increased competition and other effects of deregulation and consolidation of the financial services industry; monetary and fiscal policies of the federal government; deposit flows; disintermediation; the cost and availability of funds; general market rates of interest; interest rates or investment returns on competing investments; demand for loan products; demand for financial services; changes in accounting policies or guidelines; acts of terrorism and developments in the war on terrorism; and changes in the quality or composition of loan and investment portfolios. See also Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2008 and factors regarding future operations listed below.
Unless otherwise indicated or unless the context requires otherwise, all references in this Report to "First Business Financial Services", the "Corporation", "FBFS", "we", "us", "our", or similar references mean First Business Financial Services, Inc. together with our subsidiaries. "First Business Bank" or "First Business Bank - Milwaukee" or the "Banks" are used to refer to our subsidiaries, First Business Bank and First Business Bank - Milwaukee, alone.

• Net loss for the three months ended March 31, 2009 was $193,000 compared to net income of $770,000 for the three months ended March 31, 2008.

• Net interest margin decreased slightly to 2.65% for the three months ended March 31, 2009 from 2.67% for the three months ended March 31, 2008.

• Top line revenue increased 12.5% to $8.1 million for the three months ended March 31, 2009 compared to $7.2 million for the comparable period of the prior year.

• Loan and lease loss provision was $2.2 million for the three months ended March 31, 2009 compared to $553,000 for same time period in the prior year. Allowance for loan and lease loss as a percentage of total loans was 1.50% at March 31, 2009 compared to 1.39% at December 31, 2008.

• Diluted losses per share were $0.08 compared to diluted earnings per share of $0.31 for the three months ended March 31, 2008.

• Annualized return on average equity and return on average assets was (1.43)% and (0.08)%, respectively for the three month period ended March 31, 2009, compared to 6.17% and 0.33%, respectively, for the same time period in 2008.

• We elected not to participate in the U.S. Troubled Asset Relief Program Capital Purchase Program.

Results of Operations 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 grew 12.5% for the three months ended March 31, 2009 over the same period in the prior year. The components of top line revenue were as follows:

                                            For the Three Months Ended
                                                    March 31,
                                          2009           2008       Change
                                              (Dollars In Thousands)
              Net interest income      $    6,488       $ 6,062         7.0 %
              Non-interest income           1,562         1,092        43.0

              Total top line revenue   $    8,050       $ 7,154        12.5

Adjusted Net Income
Adjusted net income is comprised of our net income (loss) 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 have experienced significant 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 adjust our GAAP net income by adding back the after tax effects of the provision for loan and lease losses and reducing GAAP net income (loss) by the related after tax 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. Due to increased loan charge-off activity in the first three months of 2009, our adjusted net income has declined by 51.9% for the three months ended March 31, 2009 compared to the comparable period of the prior year. 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. 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 Three Months Ended
                                                                March 31,
                                                      2009          2008       Change
                                                         (Dollars In Thousands)
  Net income (loss), presented under US GAAP       $     (193 )     $ 770       (125.1 )%
  Add back:
  Provision for loan and lease losses, after tax        1,335         336        297.3
  Less:
  Net charge-offs, after tax                              674         133        406.7

  Adjusted net income                              $      468       $ 973        (51.9 )

Return on Equity
We view return on equity to be an important measurement to monitor profitability and we are continuing to focus on improving our return on equity throughout 2009 by enhancing the overall profitability of our client relationships, controlling our expenses and minimizing our costs of credit. Return on equity for the three months ended March 31, 2009 was (1.43)%, compared to 6.17% for the three months ended March 31, 2008. The decrease in return on equity from the comparable periods of the prior year is primarily attributable to the decrease in net income which was caused by increased costs of credit including provision for loan and lease losses and collateral liquidation costs among other factors discussed in the Quarterly Report on Form 10-Q.
Net Interest Income. Net interest income depends 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 procedures used by management in responding to such changes.
Net interest income was $6.5 million for the three months ended March 31, 2009, an increase of 7.0% from the same period in 2008. The increase in net interest income was primarily caused by the increased interest rate spread on our interest earning asset and interest bearing liability portfolios and an increase in interest earning assets of 7.9%. The net interest spread for the three months ended March 31, 2009 was 2.41% compared to 2.33% for the three months ended March 31, 2008. We have been successful in increasing the spread of our rate sensitive portfolio through implementation and utilization of interest rate floors on our variable rate loan products and through managed pricing on our deposit products.
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 three months ended March 31, 2009, compared to the same period of 2008.

