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EX-32 - EXHIBIT 32 - FIRST BUSINESS FINANCIAL SERVICES, INC.fbiz2016930exhibit32.htm
EX-31.2 - EXHIBIT 31.2 - FIRST BUSINESS FINANCIAL SERVICES, INC.fbiz2016930exhibit312.htm
EX-31.1 - EXHIBIT 31.1 - FIRST BUSINESS FINANCIAL SERVICES, INC.fbiz2016930exhibit311.htm
EX-10.1 - EXHIBIT 10.1 - FIRST BUSINESS FINANCIAL SERVICES, INC.rsaawardformexhibit101.htm
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ
 
Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2016
OR
¨
 
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Commission file number 001-34095
FIRST BUSINESS FINANCIAL SERVICES, INC.
(Exact name of registrant as specified in its charter)
Wisconsin
 
39-1576570
 
 
 
(State or other 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
Registrant’s telephone number, including area code
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§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 þ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ¨
 
Accelerated filer þ
 
Non-accelerated filer ¨
 
Smaller reporting company ¨
 
 
 
 
(Do not check if a smaller reporting company)
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ
The number of shares outstanding of the registrant’s sole class of common stock, par value $0.01 per share, on October 27, 2016 was 8,706,740 shares.



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







PART I. Financial Information
Item 1. Financial Statements
First Business Financial Services, Inc.
Consolidated Balance Sheets
 
 
September 30,
2016
 
December 31,
2015
 
 
(unaudited)
 
 
 
(In Thousands, Except Share Data)
Assets
 
 
 
 
Cash and due from banks
 
$
16,694

 
$
14,640

Short-term investments
 
52,070

 
98,924

Cash and cash equivalents
 
68,764

 
113,564

Securities available-for-sale, at fair value
 
154,480

 
140,548

Securities held-to-maturity, at amortized cost
 
35,109

 
37,282

Loans held for sale
 
2,627

 
2,702

Loans and leases receivable, net of allowance for loan and lease losses of $20,067 and $16,316, respectively
 
1,438,230

 
1,414,649

Premises and equipment, net
 
3,898

 
3,954

Foreclosed properties
 
1,527

 
1,677

Bank-owned life insurance
 
29,028

 
28,298

Federal Home Loan Bank and Federal Reserve Bank stock, at cost
 
2,165

 
2,843

Goodwill and other intangible assets
 
12,762

 
12,493

Accrued interest receivable and other assets
 
23,848

 
24,071

Total assets
 
$
1,772,438

 
$
1,782,081

Liabilities and Stockholders’ Equity
 
 
 
 
Deposits
 
$
1,566,199

 
$
1,577,231

Federal Home Loan Bank and other borrowings
 
29,946

 
34,740

Junior subordinated notes
 
10,001

 
9,990

Accrued interest payable and other liabilities
 
6,361

 
9,288

Total liabilities
 
1,612,507

 
1,631,249

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, 8,960,083 and 8,922,375 shares issued, 8,717,299 and 8,699,410 shares outstanding, at September 30, 2016 and December 31, 2015, respectively
 
90

 
89

Additional paid-in capital
 
77,544

 
76,549

Retained earnings
 
88,255

 
80,584

Accumulated other comprehensive income (loss)
 
806

 
(80
)
Treasury stock, 242,784 and 222,965 shares at September 30, 2016 and December 31, 2015, respectively, at cost
 
(6,764
)
 
(6,310
)
Total stockholders’ equity
 
159,931

 
150,832

Total liabilities and stockholders’ equity
 
$
1,772,438

 
$
1,782,081


See accompanying Notes to Unaudited Consolidated Financial Statements.


1


First Business Financial Services, Inc.
Consolidated Statements of Income (Unaudited)
 
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
 
2016
 
2015
 
2016
 
2015
 
 
(In Thousands, Except Per Share Data)
Interest income:
 
 
 
 
 
 
 
 
Loans and leases
 
$
18,016

 
$
17,323

 
$
55,161

 
$
51,328

Securities income
 
698

 
722

 
2,102

 
2,246

Short-term investments
 
184

 
90

 
533

 
297

Total interest income
 
18,898

 
18,135

 
57,796

 
53,871

Interest expense:
 
 
 
 
 
 
 
 
Deposits
 
2,870

 
2,785

 
8,961

 
7,947

Notes payable and other borrowings
 
453

 
460

 
1,425

 
1,364

Junior subordinated notes
 
280

 
280

 
835

 
832

Total interest expense
 
3,603

 
3,525

 
11,221

 
10,143

Net interest income
 
15,295

 
14,610

 
46,575

 
43,728

Provision for loan and lease losses
 
3,537

 
287

 
6,824

 
1,491

Net interest income after provision for loan and lease losses
 
11,758

 
14,323

 
39,751

 
42,237

Non-interest income:
 
 
 
 
 
 
 
 
Trust and investment services fee income
 
1,364

 
1,251

 
3,981

 
3,737

Gain on sale of Small Business Administration loans
 
347

 
927

 
3,854

 
2,274

Gain on sale of residential mortgage loans
 
198

 
244

 
540

 
614

Service charges on deposits
 
772

 
705

 
2,247

 
2,094

Loan fees
 
506

 
486

 
1,791

 
1,487

Increase in cash surrender value of bank-owned life insurance
 
244

 
243

 
730

 
715

Other non-interest income
 
209

 
246

 
914

 
1,155

Total non-interest income
 
3,640

 
4,102

 
14,057

 
12,076

Non-interest expense:
 
