UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

þ		Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

o		Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission file number 001-34095

(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)

(608) 238-8008

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 and 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 Field required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) 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 whether the registrant is a large accelerated filer, an accelerated filer, or a non- accelerated filer. 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 (Do not check if a smaller reporting company)		Smaller reporting company þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

The number of shares outstanding of the registrant’s sole class of common stock, par value $0.01 per share, on April 22, 2010 was 2,539,992 shares.

 

 

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FIRST BUSINESS FINANCIAL SERVICES, INC.
INDEX — FORM 10-Q

PART I. Financial Information			1
Item 1. Financial Statements			1
Consolidated Balance Sheets			1
Consolidated Statements of Income (Loss) (Unaudited)			2
Consolidated Statements of Changes in Stockholders’ Equity and Comprehensive Income (Unaudited)			3
Consolidated Statements of Cash Flows (Unaudited)			4
Notes to Unaudited Consolidated Financial Statements			5
Item 2. — Management’s Discussion and Analysis of Financial Condition and Results of Operations			19
Item 3. — Quantitative and Qualitative Disclosures about Market Risk			34
Item 4T. — Controls and Procedures			34
Part II. Other Information			35
Item 1. — Legal Proceedings			35
Item 1A. -Risk Factors			35
Item 2. — Unregistered Sales of Equity Securities and Use of Proceeds			35
Item 3. — Defaults Upon Senior Securities			35
Item 4. — Submission of Matters to a Vote of Security Holders			35
Item 5. — Other Information			36
Item 6. — Exhibits			36
Signatures			36
Exhibit 31.1
Exhibit 31.2
Exhibit 32

PART I. Financial Information

Item 1.		Financial Statements

First Business Financial Services, Inc.

Consolidated Balance Sheets

		(Unaudited)
		March 31,				December 31,
		2010				2009
		(In Thousands, Except Share Data)
Assets
Cash and due from banks		$	8,031			$	8,566
Short-term investments			79,077				104,171
Cash and cash equivalents			87,108				112,737
Securities available-for-sale, at fair value			131,869				122,286
Loans and leases receivable, net of allowance for loan and lease losses of $15,342 and $14,124, respectively			839,382				839,807
Leasehold improvements and equipment, net			1,143				1,189
Foreclosed properties			1,333				1,671
Cash surrender value of bank-owned life insurance			16,423				16,254
Investment in Federal Home Loan Bank stock, at cost			2,367				2,367
Goodwill and other intangibles			2,735				2,740
Accrued interest receivable and other assets			19,422				18,385
Total assets		$	1,101,782			$	1,117,436
Liabilities and Stockholders’ Equity
Deposits		$	964,547			$	984,374
Federal Home Loan Bank and other borrowings			57,513				57,515
Junior subordinated notes			10,315				10,315
Accrued interest payable and other liabilities			13,917				10,839
Total liabilities			1,046,292				1,063,043
Commitments and contingencies
Stockholders’ equity:
Preferred stock, $0.01 par value, 2,500,000 shares authorized, none issued or outstanding			—				—
Common stock, $0.01 par value, 25,000,000 shares authorized, 2,618,010 and 2,616,010 shares issued, 2,540,141 and 2,539,306 outstanding at 2010 and 2009, respectively			26				26
Additional paid-in capital			24,867				24,731
Retained earnings			30,302				29,582
Accumulated other comprehensive income			1,796				1,544
Treasury stock (77,869 and 76,704 shares at 2010 and 2009, respectively), at cost			(1,501	)			(1,490	)
Total stockholders’ equity			55,490				54,393
Total liabilities and stockholders’ equity		$	1,101,782			$	1,117,436

See accompanying Notes to Unaudited Consolidated Financial Statements.

First Business Financial Services, Inc.

Consolidated Statements of Income (Loss) (Unaudited)

