XNAS:FBIZ First Business Financial Services, Inc. Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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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 March 31, 2012
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 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
Telephone number
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 ¨
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 þ No ¨
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 ¨
 
Accelerated filer ¨
 
Non-accelerated filer ¨
 
Smaller reporting company þ
 
 
 
 
(Do not check if a smaller reporting company)
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the 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 April 19, 2012 was 2,625,288 shares.



FIRST BUSINESS FINANCIAL SERVICES, INC.
INDEX — FORM 10-Q
 Exhibit 31.1
 
 Exhibit 31.2
 
 Exhibit 32
 
 EX-101 INSTANCE DOCUMENT
 
 EX-101 SCHEMA DOCUMENT
 
 EX-101 CALCULATION LINKBASE DOCUMENT
 
 EX-101 LABELS LINKBASE DOCUMENT
 
 EX-101 PRESENTATION LINKBASE DOCUMENT
 
 EX-101 DEFINITION LINKBASE DOCUMENT
 


2


PART I. Financial Information
Item 1. Financial Statements
First Business Financial Services, Inc.
Consolidated Balance Sheets
 
 
(unaudited)
 
 
 
 
March 31,
2012
 
December 31,
2011
 
(In Thousands, Except Share Data)
Assets
 
 
 
 
Cash and due from banks
 
$
14,334

 
$
16,707

Short-term investments
 
121,017

 
113,386

Cash and cash equivalents
 
135,351

 
130,093

Securities available-for-sale, at fair value
 
170,547

 
170,386

Loans and leases receivable, net of allowance for loan and lease losses of $14,451 and $14,155, respectively
 
817,297

 
836,687

Leasehold improvements and equipment, net
 
1,035

 
999

Foreclosed properties
 
2,590

 
2,236

Cash surrender value of bank-owned life insurance
 
17,830

 
17,660

Investment in Federal Home Loan Bank stock, at cost
 
1,748

 
2,367

Accrued interest receivable and other assets
 
15,647

 
16,737

Total assets
 
$
1,162,045

 
$
1,177,165

Liabilities and Stockholders’ Equity
 
 
 
 
Deposits
 
$
1,033,789

 
$
1,051,312

Federal Home Loan Bank and other borrowings
 
41,498

 
40,292

Junior subordinated notes
 
10,315

 
10,315

Accrued interest payable and other liabilities
 
10,009

 
11,032

Total liabilities
 
1,095,611

 
1,112,951

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, 2,714,985 shares issued, 2,625,288 and 2,625,569 shares outstanding at 2012 and 2011, respectively
 
27

 
27

Additional paid-in capital
 
25,978

 
25,843

Retained earnings
 
39,527

 
37,501

Accumulated other comprehensive income
 
2,554

 
2,491

Treasury stock (89,697 and 89,416 shares at 2012 and 2011, respectively), at cost
 
(1,652
)
 
(1,648
)
Total stockholders’ equity
 
66,434

 
64,214

Total liabilities and stockholders’ equity
 
$
1,162,045

 
$
1,177,165


See accompanying Notes to Unaudited Consolidated Financial Statements.

First Business Financial Services, Inc.
Consolidated Statements of Income (Unaudited)
 
 
For the Three Months Ended March 31,
 
 
2012
 
2011
 
 
(In Thousands, Except Share Data)
Interest income:
 
 
 
 
Loans and leases
 
$
12,726

 
$
12,920

Securities income
 
831

 
1,117

Short-term investments
 
76

 
33

Total interest income
 
13,633

 
14,070

Interest expense:
 
 
 
 
Deposits
 
3,744

 
4,650

Notes payable and other borrowings
 
686

 
662

Junior subordinated notes
 
277

 
274

Total interest expense
 
4,707

 
5,586

Net interest income
 
8,926

 
8,484

Provision for loan and lease losses
 
504

 
1,404

Net interest income after provision for loan and lease losses
 
8,422

 
7,080

Non-interest income:
 
 
 
 
Trust and investment services fee income
 
687

 
641

Service charges on deposits
 
479

 
373

Loan fees
 
398

 
331

Increase in cash surrender value of bank-owned life insurance
 
170

 
167

Credit, merchant and debit card fees
 
55

 
52

Other
 
61

 
108

Total non-interest income
 
1,850

 
1,672

Non-interest expense:
 
 
 
 
Compensation
 
4,005

 
3,737

Occupancy
 
332

 
341

Professional fees
 
432

 
427

Data processing
 
317

 
310

Marketing
 
266

 
279

Equipment
 
112

 
114

FDIC insurance
 
587

 
759

Collateral liquidation costs
 
108

 
242

Net loss on foreclosed properties
 
175

 
51

Other
 
498

 
500

Total non-interest expense
 
6,832

 
6,760

Income before income tax expense
 
3,440

 
1,992

Income tax expense
 
1,230

 
643

Net income
 
$
2,210

 
$
1,349

Earnings per common share:
 
