XNAS:FBIZ First Business Financial Services Inc Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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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 June 30, 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 July 19, 2012 was 2,629,352 shares.



FIRST BUSINESS FINANCIAL SERVICES, INC.
INDEX — FORM 10-Q
Item 4. Mine Safety Disclosures
 Exhibit 10.1
 
 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)
 
 
 
 
June 30,
2012
 
December 31,
2011
 
(In Thousands, Except Share Data)
Assets
 
 
 
 
Cash and due from banks
 
$
13,954

 
$
16,707

Short-term investments
 
64,415

 
113,386

Cash and cash equivalents
 
78,369

 
130,093

Securities available-for-sale, at fair value
 
195,904

 
170,386

Loans and leases receivable, net of allowance for loan and lease losses of $14,818 and $14,155, respectively
 
847,711

 
836,687

Leasehold improvements and equipment, net
 
1,030

 
999

Foreclosed properties
 
1,937

 
2,236

Cash surrender value of bank-owned life insurance
 
18,006

 
17,660

Investment in Federal Home Loan Bank stock, at cost
 
1,519

 
2,367

Accrued interest receivable and other assets
 
15,550

 
16,737

Total assets
 
$
1,160,026

 
$
1,177,165

Liabilities and Stockholders’ Equity
 
 
 
 
Deposits
 
$
1,029,230

 
$
1,051,312

Federal Home Loan Bank and other borrowings
 
42,396

 
40,292

Junior subordinated notes
 
10,315

 
10,315

Accrued interest payable and other liabilities
 
10,319

 
11,032

Total liabilities
 
1,092,260

 
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, 2,629,352 and 2,625,569 shares outstanding at 2012 and 2011, respectively
 
27

 
27

Additional paid-in capital
 
26,036

 
25,843

Retained earnings
 
40,908

 
37,501

Accumulated other comprehensive income
 
2,373

 
2,491

Treasury stock (85,633 and 89,416 shares at 2012 and 2011, respectively), at cost
 
(1,578
)
 
(1,648
)
Total stockholders’ equity
 
67,766

 
64,214

Total liabilities and stockholders’ equity
 
$
1,160,026

 
$
1,177,165


See accompanying Notes to Unaudited Consolidated Financial Statements.


2


First Business Financial Services, Inc.
Consolidated Statements of Income (Unaudited)
 
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
 
2012
 
2011
 
2012
 
2011
 
 
(In Thousands, Except Share Data)
Interest income:
 
 
 
 
 
 
 
 
Loans and leases
 
$
13,038

 
$
13,049

 
$
25,764

 
$
25,969

Securities income
 
854

 
1,106

 
1,685

 
2,224

Short-term investments
 
51

 
19

 
127

 
52

Total interest income
 
13,943

 
14,174

 
27,576

 
28,245

Interest expense:
 
 
 
 
 
 
 
 
Deposits
 
3,332

 
4,350

 
7,076

 
9,000

Notes payable and other borrowings
 
724

 
578

 
1,410

 
1,240

Junior subordinated notes
 
278

 
277

 
555

 
552

Total interest expense
 
4,334

 
5,205

 
9,041

 
10,792

Net interest income
 
9,609

 
8,969

 
18,535

 
17,453

Provision for loan and lease losses
 
2,045

 
1,474

 
2,549

 
2,878

Net interest income after provision for loan and lease losses
 
7,564

 
7,495

 
15,986

 
14,575

Non-interest income:
 
 
 
 
 
 
 
 
Trust and investment services fee income
 
755

 
655

 
1,442

 
1,296

Service charges on deposits
 
493

 
417

 
972

 
790

Loan fees
 
345

 
368

 
743

 
699

Increase in cash surrender value of bank-owned life insurance
 
176

 
168

 
346

 
335

Credit, merchant and debit card fees
 
64

 
58

 
119

 
111

Other
 
71

 
78

 
132

 
187

Total non-interest income
 
1,904

 
1,744

 
3,754

 
3,418

Non-interest expense:
 
 
 
 
 
 
 
