Form 10-K.

Overview

Our principal business is conducted by FBB and FBB – Milwaukee and certain subsidiaries of FBB and consists of a full range of commercial banking products and services tailored to meet the financial service needs of small and medium size businesses, business owners, executives, professionals, and high net worth individuals. Products include commercial lending, asset-based lending, equipment financing, trust and investment services and a broad range of deposit products. Our operating philosophy is focused on local decision making and local client service from each of our primary banking locations in Madison, Brookfield and Appleton, Wisconsin combined with the efficiency of centralized administrative functions such as support for information technology, finance and accounting and human resources. We believe we have a unique niche business banking model and we consistently operate within this niche. This allows us to provide a great deal of expertise in providing financial solutions to our clients with an experienced staff to serve our clients on an ongoing basis.

Beginning in 2008, continuing throughout 2009 and into 2010, the U.S. and world economies have experienced unprecedented changes in the capital and credit markets that have adversely affected the U.S. banking industry. The turmoil in the credit and capital markets has adversely impacted real estate values, businesses and the demand for credit, and the overall economic climate. Many financial institutions have sought merger partners or buyers, been forced to raise additional capital or forced into FDIC receivership by their primary regulator. The U.S. government has instituted several programs to stabilize the U.S. financial system and/or stimulate the U.S. economy that, among other things, were directed at increasing the capital bases of financial institutions.

The current economic environment presents significant challenges for us and our industry. We believe that our historic policies and underwriting practices, which we believe to be conservative, have left us relatively well-positioned in the current economic climate as compared to many U.S. financial institutions.

Our profitability depends on our ability to execute our strategic plan. Our plan emphasizes improving the overall quality of our loan and lease portfolio, minimizing loan and lease loss specific reserves and charge-offs, generating organic growth in our loan and lease portfolios and increasing our market share of in-market core deposits. Given a troubled economy throughout 2009, there were limited opportunities to grow the loan and lease portfolios of the Banks with appropriate quality and there was additional stress on our loan and lease portfolios. Therefore, our focus in 2009 was to closely monitor our loan portfolio, work through identified credit issues, maintain adequate capital levels and build prudent liquidity to be able to position the Banks for a return to a growth strategy and navigate through the economic turmoil. While our long term strategic plan remains the same, current weak economic conditions will dictate similar areas of focus in the near term.

As of December 31, 2009, our capital position and the capital position of each of our Banks is greater than regulatory minimum requirements and each of our Bank’s regulatory capital is greater than the level required to be “well capitalized” under Prompt Corrective Action Requirements.

In March 2009, we were approved to participate in the CPP offered by the UST. Subsequently, our Board elected not to participate in this program after fully evaluating the related costs and benefits, as well as the potential impact on the long-term value of our common stock outstanding.

Operational highlights

•

Our total assets increased to $1.1 billion as of December 31, 2009, a 10.5% increase as compared to $1.0 billion at December 31, 2008. The asset growth was primarily in our short-term investments which increased by approximately $99.7 million to $104.2 million at December 31, 2009 from $4.5 million at December 31, 2008. The majority of our short-term investments are maintained in balances with the Federal Reserve Bank. We view liquidity and safety and soundness to be a priority. Maintaining this level of liquidity with the Federal Reserve Bank was deemed a prudent business decision as we continue to navigate through the economic challenges that we currently face.

•

Net income for the year ended December 31, 2009 was $1.0 million compared to $3.1 million for the year ending December 31, 2008. The decline in net income is primarily attributable to an increase in the provision for loan and lease losses, increased collateral liquidation costs, and increased FDIC insurance expense.

•

Return on average equity was 1.90% in 2009 compared to 6.11% in 2008.

•

Top line revenue, which consists of net interest revenue and non-interest income, increased 10.0% to $34.5 million in 2009 compared to $31.4 million in 2008.

•

Our net interest margin decreased slightly to 2.77% for 2009 as compared to 2.81% for 2008.

•

Non-accrual loans and leases increased approximately $11.5 million, or 70.9%, to $27.8 million as of December 31, 2009 from $16.3 million as of December 31, 2008.

Recent Developments and Other Income Tax Matters

On February 19, 2009, the State of Wisconsin passed the Budget Stimulus Bill containing a number of provisions affecting business taxpayers including the adoption of unitary combined reporting. Effective for tax periods beginning January 1, 2009, corporations engaged in a unitary business are required to report their share of income from that unitary business to Wisconsin through the use of a combined report. Key components of the new combined reporting requirements include the following:

•

Many types of corporate entities, including certain activities of foreign entities, financial institutions and domestic insurance companies, are included in the combined group;

•

A greater than fifty percent direct or indirect ownership test applies for determining which corporate entities are included in the combined group;

•

The definition of a “unitary business” is construed as broadly as permitted under the U.S. Constitution and there is a presumption that a unitary business exists if certain factors – such as centralized management, intercorporate debts, or intercorporate services – are present;

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Only specified losses (e.g., losses generated when included in a combined report) may be shared amongst members of the combined group; and

•

Members of combined group shall be jointly and severally liable for costs, penalties, interest and taxes associated with the combined report.

We have completed our evaluation of the new Wisconsin Department of Revenue tax legislation and have concluded that our Nevada Investment subsidiaries will be included in the unitary group and are subject to Wisconsin income tax beginning on January 1, 2009. The adoption of the combined reporting rules had minimal impact on the consolidated financial results of the Corporation. Please refer to Note 16 in the Notes to the Consolidated Financial Statements for further details.

Like many financial institutions located in Wisconsin, FBB established a Nevada subsidiary for the purpose of investing and managing the Bank’s investment portfolio and purchasing a portion of FBB’s loans. FBB’s Nevada investment subsidiaries now hold and manage these assets. FBCC established a Nevada subsidiary for the purpose of purchasing FBCC’s loans. The investment subsidiaries have not filed returns with, or paid income or franchise taxes to, the State of Wisconsin. The Wisconsin Department of Revenue (the Department) implemented a program to audit Wisconsin financial institutions which formed investment subsidiaries located outside of Wisconsin, and the Department has generally indicated that it intends to assess income or franchise taxes on the income of the out-of-state investment subsidiaries of Wisconsin financial institutions. FBB received a Notice of Audit from the Department that covers the years from 1999 through 2005 and relates primarily to the issue of income of the Nevada investment subsidiaries. FBCC received a Notice of Audit from the Department that covers the years from 2001 through 2005. During 2004, the Department offered a blanket settlement agreement to most banks in Wisconsin having Nevada investment subsidiaries. The Department has not issued an assessment to FBB or FBCC, but the Department has stated that it intends to do so if the matter is not settled.