		For the Three Months Ended
		March 31,
		2010				2009
		(In Thousands, Except Share Data)
Interest income:
Loans and leases		$	13,190			$	12,555
Securities			1,135				1,239
Short-term investments			41				11
Total interest income			14,366				13,805
Interest expense:
Deposits			5,511				6,464
Notes payable and other borrowings			734				579
Junior subordinated notes			274				274
Total interest expense			6,519				7,317
Net interest income			7,847				6,488
Provision for loan and lease losses			1,344				2,197
Net interest income after provision for loan and lease losses			6,503				4,291
Non-interest income:
Trust and investment services income			567				434
Service charges on deposits			398				334
Increase in cash surrender value of bank-owned life insurance			162				181
Loan fees			250				273
Credit, merchant and debit card fees			51				47
Other			201				293
Total non-interest income			1,629				1,562
Non-interest expense:
Compensation			3,495				3,173
Occupancy			372				361
Equipment			145				169
Data processing			299				280
Marketing			195				205
Professional fees			519				513
FDIC Insurance			782				335
Collateral liquidation costs			224				562
Loss on foreclosed properties, net			113				—
Other			400				563
Total non-interest expense			6,544				6,161
Income (loss) before income tax expense (benefit)			1,588				(308	)
Income tax expense (benefit)			689				(115	)
Net income (loss)		$	899			$	(193	)
Earnings (loss) per common share:
Basic		$	0.35			$	(0.08	)
Diluted			0.35				(0.08	)
Dividends declared per share			0.07				0.07

See accompanying Notes to Unaudited Consolidated Financial Statements.

First Business Financial Services, Inc.

Consolidated Statements of Changes in Stockholders’ Equity and Comprehensive Income
(Unaudited)

														Accumulated
						Additional								other
		Common				paid-in				Retained				comprehensive				Treasury
		stock				capital				earnings				income				stock				Total
		(In Thousands, Except Share Data)
Balance at December 31, 2008		$	26			$	24,088			$	29,252			$	1,065			$	(1,425	)		$	53,006
Comprehensive income:
Net income			—				—				(193	)			—				—				(193	)
Unrealized securities gains arising during the period			—				—				—				985				—				985
Unrealized derivative losses arising during the period			—				—				—				(1	)			—				(1	)
Reclassification adjustment for realized losses on derivatives			—				—				—				3				—				3
Income tax effect			—				—				—				(388	)			—				(388	)
Comprehensive income																							406
Share-based compensation — restricted shares			—				172				—				—				—				172
Cash dividends ($0.07 per share)			—				—				(178	)			—				—				(178	)
Treasury stock purchased (1,027 shares)			—				—				—				—				(13	)			(13	)
Balance at March 31, 2009		$	26			$	24,260			$	28,881			$	1,664			$	(1,438	)		$	53,393

														Accumulated
						Additional								other
		Common				paid-in				Retained				comprehensive				Treasury
		stock				capital				earnings				income				stock				Total
		(In Thousands, Except Share Data)
Balance at December 31, 2009		$	26			$	24,731			$	29,582			$	1,544			$	(1,490	)		$	54,393
Comprehensive income:
Net income			—				—				899				—				—				899
Unrealized securities gains arising during the period			—				—				—				423				—				423
Income tax effect			—				—				—				(171	)			—				(171	)
Comprehensive income																							1,151
Share-based compensation — restricted shares			—				136				—				—				—				136
Cash dividends ($0.07 per share)			—				—				(179	)			—				—				(179	)
Treasury stock purchased (1,165 shares)			—				—				—				—				(11	)			(11	)
Balance at March 31, 2010		$	26			$	24,867			$	30,302			$	1,796			$	(1,501	)		$	55,490

See accompanying Notes to Unaudited Consolidated Financial Statements.

First Business Financial Services, Inc.

Consolidated Statements of Cash Flows (Unaudited)

		For the Three Months Ended
		March 31,
		2010				2009
		(In Thousands)
Operating activities
Net income (loss)		$	899			$	(193	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Deferred income taxes, net			(1,052	)			(266	)
Provision for loan and lease losses			1,344				2,197
Depreciation, amortization and accretion, net			318				147
Share-based compensation			136				172
Increase in cash surrender value of bank-owned life insurance			(161	)			(173	)
Origination of loans for sale			(250	)			(1,279	)
Sale of loans originated for sale			250				1,281
Gain on sale of loans originated for sale			—				(2	)
Loss on foreclosed properties and repossessed assets			113				—
Increase in accrued interest receivable and other assets			(175	)			(476	)
Increase in accrued interest payable and other liabilities			3,078				381
Net cash provided by operating activities			4,500				1,789
Investing activities
Proceeds from maturities of available-for-sale securities			9,492				7,013
Purchases of available-for-sale securities			(18,842	)			(5,286	)
Proceeds from sale of foreclosed properties and repossessed assets			368				—
Net increase in loans and leases			(1,062	)			(10,160	)
Purchases of leasehold improvements and equipment, net			(58	)			(151	)
Purchase of cash surrender value of life insurance			(8	)			(8	)
Net cash used in investing activities			(10,110	)			(8,592	)
Financing activities
Net (decrease) increase in deposits			(19,827	)			51,496
Repayment of FHLB advances			(2	)			(15,003	)
Net decrease in short-term borrowed funds			—				(22,000	)
Cash dividends paid			(179	)			(178	)
Purchase of treasury stock			(11	)			(13	)
Net cash (used in) provided by financing activities			(20,019	)			14,302
Net (decrease) increase in cash and cash equivalents			(25,629	)			7,499
Cash and cash equivalents at the beginning of the period			112,737				23,684
Cash and cash equivalents at the end of the period		$	87,108			$	31,183
Supplementary cash flow information
Interest paid on deposits and borrowings		$	5,960			$	7,192
Income taxes paid			33				15
Transfer to foreclosed properties and repossessed assets			143				—