 
 
 
 
 
 
 
Compensation
 
7,637

 
7,320

 
24,454

 
21,598

Occupancy
 
530

 
486

 
1,538

 
1,472

Professional fees
 
1,065

 
1,268

 
2,888

 
3,772

Data processing
 
623

 
587

 
1,971

 
1,772

Marketing
 
528

 
693

 
1,710

 
2,036

Equipment
 
292

 
308

 
913

 
914

FDIC insurance
 
444

 
260

 
989

 
693

Collateral liquidation costs
 
89

 
22

 
204

 
402

Net (gain) loss on foreclosed properties
 

 
(163
)
 
93

 
(178
)
Impairment of tax credit investments
 
3,314

 

 
3,520

 

Other non-interest expense
 
1,231

 
1,203

 
3,630

 
3,209

Total non-interest expense
 
15,753

 
11,984

 
41,910

 
35,690

(Loss) income before income tax expense
 
(355
)
 
6,441

 
11,898

 
18,623

Income tax (benefit) expense
 
(2,895
)
 
2,060

 
1,095

 
6,192

Net income
 
$
2,540

 
$
4,381

 
$
10,803

 
$
12,431

Earnings per common share:
 
 
 
 
 
 
 
 
Basic
 
$
0.29

 
$
0.50

 
$
1.24

 
$
1.43

Diluted
 
$
0.29

 
$
0.50

 
$
1.24

 
$
1.43

Dividends declared per share
 
$
0.12

 
$
0.11

 
$
0.36

 
$
0.33

See accompanying Notes to Unaudited Consolidated Financial Statements.

2


First Business Financial Services, Inc.
Consolidated Statements of Comprehensive Income (Unaudited)

 
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
 
2016
 
2015
 
2016
 
2015
 
 
(In Thousands)
 
 
 
 
 
 
 
 
 
Net income
 
$
2,540

 
$
4,381

 
$
10,803

 
$
12,431

Other comprehensive income, before tax
 
 
 
 
 
 
 
 
Securities available-for-sale:
 
 
 
 
 
 
 
 
Net unrealized securities gains arising during the period
 
81

 
443

 
1,317

 
298

Securities held-to-maturity:
 
 
 
 
 
 
 
 
Amortization of net unrealized losses transferred from available-for-sale
 
41

 
54

 
124

 
181

Income tax expense
 
(47
)
 
(192
)
 
(555
)
 
(185
)
     Total other comprehensive income
 
$
75

 
$
305

 
$
886

 
$
294

Comprehensive income
 
$
2,615

 
$
4,686

 
$
11,689

 
$
12,725


See accompanying Notes to Unaudited Consolidated Financial Statements.

3


First Business Financial Services, Inc.
Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)


 
 
Common shares outstanding
 
Common
stock
 
Additional
paid-in
capital
 
Retained
earnings
 
Accumulated
other
comprehensive
income
 
Treasury
stock
 
Total
 
 
(In Thousands, Except Share Data)
Balance at December 31, 2014
 
8,671,854

 
$
45

 
$
74,963

 
$
67,886

 
$
218

 
$
(5,364
)
 
$
137,748

Net income
 

 

 

 
12,431

 

 

 
12,431

Other comprehensive income
 

 

 

 

 
294

 

 
294

Common stock dividends
 

 
44

 
(44
)
 

 

 

 

Exercise of stock options
 
24,000

 

 
300

 

 

 

 
300

Share-based compensation - restricted shares
 
43,602

 

 
717

 

 

 

 
717

Share-based compensation - tax benefits
 

 

 
253

 

 

 

 
253

Cash dividends ($0.33 per share)
 

 

 

 
(2,859
)
 

 

 
(2,859
)
Treasury stock purchased
 
(40,681
)
 

 

 

 

 
(917
)
 
(917
)
Balance at September 30, 2015
 
8,698,775

 
$
89

 
$
76,189

 
$
77,458

 
$
512

 
$
(6,281
)
 
$
147,967


 
 
Common shares outstanding
 
Common
stock
 
Additional
paid-in
capital
 
Retained
earnings
 
Accumulated
other
comprehensive
(loss) income
 
Treasury
stock
 
Total
 
 
(In Thousands, Except Share Data)
Balance at December 31, 2015
 
8,699,410

 
$
89

 
$
76,549

 
$
80,584

 
$
(80
)
 
$
(6,310
)
 
$
150,832

Net income
 

 

 

 
10,803

 

 

 
10,803

Other comprehensive income
 

 

 

 

 
886

 

 
886

Share-based compensation - restricted shares
 
37,708

 
1

 
857

 

 

 

 
858

Share-based compensation - tax benefits
 

 

 
138

 

 

 

 
138

Cash dividends ($0.36 per share)
 

 

 

 
(3,132
)
 

 

 
(3,132
)
Treasury stock purchased
 
(19,819
)
 

 

 

 

 
(454
)
 
(454
)
Balance at September 30, 2016
 
8,717,299

 
$
90

 
$
77,544

 
$
88,255

 
$
806

 
$
(6,764
)
 
$
159,931


See accompanying Notes to Unaudited Consolidated Financial Statements.