Prior to the formation of the investment subsidiaries, we obtained private letter rulings from the Department regarding the non-taxability of income generated by the investment subsidiaries in the State of Wisconsin. We believe we complied with Wisconsin law and the private rulings received from the Department. Should an assessment be forthcoming, we intend to defend our position vigorously through the normal administrative appeals process in place at the Department and through other judicial channels should they become necessary. Although we will vigorously oppose any such assessment, there can be no assurance that the Department will not be successful in whole or in part in its efforts to tax the income of our Nevada investment subsidiaries. We recorded, as a component of current state income tax expense, an estimated liability including interest which is the most likely amount within a range of probable settlement amounts relating to the taxation of income generated by the Nevada subsidiaries prior to January 1, 2009. In 2009, we continued to accrue interest related to the uncertain tax position surrounding this issue. We do not expect the resolution of this matter to materially affect our consolidated results of operations and financial position beyond the amounts accrued.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. By their nature, changes in these assumptions and estimates could significantly affect the financial position or results of operations for FBFS. Actual results could differ from those estimates. Please refer to Note 1 to the Consolidated Financial Statements for a discussion of the most significant accounting policies followed by FBFS. Discussed below are certain policies that are critical to FBFS. We view critical accounting policies to be those which are highly dependent on subjective or complex judgments, estimates, and assumptions, and where changes in those estimates and assumptions could have a significant impact on the financial statements.

Allowance for Loan and Lease Losses. The allowance for loan and lease losses represents our recognition of the risks of extending credit and our evaluation of the quality of the loan and lease portfolio and as such, requires the use of judgment as well as other systematic objective and quantitative methods. The risks of extending credit and the accuracy of our evaluation of the quality of the loan and lease portfolio are neither static nor mutually exclusive and could result in a material impact on our consolidated financial statements. We could over-estimate the quality of the loan and lease portfolio resulting in a lower allowance for loan and lease losses than necessary, overstating net income and equity. Conversely, we could under-estimate the quality of the loan and lease portfolio, resulting in a higher allowance for loan and lease losses than necessary, understating net income and equity. The allowance for loan and lease losses is a valuation allowance for probable credit losses, increased by the provision for loan and lease losses and decreased by charge-offs, net of recoveries. We estimate the allowance reserve balance required and the related provision for loan and lease losses based on monthly evaluations of the loan and lease portfolio, with particular attention paid to loans and leases that have been specifically identified as needing additional management analysis because of the potential for further problems. During these evaluations, consideration is also given to such factors as the level and composition of impaired and other non-performing loans and leases, historical loss experience, results of examinations by regulatory agencies, independent loan and lease reviews, the market value of collateral, the strength and availability of guarantees, concentration of credits and other factors. Allocations of the allowance may be made for specific loans or leases, but the entire allowance is available for any loan or lease that, in our judgment, should be charged off. Loan and lease losses are charged against the allowance when we believe that the uncollectibility of a loan or lease balance is confirmed. See Note 1 to the Consolidated Financial Statements for further discussion of the allowance for loan and lease losses.

We also continue to pursue all practical and legal methods of collection, repossession and disposal of problem loans, and adhere to rigorous underwriting standards in our origination process in order to continue to maintain strong asset quality. Although we believe that the allowance for loan and lease losses is adequate based upon current evaluation of loan and lease delinquencies, non-performing assets, charge-off trends, economic conditions and other factors, there can be no assurance that future adjustments to the allowance will not be necessary. Should the quality of loans or leases deteriorate, then the allowance for loan and lease losses would generally be expected to increase relative to total loans and leases. When loan or lease quality improves, then the allowance would generally be expected to decrease relative to total loans and leases.

Income Taxes. FBFS and its wholly owned subsidiaries file a consolidated federal income tax return and effective January 1, 2009, a combined Wisconsin state tax return. Deferred income taxes are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. The determination of current and deferred income taxes is based on complex analyses of many factors, including the interpretation of federal and state income tax laws, the difference between the tax and financial reporting basis of assets and liabilities (temporary differences), estimates of amounts currently due or owed, such as the timing of reversals of temporary differences and current accounting standards. We apply a more likely than not approach to each of our tax positions when determining the amount of tax benefit to record in our consolidated financial statements. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on deferred taxes is recognized in income in the period that includes the enactment date. We have made our best estimate of valuation allowances utilizing positive and negative evidence and evaluation of sources of taxable income including tax planning strategies and expected reversals of timing differences to determine our best estimate of valuation allowances needed for deferred tax assets on certain net operating loss carryforwards and other temporary differences. Realization of deferred tax assets over time is dependent on our ability to generate sufficient taxable earnings in future periods. A valuation allowance has been established for the future benefits attributable to certain of our state net operating losses. We have also made our best estimate of the probable loss related to a state tax exposure matter. These estimates are subject to change. Changes in these estimates could adversely affect future consolidated results of operations.

FBFS and its subsidiaries have state net operating loss (NOL) carryforwards as of December 31, 2009 of approximately $49.4 million, which expire in years 2010 through 2025. The majority of the state NOL carryforwards are attributable to the State of Wisconsin. We have established a valuation allowance of approximately $24.3 million for the NOL carryforwards. See Note 16 to the Consolidated Financial Statements for further discussion of income taxes. The federal and state taxing authorities who make assessments based on their determination of tax laws may periodically review our interpretation of federal and state income tax laws. Tax liabilities could differ significantly from the estimates and interpretations used in determining the current and deferred income tax liabilities based on the completion of taxing authority examinations.

Goodwill and Other Intangible Assets. Goodwill was recorded as a result of the acquisition of the 49% interest in the Business Banc Group (BBG) on June 1, 2004, the purchase price of which exceeded the fair value of the net assets acquired. Goodwill is reviewed at least annually, as of June 30, for impairment. This review requires judgment. If goodwill is determined to be impaired, a reduction in value would be expensed in the period in which it became impaired. No impairments have been recognized for the years ended December 31, 2009 or 2008. Our goodwill impairment evaluation is based upon discounted cash flows of the subsidiary reporting unit with further evaluation of the consolidated entity market capitalization. A series of assumptions, including the discount rate applied to the estimated future cash flows, are embedded within the evaluation. These assumptions and estimates are subject to uncertainties. There can be no assurances that discount rates will not increase, projected earnings and cash flows of our subsidiary reporting unit will not decline, and facts and circumstances influencing our consolidated market capitalization will not be altered. Accordingly, an impairment charge to goodwill and other intangible assets may be required if the book equity of our subsidiary reporting unit exceeds its fair value. An impairment charge to goodwill could have an adverse impact on future consolidated results of operations. See Note 1 and Note 7 to the Consolidated Financial Statements for further discussion of goodwill and other intangible assets.

Judgment is also used in the valuation of other intangible assets consisting of a core deposit intangible and a client list from a purchased brokerage/investment business. Core deposit intangibles were recorded for core deposits acquired in the BBG acquisition which was accounted for using the purchase method of accounting. The core deposit intangible assets were recorded under the presumption that they provide a more favorable source of funding than wholesale borrowings. An intangible asset was recorded for the present value of the difference between the expected interest to be incurred on these deposits and interest expense that would be expected if these deposits were replaced by wholesale borrowings, over the expected lives of the core deposits. The original estimate of the underlying lives of core deposits is fifteen years and ten years for the client list. These definite life intangible assets are amortized over the expected useful life. If it is determined that the deposits or the client list have shorter lives, the assets will be adjusted and an expense will be recorded for the amount that is impaired. No adjustments to the estimated useful lives of these intangible assets were made during the years ended December 31, 2009 or 2008.