See accompanying Notes to Unaudited Consolidated Financial Statements.

Notes to Unaudited Consolidated Financial Statements

Note 1 — Principles of Consolidation

The unaudited consolidated financial statements include the accounts and results of First Business Financial Services, Inc. (FBFS or the Corporation), and its wholly-owned subsidiaries, First Business Bank and First Business Bank — Milwaukee. All significant intercompany balances and transactions have been eliminated in consolidation.

Note 2 — Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. The Corporation has not changed its significant accounting and reporting policies from those disclosed in the Corporation’s Form 10-K for the year ended December 31, 2009. There have been no significant changes in the methods or assumptions used in accounting policies requiring material estimates and assumptions.

In the opinion of management, all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of the unaudited consolidated financial statements have been included in the unaudited consolidated financial statements. The results of operations for the three month period ended March 31, 2010 are not necessarily indicative of results that may be expected for any other interim period or the entire fiscal year ending December 31, 2010. Certain amounts in prior periods have been reclassified to conform to the current presentation. Subsequent events have been evaluated through the issuance of the unaudited consolidated financial statements.

Note 3 — Recent Accounting Pronouncements

Transfers and Servicing of Financial Assets. In June 2009, the FASB issued Accounting Standards Update (ASU) No. 2009-16, “Transfers and Servicing (Topic 860)” which eliminates the concept of a “qualifying special-purpose entity”, changes the requirements for derecognizing financial assets and requires additional disclosures about a transferor’s continuing involvement in transferred financial assets. This pronouncement is effective for interim and annual reporting periods beginning after November 15, 2009. The recognition and measurement provisions regarding transfers of financial assets shall be applied to transfers that occur on or after the effective date. The disclosure requirements must be applied to transfers that occurred before and after the effective date. The Corporation adopted this new pronouncement on January 1, 2010, as required. The sale accounting treatment for the Corporation’s participation loans have been evaluated in accordance with the new standard. Refer to Note 7 — Loans and Leases for additional information. The adoption of this standard did not have a material impact on the consolidated financial statements of the Corporation.

Consolidation of Variable Interest Entities. In December 2009, the FASB issued ASU No. 2009-17, “Consolidation (Topic 810) — Improvements to Financial Reporting for Enterprises Involved with Variable Interest Entities”, amending prior guidance to change how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. This statement requires an enterprise to perform an analysis to determine whether the enterprise’s variable interest or interests give it a controlling financial interest in a variable interest entity. This analysis identifies the primary beneficiary of a variable interest entity as the enterprise that has both of the following characteristics:

•

The power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance; and

•

The obligation to absorb losses of the entity that could potentially be significant to the variable interest entity or the right to receive benefits from the entity that could potentially be significant to the variable interest entity.

Ongoing reassessments of whether an enterprise is the primary beneficiary of a variable interest entity are required. The Corporation adopted this accounting standard on January 1, 2010, as required. There was no impact to the unaudited consolidated financial statements due to the adoption of this standard.

Consolidation. In January 2010, the FASB issued ASU 2010-02, Consolidation (Topic 810) — Accounting and Reporting for Decreases in Ownership of a Subsidiary — a Scope Clarification” which provides amendments to Subtopic 810-10 and related guidance within U.S. GAAP to clarify the scope of which the decrease in ownership provisions apply or do not apply. The amendments also expand the disclosures about the deconsolidation of a subsidiary or derecognition of a group of assets within the scope of Subtopic 810-10 including the valuation techniques used to measure the fair value of any retained investment, the nature of continuing involvement with the subsidiary and whether the transaction that resulted in the deconsolidation of the subsidiary or the derecognition of the group of assets was with a related party. The amendments of this update are effective beginning in the first interim or annual reporting period ending on or after December 15, 2009. The amendments in this update should be applied retrospectively to the first period that an entity adopted previous amendments to ASC 810-10 relating to non-controlling interests. The Corporation adopted this accounting standard on January 1, 2010, as required. There was no impact to the unaudited consolidated financial statements due to the adoption of this standard.

