filing, and the Corporation undertakes no obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances. Forward-looking statements may also be made by the Corporation from time to time in other reports and documents as well as oral presentations. In addition to the assumptions and other factors referenced specifically in connection with such statements, the following factors could impact the business and financial prospects of the Corporation: continued deterioration in commercial real estate markets; general economic conditions; legislative and regulatory initiatives; 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; and acts of terrorism and developments in the war on terrorism. 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 income for the three months ended September 30, 2009 was $1.4 million compared to net income of $1.2 million for the three months ended September 30, 2008. Net income for the nine months ended September 30, 2009 was $1.4 million compared to net income of $3.0 million for the nine months ended September 30, 2008.

• Net interest margin increased to 2.88% for the three months ended September 30, 2009 compared to 2.78% for the three months ended September 30, 2008. Net interest margin remained relatively flat at 2.76% for the nine months ended September 30, 2009 compared to 2.77% for the nine months ended September 30, 2008.

• Top line revenue increased 11.5% to $25.6 million for the nine months ended September 30, 2009 compared to $22.9 million for the comparable period of the prior year. Approximately $322,000 of gains on sales of available-for-sale securities were included in top line revenue for the nine months ended September 30, 2009. There were no sales of securities in the comparable period of the prior year.

• Loan and lease loss provision was $1.4 million for the three months ended September 30, 2009 compared to $17,000 for same time period in the prior year. Loan and lease loss provision was $5.2 million for the nine months ended September 30, 2009 compared to $1.3 million for the nine months ended September 30, 2008. Allowance for loan and lease loss as a percentage of gross loans and leases was 1.47% at September 30, 2009 compared to 1.39% at December 31, 2008.

• Diluted earnings per share for the three months ended September 30, 2009 were $0.53 compared to $0.46 for the three months ended September 30, 2008. Diluted earnings per share were $0.56 and $1.19 for the nine months ended September 30, 2009 and 2008, respectively.

• Annualized return on average equity and return on average assets were 9.88% and 0.51%, respectively for the three month period ended September 30, 2009, compared to 9.14% and 0.48%, respectively, for the same time period in 2008. Return on average equity and return on average assets were 3.49% and 0.18%, respectively, for the nine months ended September 30, 2009 compared to 7.90% and 0.42%, respectively, for the nine months ended September 30, 2008.

• In March 2009, we elected not to participate in the U.S. Troubled Asset Relief Program Capital Purchase Program.

• In the second quarter of 2009 we recorded a special FDIC assessment equivalent to 5 basis points of total assets less Tier 1 Capital of our subsidiary banks, or approximately $481,000.

                             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 11.5% for the nine months ended September 30, 2009 over the same
period in the prior year. Gains on sales of available-for-sale securities of
approximately $322,000 were included in non-interest income for three months
ended September 30, 2009. The components of top line revenue were as follows:

                                    For the Three Months Ended                        For the Nine Months Ended
                                           September 30,                                    September 30,
                               2009             2008             Change          2009              2008           Change
                                                                (Dollars In Thousands)
Net interest income         $    7,333         $ 6,517             12.5 %     $    20,666        $ 19,231           7.5 %
Non-interest income              1,889           1,340             41.0             4,906           3,700          32.6

Total top line revenue      $    9,222         $ 7,857             17.4       $    25,572        $ 22,931          11.5

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 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 to add back the after tax effects of the provision for loan and lease losses and to reduce GAAP net income 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 and overall increased costs of credit including collateral liquidation costs in the first nine months of 2009, our adjusted net income has declined by 44.3% for the nine months ended September 30, 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              For the Nine Months Ended
                                                            September 30,                           September 30,
                                                    2009           2008       Change        2009          2008       Change
                                                                           (Dollars In Thousands)
Net income, presented under US GAAP              $    1,353       $ 1,172        15.4 %   $   1,419      $ 3,010       (52.9 )%
Add back:
Provision for loan and lease losses, after tax          838            10           *         3,174          799       297.2
Less:
Net charge-offs (recoveries), after tax                 768           (46 )         *         2,592          214           *

Adjusted net income                              $    1,423       $ 1,228        15.9     $   2,001      $ 3,595       (44.3 )

* Not meaningful Return on Equity Return on equity for the three months ended September 30, 2009 was 9.88%, compared to 9.14% for the three months ended September 30, 2008. Return on equity for the nine months ended September 30, 2009 was 3.49% compared to 7.90% for the nine months ended September 30, 2008. The decrease in return on equity from the nine-month comparable period 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, and increased FDIC insurance expense, including a special assessment accrued during the second quarter of 2009, along with other factors discussed in this Quarterly Report on Form 10-Q. 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. 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.

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 and nine months ended September 30, 2009, compared to the same periods of 2008.