Results of Operations

Comparison of the Years Ended December 31, 2009 and 2008

Overview. Net income for the year ended December 31, 2009 was $1.0 million, a decline of 66.7%, or $2.1 million, from $3.1 million for the year ended December 31, 2008. The principal factors that contributed to this decline include an increase in the provision for loan and lease losses and an increase in certain non-interest expenses. The provision for loan and lease losses increased $3.9 million primarily as a result of charges to the provision for the amount necessary to cover higher than anticipated charge-offs due to further deterioration of market conditions and increases in our general reserves caused by changes in our subjective criteria used to identify probable losses within the loan and lease portfolio. Non-interest expenses increased $2.6 million primarily due to increases in FDIC insurance expense and increased collateral liquidation costs. Positive factors partially offsetting the decline in net income include an increase in net interest income of $1.8 million and a $1.3 million increase in non-interest income which was primarily driven by increased service charges on deposits, increased loan fees and gains on sales of securities. Both basic earnings and diluted earnings per share were $0.41 for the year ended December 31, 2009. Both basic and diluted earnings per share were $1.24 for the year ended December 31, 2008. The decline in both basic and diluted earnings per share was directly related to the 66.7% decline in net income for the year ended December 31, 2009. Return on average assets and return on average equity were 0.10% and 1.90%, respectively, for the year ended December 31, 2009 compared to 0.32% and 6.11%, respectively, for the year ended December 31, 2008.

Top Line Revenue. Top line revenue is comprised of net interest income and non-interest income. This measurement is also commonly referred to as operating revenue. Top line revenue increased by approximately 10.0% from the prior year. The components of top line revenue were as follows:

		For the Year Ended
		December 31,
		2009				2008				Change
		(Dollars In Thousands)
Net interest income		$	28,034			$	26,258				6.8	%
Non-interest income			6,450				5,105				26.3
Total top line revenue		$	34,484			$	31,363				10.0

Adjusted Net Income. Adjusted net income is comprised of our net income as presented under generally accepted accounting principles (GAAP) adjusted for the after tax effects of the provision for loan and lease losses and actual net charge-offs incurred during the year. Historically, we experienced substantial organic growth in our loan and lease portfolio. As a result of this organic growth and the need for an additional provision for loan and lease losses required to support the increased inherent risk associated with a growing portfolio, we adjusted our GAAP net income for the after tax effects of the provision for loan and lease losses and related net charge-off activities to allow our management to better analyze the growth of our earnings, including a comparison to our benchmark peers. Institutions with different loan and lease growth rates may not have comparable provisions for loan and lease loss amounts and net charge-off activity. In our judgment, presenting net income excluding the after tax effects of the provision for loan and lease losses and actual net charge-offs allows investors to trend, analyze and benchmark our results of operations in a more meaningful manner. Our adjusted net income declined by 44.1% to $2.4 million for the year ended December 31, 2009 compared to $4.3 million for the year ended December 31, 2008. The decline in adjusted net income was primarily driven by the increased charge-offs recorded during 2009 coupled with increased collateral liquidation costs incurred to work through an increase in the number of impaired loans and leases in the loan and lease portfolio and a substantial increase in FDIC insurance expense. Adjusted net income is a non-GAAP financial measure that does not represent and should not be considered as an alternative to net income derived in accordance with GAAP. A reconciliation of net income to adjusted net income is as follows:

		For the Year Ended December 31,
		2009				2008				Change
		(Dollars in Thousands)
Net income, presented under US GAAP		$	1,041			$	3,124				(66.7	)%
Add back:
Provision for loan and lease losses, after tax			5,000				2,613				91.4
Less:
Net charge-offs, net of tax			3,616				1,402				157.9
Adjusted net income		$	2,425			$	4,335				(44.1	)

Return on Equity. Return on equity for the year ended December 31, 2009 was 1.90% compared to 6.11% for the year ended December 31, 2008. The decline in return on equity was directly related to the decline in net income which was caused by increased provision for loan and lease losses, increased collateral liquidation costs, and increased FDIC insurance expense, including a special assessment accrued for during the second quarter of 2009, along with other factors discussed throughout this Annual Report on Form 10-K, partially offset by increases in net interest income and non-interest income. We view return on equity as an important measurement for monitoring profitability and we are continuing to focus on improving our return to our shareholders by enhancing the overall profitability of our client relationships, controlling our expenses and minimizing our costs of credit.

Net Interest Income. Net interest income is dependent on the amounts of and yields on interest-earning assets as compared to the amounts of and rates on interest-bearing liabilities. Net interest income is sensitive to changes in market rates of interest and the asset/liability management strategies used by management in responding to such changes. The dollar volume of loans, leases and investments compared to the dollar volume of deposits and borrowings, combined with the interest rate spread, produces the changes in net interest income between periods. The table below provides information with respect to (1) the effect on interest income attributable to changes in rate (changes in rate multiplied by prior volume), (2) the effect on interest income attributable to changes in volume (changes in volume multiplied by prior rate) and (3) the changes in rate/volume (changes in rate multiplied by changes in volume) for the year ended December 31, 2009 compared to the year ended December 31, 2008.

Rate/Volume Analysis

		Increase (Decrease) for the Year Ended December 31,
		2009 Compared to 2008
										Rate/
		Rate				Volume				Volume				Net
		(In Thousands)
Interest-Earning Assets
Commercial real estate and other mortgage loans		$	(4,625	)		$	3,092			$	(412	)		$	(1,945	)
Commercial and industrial loans			(403	)			(1,027	)			24				(1,406	)
Leases			(30	)			75				(1	)			44
Consumer loans			(159	)			(57	)			7				(209	)
Total loans and leases receivable			(5,217	)			2,083				(382	)			(3,516	)
Mortgage-related securities			(411	)			570				(50	)			109
Investment securities			—				(10	)			—				(10	)
FHLB Stock			—				—				—				—
Short-term investments			(75	)			624				(549	)			—
Total net change in income on interest-earning assets			(5,703	)			3,267				(981	)			(3,417	)
Interest-Bearing Liabilities
NOW accounts			(767	)			64				(48	)			(751	)
Money market			(619	)			1,163				(269	)			275
Certificates of deposit			(949	)			1,654				(577	)			128
Brokered certificates of deposit			(3,569	)			(1,321	)			205				(4,685	)
Total deposits			(5,904	)			1,560				(689	)			(5,033	)
FHLB advances			102				(563	)			(42	)			(503	)
Other borrowings			(62	)			(421	)			10				(473	)
Junior subordinated notes			(1	)			821				(4	)			816
Total net change in expense on interest-bearing liabilities			(5,865	)			1,397				(725	)			(5,193	)
Net change in net interest income		$	162			$	1,870			$	(256	)		$	1,776

The yield on earning assets was 5.57% for the year ended December 31, 2009, a decline of 82 basis points from 6.39% for the year ended December 31, 2008. Loan and lease yields were primarily impacted by a low interest rate environment and the re-pricing of adjustable rate loans mitigated by the existence of interest rate floors within the terms of the loan agreements. As of December 31, 2009, approximately 55% of our loan and lease portfolio had a fixed interest rate while another 26.3% of our loan and lease portfolio contained interest rate floors. The magnitude of the portfolio being fixed rate in nature or represented by “in-the-money” floors has protected our loan and lease portfolio yield from declines of the same magnitude as the overall interest rate environment. The average prime rate declined 183 basis points to 3.25% for the year ended December 31, 2009 compared to 5.08% for the same period of 2008. Our loan yield is affected by the level of non-accrual loans and by the varying amount of loan fees collected in lieu of interest. For the year ended December 31, 2009 as compared to the year ended December 31, 2008, the net effect of these factors was approximately only two basis points on the overall yield of the loan and lease portfolio.