4


First Business Financial Services, Inc.
Consolidated Statements of Cash Flows (Unaudited)
 
 
For the Nine Months Ended September 30,
 
 
2016
 
2015
 
 
(In Thousands)
Operating activities
 
 
 
 
Net income
 
$
10,803

 
$
12,431

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Deferred income taxes, net
 
(9
)
 
319

Impairment of tax credit investments
 
3,520

 

Provision for loan and lease losses
 
6,824

 
1,491

Depreciation, amortization and accretion, net
 
1,403

 
(379
)
Share-based compensation
 
858

 
717

Increase in cash surrender value of bank-owned life insurance
 
(730
)
 
(715
)
Origination of loans for sale
 
(54,794
)
 
(52,295
)
Sale of loans originated for sale
 
59,263

 
53,612

Gain on sale of loans originated for sale
 
(4,394
)
 
(2,887
)
Net loss (gain) on foreclosed properties, including impairment valuation
 
93

 
(178
)
Excess tax benefit from share-based compensation
 
(138
)
 
(253
)
Increase in accrued interest receivable and other assets
 
(3,106
)
 
(529
)
(Decrease) increase in accrued interest payable and other liabilities
 
(2,789
)
 
1,342

Net cash provided by operating activities
 
16,804

 
12,676

Investing activities
 
 
 
 
Proceeds from maturities, redemptions and paydowns of available-for-sale securities
 
32,555

 
32,930

Proceeds from maturities, redemptions and paydowns of held-to-maturity securities
 
2,906

 
3,253

Proceeds from sale of available-for-sale securities
 
2,183

 

Purchases of available-for-sale and held-to-maturity securities
 
(48,943
)
 
(32,614
)
Proceeds from sale of foreclosed properties
 
57

 
528

Net increase in loans and leases
 
(29,962
)
 
(96,898
)
Investment in limited partnerships
 
(2,238
)
 
(578
)
Distributions from limited partnerships
 
791

 
332

Investment in Federal Home Loan Bank and Federal Reserve Bank Stock
 
(388
)
 
(1,349
)
Proceeds from sale of Federal Home Loan Bank Stock
 
1,066

 
846

Purchases of leasehold improvements and equipment, net
 
(519
)
 
(498
)
Net cash used in investing activities
 
(42,492
)
 
(94,048
)
Financing activities
 
 
 
 
Net (decrease) increase in deposits
 
(10,924
)
 
101,529

Repayment of Federal Home Loan Bank advances
 
(3,500
)
 

Net (decrease) increase in short-term borrowed funds
 
(1,240
)
 
2,500

Excess tax benefit from share-based compensation
 
138

 
253

Cash dividends paid
 
(3,132
)
 
(2,859
)
Exercise of stock options
 

 
300

Purchase of treasury stock
 
(454
)
 
(917
)
Net cash (used in) provided by financing activities
 
(19,112
)
 
100,806

Net (decrease) increase in cash and cash equivalents
 
(44,800
)
 
19,434

Cash and cash equivalents at the beginning of the period
 
113,564

 
103,237

Cash and cash equivalents at the end of the period
 
$
68,764

 
$
122,671

Supplementary cash flow information
 
 
 
 
Cash paid during the period for:
 
 
 
 
Interest paid on deposits and borrowings
 
$
11,058

 
$
9,817

Income taxes paid
 
5,122

 
3,793

Non-cash investing and financing activities:
 
 
 
 
Transfer of loans from held-to-maturity to held-for-sale
 
11,504

 
2,401

See accompanying Notes to Unaudited Consolidated Financial Statements.

5


Notes to Unaudited Consolidated Financial Statements

Note 1 — Nature of Operations and Summary of Significant Accounting Policies
Nature of Operations. The accounting and reporting practices of First Business Financial Services, Inc. (the “Corporation”), its wholly owned subsidiaries, First Business Bank (“FBB”), First Business Bank – Milwaukee (“FBB – Milwaukee”) and Alterra Bank (“Alterra”), have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). FBB, FBB – Milwaukee and Alterra are sometimes referred to together as the “Banks.” FBB operates as a commercial banking institution in the Madison, Wisconsin market, consisting primarily of Dane County and the surrounding areas, with loan production offices in Northeast Wisconsin. FBB also offers trust and investment services through First Business Trust & Investments (“FBTI”), a division of FBB. FBB – Milwaukee operates as a commercial banking institution in the Milwaukee, Wisconsin market, consisting primarily of Waukesha County and the surrounding areas, with a loan production office in Kenosha, Wisconsin. Alterra operates as a commercial banking institution in the Kansas City market and the surrounding areas. The Banks provide a full range of financial services to businesses, business owners, executives, professionals and high net worth individuals. The Banks are subject to competition from other financial institutions and service providers and are also subject to state and federal regulations. FBB has the following wholly owned subsidiaries: First Business Capital Corp. (“FBCC”), First Madison Investment Corp. (“FMIC”), First Business Equipment Finance, LLC (“FBEF”), Rimrock Road Investment Fund, LLC (“Rimrock Road”), BOC Investment, LLC (“BOC”) and Mitchell Street Apartments Investments, LLC (“Mitchell Street”). FMIC is located in and was formed under the laws of the state of Nevada. FBB-Milwaukee has one subsidiary, FBB – Milwaukee Real Estate, LLC (“FBBMRE”).
Basis of Presentation. The accompanying unaudited Consolidated Financial Statements were prepared in accordance with GAAP and 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 and should be read in conjunction with the Corporation’s Consolidated Financial Statements and footnotes thereto included in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2015. The unaudited Consolidated Financial Statements include the accounts of the Corporation and its wholly owned subsidiaries. In accordance with the provisions of Accounting Standards Codification (“ASC”) Topic 810, the Corporation’s ownership interest in FBFS Statutory Trust II (“Trust II”) has not been consolidated into the financial statements. All significant intercompany balances and transactions have been eliminated in consolidation.
Management of the Corporation is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements as well as reported amounts of revenues and expenses during the reporting period. Actual results could differ significantly from those estimates. Material estimates that could significantly change in the near-term include the value of lease residuals, property under operating leases, securities, income taxes, goodwill and the level of the allowance for loan and lease losses. The results of operations for the nine month period ended September 30, 2016 are not necessarily indicative of results that may be expected for any other interim period or the entire fiscal year ending December 31, 2016. Certain amounts in prior periods may have been reclassified to conform to the current presentation. Subsequent events have been evaluated through the date of the issuance of the unaudited Consolidated Financial Statements. No significant subsequent events have occurred through this date requiring adjustment to the financial statements or disclosures.
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, 2015 except as described further below in this Note 1.
Recent Accounting Pronouncements
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230). The ASU provides guidance on eight specific cash flow issues with the objective of reducing diversity in practice. The ASU is effective for public companies for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. The amendments in this update will be applied retrospectively to each prior period presented. The Corporation intends to adopt the accounting standard during the first quarter of 2018, as required, and is currently evaluating the impact on its results of operations, financial position and liquidity.