                                      Three Months                                          Nine Months
                                                Rate/                                                 Rate/
                      Rate        Volume       Volume         Net           Rate        Volume       Volume         Net
                                                               (In Thousands)}
Interest-Earning
Assets
Commercial real
estate and other
mortgage loans      $ (1,171 )    $   919      $  (125 )    $   (377 )    $ (3,841 )    $ 2,344      $  (345 )    $ (1,842 )
Commercial loans         374         (394 )        (36 )         (56 )        (307 )       (481 )         11          (777 )
Direct financing
leases                    (4 )         15           (1 )          10           (21 )         78           (1 )          56
Consumer loans           (44 )        (30 )          4           (70 )        (111 )        (43 )          5          (149 )

Total loans and
leases
receivable              (845 )        510         (158 )        (493 )      (4,280 )      1,898         (330 )      (2,712 )
Mortgage-related
securities              (144 )        147          (17 )         (14 )        (195 )        421          (24 )         202
Investment
securities                 -            -            -             -             -          (10 )          -           (10 )
Federal Home
Loan Bank Stock            -            -            -             -             -            -            -             -
Short-term
investments              (14 )        152         (135 )           3           (67 )        399         (358 )         (26 )

Total net change
in income on
interest-earning
assets                (1,003 )        809         (310 )        (504 )      (4,542 )      2,708         (712 )      (2,546 )

Interest-Bearing
Liabilities
NOW accounts            (154 )         24          (17 )        (147 )        (694 )         28          (22 )        (688 )
Money market             (43 )        292          (23 )         226          (694 )        775         (248 )        (167 )
Certificates of
deposit                 (273 )        576         (258 )          45          (717 )      1,418         (507 )         194
Brokered
certificates of
deposit                 (891 )       (712 )        108        (1,495 )      (2,553 )       (875 )        129        (3,299 )

Total deposits        (1,361 )        180         (190 )      (1,371 )      (4,658 )      1,346         (648 )      (3,960 )
FHLB advances             14         (123 )          4           265           (22 )       (455 )          9           817
Other borrowings         104         (175 )         (5 )        (114 )        (101 )       (286 )         17          (468 )
Junior
subordinated
notes                      -          261          (29 )        (100 )           -          808            9          (370 )

Total net change
in expense on
interest-bearing
liabilities           (1,243 )        143         (220 )      (1,320 )      (4,781 )      1,413         (613 )      (3,981 )

Net change in
net interest
income              $    240      $   666      $   (90 )    $    816      $    239      $ 1,295      $   (99 )    $  1,435

The yield on earning assets was 5.60% for the three months ended September 30, 2009, a decline of 68 basis points from 6.28% for the three months ended September 30, 2008. Loan yields were primarily impacted by the declining 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 September 30, 2009, approximately 52% of our loan and lease portfolio had a fixed interest rate while another 25% 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 175 basis points to 3.25% for the three months ended September 30, 2009 compared to 5.00% for the same three month period of 2008. In addition, we have experienced increased levels of non-accrual loans, resulting in foregone interest of approximately $471,000 for the three months ended September 30, 2009, compared to $94,000 for the three months ended September 30, 2008. This equates to approximately a 16 basis point reduction in the overall loan and lease portfolio yield. As part of interest yield, we also recognize fees collected in lieu of interest including prepayment fees for loans that are paid in full prior to their stated maturity. For the three months ended September 30, 2009, we recognized approximately $815,000 of fees in lieu of interest compared to $365,000 for the three months ended September 30, 2008, resulting in an increase of the overall yield of the loan and lease portfolio of approximately 20 basis points.
The rate on interest-bearing liabilities was 2.93% for the three months ended September 30, 2009, a decrease of 84 basis points from 3.77% for the comparable period of the prior year. Rates on interest-bearing deposits were 2.69% for the three months ended September 30, 2009, a decrease of 99 basis points