The rate on interest-bearing liabilities was 3.03% for the year ended December 31, 2009, a decrease of 86 basis points from 3.89% for the comparable period of the prior year. Rates on interest-bearing deposits were 2.82% for the year ended December 31, 2009, a decrease of 97 basis points from 3.79% for the comparable period of the prior year. The decrease was primarily due to the overall lower rate environment partially offset by influences of competitive pricing and implied interest rate floors necessary to retain in-market deposit balances.

The average cost of borrowings including FHLB advances, other borrowings, and junior subordinated notes for the year ended December 31, 2009 was 5.61% compared to 4.86% for the year ended December 31, 2008. The increase in the weighted average cost of borrowings is primarily due to the timing of the issuance of our junior subordinated notes and the April 2009 re-issuance of approximately $31 million of subordinated debt. The junior subordinated notes were issued on September 26, 2008 and bear a fixed interest rate of 10.5%. We re-issued approximately $31 million of subordinated debt with increased spreads over the 1 Month LIBOR index and a floor of 5.5% where the prior year subordinated notes did not contain interest rate floors. The notes were re-issued in April 2009 and have been at their floor since the end of April 2009; however, this is partially offset by a decline in the average 1 Month LIBOR index year over year.

Net interest margin decreased to 2.77% for the year ended December 31, 2009 from 2.81% for the year ended December 31, 2008. The decline in net interest margin was primarily caused by our strategic shift toward increased on-balance sheet liquidity by maintaining a higher level of lower yielding, immediately available deposits with the Federal Reserve Bank and a decline in the relative contribution of net free funds to the net interest margin. In this challenging economic environment, we are generally implementing interest rate floors on new and renewed variable rate loans and increasing spreads on loans which have allowed us to increase our overall net interest spread. For the year ended December 31, 2009 average short-term investments were approximately $34.8 million and were earning approximately 24 basis points. This compares to an average balance of short-term investments for the year ended December 31, 2008 of $4.2 million yielding 2.04%. The substantial increase in the average balance of the short-term investments is directly related to our emphasis of increasing our on-balance sheet liquidity held on deposit with the Federal Reserve Bank.

Net Interest Income Information

Average Interest-Earning Assets, Average Interest-Bearing Liabilities, Interest Rate Spread and Net Interest Margin. The following table shows our average balances, interest, average rates, net interest margin and the spread between combined average rates earned on the our interest-earning assets and cost of interest-bearing liabilities for the periods indicated. The average balances are derived from average daily balances.

		For the Year Ended December 31,
		2009												2008
										Average												Average
		Average								yield/				Average								yield/
		balance				Interest				cost				balance				Interest				cost
		(Dollars In Thousands)
Interest-Earning Assets
Commercial real estate and other mortgage loans		$	595,885			$	32,794				5.50	%		$	547,177			$	34,739				6.35	%
Commercial and industrial loans			214,212				15,822				7.39				227,795				17,228				7.56
Leases			29,577				1,847				6.24				28,398				1,803				6.35
Consumer loans			21,583				1,005				4.66				22,648				1,214				5.36
Total loans and leases receivable(1)			861,257				51,468				5.98				826,018				54,984				6.66
Mortgage-related securities(2)			114,151				4,803				4.21				101,787				4,694				4.61
Investment securities(2)			—				—				—				261				10				3.83
Federal Home Loan Bank stock			2,367				—				—				2,367				—				—
Short-term investments			34,762				85				0.24				4,169				85				2.04
Total interest-earning assets			1,012,537				56,356				5.57				934,602				59,773				6.39
Non-interest-earning assets			40,779												34,758
Total assets		$	1,053,316											$	969,360
Interest-Bearing Liabilities
NOW accounts		$	67,061				266				0.40			$	63,089				1,017				1.61
Money market			214,751				2,953				1.38				149,727				2,678				1.79
Certificates of deposit			121,801				2,847				2.34				75,730				2,719				3.59
Brokered certificates of deposit			460,691				18,332				3.98				488,734				23,017				4.71
Total deposits			864,304				24,398				2.82				777,280				29,431				3.79
FHLB advances			18,873				880				4.66				31,840				1,383				4.34
Other borrowings			40,738				1,932				4.74				49,393				2,405				4.87
Junior subordinated notes			10,315				1,112				10.78				2,734				296				10.83
Total interest-bearing liabilities			934,230				28,322				3.03				861,247				33,515				3.89
Non-interest-bearing liabilities			64,398												57,009
Total liabilities			998,628												918,256
Stockholders’ equity			54,688												51,104
Total liabilities and stockholders’ equity		$	1,053,316											$	969,360
Net interest income/interest rate spread						$	28,034				2.53	%						$	26,258				2.50	%
Net interest-earning assets		$	78,307											$	73,355
Net interest margin											2.77	%											2.81	%
Average interest-earning assets to average interest-bearing liabilities			108.38	%											108.52	%
Return on average assets			0.10												0.32
Return on average equity			1.90												6.11
Average equity to average assets			5.19												5.27
Non-interest expense to average assets			2.33												2.26

Provision for Loan and Lease Losses. Our provision for loan and lease losses is dependent on credit quality and determined based upon the inherent credit risk and other subjective factors pursuant to our allowance for loan and lease loss methodology, the magnitude of net charge-offs recorded in the period and the amount of reserves established for impaired loans that present collateral shortfall positions. To establish the appropriate level of the allowance for loan and lease losses, we regularly review our historical charge-off migration analysis and an analysis of the current level and trend of several factors that we believe may indicate losses in the loan and lease portfolio. These factors include delinquencies, volume, average size, average risk rating, technical defaults, unemployment rates, geographic concentrations, industry concentrations, loans and leases on the management attention watch list, experience in the credit granting functions and changes in underwriting standards, and level of non-performing assets and related fair value of underlying collateral. While we have made no significant changes to our loan and lease policies in 2009 or 2008, current economic conditions have caused us to add additional rigor to our underwriting and monitoring processes.

The provision for loan and lease losses totaled $8.2 million for the year ended December 31, 2009 compared to $4.3 million for the year ended December 31, 2008. During the year ended December 31, 2009, the significant factors influencing the provision for loan and lease losses were the following:

•

increasing the amount of the general reserve by approximately $2.0 million due to changes in the evaluation of the subjective factors including changes in the charge-off migration analysis for current year activity,

•

increasing the reserve by approximately $6.1 million for the amount necessary to cover higher than anticipated net charge-offs due to further deterioration of market conditions,

•

a net increase of approximately $429,000 due to required specific reserves on impaired loans and

•

decreasing the reserve by approximately $179,000 for decreased inherent risk associated with the net decline of non-impaired loans in the loan and lease portfolio.

Refer to Allowance for Loan and Lease Losses for further information.

Non-Interest Income. Non-interest income, consisting primarily of fees earned for trust and investment services, service charges and fees on deposits and loans and income from bank-owned life insurance, increased $1.3 million, or 26.3%, to $6.5 million for the year ended December 31, 2009, from $5.1 million for the year ended December 31, 2008.