 
Compensation
 
4,226

 
3,836

 
8,231

 
7,573

Occupancy
 
332

 
358

 
664

 
699

Professional fees
 
447

 
345

 
879

 
772

Data processing
 
350

 
324

 
667

 
634

Marketing
 
279

 
248

 
545

 
527

Equipment
 
122

 
105

 
234

 
219

FDIC insurance
 
533

 
571

 
1,120

 
1,330

Collateral liquidation costs
 
79

 
177

 
187

 
419

Net loss on foreclosed properties
 
67

 
79

 
242

 
130

Other
 
697

 
595

 
1,195

 
1,096

Total non-interest expense
 
7,132

 
6,638

 
13,964

 
13,399

Income before income tax expense
 
2,336

 
2,601

 
5,776

 
4,594

Income tax expense
 
771

 
88

 
2,001

 
732

Net income
 
$
1,565

 
$
2,513

 
$
3,775

 
$
3,862

Earnings per common share:
 
 
 
 
 
 
 
 
Basic
 
$
0.60

 
$
0.97

 
$
1.44

 
$
1.49

Diluted
 
0.60

 
0.97

 
1.44

 
1.49

Dividends declared per share
 
0.07

 
0.07

 
0.14

 
0.14


See accompanying Notes to Unaudited Consolidated Financial Statements.

3


First Business Financial Services, Inc.
Consolidated Statements of Comprehensive Income (Unaudited)
 
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
 
2012
 
2011
 
2012
 
2011
 
 
(In Thousands)
 
 
 
 
 
 
 
 
 
Net income
 
$
1,565

 
$
2,513

 
$
3,775

 
$
3,862

Other comprehensive income, before tax
 
 
 
 
 
 
 
 
Unrealized securities (losses) gains arising during the period
 
(295
)
 
1,710

 
(192
)
 
1,173

Income tax benefit (expense)
 
113

 
(658
)
 
74

 
(458
)
Comprehensive income
 
$
1,383

 
$
3,565

 
$
3,657

 
$
4,577

 
 
 
 
 
 
 
 
 
See accompanying Notes to Unaudited Consolidated Financial Statements.

4


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
 

 

 
3,862

 

 

 
3,862

Other comprehensive income
 

 

 

 
715

 

 
715

Share-based compensation - restricted shares
 

 
307

 

 

 

 
307

Share-based compensation - tax benefits
 

 

 

 

 

 

Cash dividends ($0.14 per share)
 

 

 
(364
)
 

 

 
(364
)
Treasury stock purchased (630 shares)
 

 

 

 

 
(8
)
 
(8
)
Balance at June 30, 2011
 
$
27

 
$
25,560

 
$
33,306

 
$
2,507

 
$
(1,553
)
 
$
59,847

 
 
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
 

 

 
3,775

 

 

 
3,775

Other comprehensive loss
 

 

 

 
(118
)
 

 
(118
)
Share-based compensation - restricted shares
 

 
268

 

 

 

 
268

Share-based compensation - tax benefits
 

 
2

 

 

 

 
2

Cash dividends ($0.14 per share)
 

 

 
(368
)
 

 

 
(368
)
Treasury stock purchased (375 shares)
 

 

 

 

 
(7
)
 
(7
)
Treasury stock re-issued (4,158 shares)
 

 
(77
)
 

 

 
77

 

Balance at June 30, 2012
 
$
27

 
$
26,036

 
$
40,908

 
$
2,373

 
$
(1,578
)
 
$
67,766


See accompanying Notes to Unaudited Consolidated Financial Statements.


5


First Business Financial Services, Inc.
Consolidated Statements of Cash Flows (Unaudited)
 
 
For the Six Months Ended June 30,
 
 
2012
 
2011
 
 
(In Thousands)
Operating activities
 
 
 
 
Net income
 
$
3,775

 
$
3,862

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Deferred income taxes, net
 
637

 
1,051

Provision for loan and lease losses
 
2,549

 
2,878

Depreciation, amortization and accretion, net
 
1,551

 
1,017

Share-based compensation
 
268

 
307

Increase in cash surrender value of bank-owned life insurance
 
(346
)
 
(335
)
Origination of loans for sale
 
(580
)
 
(988
)
Sale of loans originated for sale
 
583

 
993

Gain on sale of loans originated for sale
 
(3
)
 