Note 4 — Earnings Per Share.

Earnings per common share are computed using the two-class method. Basic earnings per common share are computed by dividing net income (loss) allocated to common shares by the weighted average number of shares outstanding during the applicable period, excluding outstanding participating securities. Participating securities include unvested restricted shares. Unvested restricted shares are considered participating securities because holders of these securities receive non-forfeitable dividends at the same rate as holders of the Corporation’s common stock. Diluted earnings per share are computed by dividing net income (loss) allocated to common shares adjusted for reallocation of undistributed earnings of unvested restricted shares by the weighted average number of shares determined for the basic earnings per common share computation plus the dilutive effect of common stock equivalents using the treasury stock method. For the three month periods ended March 31, 2010 and 2009, average anti-dilutive employee share-based awards totaled 200,332 and 253,169, respectively.

		For the Three Months
		Ended March 31,
		2010				2009
Distributed earnings allocated to common stockholders		$	173,177			$	171,187
Undistributed earnings allocated to common stockholders			702,253				(357,067	)
Income (loss) available to common stockholders for basic earnings per share			875,430				(185,880	)
Reallocation of undistributed earnings for diluted earnings per share			—				—
Income (loss) available to common stockholders for diluted earnings per share		$	875,430			$	(185,880	)
Basic average shares			2,473,557				2,445,880
Dilutive effect of share-based awards			—				—
Dilutive average shares			2,473,557				2,445,880
Earnings per common share:
Basic		$	0.35			$	(0.08	)
Diluted			0.35				(0.08	)

Note 5 — Share-Based Compensation

The Corporation adopted an equity incentive plan in 1993, as amended in 1995, an equity incentive plan in 2001 and the 2006 Equity Incentive Plan (the Plans). The Plans are administered by the Compensation Committee of the Board of Directors of FBFS and provide for the grant of equity ownership opportunities through incentive stock options, nonqualified stock options (Stock Options) and restricted shares. As of March 31, 2010, 133,404 shares were available for future grants under the 2001 and 2006 Equity Incentive Plans (2001 and 2006 Plans). Shares covered by awards that expire, terminate or lapse will again be available for the grant of awards under the 2001 and 2006 Plans. The Corporation may issue new shares and shares from treasury for shares delivered under the Plans.

Stock Options

The Corporation may grant Stock Options to senior executives and other employees under the Plans. Stock Options generally have an exercise price that is equal to the fair value of the common shares on the date the option is granted. Stock Options granted under the 2001 and 2006 Plans are subject to graded vesting, generally ranging from four to eight years, and have a contractual term of 10 years. For any new awards issued, compensation expense is recognized over the requisite service period for the entire award on a straight-line basis. The Corporation has not granted any Stock Options since the Corporation became a public entity nor has it modified, repurchased or cancelled any Stock Options during that period. Therefore, no stock-based compensation was recognized in the consolidated statement of income (loss) for the three months ended March 31, 2010 and 2009, except with respect to restricted share awards. As of March 31, 2010, all Stock Options granted and not previously forfeited have vested.

Stock Option activity for the year ended December 31, 2009 and three months ended March 31, 2010 was as follows:

										Weighted
										Average
										Remaining
						Weighted				Contractual
		Options				Average Price				Life (Years)
Outstanding at December 31, 2008			157,290			$	22.07				4.67
Granted			—				—
Exercised			—				—
Forfeited			(14,500	)			22.63
Outstanding at December 31, 2009			142,790				22.01				3.66
Options exercisable at December 31, 2009			142,790								3.66
Outstanding as of December 31, 2009			142,790			$	22.01				3.66
Granted			—				—
Exercised			—				—
Forfeited			—				—
Outstanding at March 31, 2010			142,790				22.01				3.41
Options exercisable at March 31, 2010			142,790				22.01				3.41

Restricted Shares

Under the 2001 and 2006 Plans, the Corporation may grant restricted shares to plan participants, subject to forfeiture upon the occurrence of certain events until dates specified in the participant’s award agreement. While the restricted shares are subject to forfeiture, the participant may exercise full voting rights and will receive all dividends and other distributions paid with respect to the restricted shares. The restricted shares granted under the 2001 and 2006 Plans are subject to graded vesting. Compensation expense is recognized over the requisite service period of four years for the entire award on a straight-line basis. Upon vesting of restricted share awards, the benefits of tax deductions in excess of recognized compensation expense is recognized as a financing cash flow activity. For the three months ended March 31, 2010 and 2009, restricted share awards vested on a date at which the market price was lower than the market value on the date of grant; therefore, there is no excess tax benefit reflected in the consolidated statements of cash flows for the periods.