6


Note 2 — Earnings Per Common Share
Earnings per common share are computed using the two-class method. Basic earnings per common share are computed by dividing net income 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, or dividend equivalents, at the same rate as holders of the Corporation’s common stock. Diluted earnings per share are computed by dividing net income 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.
There were no anti-dilutive employee share-based awards for the three and nine month periods ended September 30, 2016 and 2015.
 
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
 
2016
 
2015
 
2016
 
2015
 
 
(Dollars in Thousands, Except Per Share Data)
Basic earnings per common share
 
 
 
 
 
 
 
 
Net income
 
$
2,540

 
$
4,381

 
$
10,803

 
$
12,431

Less: earnings allocated to participating securities
 
38

 
68

 
165

 
206

Basic earnings allocated to common shareholders
 
$
2,502

 
$
4,313

 
$
10,638

 
$
12,225

 
 
 
 
 
 
 
 
 
Weighted-average common shares outstanding, excluding participating securities
 
8,582,836

 
8,546,563

 
8,569,613

 
8,538,219

 
 
 
 
 
 
 
 
 
Basic earnings per common share
 
$
0.29

 
$
0.50

 
$
1.24

 
$
1.43

 
 
 
 
 
 
 
 
 
Diluted earnings per common share
 
 
 
 
 
 
 
 
Earnings allocated to common shareholders, diluted
 
$
2,502

 
$
4,313

 
$
10,638

 
$
12,225

 
 
 
 
 
 
 
 
 
Weighted-average common shares outstanding, excluding participating securities
 
8,582,836

 
8,546,563

 
8,569,613

 
8,538,219

Dilutive effect of share-based awards
 

 

 

 
1,486

Weighted-average diluted common shares outstanding, excluding participating securities
 
8,582,836

 
8,546,563

 
8,569,613

 
8,539,705

 
 
 
 
 
 
 
 
 
Diluted earnings per common share
 
$
0.29

 
$
0.50

 
$
1.24

 
$
1.43


Note 3 — Share-Based Compensation
The Corporation adopted the 2012 Equity Incentive Plan (the “Plan”) during the quarter ended June 30, 2012. The Plan is administered by the Compensation Committee of the Board of Directors of the Corporation and provides for the grant of equity ownership opportunities through incentive stock options and nonqualified stock options (together, “Stock Options”), restricted stock, restricted stock units, dividend equivalent units and any other type of award permitted by the Plan. As of September 30, 2016, 273,737 shares were available for future grants under the Plan. Shares covered by awards that expire, terminate or lapse will again be available for the grant of awards under the Plan. The Corporation may issue new shares and shares from its treasury stock for shares delivered under the Plan.
Restricted Stock
Under the Plan, the Corporation may grant restricted stock to plan participants, subject to forfeiture upon the occurrence of certain events until the dates specified in the participant’s award agreement. While restricted stock is subject to forfeiture, with the exception of restricted stock units, which do not have voting rights and are provided dividend equivalents, restricted stock participants may exercise full voting rights and will receive all dividends and other distributions paid with respect to the

7


restricted shares. The restricted stock granted under the Plan is typically subject to a vesting period. Compensation expense is recognized over the requisite service period of generally four years for the entire award on a straight-line basis. Upon vesting of restricted share awards, the benefit of tax deductions in excess of recognized compensation expense is recognized as a financing cash flow activity.
Restricted stock activity for the year ended December 31, 2015 and the nine months ended September 30, 2016 was as follows:
 
 
Number of
Restricted Shares/Units
 
Weighted Average
Grant-Date
Fair Value
Nonvested balance as of December 31, 2014
 
154,998

 
$
16.97

Granted
 
53,790

 
22.52

Vested
 
(64,874
)
 
15.23

Forfeited
 
(8,443
)
 
15.03

Nonvested balance as of December 31, 2015
 
135,471

 
20.13

Granted
 
50,700

 
22.98

Vested
 
(53,000
)
 
18.73

Forfeited
 
(12,992
)
 
18.96

Nonvested balance as of September 30, 2016
 
120,179

 
$
21.22


As of September 30, 2016, the Corporation had $2.4 million of deferred unvested compensation expense, which the Corporation expects to recognize over a weighted-average period of approximately 2.80 years.