                                                                              Rate/
                                                Rate          Volume         Volume           Net
                                                                  (In Thousands)
Interest-Earning Assets
Commercial real estate and other
mortgage loans                                $ (1,630 )      $   714        $  (130 )      $ (1,046 )
Commercial and industrial loans                   (571 )          197            (26 )          (400 )
Leases                                              (5 )           27              -              22
Consumer loans                                     (22 )            6              -             (16 )

Total loans and leases receivable               (2,228 )          944           (156 )        (1,440 )
Mortgage-related securities                         (6 )          138              -             132
Investment securities                                -             (9 )            -              (9 )
Federal Home Loan Bank Stock                         -              -              -               -
Fed funds sold                                     (21 )           (2 )            2             (21 )
Short-term investments                             (16 )           44            (38 )           (10 )

Total net change in income on
interest-earning assets                         (2,271 )        1,115           (192 )        (1,348 )

Interest-Bearing Liabilities
NOW accounts                                      (364 )          (99 )           83            (380 )
Money market                                      (607 )          123            (71 )          (555 )
Certificates of deposit                           (275 )          469           (163 )            31
Brokered certificates of deposit                  (964 )          369            (62 )          (657 )

Total deposits                                  (2,210 )          862           (213 )        (1,561 )
Junior subordinated notes                          274            274           (274 )           274
FHLB advances                                      (37 )         (200 )           17            (220 )
Other borrowings                                  (269 )            4             (2 )          (267 )

Total net change in expense on
interest-bearing liabilities                    (2,242 )          940           (472 )        (1,774 )

Net change in net interest income             $    (29 )      $   175        $   280        $    426

The yield on earning assets was 5.65% for the three months ended March 31, 2009, a decline of 104 basis points from 6.69% for the three months ended March 31, 2008. The decline in the yield on earning assets is attributable to the loan and lease portfolio as the yield on our mortgage related securities portfolio is substantially unchanged. Loan yields have been primarily impacted by the declining interest rate environment and the repricing of adjustable rate loans mitigated by the existence of interest rate floors within the terms of the contracts. As of March 31, 2009, approximately 58% of the average loan and lease portfolio had a fixed rate yield while 22% of our loan and lease portfolio contains interest rate floors that will influence the overall yield of the portfolio in a declining rate environment. The existence of the interest rate floors and fixed rate loans provide opportunity to protect the interest income in a falling rate environment. The average prime rate for the three months ended March 31, 2009 was 3.25% compared to 6.21% for the same three month period of 2008.