 
 
 
Basic
 
$
0.84

 
$
0.52

Diluted
 
0.84

 
0.52

Dividends declared per share
 
0.07

 
0.07


See accompanying Notes to Unaudited Consolidated Financial Statements.
First Business Financial Services, Inc.
Consolidated Statements of Comprehensive Income (Unaudited)
 
For the Three Months Ended March 31,
 
2012
 
2011
 
(In Thousands)
 
 
 
 
Net income
$
2,210

 
$
1,349

Other comprehensive income, before tax
 
 
 
Unrealized securities gains (losses) arising during the period
102

 
(537
)
Income tax (expense) benefit
(39
)
 
200

Comprehensive income
$
2,273

 
$
1,012

 
 
 
 
See accompanying Notes to Unaudited Consolidated Financial Statements.

2


First Business Financial Services, Inc.
Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)
 
 
Common
stock
 
Additional
paid-in
capital
 
Retained
earnings
 
Accumulated
other
comprehensive
income
 
Treasury
stock
 
Total
 
 
(In Thousands, Except Share Data)
Balance at December 31, 2010
 
$
27

 
$
25,253

 
$
29,808

 
$
1,792

 
$
(1,545
)
 
$
55,335

Net income
 

 

 
1,349

 

 

 
1,349

Other comprehensive loss
 

 

 

 
(337
)
 

 
(337
)
Share-based compensation - restricted shares
 

 
155

 

 

 

 
155

Share-based compensation - tax benefits
 

 

 

 

 

 

Cash dividends ($0.07 per share)
 

 

 
(182
)
 

 

 
(182
)
Treasury stock purchased (282 shares)
 

 

 

 

 
(3
)
 
(3
)
Balance at March 31, 2011
 
$
27

 
$
25,408

 
$
30,975

 
$
1,455

 
$
(1,548
)
 
$
56,317

 
 
Common
stock
 
Additional
paid-in
capital
 
Retained
earnings
 
Accumulated
other
comprehensive
income
 
Treasury
stock
 
Total
 
 
(In Thousands, Except Share Data)
Balance at December 31, 2011
 
$
27

 
$
25,843

 
$
37,501

 
$
2,491

 
$
(1,648
)
 
$
64,214

Net income
 

 

 
2,210

 

 

 
2,210

Other comprehensive income
 

 

 

 
63

 

 
63

Share-based compensation - restricted shares
 

 
134

 

 

 

 
134

Share-based compensation - tax benefits
 

 
1

 

 

 

 
1

Cash dividends ($0.07 per share)
 

 

 
(184
)
 

 

 
(184
)
Treasury stock purchased (281 shares)
 

 

 

 

 
(4
)
 
(4
)
Balance at March 31, 2012
 
$
27

 
$
25,978

 
$
39,527

 
$
2,554

 
$
(1,652
)
 
$
66,434


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,
 
 
2012
 
2011
 
 
(In Thousands)
Operating activities
 
 
 
 
Net income
 
$
2,210

 
$
1,349

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Deferred income taxes, net
 
(45
)
 
(45
)
Provision for loan and lease losses
 
504

 
1,404

Depreciation, amortization and accretion, net
 
781

 
463

Share-based compensation
 
134

 
155

Increase in cash surrender value of bank-owned life insurance
 
(170
)
 
(167
)
Origination of loans for sale
 
(402
)
 
(811
)
Sale of loans originated for sale
 

 
814

Gain on sale of loans originated for sale
 

 
(3
)
Loss on foreclosed properties
 
175

 
51

Excess tax benefit from stock-based compensation
 
(1
)
 

Decrease in accrued interest receivable and other assets
 
1,200

 
1,492

Decrease in accrued interest payable and other liabilities
 
(1,022
)
 
(969
)
Net cash provided by operating activities
 
3,364

 
3,733

Investing activities
 
 
 
 
Proceeds from maturities of available-for-sale securities
 
13,994

 
10,914

Purchases of available-for-sale securities
 
(14,746
)
 
(18,243
)
Proceeds from sale of foreclosed properties
 
657

 
307

Net decrease in loans and leases
 
18,102

 
7,492

Investment in Aldine Capital Fund, L.P.
 