Trust and investment services fee income declined by $50,000, or 2.6%, to $1.9 million for the year ended December 31, 2009 compared to $2.0 million for the year ended December 31, 2008. Trust and investment services fee income can be broken into two components including trust fee income and brokerage income. Trust fee income is driven by the market value of assets under management. Trust fee income remained flat at $1.6 million for the year ended December 31, 2009. As clients add or withdraw assets and market values fluctuate, so does trust fee income. At December 31, 2009, we had $323.3 million of trust assets under management. This is a $67.9 million, or 27.1%, increase in trust assets under management which were $255.4 million at December 31, 2008. The increase in trust assets under management is a result of the overall change in equity market values late in 2009 coupled with additional assets received from new and existing clients. In the six month period ending February 2009, the equity markets suffered their worst downturn since the Great Depression as measured by the performance of Dow Jones Industrial average. Equity markets had a significant recovery in the remaining ten months of 2009, but remained down over the two year period by more than 21% as measured by the Dow Jones Industrial average, thus affecting the level of trust fee income recorded. The second component of trust and investment services fee income relates to brokerage income. Brokerage income is comprised of commissions on trading activity and 12b-1 fees on mutual fund positions. As a result of changes in client activity, brokerage income decreased by approximately $90,000, or 23.0%, for the year ended December 31, 2009 compared to the year ended December 31, 2008. As of December 31, 2009, the brokerage assets under administration increased by $17.3 million, or 16.2%, to $124.2 million compared to $106.8 million at December 31, 2008.

Service charges on deposits increased $438,000, or 39.8%, to $1.5 million for the year ended December 31, 2009 from $1.1 million for the year ended December 31, 2008. The increase in service charge income is in direct correlation to a lower interest rate environment. Our business demand deposit clients receive an earnings credit based upon current market rates and balances kept within our Banks. These earnings credits are utilized to reduce the service charges incurred on their deposit accounts. As the interest rate index utilized to calculate the earnings credit has fallen over the measurement period, the majority of our clients do not have sufficient earnings credits to fully eliminate the service charges on their accounts, resulting in increased service charge income recognized within our consolidated financial statements.

Loan fees increased approximately $415,000, or 65.3%, to $1.1 million for the year ended December 31, 2009 from $636,000 for the year ended December 31, 2008. Loan fees represent non-deferrable fees earned on loan activity and the revenue generated through our collateral audit process we perform to ensure the integrity of the collateral associated with our asset-based loans. The increase in loan fees was primarily related to additional audit fee income recognized.

During the third quarter of 2009, we sold approximately $15.0 million of collateralized mortgage obligations of government-sponsored enterprises in an effort to modify the overall risk profile of our investment portfolio. A gain of approximately $322,000 was recognized on the sale of these securities. Proceeds from the sale of these securities were used to purchase collateralized mortgage obligations of government agencies, or GNMA securities. GNMA securities are guaranteed by the U.S. federal government which reduces our overall exposure to other than temporary losses and have favorable capital treatment under the regulatory guidelines. No securities were sold during the year ended December 31, 2008.

Beginning in the third quarter of 2008, we offered interest rate swap products directly to our qualified commercial borrowers. We simultaneously economically hedged these client derivative transactions by entering into offsetting interest rate swap contracts with dealer counterparties. Derivative transactions executed as part of this program are not designated as hedge relationships and are marked-to-market through earnings each period. We recognize income in the consolidated income statements related to the initial fair value for the swaps which for the year ended December 31, 2009 and 2008 totaled $279,000 and $188,000, respectively. With changes in the economic environment and overall interest rate changes, our activity of closing interest rate swaps as a means to offer a fixed rate alternative to our clients has slowed. At this time, we do not expect a significant increase in our derivative portfolio. Change in fair value of non-hedge derivative contracts is included in other income in the consolidated statements of income. The derivative contracts have mirror-image terms, which results in the positions’ changes in fair value primarily offsetting through earnings each period. Each of the swap contracts include a credit risk component of the fair value calculation which is included in earnings but was not significant for the year ended December 31, 2009 and 2008.

Non-Interest Expense. Non-interest expense increased $2.6 million, or 12.0%, to $24.5 million for the year ended December 31, 2009 from $21.9 million for the comparable period of 2008, primarily due to an increase in FDIC insurance expense and an increase in collateral liquidation costs.

FDIC insurance expense was $2.2 million for the year ended December 31, 2009 compared to $599,000 for the year ended December 31, 2008. The increase in FDIC insurance expense is due to higher premium rates to reflect our participation in the temporary liquidity guarantee program, general overall increases in the rates charged by the FDIC applied to our larger deposit base and the recognition of a special assessment of approximately $481,000 that was paid during 2009. On December 31, 2009, the Banks prepaid their estimated regular insurance assessment for 2010, 2011 and 2012. The payment, in the amount of $5.4 million, is reflected as a prepaid asset in other assets in our consolidated balance sheet and will be amortized over the insurance coverage periods.

Collateral liquidation costs were $1.3 million for the year ended December 31, 2009 compared to $41,000 for the year ended December 31, 2008. These expenses represent costs incurred to work through our impaired loans. Collateral liquidation costs include legal expenses, rent expenses, shipping costs, warranty expenses, taxes incurred by the client and other necessary expenses required for us to pay to protect our security interest. It is doubtful that we will recoup these expenses and have recognized them through our consolidated results of operations as incurred. Our focus in 2009 was on working through our impaired loans and leases and resulted in the substantial increase in expense in 2009 as compared to 2008. While we will continue to work through our impaired loan portfolio, we do not expect the 2009 level of collateral liquidation costs to repeat in 2010.

Income Taxes. Income tax expense was $717,000 for the year ended December 31, 2009, with an effective tax rate of 40.8%, compared to $2.1 million, with an effective tax rate of 39.7%, for the year ended December 31, 2008. The effective tax rate also includes additional interest expense, net of federal tax benefit, accrued on our uncertain tax positions. Interest expense, net of federal tax benefit, recognized on these uncertain tax positions was approximately $160,000 and $116,000 for the years ended December 31, 2009 and 2008, respectively. Excluding the interest expenses related to the uncertain tax positions, our effective tax rate for the years ended December 31, 2009 and 2008 would have been 31.7% and 37.4%, respectively. The decline in the effective tax rate, based on this measurement, was due to the relationship of tax-exempt income (e.g., increase in cash surrender value of life insurance) to income before tax expense. In addition, in 2008, we recorded an additional expense of $35,000 associated with closing of an IRS examination of the 2004 and 2005 tax years.

In February 2009, the State of Wisconsin enacted unitary combined reporting effective January 1, 2009. Due to the new tax law, we have included income generated by our investment subsidiaries, which are domiciled in Nevada, into our calculation of taxable income to determine our expected Wisconsin tax liability. As a result of the new law, 2009 and future tax losses generated by our holding company will be recognized and offset against Wisconsin income generated by other members of the combined group. The deferred tax asset related to existing Wisconsin holding company state tax net operating losses from years prior to 2009 will continue to maintain a 100% valuation allowance since we have determined that it is more likely than not that the deferred tax asset will not be realized.