The rate on interest-bearing liabilities was 3.24% for the three months ended March 31, 2009, a decrease of 112 basis points from 4.36% for the comparable period of the prior year. Rates on interest-bearing deposits was 3.13% for the three months ended March 31, 2009, a decrease of 114 basis points from 4.27% for the comparable period of the prior year primarily due to the overall declining rate environment although influenced by competitive pricing necessary to retain balances and the impacts of implicit floors on interest-bearing transaction accounts.
The net interest margin decreased slightly to 2.65% for the three months ended March 31, 2009 from 2.67% for the three months ended March 31, 2008. As interest rates decline the contribution of net free funds also declines. The improvement in our net interest spread was offset by the declining value of the net free funds resulting in minimal changes in our net interest margin when comparing the three months ended March 31, 2009 and 2008. Net free funds are non-interest bearing liabilities plus stockholders' equity less non-interest earning assets. Our net free funds are principally non-interest bearing demand deposit accounts and stockholders' equity. We continue to manage the composition and duration of interest-bearing liabilities to limit our exposure to changing interest rates. Average earning assets increased 7.9% to $977.7 million for the three months ended March 31, 2009 from $906.5 million for the three months ended March 31, 2008, with the growth occurring primarily in the loan and lease portfolios. We experienced a strong level of growth in the loan and lease portfolios during the first half of 2008, but have experienced limited growth in the loan and lease portfolios in the first quarter of 2009 as we continue to experience competition for the highest quality loans.
Average interest bearing liabilities increased 8.2% to $903.2 million for the three months ended March 31, 2009 from $834.5 million for the comparable period of the prior year, with the growth occurring primarily in our certificates of deposit. Brokered certificates of deposit continued to be a principal source of our funding.

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

                                                               For the Three Months Ended March 31,
                                                    2009                                                   2008
                                Average                             Average            Average                            Average
                                balance          Interest          yield/cost          balance         Interest          yield/cost
                                                                      (Dollars In Thousands)
Interest-Earning Assets
Commercial real estate
and other mortgage
loans(1)                      $   575,359        $   7,888                5.48 %      $ 532,771        $   8,934                6.71 %
Commercial and
industrial loans(1)               227,716            3,920                6.89          217,807            4,320                7.93
Leases(1)                          30,457              478                6.29           28,740              456                6.36
Consumer loans                     22,225              269                4.84           21,764              285                5.24

Total loans and leases
receivable(1)                     855,757           12,555                5.87          801,082           13,995                6.99
Mortgage-related
securities(2)                     108,290            1,239                4.58           96,255            1,107                4.60
Investment securities(2)                -                -                   -              991                9                3.63
Federal Home Loan Bank
stock                               2,367                -                   -            2,367                -                   -
Fed funds sold and other            3,038                2                0.26            3,302               23                2.79
Short-term investments              8,258                9                0.44            2,480               19                3.06

Total interest-earning
assets                            977,710           13,805                5.65          906,477           15,153                6.69

Non-interest-earning
assets                             37,577                                                32,184

Total assets                  $ 1,015,287                                             $ 938,661


Interest-Bearing
Liabilities
NOW accounts                  $    53,844               54                0.40        $  69,668              434                2.49
Money market                      176,812              497                1.12          158,316            1,052                2.66
Certificates of deposits          116,479              823                2.83           73,160              792                4.33
Brokered certificates of
deposit                           479,905            5,091                4.24          450,967            5,748                5.10

Total deposits                    827,040            6,465                3.13          752,111            8,026                4.27
Junior subordinated
notes                              10,315              274               10.63                -                -                   -
FHLB advances                      19,987              218                4.36           36,793              438                4.76
Other borrowings                   45,904              360                3.14           45,592              627                5.50

Total interest-bearing
liabilities                       903,246            7,317                3.24          834,496            9,091                4.36

Non-interest-bearing
liabilities                        58,236                                                54,240

Total liabilities                 961,482                                               888,736
Stockholders' equity               53,805                                                49,925

Total liabilities and
stockholders' equity          $ 1,015,287                                             $ 938,661


Net interest
income/interest rate
spread                                           $   6,488                2.41                         $   6,062                2.33

Net interest-earning
assets                        $    74,464                                             $  71,981

Net interest margin                                                       2.65                                                  2.67
Average interest-earning
assets to average
interest-bearing
liabilities                        108.24 %                                              108.63 %
Return on average assets            (0.08 )                                                0.33
Return on average equity            (1.43 )                                                6.17
Average equity to
average assets                       5.30                                                  5.32
Non-interest expense to
average assets                       2.43                                                  2.28

(1) The average balances of loans and leases include non-performing loans and leases. Interest income related to non-performing loans and leases is recognized when collected.