Restricted share activity for the year ended December 31, 2009 and the three months ended March 31, 2010 was as follows:

						Weighted Average
		Number of				Grant-Date
		Restricted Shares				Fair Value
Nonvested balance as of December 31, 2008			104,949			$	19.12
Granted			6,500				10.07
Vested			(34,273	)			19.77
Forfeited			(6,914	)			19.99
Nonvested balance as of December 31, 2009			70,262			$	17.88
Granted			2,000				10.15
Vested			(7,773	)			22.46
Forfeited			—				—
Nonvested balance as of March 31, 2010			64,489			$	17.08

As of March 31, 2010, approximately $785,000 of deferred compensation expense was included in additional paid-in capital in the consolidated balance sheet related to unvested restricted shares which the Corporation expects to recognize over four years. As of March 31, 2010, all restricted shares that vested were delivered. For the three months ended March 31, 2010 and 2009, share-based compensation expense included in the consolidated statements of income (loss) totaled approximately $136,000 and $172,000, respectively.

Note 6 — Securities

The amortized cost and estimated fair values of securities available-for-sale were as follows:

		As of March 31, 2010
						Gross				Gross
						unrealized				unrealized				Estimated
		Amortized cost				holding gains				holding losses				fair value
		(In Thousands)
Collateralized mortgage obligations — government agencies		$	126,508			$	3,062			$	(228	)		$	129,342
Collateralized mortgage obligations — government-sponsored enterprises			2,490				37				—				2,527
		$	128,998			$	3,099			$	(228	)		$	131,869

		As of December 31, 2009
						Gross				Gross
						unrealized				unrealized				Estimated
		Amortized cost				holding gains				holding losses				fair value
		(In Thousands)
Collateralized mortgage obligations — government agencies		$	116,109			$	2,615			$	(215	)		$	118,509
Collateralized mortgage obligations — government-sponsored enterprises			3,729				48				—				3,777
		$	119,838			$	2,663			$	(215	)		$	122,286

Collateralized mortgage obligations — government agencies represent securities issued by the Government National Mortgage Association. Collateralized mortgage obligations — government-sponsored enterprises include securities issued by the Federal Home Loan Mortgage Corporation and the Federal National Mortgage Association.

The amortized cost and estimated fair value of securities available-for-sale by contractual maturity at March 31, 2010 are shown below. Actual maturities may differ from contractual maturities because issuers have the right to call or prepay obligations without call or prepayment penalties.

						Estimated
		Amortized Cost				Fair Value
		(In Thousands)
Due in one year or less		$	—			$	—
Due in one year through five years			934				977
Due in five through ten years			3,870				3,941
Due in over ten years			124,194				126,951
		$	128,998			$	131,869

The table below shows the Corporation’s gross unrealized losses and fair value of investments, aggregated by investment category and length of time that individual investments have been in a continuous unrealized loss position at March 31, 2010 and December 31, 2009. At March 31, 2010 and December 31, 2009, the Corporation had 17 and 10 securities that were in an unrealized loss position, respectively. Such securities have declined in value due to the current interest rate environment and have not experienced credit rating downgrades. At March 31, 2010 the Corporation did not hold any securities that have been in a continuous loss position for twelve months or greater. The Corporation also has not specifically identified securities in a loss position for sale in the near term and does not believe that it will be required to sell any such securities. It is expected that the Corporation will recover the entire amortized cost basis of each security based upon an evaluation of the present value of the expected future cash flows. Accordingly, no other than temporary impairment was recorded in the consolidated results of operations for the three months ended March 31, 2010.

A summary of unrealized loss information for available-for-sale securities, categorized by security type follows:

		As of March 31, 2010
		Less than 12 months								12 months or longer								Total
						Unrealized								Unrealized								Unrealized
		Fair value				losses				Fair value				losses				Fair value				losses
		(In Thousands)
Collateralized mortgage obligations — government agencies		$	27,612			$	228			$	—			$	—			$	27,612			$	228
		$	27,612			$	228			$	—			$	—			$	27,612			$	228

		As of December 31, 2009
		Less than 12 months								12 months or longer								Total
						Unrealized								Unrealized								Unrealized
		Fair value				losses				Fair value				losses				Fair value				losses
		(In Thousands)
Collateralized mortgage obligations — government agencies		$	17,220			$	215			$	—			$	—			$	17,220			$	215
		$	17,220			$	215			$	—			$	—			$	17,220			$	215

There were no sales of securities available for sale for the three months ended March 31, 2010 and 2009.