As discussed earlier in management’s discussion and analysis, the Wisconsin Department of Revenue is auditing our treatment of our Nevada investment subsidiaries within FBB’s tax returns for the periods from 1999-2005, and FBCC’s tax returns for the period from 2001-2005. We had previously recorded an uncertain tax position reserve related to the treatment of the income generated by the Nevada investment subsidiaries in our separate company tax returns. Due to the change in the tax law, additional reserves relating to this uncertain tax position are no longer necessary since the investment subsidiaries’ income are taxed in Wisconsin beginning in 2009. The difference between the additional tax incurred from the Wisconsin unitary provisions and the amount of tax expense previously related to uncertain tax positions was minor and therefore the change in the Wisconsin tax law did not have a significant impact to our overall effective tax rate or tax position for the year ended December 31, 2009 compared to the year ended December 31, 2008. Please refer to Note 16 in the Notes to the Consolidated Financial Statements for further discussion.

Financial Condition
December 31, 2009

General. At December 31, 2009 our total assets were $1.1 billion, an increase of $106.7 million, or 10.6%, from $1.0 billion at December 31, 2008. This asset growth was primarily in our short-term investments portfolio which increased by approximately $99.7 million as we continued to build our on balance sheet liquidity.

Short-term investments. Short-term investments were $104.2 million at December 31, 2009 compared to $4.5 million at December 31, 2009. Funds obtained from successful in-market deposit gathering initiatives were used to pay-down overnight FHLB advances and to purchase additional securities available for sale. Any excess funds were maintained as on-balance sheet liquidity in our interest bearing account with the Federal Reserve Bank. We value the safety and soundness provided by the Federal Reserve Bank, and in this difficult environment, we view on-balance sheet liquidity as a critical element to maintaining appropriate levels of cash to meet our obligations.

Securities. Securities available-for-sale increased $13.2 million to $122.3 million at December 31, 2009 from $109.1 million at December 31, 2008, primarily due to purchases of collateralized mortgage obligations issued by government agencies, primarily Government National Mortgage Association (GNMA), and positive increases in market valuation on the portfolio of securities we hold. Securities are classified as available-for-sale, held-to-maturity and trading. Available-for-sale securities are carried at fair value, with the unrealized gains and losses, net of tax, reported as a separate component of stockholders’ equity. We held no securities designated as held-to-maturity or trading as of December 31, 2009 and 2008.

Our available-for-sale portfolio primarily consists of collateralized mortgage obligations and is used to provide a source of liquidity, while contributing to the earnings potential of the Banks’ assets. We purchase investment securities intended to protect our net interest margin while maintaining an acceptable risk profile. Mortgage-related securities, including collateralized mortgage obligations, are subject to risks based upon the future performance of underlying mortgage loans for these securities. The overall credit risk associated with these investments as it relates to our investment portfolio is minimal as we primarily purchase investments which are guaranteed by GNMA. We may also purchase securities insured by the Federal Home Loan Mortgage Corporation (FHLMC) or Federal National Mortgage Association (FNMA). In addition, we believe the collateralized mortgage obligations represent attractive investments due to the wide variety of maturity and repayment options available to allow us to better match our liability structure. Of the total available-for-sale mortgage securities at December 31, 2009, $118.5 million, or 96.9%, were issued by GNMA and $3.8 million, or 3.1% were issued by FHLMC or FNMA. None of the securities within our portfolio are collateralized by sub-prime mortgages. We do not hold any FHLMC or FNMA preferred stock. GNMA securities are guaranteed by the U.S. federal government and provide favorable capital treatment. Throughout 2009, we sold approximately $15.0 million of FHLMC or FNMA securities. The sales of these securities resulted in a net gain on sale of securities available for sale of approximately $322,000. The proceeds from the sales of these securities were used to purchase GNMA securities as we continue to modify the overall risk exposure of our investment portfolio.

Risks associated with our mortgage related securities portfolio are prepayment risk, extension risk and interest rate risk. Should general interest rates decline, the mortgage-related securities portfolio would be subject to prepayments caused by borrowers seeking lower financing rates. Conversely, an increase in general interest rates could cause the mortgage-related securities portfolio to be subject to a longer term to maturity caused by borrowers being less likely to prepay their loans. Such a rate increase could also cause the fair value of the mortgage related securities portfolio to decline. Given the current economic condition and increased rates of foreclosures, extension risk becomes more prevalent; however, based upon the tranches of the securities we purchased, we are part of the pool that is first to receive its contractual principal and interest on these investments, thereby minimizing the risk of default and deviation from the planned extension risk and other-than-temporary loss considerations.

Investment objectives are formed to meet liquidity requirements and generate a favorable return on investments without compromising other business objectives and levels of interest rate risk and credit risk. Consideration is also given to investment portfolio concentrations. Federal and state chartered banks are allowed to invest in various types of assets, including U.S. Treasury obligations, securities of various federal agencies, state and municipal obligations, mortgage-related securities, certain time deposits of insured financial institutions, repurchase agreements, loans of federal funds, and, subject to certain limits, corporate debt and equity securities, commercial paper and mutual funds. Our investment policy provides that we will not engage in any practice that the Federal Financial Institutions Examination Council considers an unsuitable investment practice. These objectives are formalized and documented in our investment policy which is approved by the Banks’ Boards of Directors (Boards) on an annual basis. Management, as authorized by the Boards, implements this policy. The Boards review investment activity on a monthly basis.

At December 31, 2009, $55.9 million of our mortgage-related securities was pledged to secure our various obligations.

The table below sets forth information regarding the amortized cost and fair values of our investments and mortgage-related securities at the dates indicated.

		As of December 31,
		2009								2008
		Amortized cost				Fair value				Amortized cost				Fair value
		(In Thousands)
Securities available-for-sale
Collateralized mortgage obligations – government agencies		$	116,109			$	118,509			$	81,406			$	82,859
Collateralized mortgage obligations – government sponsored enterprises			3,729				3,777				26,090				26,265
		$	119,838			$	122,286			$	107,496			$	109,124

The following table sets forth the contractual maturity and weighted average yield characteristics of the fair value of our debt securities at December 31, 2009, classified by term maturity. Actual maturities may differ from contractual maturities because issuers have the right to call or prepay obligations without call or prepayment penalties.

		Less than One Year								One to Five Years								Five to Ten Years								Over Ten Years
						Weighted								Weighted								Weighted								Weighted
						Average								Average								Average								Average
		Balance				Yield				Balance				Yield				Balance				Yield				Balance				Yield				Total
		(Dollars In Thousands)
Available-for-sale
Collateralized mortgage obligations – government agencies		$	—				—			$	918				5.14	%		$	438				5.26	%		$	117,153				4.04	%		$	118,509
Collateralized mortgage obligations – government sponsored enterprises			—				—				131				3.84				3,165				3.74				481				4.36				3,777
		$	—							$	1,049				4.97			$	3,603				3.92			$	117,634				4.04			$	122,286

We currently do not hold any tax-exempt securities; therefore, all yields presented are based on a tax equivalent basis.