 
(210
)
Proceeds from sale of FHLB Stock
 
619

 

Purchases of leasehold improvements and equipment, net
 
(228
)
 
(66
)
Premium payment on bank owned life insurance policies
 

 
(8
)
Net cash provided by investing activities
 
18,398

 
186

Financing activities
 
 
 
 
Net (decrease) increase in deposits
 
(17,523
)
 
7,782

Repayment of FHLB advances
 
(3
)
 
(2,003
)
Net increase in short-term borrowed funds
 
1,209

 

Proceeds from issuance of subordinated notes payable
 
6,215

 

Repayment of subordinated notes payable
 
(6,215
)
 

Excess tax benefit from stock-based compensation
 
1

 

Cash dividends paid
 
(184
)
 
(182
)
Purchase of treasury stock
 
(4
)
 
(3
)
Net cash (used in) provided by financing activities
 
(16,504
)
 
5,594

Net increase in cash and cash equivalents
 
5,258

 
9,513

Cash and cash equivalents at the beginning of the period
 
130,093

 
50,819

Cash and cash equivalents at the end of the period
 
$
135,351

 
$
60,332

Supplementary cash flow information
 
 
 
 
Interest paid on deposits and borrowings
 
$
4,528

 
$
5,360

Income taxes paid
 
600

 
890

Transfer to foreclosed properties
 
1,186

 
935


See accompanying Notes to Unaudited Consolidated Financial Statements.

3


Notes to Unaudited Consolidated Financial Statements

Note 1 — Nature of Operations and Summary of Significant Accounting Policies
Nature of Operations. First Business Financial Services, Inc. (together with all of its subsidiaries, collectively referred to as “FBFS” or the “Corporation”) is a registered bank holding company incorporated under the laws of the State of Wisconsin and is engaged in the commercial banking business through its wholly owned subsidiaries First Business Bank (“FBB”) and First Business Bank — Milwaukee (“FBB-Milwaukee”). FBB and FBB-Milwaukee are sometimes referred to together as the “Banks”. FBB operates as a commercial banking institution in the Dane County and surrounding areas market with loan production offices in Oshkosh, Appleton, and Green Bay, 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 Waukesha County and surrounding areas market. 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 subsidiaries: First Business Capital Corp. (“FBCC”), First Madison Investment Corp. (“FMIC”), First Business Equipment Finance, LLC and FBB Real Estate, LLC (“FBBRE”). 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”).
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 (“Banks”). 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 were eliminated in consolidation.
Basis of Presentation. The accompanying unaudited consolidated financial statements were 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, 2011 except as described further below in Note 1.
In the opinion of management, all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of the unaudited consolidated financial statements were included in the unaudited consolidated financial statements. The results of operations for the three month period ended March 31, 2012 is not necessarily indicative of results that may be expected for any other interim period or the entire fiscal year ending December 31, 2012. Certain amounts in prior periods may have been reclassified to conform to the current presentation. Subsequent events were evaluated through the issuance of the unaudited consolidated financial statements.
Recent Accounting Pronouncements.
Fair Value Measurement. In May 2011, the FASB issued ASU 2011-04, “Fair Value Measurement: Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in the U.S. GAAP and IFRSs” (ASU 2011-04). The amended guidance of ASU 2011-04 (i) clarifies how a principal market is determined, (ii) establishes the valuation premise for the highest and best use of non-financial assets, (iii) addresses the fair value measurement of instruments with offsetting market or counterparty credit risks, (iv) extends the prohibition on blockage factors to all three levels of the fair value hierarchy, and (v) requires additional disclosures including transfers between Level 1 and Level 2 of the fair value hierarchy, quantitative and qualitative information and a description of an entity's valuation process for Level 3 fair value measurements, and fair value hierarchy disclosures for financial instruments not measured at fair value. ASU 2011-04 is effective for interim and annual periods beginning on or after December 15, 2011, with early adoption prohibited. The adoption of ASU 2011-04 as of January 1, 2012 did not have a material impact on the Corporation's consolidated financial condition or results of operations.

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 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.
For the three month periods ended March 31, 2012 and 2011, average anti-dilutive employee share-based awards totaled 115,050 and 202,741, respectively.
 
 
For the Three Months
 
 
Ended March 31,
 
 
2012
 
2011
Basic earnings per common share
 
 
 
 
Net income
 
$
2,210,237

 
$
1,349,460

Less: earnings allocated to participating securities
 
80,221

 
51,796

Earnings allocated to common shareholders
 
$
2,130,016

 
$
1,297,664

 
 
 
 
 
Weighted-average common shares outstanding, excluding participating securities
 
2,530,084

 
2,497,918

 
 
 
 
 
Basic earnings per common share
 
$
0.84

 
$
0.52

 
 
 
 
 
Diluted earnings per common share
 
 
 
 
Earnings allocated to common shareholders
 
$
2,130,016

 
$
1,297,663

Reallocation of undistributed earnings
 
(24
)
 

Earnings allocated to common shareholders
 
$
2,129,992

 
$
1,297,663

 
 
 
 
 
Weighted average common shares outstanding
 
2,530,084

 
2,497,918

Dilutive effect of share-based awards
 
863

 

Weighted-average diluted common shares outstanding
 
2,530,947

 
2,497,918

 
 
 
 