At March 31, 2010 and December 31, 2009, securities with a fair value of approximately $57.3 million and $55.9 million, respectively, were pledged to secure public deposits, interest rate swap contracts and Federal Home Loan Bank (FHLB) advances and availability for additional advances.

Note 7 — Loans and Leases

Loans and leases receivable consisted of the following:

		March 31,				December 31,
		2010				2009
		(In Thousands)
First mortgage loans:
Commercial real estate		$	442,754			$	441,806
Construction and land development			57,909				64,194
Multi-family			43,833				43,959
1-4 family			56,418				56,131
Total first mortgage loans			600,914				606,090
Commercial and industrial loans			211,407				199,661
Direct financing leases, net			25,524				27,607
Home equity loans and second mortgage			6,369				7,879
Consumer and other			10,973				13,260
Loans and leases receivable, gross			855,187				854,497
Less:
Allowance for loan and lease losses			15,342				14,124
Deferred loan fees			463				566
Loans and leases receivable, net		$	839,382			$	839,807

The total principal amount of loans transferred to third parties during the three months ended March 31, 2010 was $3.1 million. Each of the transfers of these financial assets met the qualifications for sale accounting, and therefore $3.1 million has been derecognized in the unaudited consolidated financial statements. The Corporation has a continuing involvement in each of the agreements by way of servicing the loans; however, there are no further obligations, other than standard representations and warranties related to sold amounts, required of the Corporation in the event of default. The loans were transferred at their fair value and no gain or loss was recognized upon the transfer.

The total amount of loans transferred to third parties as loan participations at March 31, 2010 was $54.6 million of which $54.6 million has been derecognized as a sale under the applicable accounting guidance in effect at the time of the transfers of the financial assets. The Corporation continues to have involvement with these loans by way of the relationship management and all servicing responsibilities. As of March 31, 2010, none of the loans in this participation sold portfolio were considered impaired nor has the Corporation recognized any charge-offs associated with any retained portion of this pool of loans as measured by the Corporation’s allowance for loan and lease loss measurement process and policies.

Non-accrual loans and leases consisted of the following at March 31, 2010 and December 31, 2009, respectively:

		March 31,				December 31,
		2010				2009
		(Dollars In Thousands)
Non-accrual loans and leases
First mortgage loans:
Commercial real estate		$	8,087			$	8,482
Construction and land development			3,751				3,317
Multi-family			3,534				1,760
1-4 family			4,361				3,015
Total first mortgage loans			19,733				16,574
Commercial and industrial			7,638				7,086
Direct financing leases, net			—				1
Home equity and second mortgage			955				872
Consumer and other			3,292				3,292
Total non-accrual loans and leases			31,618				27,825
Foreclosed properties and repossessed assets, net			1,333				1,671
Total non-performing assets		$	32,951			$	29,496
Performing troubled debt restructurings		$	—			$	—
Total non-accrual loans and leases to gross loans and leases			3.70	%			3.26	%
Total non-performing assets to total assets			2.99				2.64
Allowance for loan and lease losses to non-accrual loans and leases			48.52				50.76

Note 8 — Allowance for Loan and Lease Losses

A summary of the activity in the allowance for loan and lease losses is presented below:

		Three
		Months Ended				Year Ended
		March 31,				December 31,
		2010				2009
		(Dollars In Thousands)
Allowance at beginning of period		$	14,124			$	11,846
Charge-offs:
Commercial real estate and other first mortgage			(125	)			(3,647	)
Commercial and industrial			(2	)			(2,031	)
Direct financing leases			—				(231	)
Home equity loans and second mortgage			—				(157	)
Consumer and other			—				(36	)
Total charge-offs			(127	)			(6,102	)
Recoveries:
Commercial real estate and other mortgage			—				—
Commercial and industrial			1				147
Direct financing leases			—				—
Home equity loans and second mortgage			—				8
Consumer and other			—				—
Total recoveries			1				155
Net charge-offs			(126	)			(5,947	)
Provision for loan and lease losses			1,344				8,225
Allowance at end of period		$	15,342			$	14,124
Allowance to gross loans and leases			1.79	%			1.65	%

The following represents information regarding our impaired loans:

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

Net foregone interest income on impaired loans and leases for the three months ended March 31, 2009 was $337,000.