Derivative Activities. The Banks’ investment policies allow the Banks to participate in hedging strategies or use financial futures, options or forward commitments or interest rate swaps with prior Board approval. The Banks utilize, from time to time, derivative instruments in the course of their asset/liability management. As of December 31, 2009, we did not hold any derivative instruments that were designated as cash flow or fair value hedges, and our current derivative portfolio consisted primarily of interest rate swaps offered directly to qualified commercial borrowers which allow us to provide a fixed rate alternative to our clients while mitigating our interest rate risk by keeping a variable rate loan in our portfolio. We economically hedge client derivative transactions by entering into equal and offsetting interest rate swap contracts executed with dealer counterparties. The economic hedge with the dealer counterparties allows us to primarily offset the fixed rate interest rate risk. Derivative transactions executed through this program are not designated as accounting hedge relationships and are marked-to market through earnings each period. For further discussion on our interest rate risk management activities and use of derivatives, see Note 1 to the Consolidated Financial Statements.

As of December 31, 2009, the aggregate amortizing notional value of interest rate swaps with various commercial borrowers was approximately $48.4 million. We receive fixed rates and pay floating rates based upon LIBOR on the swaps with commercial borrowers. These swaps mature between August 2013 and April 2019. At December 31, 2009, the fair value of the swaps with commercial borrowers was approximately $1.3 million and was included in accrued interest receivable and other assets, and a derivative liability of $167,000, included in accrued interest and other liabilities. On the offsetting swap contracts with dealer counterparties, we pay fixed rates and receive floating rates based upon LIBOR. These interest rate swaps mature between August 2013 and April 2019. Dealer counterparty swaps were reported on our balance sheet as a net derivative liability of $1.1 million due to master netting and settlement contracts with dealer counterparties and is included in accrued interest payable and other liabilities as of December 31, 2009.

Loans and Leases Receivable. Total net loans and leases remained flat at $839.8 million at December 31, 2009 compared to $840.5 at December 31, 2008. Gross loans increased by approximately $1.7 million while the allowance for loan and lease losses increased by $2.3 million. The Banks principally originate commercial and industrial loans and commercial real estate loans. The growth in our gross loan and lease portfolio during 2009 is substantially lower than growth rates we experienced in prior years. The demand for new loans within our markets has declined. We are competing for fewer high quality loan opportunities with other lenders which have put pressure on our ability to grow our loan and lease portfolio at those growth rates we experienced in recent years. We remain committed to our underwriting standards and continue to seek high quality assets to continue to execute our growth plan. The current economic environment continues to put strain on our loan and lease portfolio as evidenced by an increase in the amount of impaired loans within our portfolio. Increased impaired loans coupled with declines in collateral values have caused increased allowance for loan and lease loss reserves.

We are experiencing a reduction in our commercial and industrial loan portfolio as our clients manage through the economic environment by downsizing their balance sheets which in turn reduces their outstanding borrowings with us. Commercial and industrial loans decreased by approximately $25.3 million, or 16.7%, to $126.7 million at December 31, 2009 from $151.9 million at December 31, 2008. Conversely, we have experienced an increase in our first mortgage loan portfolio. Total first mortgage loans, including commercial real estate loans, construction and land development loans, multi-family loans and 1-4 family loans, were $606.1 million at December 31, 2009, an increase of 6.5%, from $568.9 million at December 31, 2008. We are experiencing a decline in the construction and land development loan portfolio as projects complete and migrate to permanent financing, as there are limited new construction loan origination opportunities, as the projects are refinanced with other institutions as we make an effort to reduce our exposure in this portion of our portfolio, as loans are written down to their estimated fair value through a charge to the allowance for loan losses or are ultimately foreclosed upon.

As discussed in Item 1A – Risk Factors, we have a concentration in commercial real estate loans. Commercial real estate lending typically involves larger loan principal amounts than that for residential mortgage loans or consumer loans. Commercial real estate loans have historically been viewed as having more inherent risk of default implying a higher potential loss on an individual loan basis. The repayment of these loans generally is dependent on sufficient income from the properties securing the loans to cover operating expenses and debt service. Payments on loans secured by commercial real estate are often dependent upon the successful operation and management of the properties therefore repayment of these loans may be affected by factors outside the borrower’s control, including adverse conditions in the real estate market or the economy. In the event that the cash flow from the property is reduced, the borrower’s ability to repay the loan could be impacted. The deterioration of one or a few of these loans could cause a significant increase in our percentage of non-performing loans. We have historically purchased loan participations in commercial real estate loans. These loan participations increased our risk of exposure to loss in geographic areas outside of our primary markets. We no longer purchase loan participations from other financial institutions. An increase in non-performing loans results in a loss of earnings from these loans and could result in an increase in the provision for loan and lease loss and an increase in charge-offs, all of which could have a material adverse impact on our net income.

Loan Portfolio Composition. The following table presents information concerning the composition of the Banks’ consolidated loans and leases held for investment at the dates indicated.

		As of December 31,
		2009								2008								2007
						Percent of								Percent of								Percent of
		Amount				Total				Amount				Total				Amount				Total
		(Dollars In Thousands)
Mortgage loans:
Commercial real estate		$	441,806				51.70	%		$	390,094				45.74	%		$	336,153				43.01	%
Construction and land development			64,194				7.51				84,778				9.94				90,545				11.58
Multi-family			43,959				5.14				42,514				4.99				41,821				5.35
1-4 family			56,131				6.58				51,542				6.04				48,437				6.20
Total mortgage loans			606,090				70.93				568,928				66.71				516,956				66.14
Commercial loans and leases:
Commercial and industrial			126,666				14.82				151,947				17.82				147,856				18.92
Asset-based			72,995				8.54				80,403				9.43				65,930				8.43
Direct financing leases, net			27,607				3.24				29,722				3.48				29,383				3.76
Total commercial loans and leases			227,268				26.60				262,072				30.73				243,169				31.11
Consumer loans:
Home equity and second mortgage			7,879				0.92				7,386				0.87				9,784				1.25
Credit card			817				0.10				855				0.10				854				0.11
Personal			384				0.04				1,254				0.15				1,147				0.15
Other			12,059				1.41				12,336				1.44				9,724				1.24
Total consumer loans			21,139				2.47				21,831				2.56				21,509				2.75
Gross loans and leases receivable			854,497				100.00	%			852,831				100.00	%			781,634				100.00	%
Contras to loans and leases:
Allowance for loan and lease losses			(14,124	)							(11,846	)							(9,854	)
Deferred loan fees			(566	)							(439	)							(147	)
Loans and leases receivable, net		$	839,807							$	840,546							$	771,633

Commercial Real Estate. The Banks originate commercial real estate loans which have fixed or adjustable rates and terms of generally up to five years and amortizations of up to twenty-five years on existing commercial real estate and new construction. Loans secured by commercial real estate consist of commercial owner-occupied properties as well as investment properties.

Construction, Multi-family Loans and 1-4 Family. The Banks originate loans to construct commercial properties and complete land development projects. The Banks’ construction loans generally have terms of six to twenty-four months with fixed or adjustable interest rates and fees that are due at the time of origination. Loan proceeds are disbursed in increments as construction progresses and as project inspections warrant. Multi-family loans are primarily secured by apartment buildings and are primarily located in Dane and Waukesha counties. One to four family first mortgage loans are primarily secured by single family homes that are held for investment by our clients. Loan participations expand the exposure to areas outside of the Banks’ primary market area. As of December 31, 2009 and 2008, our purchased participation commercial real estate loans were approximately $2.5 million and $5.6 million, respectively. We no longer purchase participations from other financial institutions to allow us direct access to all of our borrowing relationships. The change in participations purchased balances from 2008 to 2009 includes pay-downs/pay-offs of approximately $1.2 million, transfers to other real estate owned of approximately $583,000, and charge-offs recorded of approximately $1.4 million.