 
Diluted earnings per common share
 
$
0.84

 
$
0.52


Note 3 — Share-Based Compensation
The Corporation adopted the 2006 Equity Incentive Plan (the “Plan”). The Plan is administered by the Compensation Committee of the Board of Directors of FBFS and provides for the grant of equity ownership opportunities through incentive stock options and nonqualified stock options (“Stock Options”) as well as restricted stock. As of March 31, 2012, 45,542 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 treasury for shares delivered under the Plan. The 2006 plan expires January 30, 2016.
Stock Options
The Corporation may grant Stock Options to senior executives and other employees under the its approved equity incentive 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 awarded. Stock Options granted under the 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. No Stock Options were granted since the Corporation met the definition of a public entity and no Stock Options were modified, repurchased or cancelled. Therefore, no stock-based compensation related to Stock Options was recognized in the consolidated financial statements for the three months ended March 31, 2012 and 2011. As of March 31, 2012, all Stock Options granted and not previously forfeited have vested.
Stock Option activity for the year ended December 31, 2011 and three months ended March 31, 2012 was as follows:
 
 
Options
 
Weighted
Average
Exercise Price
 
Weighted
Average
Remaining
Contractual
Life (Years)
Outstanding at December 31, 2010
 
138,766

 
$
22.09

 
2.75
Granted
 

 

 
 
Exercised
 

 

 
 
Expired
 
(13,732
)
 
19.00

 
 
Forfeited
 

 

 
 
Outstanding at December 31, 2011
 
125,034

 
$
22.43

 
1.75
Exercisable at December 31, 2011
 
125,034

 
 
 
1.75
Outstanding as of December 31, 2011
 
125,034

 
$
22.43

 
1.75
Granted
 

 

 
 
Exercised
 

 

 
 
Expired
 

 

 
 
Forfeited
 

 

 
 
Outstanding at March 31, 2012
 
125,034

 
$
22.43

 
1.50
Exercisable at March 31, 2012
 
125,034

 
$
22.43

 
1.50
Restricted Stock
Under the Plan, the Corporation may grant restricted shares to plan participants, subject to forfeiture upon the occurrence of certain events until the 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 Plan 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, 2012, there were two restricted share awards that vested on a date at which the closing price was greater than the market value on the date of grant and is reflected in the unaudited consolidated statement of cash flows. For the three months ended March 31, 2011, all restricted share awards vested on a date at which the closing price was lower than the market value on the date of grant; therefore no excess tax benefit is reflected in the unaudited consolidated statement of cash flows for that period.
Restricted share activity for the year ended December 31, 2011 and the three months ended March 31, 2012 was as follows:
 
 
Number of
Restricted Shares
 
Weighted Average
Grant-Date
Fair Value
Nonvested balance as of December 31, 2010
 
101,182

 
$
14.93

Granted
 
34,625

 
17.05

Vested
 
(39,939
)
 
16.24

Forfeited
 

 

Nonvested balance as of December 31, 2011
 
95,868

 
15.15

Granted
 

 

Vested
 
(1,125
)
 
14.08

Forfeited
 

 

Nonvested balance as of March 31, 2012
 
94,743

 
15.16


As of March 31, 2012, $1.2 million 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 approximately three years. As of March 31, 2012, all restricted shares that vested were delivered.
Note 4 — Securities
The amortized cost and estimated fair value of securities available-for-sale were as follows:

 
 
As of March 31, 2012
 
 
Amortized cost
 
Gross
unrealized
holding gains
 
Gross
unrealized
holding losses
 
Estimated
fair value
 
 
(In Thousands)
Municipal obligations
 
$
4,562

 
$
45

 
$
(59
)
 
$
4,548

Collateralized mortgage obligations — government agencies
 
159,782

 
4,254

 
(104
)
 
163,932

Collateralized mortgage obligations — government-sponsored enterprises
 
2,063

 
4

 

 
2,067

 
 
$
166,407

 
$
4,303

 
$
(163
)
 
$
170,547

 
 
As of December 31, 2011
 
 
Amortized cost
 
Gross
unrealized
holding gains
 
Gross
unrealized
holding losses
 
Estimated
fair value
 
 
(In Thousands)
Municipal obligations
 
$
2,736

 
$
95

 
$

 
$
2,831

Collateralized mortgage obligations — government agencies
 
161,443

 
4,022

 
(64
)
 
165,401

Collateralized mortgage obligations — government-sponsored enterprises
 
2,169

 

 
(15
)
 
2,154

 
 
$
166,348

 
$
4,117

 
$
(79
)
 
$
170,386


Collateralized mortgage obligations — government agencies represent securities guaranteed by the Government National Mortgage Association. Collateralized mortgage obligations — government-sponsored enterprises include securities guaranteed by the Federal Home Loan Mortgage Corporation and the Federal National Mortgage Association. Municipal obligations include securities issued by various municipalities located primarily within the State of Wisconsin and are tax-exempt general obligation bonds. There were no sales of securities available for sale in the three month periods ended March 31, 2012 and 2011.
The amortized cost and estimated fair value of securities available-for-sale by contractual maturity at March 31, 2012 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.
 