For the three and nine months ended September 30, 2016 and 2015, share-based compensation expense related to restricted stock included in the unaudited Consolidated Statements of Income was as follows:
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
 
(In Thousands)
Share-based compensation expense
$
292

 
$
268

 
$
858

 
$
717

 
  
Note 4 — Securities
The amortized cost and fair value of securities available-for-sale and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive income were as follows:

 
 
As of September 30, 2016
 
 
Amortized cost
 
Gross
unrealized gains
 
Gross
unrealized losses
 
Fair value
 
 
(In Thousands)
Available-for-sale:
 
 
 
 
 
 
 
 
U.S. Government agency obligations - government-sponsored enterprises
 
$
6,298

 
$
39

 
$

 
$
6,337

Municipal obligations
 
8,275

 
17

 
(15
)
 
8,277

Asset-backed securities
 
1,169

 

 
(39
)
 
1,130

Collateralized mortgage obligations - government issued
 
30,588

 
701

 
(7
)
 
31,282

Collateralized mortgage obligations - government-sponsored enterprises
 
106,489

 
1,057

 
(92
)
 
107,454

 
 
$
152,819

 
$
1,814

 
$
(153
)
 
$
154,480



8


 
 
As of December 31, 2015
 
 
Amortized cost
 
Gross
unrealized
gains
 
Gross
unrealized losses
 
Fair value
 
 
(In Thousands)
Available-for-sale:
 
 
 
 
 
 
 
 
U.S. Government agency obligations - government-sponsored enterprises
 
$
8,047

 
$
2

 
$
(32
)
 
$
8,017

Municipal obligations
 
4,278

 
12

 
(7
)
 
4,283

Asset-backed securities
 
1,327

 

 
(58
)
 
1,269

Collateralized mortgage obligations - government issued
 
43,845

 
814

 
(116
)
 
44,543

Collateralized mortgage obligations - government-sponsored enterprises
 
82,707

 
145

 
(416
)
 
82,436

 
 
$
140,204

 
$
973

 
$
(629
)
 
$
140,548


The amortized cost and fair value of securities held-to-maturity and the corresponding amounts of gross unrecognized gains and losses were as follows:

 
 
As of September 30, 2016
 
 
Amortized cost
 
Gross
unrecognized gains
 
Gross
unrecognized losses
 
Fair value
 
 
(In Thousands)
Held-to-maturity:
 
 
 
 
 
 
 
 
U.S. Government agency obligations - government-sponsored enterprises
 
$
1,497

 
$
8

 
$

 
$
1,505

Municipal obligations
 
16,712

 
486

 
(1
)
 
17,197

Collateralized mortgage obligations - government issued
 
9,803

 
183

 

 
9,986

Collateralized mortgage obligations - government-sponsored enterprises
 
7,097

 
179

 

 
7,276

 
 
$
35,109

 
$
856

 
$
(1
)
 
$
35,964


 
 
As of December 31, 2015
 
 
Amortized cost
 
Gross
unrecognized gains
 
Gross
unrecognized losses
 
Fair value
 
 
(In Thousands)
Held-to-maturity:
 
 
 
 
 
 
 
 
U.S. Government agency obligations - government-sponsored enterprises
 
$
1,495

 
$
1

 
$
(11
)
 
$
1,485

Municipal obligations
 
16,038

 
332

 
(5
)
 
16,365

Collateralized mortgage obligations - government issued
 
11,718

 
32

 
(41
)
 
11,709

Collateralized mortgage obligations - government-sponsored enterprises
 
8,031

 
12

 
(44
)
 
7,999

 
 
$
37,282

 
$
377

 
$
(101
)
 
$
37,558


U.S. Government agency obligations - government-sponsored enterprises represent securities issued by the Federal Home Loan Mortgage Corporation (“FHLMC”) and Federal National Mortgage Association (“FNMA”). Collateralized mortgage obligations - government issued represent securities guaranteed by the Government National Mortgage Association (“GNMA”). Collateralized mortgage obligations - government-sponsored enterprises include securities guaranteed by the FHLMC and the FNMA. Asset-backed securities represent securities issued by the Student Loan Marketing Association (“SLMA”) which are 97% guaranteed by the U.S. Government. Municipal obligations include securities issued by various

9


municipalities located primarily within the State of Wisconsin and are primarily general obligation bonds that are tax-exempt in nature. For the nine months ended September 30, 2016, a gain of $7,000 was recorded from the sale of three available-for-sale securities. No sales of available-for-sale securities occurred during the nine months ended September 30, 2015.

At September 30, 2016 and December 31, 2015, securities with a fair value of $20.2 million and $23.0 million, respectively, were pledged to secure interest rate swap contracts, outstanding Federal Home Loan Bank (“FHLB”) advances, if any, and additional FHLB availability.
The amortized cost and fair value of securities by contractual maturity at September 30, 2016 are shown below. Actual maturities may differ from contractual maturities because issuers have the right to call or prepay certain obligations without call or prepayment penalties.
 