(2) Includes amortized cost basis of assets available for sale.

Provision for Loan and Lease Losses. The provision for loan and lease losses totaled $2.2 million and $553,000 for the three months ended March 31, 2009 and 2008, respectively. The increase in the provision for loan and lease losses recorded in the three months ended March 31, 2009 and 2008 is related to the changes of inherent risks within our portfolio. Our required provision for loan and lease losses is determined based upon 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 required amount of reserves established for impaired loans that present potential collateral shortfall positions. During the three months ended March 31, 2009, the significant factors influencing the provision for loan and lease losses were:
establishing specific reserves of approximately $434,000 on impaired loans and leases with estimated collateral shortfalls, re-establishing the reserve by approximately $1.1 million for charge-offs recorded during the current quarter, increasing the amount of the required allowance for loan and lease losses by approximately $663,000 to reflect the increased inherent risk within our portfolio as evaluated by the factors prescribed by our loan and lease loss methodology. Refer to Asset Quality for further information.
Non-Interest Income. Non-interest income, consisting primarily of fees earned for trust and investment services, service charges on deposits, income from bank-owned life insurance and loan fees, increased $470,000 or 43.0%, to $1.6 million for the three months ended March 31, 2009 from $1.1 million for the same period in 2008.
Trust and investment services fee income decreased $48,000, or 9.9%, to $434,000 for the three months ended March 31, 2009, from $482,000 for the same period in 2008. Trust and investment services fee income can be broken into two components: trust fee income and brokerage income. Trust fee income was $353,000 for the three months ended March 31, 2009 compared to $392,000 for the three months ended March 31, 2008. Trust fee income is driven by the market values of assets under management. As clients add or withdraw assets and market values fluctuate, so does trust fee income. At March 31, 2009, we had $238.3 million of trust assets under management. This is a $44.7 million, or 15.8%, decrease from assets under management of $283.0 million at March 31, 2008. The decrease in trust assets under management is a result of the overall decline in equity market values of such assets since March 31, 2008. 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. At March 31, 2009, brokerage assets under administration decreased by $35.9 million, 25.8%, to $102.9 million from $138.8 million at March 31, 2008. As a result of decreased client activity and declining equity markets, brokerage income decreased by $9,000, or 10.0%, to $81,000 for the three months ended March 31, 2009, from $90,000 for the three months ended March 31, 2008. Service charges on deposits increased $124,000, or 59.0%, to $334,000 for the three months ended March 31, 2009 from $210,000 for the same period in 2008. The increase in service charge income is in direct correlation to the declining interest rate environment. We give each of our demand deposit clients an earnings credit based upon current market rates and the balances the clients keep within our Banks. The client uses these earnings credits to offset the service charges incurred on its deposit accounts. As the interest rate index utilized to calculate the earnings credit has fallen substantially 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.
Loan fees increased $137,000, or 100.7%, to $273,000 for the three months ended March 31, 2009 from $136,000 for the same period in 2008. Loan fees represent non-deferrable fees earned on loan activity and the revenue generated through the collateral audit process we perform to ensure the integrity of the collateral associated with our asset based commercial loans. The increase in loan fees was directly related to increased audit fee revenue recognized on audits substantially completed.
Since the third quarter of 2008, we offer interest rate swap products directly to our qualified commercial borrowers. We economically hedged these client derivative transactions by simultaneously entering into offsetting interest rate swap contracts with dealer counterparties. Derivative transactions executed as part

of this program are not designated as SFAS 133 hedge relationships and are marked-to-market through earnings each period. We recognized in the consolidated income statements the initial fair value recognition for the swaps which for the three months ended March 31, 2009 totaled $232,000. Changes in fair value of non-hedge derivative contracts are included in other income in the consolidated statements of income. The derivative contracts have mirror-image terms, which . . .