 
Amortized Cost
 
Estimated
Fair Value
 
 
(In Thousands)
Due in one year or less
 
$
234

 
$
239

Due in one year through five years
 

 

Due in five through ten years
 
6,323

 
6,379

Due in over ten years
 
159,850

 
163,929

 
 
$
166,407

 
$
170,547


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 were in a continuous unrealized loss position at March 31, 2012 and December 31, 2011. At March 31, 2012 and December 31, 2011, the Corporation had 15 out of 168 securities and 9 out of 155 securities that were in an unrealized loss position, respectively. Such securities have not experienced credit rating downgrades; however, they have primarily declined in value due to the current interest rate environment. At March 31, 2012, the Corporation did not hold any securities that had been in a continuous loss position for twelve months or greater.
The Corporation also has not specifically identified 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. 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, 2012 and 2011.

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

 
 
As of March 31, 2012
 
 
Less than 12 months
 
12 months or longer
 
Total
 
 
Fair value
 
Unrealized
losses
 
Fair value
 
Unrealized
losses
 
Fair value
 
Unrealized
losses
 
 
(In Thousands)
Municipal obligations
 
$
1,894

 
$
59

 
$

 
$

 
$
1,894

 
$
59

Collateralized mortgage obligations - government agencies
 
11,420

 
104

 

 

 
11,420

 
104

 
 
$
13,314

 
$
163

 
$

 
$

 
$
13,314

 
$
163

 
 
As of December 31, 2011
 
 
Less than 12 months
 
12 months or longer
 
Total
 
 
Fair value
 
Unrealized
losses
 
Fair value
 
Unrealized
losses
 
Fair value
 
Unrealized
losses
 
 
(In Thousands)
Collateralized mortgage obligations - government issued
 
$
16,336

 
$
64

 
$

 
$

 
$
16,336

 
$
64

Collateralized mortgage obligations - government agencies
 
2,076

 
15

 

 

 
2,076

 
15

 
 
$
18,412

 
$
79

 
$

 
$

 
$
18,412

 
$
79

At March 31, 2012 and December 31, 2011, securities with a fair value of $16.1 million and $19.6 million, respectively, were pledged to secure interest rate swap contracts, outstanding Federal Home Loan Bank (FHLB) advances and client letters of credit. Securities pledged also provide for future availability for additional advances from the FHLB.

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:
 
 
March 31,
2012
 
December 31,
2011
 
 
(In Thousands)
Commercial real estate loans
 
 
 
 
Commercial real estate — owner occupied
 
$
149,103

 
$
150,528

Commercial real estate — non-owner occupied
 
292,129

 
304,597

Construction and land development
 
46,080

 
38,124

Multi-family
 
39,447

 
43,905

1-4 family
 
37,081

 
43,513

Total commercial real estate loans
 
563,840

 
580,667

Commercial and industrial loans
 
235,394

 
237,099

Direct financing leases, net
 
15,808

 
17,128

Consumer and other
 
 
 
 
Home equity loans and second mortgage loans
 
4,971

 
4,970

Consumer and other
 
12,477

 
11,682

 
 
17,448

 
16,652

Total gross loans and lease receivables
 
832,490

 
851,546

Less:
 
 
 
 
Allowance for loan and lease losses
 
14,451

 
14,155

Deferred loan fees
 
742

 
704

Loans and lease receivables, net
 
$
817,297

 
$
836,687


The total principal amount of loans transferred to third parties, which consisted solely of participation interests in originated loans, during the three months ended March 31, 2012 and 2011 was $25.8 million and $1.5 million, respectively. Each of the transfers of these financial assets met the qualifications for sale accounting and therefore $25.8 million and $1.5 million for the three ended March 31, 2012 and 2011 has been derecognized in the unaudited consolidated financial statements. The Corporation has a continuing involvement in each of the agreements by way of relationship management and servicing the loans; however, there are no further obligations required of the Corporation in the event of default, other than standard representations and warranties related to sold amounts. The loans were transferred at their fair value and no gain or loss was recognized upon the transfer as the participation interest was transferred at or near the date of loan origination. There were no other significant purchases or sales of loan and lease receivables or transfers to loans held for sale during the three months ended March 31, 2012 and 2011.
The total amount of outstanding loans transferred to third parties as loan participations at March 31, 2012 and December 31, 2011 was $43.8 million and $49.2 million, respectively, all of which were treated as a sale and derecognized 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 partial ownership, relationship management and all servicing responsibilities. As of March 31, 2012 and December 31, 2011, the total amount of loan participations remaining on the Corporation’s balance sheet was $67.4 million and $74.6 million, respectively. As of March 31, 2012 and December 31, 2011, $3.4 million and $3.4 million of the loans in this participation sold portfolio were considered impaired, respectively. The Corporation recognized a total $2.7 million charge-off associated with specific credits within the retained portion of this portfolio of loans and is measured by the Corporation’s allowance for loan and lease loss measurement process and policies. The Corporation does not share in the participant’s portion of the charge-offs.
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 March 31, 2012 and December 31, 2011:
 