 
As of September 30, 2016
 
 
Available-for-Sale
 
Held-to-Maturity
 
 
Amortized cost
 
Fair value
 
Amortized cost
 
Fair value
 
 
(In Thousands)
Due in one year or less
 
$
3,258

 
$
3,261

 
$

 
$

Due in one year through five years
 
13,965

 
14,053

 
5,953

 
6,035

Due in five through ten years
 
78,174

 
79,485

 
12,255

 
12,667

Due in over ten years
 
57,422

 
57,681

 
16,901

 
17,262

 
 
$
152,819

 
$
154,480

 
$
35,109

 
$
35,964


The tables below show the Corporation’s gross unrealized losses and fair value of available-for-sale investments with unrealized losses, aggregated by investment category and length of time that individual investments were in a continuous loss position at September 30, 2016 and December 31, 2015. At September 30, 2016, the Corporation held 48 available-for-sale securities that were in an unrealized loss position. Such securities have not experienced credit rating downgrades; however, they have primarily declined in value due to the current interest rate environment. At September 30, 2016, the Corporation held eight available-for-sale securities that had been in a continuous unrealized loss position for twelve months or greater.

The Corporation also has not specifically identified available-for-sale securities in a loss position that it intends to sell in the near term and does not believe that it will be required to sell any such securities. The Corporation reviews its securities on a quarterly basis to monitor its exposure to other-than-temporary impairment. Consideration is given to such factors as the length of time and extent to which the security has been in an unrealized loss position, changes in security ratings and an evaluation of the present value of expected future cash flows, if necessary. Based on the Corporation’s evaluation, it is expected that the Corporation will recover the entire amortized cost basis of each security. Accordingly, no other than temporary impairment was recorded in the unaudited Consolidated Statements of Income for the nine months ended September 30, 2016 and 2015.

10



A summary of unrealized loss information for securities available-for-sale, categorized by security type and length of time for which the security has been in a continuous unrealized loss position follows:

 
 
As of September 30, 2016
 
 
Less than 12 months
 
12 months or longer
 
Total
 
 
Fair value
 
Unrealized
losses
 
Fair value
 
Unrealized
losses
 
Fair value
 
Unrealized
losses
 
 
(In Thousands)
Available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Government agency obligations - government-sponsored enterprises
 
$
1,000

 
$

 
$

 
$

 
$
1,000

 
$

Municipal obligations
 
4,516

 
13

 
409

 
2

 
4,925

 
15

Asset-backed securities
 

 

 
1,130

 
39

 
1,130

 
39

Collateralized mortgage obligations - government issued
 
525

 

 
1,493

 
7

 
2,018

 
7

Collateralized mortgage obligations - government-sponsored enterprises
 
20,374

 
84

 
1,992

 
8

 
22,366

 
92

 
 
$
26,415

 
$
97

 
$
5,024

 
$
56

 
$
31,439

 
$
153


 
 
As of December 31, 2015
 
 
Less than 12 months
 
12 months or longer
 
Total
 
 
Fair value
 
Unrealized
losses
 
Fair value
 
Unrealized
losses
 
Fair value
 
Unrealized
losses
 
 
(In Thousands)
Available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Government agency obligations - government-sponsored enterprises
 
$
3,536

 
$
13

 
$
1,981

 
$
19

 
$
5,517

 
$
32

Municipal obligations
 
2,403

 
7

 

 

 
2,403

 
7

Asset-backed securities
 
1,269

 
$
58

 

 

 
1,269

 
58

Collateralized mortgage obligations - government issued
 
3,373

 
19

 
5,687

 
97

 
9,060

 
116

Collateralized mortgage obligations - government-sponsored enterprises
 
59,992

 
373

 
1,717

 
43

 
61,709

 
416

 
 
$
70,573

 
$
470

 
$
9,385

 
$
159

 
$
79,958

 
$
629


The tables below show the Corporation’s gross unrecognized losses and fair value of held-to-maturity investments, aggregated by investment category and length of time that individual investments were in a continuous loss position at September 30, 2016 and December 31, 2015. At September 30, 2016, the Corporation held one held-to-maturity security that was in an unrecognized loss position. Such security has not experienced credit rating downgrades; however, it has primarily declined in value due to the current interest rate environment. There were no held-to-maturity securities that were in a continuous unrecognized loss position for twelve months or greater as of September 30, 2016. It is expected that the Corporation will recover the entire amortized cost basis of each held-to-maturity 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 Statements of Income for the nine months ended September 30, 2016 and 2015.

A summary of unrecognized loss information for securities held-to-maturity, categorized by security type follows:


11


 
 
As of September 30, 2016
 
 
Less than 12 months
 
12 months or longer
 
Total
 
 
Fair value
 
Unrecognized
losses
 
Fair value
 
Unrecognized
losses
 
Fair value
 
Unrecognized
losses
 
 
(In Thousands)
Held-to-maturity:
 
 
 
 
 
 
 
 
 
 
 
 
Municipal obligations
 
263

 
(1
)
 

 

 
263

 
(1
)
 
 
$
263

 
$
(1
)
 
$

 
$

 
$
263

 
$
(1
)

 
 
As of December 31, 2015
 
 
Less than 12 months
 
12 months or longer
 
Total
 
 
Fair value
 
Unrecognized
losses
 
Fair value
 
Unrecognized
losses
 
Fair value
 
Unrecognized
losses
 
 
(In Thousands)
Held-to-maturity:
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Government agency obligations - government-sponsored enterprises
 
$

 
$

 
$
1,000

 
$
11

 
$
1,000

 
$
11

Municipal obligations
 
436

 
4

 
199

 
1

 
635

 
5

Collateralized mortgage obligations - government issued
 
6,518

 
41

 

 

 
6,518

 
41

Collateralized mortgage obligations - government-sponsored enterprises
 
5,168

 
44

 

 

 
5,168

 
44

 
 