Commercial Loans. The Banks’ commercial and industrial loan portfolio is comprised of loans for a variety of purposes which generally are secured by inventory, accounts receivable, equipment, machinery and other corporate assets and are advanced within limits prescribed by our loan policy. The majority of such loans are secured and typically backed by personal guarantees of the owners of the borrowing business.

Of the $199.7 million of commercial and industrial loans, including asset based loans, outstanding as of December 31, 2009; $73.0 million were originated by FBCC, our asset-based lending subsidiary. These asset-based loans are typically secured by accounts receivable, inventories or equipment. Asset-based borrowers are usually highly leveraged therefore these loans generally have higher interest rates, non-origination fees collected in lieu of interest and are accompanied by close monitoring of assets. Asset-based loans secured by real estate amounted to $24.3 million as of December 31, 2009 and are included in the commercial real estate loan portfolio.

Leases. Leases originated through FBEF are originated with a fixed rate and typically a term of seven years or less. It is customary in the leasing industry to provide 100% financing, however, FBEF will, from time-to-time, require a down payment or lease deposit to provide a credit enhancement. All equipment leases must have an additional insured endorsement and a loss payable clause in the interest of FBEF and must carry sufficient physical damage and liability insurance.

FBEF leases machinery and equipment to clients under leases which qualify as direct financing leases for financial reporting and as operating leases for income tax purposes. Under the direct financing method of accounting, the minimum lease payments to be received under the lease contract, together with the estimated unguaranteed residual value (approximating 3 to 20% of the cost of the related equipment), are recorded as lease receivables when the lease is signed and the lease property is delivered to the client. The excess of the minimum lease payments and residual values over the cost of the equipment is recorded as unearned lease income. Unearned lease income is recognized over the term of the lease on a basis which results in a level rate of return on the unrecovered lease investment. Lease payments are recorded when due under the lease contract. Residual value is the estimated fair market value of the equipment on lease at lease termination. In estimating the equipment’s fair value, FBEF relies on historical experience by equipment type and manufacturer, published sources of used equipment pricing, internal evaluations and, where available, valuations by independent appraisers, adjusted for known trends.

Consumer and Other Mortgage Loans. The Banks originate a small amount of consumer loans consisting of home equity, second mortgage, credit card and other personal loans for professional and executive clients of the Banks.

Net Fee Income from Lending Activities. The Banks defer loan and lease origination and commitment fees and certain direct loan and lease origination costs and amortize the net amount as an adjustment to the related loan and lease yields. The Banks also receive other fees and charges relating to existing loans, which include prepayment penalties, loan monitoring fees, late charges and fees collected in connection with loan modifications.

The following table shows the scheduled contractual maturities of the Banks’ consolidated gross loans and leases held for investment, as well as the dollar amount of such loans and leases which are scheduled to mature after one year which have fixed or adjustable interest rates, as of December 31, 2009.

										Commercial
						Construction,				and Industrial				Direct
		Commercial				Multi-Family,				and Asset-				financing				Consumer and
		Real Estate				1-4 Family				Based				leases				other				Total
		(In Thousands)
Amounts due:
In one year or less		$	105,739			$	90,295			$	98,060			$	1,489			$	13,800			$	309,383
After one year through five years			276,390				65,045				100,974				24,039				7,339				473,787
After five years			59,677				8,944				627				2,079				—				71,327
		$	441,806			$	164,284			$	199,661			$	27,607			$	21,139			$	854,497
Interest rate terms on amounts due after one year:
Fixed		$	226,319			$	36,062			$	28,444			$	26,118			$	6,269			$	323,212
Adjustable		$	109,748			$	37,927			$	73,157			$	—			$	1,070			$	221,902

Loan and Lease Delinquencies. The Banks place loans and leases on non-accrual status when, in the judgment of management, the probability of collection of interest is deemed to be insufficient to warrant further accrual. Previously accrued but unpaid interest is deducted from interest income at that time. As a matter of policy, the Banks do not accrue interest on loans or leases past due beyond 90 days and in some instances sooner than 90 days if it is probable that payments will not be collected as scheduled. Loans on non-accrual status are considered impaired.

The following table sets forth information relating to delinquent loans and leases at the dates indicated.

		As of December 31,
		2009								2008								2007
						% of								% of								% of
						Gross								Gross								Gross
						Loans and								Loans and								Loans and
Days past due		Balance				Leases				Balance				Leases				Balance				Leases
		(Dollars in Thousands)
30 to 59 days		$	9,162	(2)			1.07	%		$	2,512				0.29	%		$	621				0.08	%
60 to 89 days			—				0.00				175				0.02				85				0.01
90 days and over (1)			3,938				0.46				4,316				0.51				2,487				0.32
		$	13,100				1.53	%		$	7,003				0.82	%		$	3,193				0.41	%

Non-performing Assets and Impaired Loans and Leases. Credit underwriting through a committee process is a key component of the operating philosophy of our Corporation. Business development officers have relatively low individual lending authority limits, therefore requiring that a significant portion of our new credit extensions be approved through various committees depending on the type of loan or lease, amount of the credit, and the related complexities of each proposal. During the current economic recession additional monitoring controls have been implemented to allow us the opportunity to have early identification of problem loans. We believe the early detection of problems results in the most optimal situation for us to mitigate our risk of loss. Through proactive monitoring of the loan and lease portfolio, we identify weakening of key performance indicators based upon our clients’ financial statements and declining market values of real estate used as collateral. These factors contributed to an increase in the number and amount of loans on management attention watch lists and consequently an increase in the number and amount of loans on non-accrual status. Non-accrual loans and leases are considered an indicator of potential future losses. The diligence involved in our underwriting, credit approval and loan monitoring processes provides for strong controls to minimize the deterioration of the quality of the loan and lease portfolio. While the strength of this underwriting process has been proven over our history, we face increasing credit risk as macro economic and political developments that impact and may continue to impact the banking industry and the welfare of our clients. The following table provides detailed information regarding the composition of our non-performing assets.

		As of December 31,
		2009				2008				2007
		(Dollars In Thousands)
Non-accrual loans and leases
First mortgage loans:
Commercial real estate		$	8,482			$	2,979			$	—
Construction and land development			3,317				5,279				1,782
Multi-family			1,760				—				4,995
1-4 family			3,015				2,082				424
Total first mortgage loans			16,574				10,340				7,201
Commercial and industrial			7,086				5,412				663
Direct financing leases, net			1				24				60
Home equity and second mortgage			872				379				940
Consumer and other loans			3,292				130				—
Total non-accrual loans and leases			27,825				16,285				8,864
Foreclosed properties, net			1,671				3,011				660
Total non-performing assets		$	29,496			$	19,296				9,524
Performing troubled debt restructurings		$	—			$	—			$	—
Total non-accrual loans and leases to total loans and leases			3.26	%			1.91	%			1.13	%
Total non-performing assets to total assets			2.64				1.91				1.04
Allowance for loan and lease losses to total loans and leases			1.65				1.39				1.26
Allowance for loan and lease losses to non-accrual loans and leases			50.76				72.74				111.17