 
Category
 
 
As of March 31, 2012
 
I
 
II
 
III
 
IV
 
Total
 
 
(Dollars in Thousands)
Commercial real estate:
 
 
 
 
 
 
 
 
 
 
Commercial real estate — owner occupied
 
$
117,407

 
$
16,751

 
$
12,524

 
$
2,421

 
$
149,103

Commercial real estate — non-owner occupied
 
218,924

 
43,007

 
29,157

 
1,041

 
292,129

Construction and land development
 
29,333

 
5,252

 
5,438

 
6,057

 
46,080

Multi-family
 
31,657

 
6,904

 
801

 
85

 
39,447

1-4 family
 
20,353

 
5,565

 
8,307

 
2,856

 
37,081

Commercial and industrial
 
202,824

 
20,290

 
6,648

 
5,632

 
235,394

Direct financing leases, net
 
10,746

 
4,449

 
613

 

 
15,808

Consumer and other:
 
 
 
 
 
 
 
 
 

Home equity and second mortgages
 
3,555

 
180

 
259

 
977

 
4,971

Other
 
11,306

 

 

 
1,171

 
12,477

Total portfolio
 
$
646,105

 
$
102,398

 
$
63,747

 
$
20,240

 
$
832,490

Rating as a % of total portfolio
 
77.61
%
 
12.30
%
 
7.66
%
 
2.43
%
 
100.00
%

 
 
Category
 
 
As of December 31, 2011
 
I
 
II
 
III
 
IV
 
Total
 
 
(Dollars in Thousands)
Commercial real estate:
 
 
 
 
 
 
 
 
 
 
Commercial real estate — owner occupied
 
$
117,065

 
$
16,488

 
$
14,004

 
$
2,972

 
$
150,529

Commercial real estate — non-owner occupied
 
236,868

 
34,823

 
30,657

 
2,249

 
304,597

Construction and land development
 
20,660

 
5,367

 
4,867

 
7,229

 
38,123

Multi-family
 
34,162

 
6,930

 
804

 
2,009

 
43,905

1-4 family
 
23,266

 
11,637

 
4,993

 
3,617

 
43,513

Commercial and industrial
 
198,018

 
25,070

 
12,453

 
1,558

 
237,099

Direct financing leases, net
 
11,398

 
5,026

 
686

 
18

 
17,128

Consumer and other:
 
 
 
 
 
 
 
 
 
 
Home equity and second mortgages
 
3,524

 
188

 
256

 
1,002

 
4,970

Other
 
10,459

 

 