$
12,122

 
$
89

 
$
1,199

 
$
12

 
$
13,321

 
$
101






12


Note 5 — Loan and Lease Receivables, Impaired Loans and Leases and Allowance for Loan and Lease Losses

Loan and lease receivables consist of the following:
 
 
September 30,
2016
 
December 31,
2015
 
 
(In Thousands)
Commercial real estate
 
 
 
 
Commercial real estate — owner occupied
 
$
169,170

 
$
176,322

Commercial real estate — non-owner occupied
 
483,540

 
436,901

Land development
 
60,348

 
59,779

Construction
 
110,426

 
100,625

Multi-family
 
73,081

 
80,254

1-4 family
 
46,341

 
50,304

Total commercial real estate
 
942,906

 
904,185

Commercial and industrial
 
464,920

 
472,193

Direct financing leases, net
 
29,638

 
31,093

Consumer and other
 
 
 
 
Home equity and second mortgages
 
5,390

 
8,237

Other
 
16,610

 
16,319

Total consumer and other
 
22,000

 
24,556

Total gross loans and leases receivable
 
1,459,464

 
1,432,027

Less:
 
 
 
 
   Allowance for loan and lease losses
 
20,067

 
16,316

   Deferred loan fees
 
1,167

 
1,062

Loans and leases receivable, net
 
$
1,438,230

 
$
1,414,649


Loans transferred to third parties consist of the guaranteed portion of Small Business Administration (“SBA”) loans which the Corporation sold in the secondary market, as well as participation interests in other originated loans. The total principal amount of the guaranteed portion of SBA loans sold during the three months ended September 30, 2016 and 2015 was $3.3 million and $9.1 million, respectively. For the nine months ended September 30, 2016 and 2015, $34.3 million and $19.2 million of the guaranteed portion of SBA loans were sold to third parties, respectively. Each of the transfers of these financial assets met the qualifications for sale accounting, and therefore all of the loans transferred during the nine months ended September 30, 2016 and 2015 have been derecognized in the unaudited Consolidated Financial Statements. The Corporation has a continuing involvement in each of the transferred lending arrangements by way of relationship management, servicing the loans, as well as being subject to normal and customary requirements of the SBA loan program; however, there are no further obligations to the third-party participant required of the Corporation, other than standard representations and warranties related to sold amounts, that would preclude the application of sale accounting treatment. The guaranteed portion of SBA loans were transferred at their fair value and the related gain was recognized upon the transfer as non-interest income in the unaudited Consolidated Financial Statements. The total outstanding balance of sold SBA loans at September 30, 2016 and December 31, 2015 was $96.9 million and $73.4 million, respectively.

In the event of a loss resulting from default and the SBA determines there is a deficiency in the manner in which the loan was originated, funded or serviced by the Corporation, the SBA may require the Corporation to repurchase the loan, deny its liability under the guaranty, reduce the amount of the guaranty, or, if it has already paid under the guaranty, seek recovery of the principal loss related to the deficiency from the Corporation. The Corporation must comply with applicable SBA regulations in order to maintain the guaranty. In addition, the Corporation retains the option to repurchase the sold guaranteed portion of an SBA loan if the loan defaults.

Management has assessed estimated losses inherent in the outstanding guaranteed portion of SBA loans sold in accordance with ASC 450, Contingencies, and determined a reserve based on the probability of future losses for these loans to be $375,000 at September 30, 2016, which is reported in other liabilities on the Corporation’s Consolidated Balance Sheets. No recourse reserve was recorded as of December 31, 2015. To date, the Corporation has not experienced significant historical losses related to the guaranteed portion of SBA loans.

13



As of September 30, 2016 and December 31, 2015, the total amount of the Corporation’s partial ownership of sold SBA loans on the Corporation’s Consolidated Balance Sheets was $30.0 million and $24.6 million, respectively. As of September 30, 2016, $2.3 million of loans in this portfolio were considered impaired as compared to $1.8 million as of December 31, 2015.

The total principal amount of transferred participation interests in other originated loans during the three months ended September 30, 2016 and 2015 was $16.7 million and $18.3 million, respectively. For the nine months ended September 30, 2016 and 2015, $32.1 million and $54.8 million of these participation interests were transferred to third parties, respectively, all of which were treated as sales and derecognized under the applicable accounting guidance at the time of transfer. No gain or loss was recognized on participation interests in other originated loans as they were transferred at or near the date of loan origination and the payments received for servicing the portion of the loans participated represents adequate compensation. The total outstanding balance of transferred loans at September 30, 2016 and December 31, 2015 was $109.1 million and $95.8 million, respectively. As of September 30, 2016 and December 31, 2015, the total amount of the Corporation’s partial ownership of these transferred loans on the Corporation’s Consolidated Balance Sheets was $109.3 million and $112.2 million, respectively. No loans in this participation portfolio were considered impaired as of September 30, 2016 and December 31, 2015. The Corporation does not share in the participant’s portion of any potential charge-offs. The total amount of loan participations purchased on the Corporation’s Consolidated Balance Sheets as of September 30, 2016 and December 31, 2015 was $454,000 and $467,000, respectively.