(5
)
Net loss on foreclosed properties
 
242

 
130

Excess tax benefit from share-based compensation
 
(2
)
 

Decrease in accrued interest receivable and other assets
 
544

 
259

Decrease in accrued interest payable and other liabilities
 
(712
)
 
(2,376
)
Net cash provided by operating activities
 
8,506

 
6,793

Investing activities
 
 
 
 
Proceeds from maturities of available-for-sale securities
 
27,571

 
20,572

Purchases of available-for-sale securities
 
(54,657
)
 
(35,181
)
Proceeds from sale of foreclosed properties
 
1,315

 
1,327

Net (increase) decrease in loans and leases
 
(14,831
)
 
12,193

Investment in Aldine Capital Fund, L.P.
 
170

 
(210
)
Proceeds from sale of FHLB Stock
 
848

 

Purchases of leasehold improvements and equipment, net
 
(295
)
 
(242
)
Premium payment on bank owned life insurance policies
 

 
(8
)
Net cash used in investing activities
 
(39,879
)
 
(1,549
)
Financing activities
 
 
 
 
Net decrease in deposits
 
(22,082
)
 
(10,810
)
Repayment of FHLB advances
 
(7
)
 
(2,006
)
Net increase in short-term borrowed funds
 
2,111

 

Proceeds from issuance of subordinated notes payable
 
6,215

 

Repayment of subordinated notes payable
 
(6,215
)
 

Excess tax benefit from share-based compensation
 
2

 

Cash dividends paid
 
(368
)
 
(364
)
Purchase of treasury stock
 
(7
)
 
(8
)
Net cash used in financing activities
 
(20,351
)
 
(13,188
)
Net decrease in cash and cash equivalents
 
(51,724
)
 
(7,944
)
Cash and cash equivalents at the beginning of the period
 
130,093

 
50,819

Cash and cash equivalents at the end of the period
 
$
78,369

 
$
42,875

Supplementary cash flow information
 
 
 
 
Interest paid on deposits and borrowings
 
$
9,288

 
$
11,203

Income taxes paid
 
1,818

 
2,751

Transfer to foreclosed properties
 
1,258

 
1,107

Reissuance of treasury stock
 
77

 


See accompanying Notes to Unaudited Consolidated Financial Statements.

6


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 and six month periods ended June 30, 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

7


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 June 30, 2012 and 2011, average anti-dilutive employee share-based awards totaled 115,050 and 139,158, respectively. For the six month periods ended June 30, 2012 and 2011, average anti-dilutive employee share-based awards totaled 116,148 and 138,766, respectively.
 
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
 
2012
 
2011
 
2012
 
2011
 
 
(Dollars in Thousands, Except Share Data)
Basic earnings per common share
 
 
 
 
 
 
 
 
Net income
 
$
1,565

 
$
2,513

 
$
3,775

 
$
3,862

Less: earnings allocated to participating securities
 
58

 
95

 
138

 
147

Basic earnings allocated to common shareholders
 
$
1,507

 
$
2,418

 
$
3,637

 
$
3,715

 
 
 
 
 
 
 
 
 
Weighted-average common shares outstanding, excluding participating securities
 
2,530,651

 
2,499,136

 
2,530,368

 
2,498,530

 
 
 
 
 
 
 
 
 
Basic earnings per common share
 
$
0.60

 
$
0.97

 
$
1.44

 
$
1.49

 
 
 
 
 
 
 
 
 
Diluted earnings per common share
 
 
 
 
 
 
 
 
Earnings allocated to common shareholders
 
$
1,507

 
$
2,418

 
$
3,637

 
$
3,715

Reallocation of undistributed earnings
 

 

 

 

Diluted earnings allocated to common shareholders
 
$
1,507

 
$
2,418

 
$
3,637

 
$
3,715

 
 
 
 
 
 
 
 
 
Weighted average common shares outstanding, excluding participating securities
 
2,530,651

 
2,499,136

 
2,530,368

 
2,498,530

Dilutive effect of share-based awards
 
1,940

 

 
1,479

 

Weighted-average diluted common shares outstanding, excluding participating securities
 