 
1,223

 
11,682

Total portfolio
 
$
655,420

 
$
105,529

 
$
68,720

 
$
21,877

 
$
851,546

Rating as a % of total portfolio
 
76.97
%
 
12.39
%
 
8.07
%
 
2.57
%
 
100.00
%

Credit underwriting through a committee process is a key component of the Corporation’s operating philosophy. Business development officers have relatively low individual lending authority limits, therefore requiring that a significant portion of the Corporation’s new credit extensions be approved through various committees depending on the type of loan or lease, amount of the credit, and the related complexities of each proposal. In addition, the Corporation makes every effort to ensure that there is appropriate collateral at the time of origination to protect the Corporation’s interest in the related loan or lease.
Each credit is evaluated for proper risk rating upon origination, at the time of each subsequent renewal, upon evaluation of updated financial information from our borrowers, or as other circumstances dictate. The Corporation uses a nine grade risk rating system to monitor the ongoing credit quality of its loans and leases. The risk rating grades follow a consistent definition, but are then applied to specific loan types based on the nature of the loan. Each risk rating is subjective and depending on the size and nature of the credit subject to various levels of review and concurrence on the stated risk rating. Depending on the type of loan and related risk rating, the Corporation groups loans into four categories, which determine the level and nature of review by management.
Category I — Loans and leases in this category are performing in accordance with the terms of the contract and generally exhibit no immediate concerns regarding the security and viability of the underlying collateral of the debt, financial stability of the borrower, integrity or strength of the borrower’s management team or the business industry in which the borrower operates. Loans and leases in this category are not subject to additional monitoring procedures above and beyond what is required at the origination or renewal of the loan or lease. The Corporation monitors Category I loans and leases through payment performance along with personal relationships with our borrowers and monitoring of financial results and compliance per the terms of the agreement.
Category II — Loans and leases in this category are beginning to show signs of deterioration in one or more of the Corporation’s core underwriting criteria such as financial stability, management strength, industry trends and collateral values. Management will place credits in this category to allow for proactive monitoring and resolution with the borrower to possibly mitigate the area of concern and prevent further deterioration or risk of loss to the Corporation. Category II loans are monitored frequently by the assigned business development officer and by a subcommittee of the Banks’ loan committees and are considered performing.
Category III — Loans and leases in this category may be classified by the Banks’ Regulators or identified by the Corporation’s business development officers and senior management as warranting special attention. Category III loans and leases generally exhibit undesirable characteristics such as evidence of adverse financial trends and conditions, managerial problems, deteriorating economic conditions within the related industry, or evidence of adverse public filings and may exhibit collateral shortfall positions. Management continues to believe that it will collect all required principal and interest in accordance with the original terms of the contract and therefore Category III loans are considered performing and no specific reserves are established for this category. This portfolio of loans is monitored on a monthly basis by management, loan committees of the Banks, as well as the Banks’ Boards of Directors.
Category IV — Loans and leases in this category are considered to be impaired. Impaired loans and leases have been placed on non-accrual as management has determined that it is unlikely that the Banks will receive the required principal and interest in accordance with the contractual terms of the agreement. Impaired loans are individually evaluated to assess the need for the establishment of specific reserves or charge-offs. When analyzing the adequacy of collateral, the Corporation obtains external appraisals at least annually for impaired loans and leases. External appraisals are obtained from the Corporation’s approved appraiser listing and are independently reviewed to monitor the quality of such appraisals. To the extent a collateral shortfall position is present, a specific reserve or charge-off will be recorded to reflect the magnitude of the impairment. Loans and leases in this category are monitored on a monthly basis by management, loan committees of the Banks, as well as the Banks’ Boards of Directors.
The delinquency aging of the loan and lease portfolio by class of receivable as of March 31, 2012 and December 31, 2011 were as follows:
As of March 31, 2012
 
30-59
days past due
 
60-89
days past due
 
Greater
than 90
days past due
 
Total past due
 
Current
 
Total loans
 
 
(Dollars In Thousands)
Accruing loans and leases
 
 
 
 
 
 
 
 
 
 
 
 
Commercial Real Estate:
 
 
 
 
 
 
 
 
 
 
 
 
Owner occupied
 
$

 
$

 
$

 
$

 
$
146,723

 
$
146,723

Non-owner occupied
 

 

 

 

 
291,088

 
291,088

Construction and land development
 

 

 

 

 
40,023

 
40,023

Multi-family
 

 

 

 

 
39,362

 
39,362

1-4 family
 

 

 

 

 
34,225

 
34,225

Commercial & Industrial
 
222

 

 

 
222

 
229,540

 
229,762

Direct financing leases, net
 
72

 

 

 
72

 
15,736

 
15,808

Consumer and other:
 
 
 
 
 
 
 
 
 
 
 
 
Home equity and second mortgages
 

 

 

 

 
3,994

 
3,994

Other
 

 

 

 

 
11,306

 
11,306

Total
 
294

 

 

 
294

 
811,997

 
812,291

Non-accruing loans and leases
 
 
 
 
 
 
 
 
 
 
 
 
Commercial Real Estate:
 
 
 
 
 
 
 
 
 
 
 
 
Owner occupied
 
$

 
$

 
$
1,488

 
$
1,488

 
$
892

 
$
2,380

Non-owner occupied
 

 

 
592

 
592

 
449

 
1,041

Construction and land development
 

 

 
5,161

 
5,161

 
896

 
6,057

Multi-family
 

 

 

 

 
85

 
85

1-4 family
 
244

 

 
155

 
399

 
2,457

 
2,856

Commercial & Industrial
 
112

 

 
299

 
411

 
5,221

 
5,632

Direct financing leases, net
 

 

 

 

 

 

Consumer and other:
 
 
 
 
 
 
 
 
 
 
 
 
Home equity and second mortgages
 

 

 
268

 
268

 
709

 
977

Other
 
8

 

 
1,160

 
1,168

 
3

 
1,171

Total
 
364

 

 
9,123

 
9,487

 
10,712

 
20,199

Total loans and leases
 
 
 
 
 
 
 
 
 
 
 
 
Commercial Real Estate:
 
 
 
 
 
 
 
 
 
 
 
 
Owner occupied
 
$

 
$

 
$
1,488

 
$
1,488

 
$
147,615

 
$
149,103

Non-owner occupied
 

 

 
592

 
592

 
291,537

 
292,129

Construction and land development
 

 

 
5,161

 
5,161

 
40,919

 
46,080

Multi-family
 

 

 

 

 
39,447

 
39,447

1-4 family
 
244

 

 
155

 
399

 
36,682

 
37,081

Commercial & Industrial
 
334

 