Note 9 — Deposits

Deposits consisted of the following:

		March 31, 2010								December 31, 2009
						Weighted								Weighted
		Balance				average rate				Balance				average rate
		(Dollars In Thousands)
Transaction accounts:
Demand deposits		$	54,733				0.00	%		$	87,687				0.00	%
Negotiable order of withdrawal (NOW) accounts			83,363				0.40				65,191				0.40
Total transaction accounts			138,096								152,878
Money market accounts			273,077				1.30				262,276				1.38
Certificates of deposit			79,991				2.09				98,431				2.34
Brokered certificates of deposit			473,383				3.54				470,789				3.98
Total deposits		$	964,547							$	984,374

Note 10 — Borrowings

Borrowings consisted of the following:

		March 31, 2010												December 31, 2009
						Weighted				Weighted								Weighted				Weighted
						average				average								average				average
		Balance				balance				rate				Balance				balance				rate
		(Dollars In Thousands)
Fed funds purchased		$	—			$	—				0.00	%		$	—			$	1,700				0.61	%
FHLB advances			18,503				18,504				4.67				18,505				18,873				4.66
Senior line of credit			10				10				4.00				10				38				4.41
Subordinated notes payable			39,000				39,000				5.30				39,000				39,000				4.92
Junior subordinated notes			10,315				10,315				10.63				10,315				10,315				10.78
		$	67,828			$	67,829				5.95			$	67,830			$	69,926				5.61
Short-term borrowings		$	18,010											$	16,010
Long-term borrowings			49,818												51,820
		$	67,828											$	67,830

As of March 31, 2010, the Corporation was in compliance with its debt covenants on its Senior line of credit. Beginning in March 2010, the Corporation pays an unused line fee on its secured Senior line of credit. For the three months ended March 31, 2010 interest expense incurred due to this unused line fee was approximately $1,000.

Note 11 — Fair Value Disclosures

The Corporation determines the fair market values of its financial instruments based on the fair value hierarchy established in ASC Topic 820, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Fair value is defined as the price that would be received in an orderly transaction that is not a forced liquidation or distressed sale at the measurement date and is based on exit prices vs. entry prices. Fair value includes assumptions about risk such as nonperformance risk in liability fair values and is a market-based measurement, not an entity-specific measurement. The standard describes three levels of inputs that may be used to measure fair value.

Level 1 — Level 1 inputs are unadjusted quoted prices in active markets for identical assets or liabilities that the Corporation has the ability to access at the measurement date.

Level 2 — Level 2 inputs are inputs other than quoted prices included with Level 1 that are observable for the asset or liability either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 — Level 3 inputs are inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Corporation’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.

Assets and liabilities measured at fair value on a recurring basis, segregated by fair value hierarchy level, are summarized below:

		Fair Value Measurements Using
		Level 1				Level 2				Level 3				Total
		(In Thousands)
March 31, 2010
Assets:
Collateralized mortgage obligations — government agencies		$	—			$	129,342			$	—			$	129,342
Collateralized mortgage obligations — government sponsored enterprises			—				2,527				—				2,527
Interest rate swaps			—				1,844				—				1,844
Liabilities:
Interest rate swaps		$	—			$	1,844			$	—			$	1,844

		Fair Value Measurements Using
		Level 1				Level 2				Level 3				Total
		(In Thousands)
December 31, 2009
Assets:
Collateralized mortgage obligations — government agencies		$	—			$	118,509			$	—			$	118,509
Collateralized mortgage obligations — government sponsored enterprises			—				3,777				—				3,777
Interest rate swaps			—				1,297				—				1,297
Liabilities:
Interest rate swaps		$	—			$	1,297			$	—			$	1,297

There were no transfers in or out of Level 1 or 2 during the three months ended March 31, 2010 or the year ended December 31, 2009.