from 3.68% for the comparable period of the prior year. The decrease is primarily due to the overall declining rate environment partially offset by influences of competitive pricing necessary to retain balances. Rates on other borrowings for the three months ended September 30, 2009 are generally indexed to One Month LIBOR plus an interest spread. A portion of these borrowings are subject to an interest rate floor of 5.5%, which was active for the entire period. The outstanding average balance of other borrowings for the three month period ended September 30, 2009 includes our subordinated notes payable and senior line of credit. The outstanding average balance of other borrowings during the three months ended September 30, 2008 also included average balances for federal funds purchased. The rates on these funds are substantially lower than those associated with our subordinated notes payable. The increase in the weighted average rate on other borrowings is due to the repayment of the lower cost federal funds purchased and the impact of the interest rate floors on our subordinated debt.
Net interest margin increased to 2.88% for the three months ended September 30, 2009 from 2.78% for the three months ended September 30, 2008. The improvement in net interest margin is primarily caused by positive pricing discipline as evidenced by the improving net interest spread, partially offset by the cost of increased on balance sheet liquidity, increased foregone interest, 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.
We increased our on balance sheet liquidity substantially during the three months ended September 30, 2009 compared to the same time period of the prior year. Our excess liquidity is maintained in the form of short-term investments at the Federal Reserve Bank and earns approximately the current federal funds rate. The lower rate earned on these assets has a negative impact on the margin but we view this as a prudent business decision to ensure we have adequate liquidity to fund our obligations during this challenging economic environment. As interest rates declined, the relative contribution of net free funds also declined. 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. Net interest margin is also influenced by the level of nonaccrual loans and the increasing amount of foregone interest on these nonaccrual loans and leases. We continue to manage the composition and duration of interest-bearing liabilities to limit our exposure to changing interest rates.
Average earning assets increased 8.4% to $1.02 billion for the three months ended September 30, 2009 from $938.6 million for the three months ended September 30, 2008, with the growth occurring primarily in our commercial real estate loan portfolios and our short-term investments. The average balance of the commercial real estate and other mortgage loan portfolio increased $58.2 million, or 10.6%, for the three months ended September 30, 2009. We continued to have success in writing new commercial real estate loans; however, we experienced reduced growth in this portfolio as we continued to compete with other lenders for fewer high quality loan opportunities. The average balance of our commercial and industrial loan portfolio decreased $13.4 million, or 5.9%, for the three months ended September 30, 2009 compared the three months ended September 30, 2008 due to many clients reducing their assets and outstanding debt obligations due to the current economic environment.
Average interest bearing liabilities increased 8.0% to $940.7 million for the three months ended September 30, 2009 from $871.3 million for the comparable period of the prior year, with the growth occurring primarily in our money market deposit accounts as we continue to focus on generating a stronger local market deposit presence.
The yield on earning assets was 5.61% for the nine months ended September 30, 2009, a decline of 82 basis points from 6.43% for the nine months ended September 30, 2008. The decline in the yield on earning assets is attributable to the loan and lease portfolio. Similar to the discussion of the fluctuations in the three months ended September 30, 2009 and 2008 above, 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. Foregone interest was approximately $1.2 million for the nine months ended September 30, 2009 compared to $393,000 for the nine months ended

September 30, 2008. This resulted in a reduction in the loan and lease portfolio yield of approximately 13 basis points, partially offset by an increase of 15 basis points attributable to loan fees collected in lieu of interest. For the nine months ended September 30, 2009, total loan fees collected in lieu of interest was $2.3 million compared to $1.4 million for the nine months ended September 30, 2008. The remaining decline in the yield on earning assets is directly related to the changing interest rate environment.
The rate on interest-bearing liabilities was 3.09% for the nine months ended September 30, 2009, a decrease of 87 basis points from 3.96% for the comparable period of the prior year. Rates on interest-bearing deposits were 2.89% for the nine months ended September 30, 2009, a decrease of 99 basis points from 3.88% for the comparable period of the prior year primarily due to the overall declining rate environment partially offset by influences of competitive pricing necessary to retain balances.
The net interest margin remained relatively flat at 2.76% for the nine months ended September 30, 2009 compared to 2.77% for the nine months ended September 30, 2008. We continue to manage the composition and duration of interest-bearing liabilities to limit our exposure to changing interest rates. Average earning assets increased 8.0% to $1.0 billion for the nine months ended September 30, 2009 from $925.7 million for the nine months ended September 30, 2008. The growth occurred primarily in our commercial real estate loan portfolio and our short-term investments as we continue to build our on-balance sheet liquidity.
Average interest bearing liabilities increased 8.3% to $924.5 million for the nine months ended September 30, 2009 from $854.0 million for the comparable period of the prior year, with the growth occurring primarily in our in-market interest-bearing accounts.

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 September 30,
                                                    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)                      $   603,362        $   8,217                5.45 %      $ 545,096        $   8,594                6.31 %
Commercial and
industrial loans(1)               210,102            4,094                7.79          232,153            4,150                7.15
Direct financing
leases(1)                          29,124              455                6.25           28,200              445                6.31
Consumer loans                     21,487              259                4.82           23,626              329                5.57

Total loans and leases
receivable(1)                     864,075           13,025                6.03          829,075           13,518                6.52
Mortgage-related
securities(2)                     116,550            1,191                4.09          103,869            1,205                4.64
Investment securities(2)                -                -                   -                -                -                   -
Federal Home Loan Bank
stock                               2,367                -                   -            2,367                -                   -
Short-term investments             34,615               19                0.22            3,306               16                1.94

Total interest-earning
assets                          1,017,607           14,235                5.60          938,617           14,739                6.28

Non-interest-earning
assets                             42,883                                                38,261

Total assets                  $ 1,060,490                                             $ 976,878


Interest-Bearing
Liabilities
NOW accounts                  $    67,288               66                0.39        $  60,585              213                1.41
. . .