 
299

 
633

 
234,761

 
235,394

Direct financing leases, net
 
72

 

 

 
72

 
15,736

 
15,808

Consumer and other:
 
 
 
 
 
 
 
 
 
 
 
0
Home equity and second mortgages
 

 

 
268

 
268

 
4,703

 
4,971

Other
 
8

 

 
1,160

 
1,168

 
11,309

 
12,477

Total
 
$
658

 
$

 
$
9,123

 
$
9,781

 
$
822,709

 
$
832,490

Percent of portfolio
 
0.08
%
 
%
 
1.10
%
 
1.17
%
 
98.83
%
 
100.00
%

As of December 31, 2011
 
30-59
days past due
 
60-89
days past due
 
Greater
than 90
days past due
 
Total past due
 
Current
 
Total loans
 
 
(Dollars In Thousands)
Accruing loans and leases
 
 
 
 
 
 
 
 
 
 
 
 
Commercial Real Estate:
 
 
 
 
 
 
 
 
 
 
 
 
Owner occupied
 
$
106

 
$

 
$

 
$
106

 
$
147,450

 
$
147,556

Non-owner occupied
 

 
131

 

 
131

 
302,217

 
302,348

Construction and land development
 
3,942

 

 

 
3,942

 
26,953

 
30,895

Multi-family
 

 

 

 

 
41,896

 
41,896

1-4 family
 

 

 

 

 
40,007

 
40,007

Commercial & Industrial
 
25

 

 

 
25

 
235,516

 
235,541

Direct financing leases, net
 

 

 

 

 
17,110

 
17,110

Consumer and other:
 
 
 
 
 
 
 
 
 
 
 
 
Home equity and second mortgages
 

 

 

 

 
3,968

 
3,968

Other
 

 

 

 

 
10,459

 
10,459

Total
 
4,073

 
131

 

 
4,204

 
825,576

 
829,780

Non-accruing loans and leases
 
 
 
 
 
 
 
 
 
 
 
 
Commercial Real Estate:
 
 
 
 
 
 
 
 
 
 
 
 
Owner occupied
 
$

 
$

 
$
2,011

 
$
2,011

 
$
961

 
$
2,972

Non-owner occupied
 

 
155

 
1,625

 
1,780

 
469

 
2,249

Construction and land development
 
114

 
515

 
704

 
1,333

 
5,896

 
7,229

Multi-family
 

 

 
2,009

 
2,009

 

 
2,009

1-4 family
 
404

 
224

 
495

 
1,123

 
2,383

 
3,506

Commercial & Industrial
 
21

 

 
298

 
319

 
1,239

 
1,558

Direct financing leases, net
 

 

 

 

 
18

 
18

Consumer and other:
 
 
 
 
 
 
 
 
 
 
 
 
Home equity and second mortgages
 

 
40

 
315

 
355

 
647

 
1,002

Other
 

 

 
1,222

 
1,222

 
1

 
1,223

Total
 
539

 
934

 
8,679

 
10,152

 
11,614

 
21,766

Total loans and leases
 
 
 
 
 
 
 
 
 
 
 
 
Commercial Real Estate:
 
 
 
 
 
 
 
 
 
 
 
 
Owner occupied
 
$
106

 
$

 
$
2,011

 
$
2,117

 
$
148,411

 
$
150,528

Non-owner occupied
 

 
286

 
1,625

 
1,911

 
302,686

 
304,597

Construction and land development
 
4,056

 
515

 
704

 
5,275

 
32,849

 
38,124

Multi-family
 

 

 
2,009

 
2,009

 
41,896

 
43,905

1-4 family
 
404

 
224

 
495

 
1,123

 
42,390

 
43,513

Commercial & Industrial
 
46

 

 
298

 
344

 
236,755

 
237,099

Direct financing leases, net
 

 

 

 

 
17,128

 
17,128

Consumer and other:
 
 
 
 
 
 
 
 
 
 
 
 
Home equity and second mortgages
 

 
40

 
315

 
355

 
4,615

 
4,970

Other
 

 

 
1,222

 
1,222

 
10,460

 
11,682

Total
 
$
4,612

 
$
1,065

 
$
8,679

 
$
14,356

 
$
837,190

 
$
851,546

Percent of portfolio
 
0.54
%
 
0.12
%
 
1.02
%
 
1.68
%
 
98.32
%
 
100.00
%

The Corporation’s non-accrual loans and leases consisted of the following at March 31, 2012 and December 31, 2011, respectively.
 
 
March 31,
2012
 
December 31,
2011
 
 
(Dollars In Thousands)
Non-accrual loans and leases
 
 
 
 
Commercial real estate:
 
 
 
 
Commercial real estate — owner occupied
 
$
2,380

 
$
2,972

Commercial real estate — non-owner occupied