Assets and liabilities measured at fair value on a nonrecurring basis, segregated by fair value hierarchy are summarized below:

						As of and for the three months ended March 31, 2010
																		Total
		Balance at				Fair Value Measurements Using												Gains
		March 31, 2010				Level 1				Level 2				Level 3				(Losses)
		(In Thousands)
Impaired loans		$	21,861			$	—			$	17,621			$	4,240			$	—
Foreclosed properties			1,333				—				1,333				—				(121	)

						As of and for the year ended December 31, 2009
																		Total
		Balance at				Fair Value Measurements Using												Gains
		December 31, 2009				Level 1				Level 2				Level 3				(Losses)
		(In Thousands)
Impaired loans		$	17,596			$	—			$	14,820			$	2,775			$	—
Foreclosed properties		$	1,671			$	—			$	1,671			$	—			$	(525	)

Impaired loans that are collateral dependent were written down to their fair value of $21.9 million and $17.6 million at March 31, 2010 and December 31, 2009, respectively, through the establishment of specific reserves or by recording charge-offs when the carrying value exceeded the fair value. Valuation techniques consistent with the market approach, income approach, or cost approach were used to measure fair value and primarily included observable inputs for the individual impaired loans being evaluated such as recent sales of similar assets or observable market data for operational or carrying costs. In cases where such inputs were unobservable, the loan balance is reflected within Level 3 of the hierarchy.

Certain non-financial assets subject to measurement at fair value on a non-recurring basis included goodwill and foreclosed properties. Foreclosed properties, upon initial recognition, are remeasured and reported at fair value through a charge-off to the allowance for loan and lease losses, if deemed necessary, based upon the fair value of the foreclosed property. The fair value of a foreclosed property, upon initial recognition, is estimated using Level 2 inputs based on observable market data, typically an appraisal, or Level 3 inputs based upon assumptions specific to the individual property or equipment. Subsequent impairments of foreclosed properties are recorded as a loss on foreclosed properties. During the three months ended March 31, 2010, approximately $143,000 of outstanding loans were transferred to foreclosed properties as the Corporation claimed title to the respective assets. During the three months ended March 31, 2010, the Corporation completed an evaluation of certain of its foreclosed assets. Based upon the evaluation and the results of the impairment calculation, we recognized impairment losses of approximately $121,000 on foreclosed properties. At March 31, 2010 and December 31, 2009, foreclosed properties, at fair value, were $1.3 million and $1.7 million, respectively.

The Corporation’s goodwill is not amortized but is subject to an annual impairment evaluation. The Corporation conducts its annual evaluation in June of each year. Based upon the results of this analysis, the fair value of the Corporation’s subsidiary reporting unit goodwill exceeds the carrying value of its assets and liabilities and, therefore, no impairment was necessary. The goodwill impairment evaluation utilized a discounted cash flow method with further evaluation of the consolidated entity market capitalization. A series of assumptions, including the discount rate applied to the estimated future cash flows, were embedded within the evaluation. These assumptions and estimates are subject to changes. 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 change. Accordingly, an impairment charge to goodwill may be required in the foreseeable future 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. On a quarterly basis, the Corporation continues to evaluate the business climate and elements affecting the reliability of the estimated cash flows utilized in the annual impairment calculation to assess if triggering events have occurred. For the period subsequent to the most recent annual evaluation period, no additional triggering events occurred.

Fair Value of Financial Instruments

The Corporation is required to disclose estimated fair values for its financial instruments. Fair value estimates, methods, and assumptions, consistent with exit price concepts for fair value measurements, are set forth below:

		March 31, 2010								December 31, 2009
		Carrying								Carrying
		Amount				Fair Value				Amount				Fair Value
		(In Thousands)
Financial assets:
Cash and cash equivalents		$	87,108			$	87,108			$	112,737			$	112,737
Securities available-for-sale			131,869				131,869				122,286				122,286
Loans and lease receivables			839,382				820,042				839,807				820,286
Federal Home Loan Bank stock			2,367				2,367				2,367				2,367
Cash surrender value of life insurance			16,423				16,423				16,254				16,254
Accrued interest receivable			3,302				3,302				3,212				3,212
Interest rate swaps			1,844				1,844				1,297				1,297
Financial liabilities:
Deposits		$	964,547			$	977,997			$	984,374			$	1,000,027
Federal Home Loan Bank and other borrowings			57,513				57,978				57,515				58,125
Junior subordinated notes			10,315				7,225				10,315				7,237
Interest rate swaps			1,844				1,844				1,297				1,297
Accrued interest payable											4,359				4,359
Off balance sheet items:
Standby letters of credit			30				30				38				38
Commitments to extend credit			—				*				—				*

Disclosure of fair value information about financial instruments, for which it is practicable to estimate that value, is required whether or not recognized in the consolidated balance sheets. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instruments. Certain financial instruments and all non-financial instruments are excluded from the disclosure requirements. Accordingly, the aggregate fair value amounts presented do not necessarily represent the underlying value of the Corporation.

The carrying amounts reported for cash and cash equivalents, accrued interest receivable and accrued interest payable approximate fair value because of their short-term nature and because they do not present unanticipated credit concerns.