2,532,591

 
2,499,136

 
2,531,847

 
2,498,530

 
 
 
 
 
 
 
 
 
Diluted earnings per common share
 
$
0.60

 
$
0.97

 
$
1.44

 
$
1.49


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 FBFS and provides for the grant of equity ownership opportunities through incentive stock options and nonqualified stock options (“Stock Options”), restricted stock, restricted stock units, dividend equivalent unit, and any other type of award permitted by the Plan. Shares previously available for grant under the 2006 Equity Incentive Plan (the "2006 Plan") were transferred to the 2012 Equity Incentive Plan. As of June 30, 2012, 241,384 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 was terminated on May 14, 2012.
Stock Options
The Corporation may grant Stock Options to senior executives and other employees under the Plan. 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 4 years to 8 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

8


recognized in the consolidated financial statements for the three and six months ended June 30, 2012 and 2011. As of June 30, 2012, all Stock Options granted and not previously forfeited have vested.
Stock Option activity for the year ended December 31, 2011 and six months ended June 30, 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

 
22.43

 
1.75
 
 
 
 
 
 
 
Outstanding as of December 31, 2011
 
125,034

 
$
22.43

 
1.75
Granted
 

 

 
 
Exercised
 

 

 
 
Expired
 

 

 
 
Forfeited
 

 

 
 
Outstanding at June 30, 2012
 
125,034

 
$
22.43

 
1.25
Exercisable at June 30, 2012
 
125,034

 
$
22.43

 
1.25
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.
Restricted share activity for the year ended December 31, 2011 and the six months ended June 30, 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
 
4,158

 
21.65

Vested
 
(1,375
)
 
14.62

Forfeited
 

 

Nonvested balance as of June 30, 2012
 
98,651

 
15.43



9


As of June 30, 2012, $1.1 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 June 30, 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 June 30, 2012
 
 
Amortized cost
 
Gross
unrealized
holding gains
 
Gross
unrealized
holding losses
 
Estimated
fair value
 
 
(In Thousands)
U.S. Government agency obligations - government-sponsored enterprises
 
$
12,668

 
$
8

 
$
(13
)
 
$
12,663

Municipal obligations
 
7,670

 
110

 
(28
)
 
7,752

Collateralized mortgage obligations — government issued
 
159,176

 
3,936

 
(178
)
 
162,934

Collateralized mortgage obligations — government-sponsored enterprises
 
12,544

 
32

 
(21
)
 
12,555

 
 
$
192,058

 
$
4,086

 
$
(240
)
 
$
195,904

 
 
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 issued
 
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


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 FHLMC and the FNMA. 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 and six month periods ended June 30, 2012 and 2011.
The amortized cost and estimated fair value of securities available-for-sale by contractual maturity at June 30, 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
 
$
159

 
$
161

Due in one year through five years
 
10,633

 
10,633

Due in five through ten years
 
13,621

 
13,759

Due in over ten years
 
167,645

 
171,351

 
 
$
192,058

 
$
195,904



10


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 June 30, 2012 and December 31, 2011. At June 30, 2012 and December 31, 2011, the Corporation had 37 securities and 9 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 June 30, 2012, the Corporation held no 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 six months ended June 30, 2012 and 2011.

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

 
 
As of June 30, 2012
 
 
Less than 12 months
 
12 months or longer
 
Total
 
 
Fair value
 
Unrealized
losses
 
Fair value
 
Unrealized
losses
 
Fair value
 
Unrealized
losses
 
 
(In Thousands)
US Government agency obligations - government-sponsored enterprises
 
$
9,030

 
$
13

 
$

 
$

 
$
9,030

 
$
13

Municipal obligations
 
$
2,525

 
$
28

 
$

 
$

 
$
2,525

 
$
28

Collateralized mortgage obligations - government issued
 
16,787

 
178

 

 

 
16,787

 
178

Collateralized mortgage obligations - government-sponsored enterprises
 
6,370

 
21

 

 

 
6,370

 
21

 
 
$
34,712

 
$
240

 
$

 
$

 
$
34,712

 
$
240

 
 
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-sponsored enterprises
 
2,076

 
15

 

 

 
2,076

 
15

 
 
$
18,412

 
$
79

 
$

 
$

 
$
18,412

 
$
79

At June 30, 2012 and December 31, 2011, securities with a fair value of $8.4 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.