According to ASC 310-30, Accounting for Certain Loans or Debt Securities Acquired in a Transfer, purchased credit-impaired loans exhibit evidence of deterioration in credit quality since origination for which it is probable at acquisition that the Corporation will be unable to collect all contractually required payments. Purchased credit-impaired loans are initially recorded at fair value, which is estimated by discounting the cash flows expected to be collected at the acquisition date. Because the estimate of expected cash flows reflects an estimate of future credit losses expected to be incurred over the life of the loans, an allowance for credit losses is not recorded at the acquisition date. The excess of cash flows expected at acquisition over the estimated fair value, referred to as the accretable yield, is recognized in interest income over the remaining life of the loan on a level-yield basis, contingent on the subsequent evaluation of future expected cash flows. The difference between the contractually required payments at acquisition and the cash flows expected to be collected at acquisition is referred to as the nonaccretable difference. A subsequent decrease in the estimate of cash flows expected to be received on purchased credit-impaired loans generally results in the recognition of an allowance for loan and lease losses. Subsequent increases in cash flows result in reversal of any nonaccretable difference (or allowance for loan and lease losses to the extent any has been recorded) with a positive impact on interest income recognized. The measurement of cash flows involves assumptions and judgments for interest rates, prepayments, default rates, loss severity and collateral values. All of these factors are inherently subjective and significant changes in the cash flow estimates over the life of the loan can result.

The following table reflects the contractually required payments receivable and fair value of the Corporation’s purchased credit-impaired loans as of September 30, 2016 and December 31, 2015:
 
September 30,
2016
 
December 31,
2015
 
(In Thousands)
Contractually required payments
$
3,806

 
$
5,291

Fair value of purchased credit-impaired loans
1,937

 
3,250


14


The following table presents a rollforward of the Corporation’s accretable yield as of September 30, 2016 and December 31, 2015:
 
As of and for the Nine Months Ended September 30, 2016
 
As of and for Year Ended December 31, 2015
 
(In Thousands)
Accretable yield, beginning of period
$
414

 
$
676

Accretion recognized in earnings
(100
)
 
(50
)
Reclassification to nonaccretable difference for loans with changing cash flows(1)
(216
)
 
(60
)
Changes in accretable yield for non-credit related changes in expected cash flows(2)
73

 
(152
)
Accretable yield, end of period
$
171

 
$
414

(1)
Represents changes in accretable yield for those loans that are driven primarily by credit performance.
(2)
Represents changes in accretable yield for those loans that are driven primarily by changes in actual and estimated payments.

The following information illustrates ending balances of the Corporation’s loan and lease portfolio, including impaired loans by class of receivable, and considering certain credit quality indicators as of September 30, 2016 and December 31, 2015:
 
 
Category
 
 
As of September 30, 2016
 
I
 
II
 
III
 
IV
 
Total
 
 
(Dollars in Thousands)
Commercial real estate:
 
 
 
 
 
 
 
 
 
 
Commercial real estate — owner occupied
 
$
139,894

 
$
13,205

 
$
11,468

 
$
4,603

 
$
169,170

Commercial real estate — non-owner occupied
 
460,093

 
19,035

 
2,505

 
1,907

 
483,540

Land development
 
54,194

 
833

 
1,647

 
3,674

 
60,348

Construction
 
99,947

 
5,470

 
2,056

 
2,953

 
110,426

Multi-family
 
72,856

 
225

 

 

 
73,081

1-4 family
 
39,605

 
2,632

 
1,339

 
2,765

 
46,341

      Total commercial real estate
 
866,589

 
41,400

 
19,015

 
15,902

 
942,906

 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
 
370,580

 
40,619

 
43,752

 
9,969

 
464,920

 
 
 
 
 
 
 
 
 
 
 
Direct financing leases, net
 
28,733

 
591

 
314

 

 
29,638

 
 
 
 
 
 
 
 
 
 
 
Consumer and other:
 
 
 
 
 
 
 
 
 

Home equity and second mortgages
 
4,637

 
557

 
14

 
182

 
5,390

Other
 
16,132

 
82

 
5

 
391

 
16,610

      Total consumer and other
 
20,769

 
639

 
19

 
573

 
22,000

 
 
 
 
 
 
 
 
 
 
 
Total gross loans and leases receivable
 
$
1,286,671

 
$
83,249

 
$
63,100

 
$
26,444

 
$
1,459,464

Category as a % of total portfolio
 
88.17
%
 
5.70
%
 
4.32
%
 
1.81
%
 
100.00
%



15


 
 
Category
 
 
As of December 31, 2015
 
I
 
II
 
III
 
IV
 
Total
 
 
(Dollars in Thousands)
Commercial real estate:
 
 
 
 
 
 
 
 
 
 
Commercial real estate — owner occupied
 
$
156,379

 
$
7,654

 
$
9,311

 
$
2,978

 
$
176,322

Commercial real estate — non-owner occupied
 
410,517

 
20,662

 
3,408

 
2,314

 
436,901

Land development
 
52,817

 
2,241

 
309

 
4,412

 
59,779

Construction
 
98,693

 
851

 
564

 
517

 
100,625

Multi-family
 
79,368

 
884

 

 
2

 
80,254

1-4 family
 
41,086

 
3,985

 
1,865

 
3,368

 
50,304

      Total commercial real estate
 
838,860

 
36,277

 
15,457

 
13,591

 
904,185

 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
 
430,199

 
7,139

 
25,706

 
9,149

 
472,193

 
 
 
 
 
 
 
 
 
 
 
Direct financing leases, net
 
29,514

 
1,013

 
528

 
38

 
31,093

 
 
 
 
 
 
 
 
 
 
 
Consumer and other:
 
 
 
 
 
 
 
 
 
 
Home equity and second mortgages
 
7,497

 

 
141

 
599

 
8,237

Other
 
15,616

 
48

 

 
655

 
16,319

      Total consumer and other
 
23,113

 
48