11


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:
 
 
June 30,
2012
 
December 31,
2011
 
 
(In Thousands)
Commercial real estate
 
 
 
 
Commercial real estate — owner occupied
 
$
154,191

 
$
150,528

Commercial real estate — non-owner occupied
 
298,890

 
304,597

Construction and land development
 
43,126

 
38,124

Multi-family
 
58,254

 
43,905

1-4 family
 
34,453

 
43,513

Total commercial real estate
 
588,914

 
580,667

Commercial and industrial
 
241,130

 
237,099

Direct financing leases, net
 
16,012

 
17,128

Consumer and other
 
 
 
 
Home equity and second mortgages
 
4,839

 
4,970

Other
 
12,280

 
11,682

Total consumer and other loans
 
17,119

 
16,652

Total gross loans and leases receivable
 
863,175

 
851,546

Less:
 
 
 
 
   Allowance for loan and lease losses
 
14,818

 
14,155

   Deferred loan fees
 
646

 
704

Loans and leases receivable, net
 
$
847,711

 
$
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 June 30, 2012 and 2011 was $8.8 million and $8.6 million, respectively. For the six months ended June 30, 2012 and 2011, $34.7 million and $10.1 million of loans were transferred to third parties, respectively. Each of the transfers of these financial assets met the qualifications for sale accounting and therefore $8.8 million and $34.7 million for the three and six months ended June 30, 2012 and $8.6 million and $10.1 million for the three and six months ended June 30, 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 and six months ended June 30, 2012 and 2011.
The total amount of outstanding loans transferred to third parties as loan participations at June 30, 2012 and December 31, 2011 was $43.1 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 June 30, 2012 and December 31, 2011, the total amount of loan participations remaining on the Corporation’s balance sheet was $65.2 million and $74.6 million, respectively. As of June 30, 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.

12


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 June 30, 2012 and December 31, 2011:
 
 
Category
 
 
As of June 30, 2012
 
I
 
II
 
III
 
IV
 
Total
 
 
(Dollars in Thousands)
Commercial real estate:
 
 
 
 
 
 
 
 
 
 
Commercial real estate — owner occupied
 
$
126,046

 
$
14,877

 
$
12,299

 
$
969

 
$
154,191

Commercial real estate — non-owner occupied
 
223,080

 
46,316

 
28,483

 
1,011

 
298,890

Construction and land development
 
26,157

 
5,570

 
5,455

 
5,944

 
43,126

Multi-family
 
50,525

 
6,881

 
797

 
51

 
58,254

1-4 family
 
18,655

 
4,629

 
8,431

 
2,738

 
34,453

      Total commercial real estate
 
444,463

 
78,273

 
55,465

 
10,713

 
588,914

 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
 
206,766

 
14,670

 
16,467

 
3,227

 
241,130

 
 
 
 
 
 
 
 
 
 
 
Direct financing leases, net
 
10,559

 
3,607

 
1,846

 

 
16,012

 
 
 
 
 
 
 
 
 
 
 
Consumer and other:
 
 
 
 
 
 
 
 
 

Home equity and second mortgages
 
3,585

 
173

 
183

 
898

 
4,839

Other
 
11,131

 

 

 
1,149

 
12,280

      Total consumer and other
 
14,716

 
173

 
183

 
2,047

 
17,119

 
 
 
 
 
 
 
 
 
 
 
Total gross loans and leases receivable
 
$
676,504

 
$
96,723

 
$
73,961

 
$
15,987

 
$
863,175

Rating as a % of total portfolio
 
78.37
%
 
11.21
%
 
8.57
%
 
1.85
%
 
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

 
$
2,971

 
$
150,528

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

 
7,230

 
38,124

Multi-family
 
34,162

 
6,930

 
804

 
2,009

 
43,905

1-4 family
 
23,266

 
11,637

 
4,993

 
3,617

 
43,513

      Total commercial real estate
 
432,021

 
75,245

 
55,325

 
18,076

 
580,667

 
 
 
 
 
 
 
 
 
 
 
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 consumer and other
 
13,983

 
188

 
256

 
2,225

 
16,652

 
 
 
 
 
 
 
 
 
 
 
Total gross loans and leases receivable
 
$
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
%

13



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 are approved through various committees depending on the type of loan or lease, asset quality grade of the credit, 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 receipt and 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. The Corporation groups loans into four loan and related risk rating categories, which ratings 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, financial stability of the borrower, integrity or strength of the borrower’s management team or the 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, continued maintenance of our personal relationships with such borrowers and, continued review of such borrowers' compliance with 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 are identified by the Corporation’s business development officers and senior management as warranting special attention. However, the balance in this category is not intended to represent the amount of adversely classified assets held by the Banks. 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, and 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, and the Banks’ Boards of Directors.
Utilizing regulatory terminology, the Corporation identified $30.2 million and $42.6 million of loans as Substandard as of June 30, 2012 and December 31, 2011. No loans and leases were identified as Special Mention, Doubtful, or Loss. The population of Substandard loans are a subset of Category III and Category IV loans.


14


The delinquency aging of the loan and lease portfolio by class of receivable as of June 30, 2012 and December 31, 2011 were as follows:
As of June 30, 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
 
$
507

 
$

 
$

 
$
507

 
$
152,715

 
$
153,222

Non-owner occupied
 

 

 

 

 
297,879

 
297,879

Construction and land development
 

 

 

 

 
37,718

 
37,718

Multi-family
 

 

 

 

 
58,203

 
58,203

1-4 family
 
314

 

 

 
314

 
31,401

 
31,715

Commercial & industrial
 
268

 

 

 
268

 
237,635

 
237,903

Direct financing leases, net
 

 

 

 

 
16,012

 
16,012

Consumer and other:
 
 
 
 
 
 
 
 
 
 
 
 
Home equity and second mortgages
 

 

 

 

 
3,941

 
3,941

Other
 

 

 

 

 
11,131

 
11,131

Total
 
1,089

 

 

 
1,089

 
846,635

 
847,724

Non-accruing loans and leases
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 
 
 
 
 
 
 
 
 
 
 
Owner occupied
 
$
102

 
$

 
$

 
$
102

 
$
867

 
$
969

Non-owner occupied
 

 

 
585

 
585

 
426

 
1,011

Construction and land development
 
110

 
106

 
550

 
766

 
4,642

 
5,408

Multi-family
 

 

 

 

 
51

 
51

1-4 family
 

 
247

 
152

 
399

 
2,339

 
2,738

Commercial & industrial
 

 

 
269

 
269

 
2,958

 
3,227

Direct financing leases, net
 

 

 

 

 

 

Consumer and other:
 
 
 
 
 
 
 
 
 
 
 
 
Home equity and second mortgages
 

 

 
200

 
200

 
698

 
898

Other
 

 

 
1,147

 
1,147

 
2

 
1,149

Total
 
212

 
353

 
2,903

 
3,468

 
11,983

 
15,451

Total loans and leases
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 
 
 
 
 
 
 
 
 
 
 
Owner occupied
 
$
609

 
$

 
$

 
$
609

 
$
153,582

 
$
154,191

Non-owner occupied
 

 

 
585

 
585

 
298,305

 
298,890

Construction and land development
 
110

 
106

 
550

 
766

 
42,360

 
43,126

Multi-family
 

 

 

 

 
58,254

 
58,254

1-4 family
 
314

 
247

 
152

 
713

 
33,740

 
34,453

Commercial & industrial
 
268

 

 
269

 
537

 
240,593

 
241,130

Direct financing leases, net
 

 

 

 

 
16,012

 
16,012

Consumer and other:
 
 
 
 
 
 
 
 
 
 
 

Home equity and second mortgages
 

 

 
200

 
200

 
4,639

 
4,839

Other
 

 

 
1,147

 
1,147

 
11,133

 
12,280

Total
 
$
1,301

 
$
353

 
$
2,903

 
$
4,557

 
$
858,618

 
$
863,175

Percent of portfolio
 
0.15
%
 
0.04
%
 
0.34
%
 
0.53
%
 
99.47
%
 
100.00
%


15


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