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EX-32 - EXHIBIT 32 - FIRST BUSINESS FINANCIAL SERVICES, INC.fbiz2016630exhibit32.htm
EX-31.2 - EXHIBIT 31.2 - FIRST BUSINESS FINANCIAL SERVICES, INC.fbiz2016630exhibit312.htm
EX-31.1 - EXHIBIT 31.1 - FIRST BUSINESS FINANCIAL SERVICES, INC.fbiz2016630exhibit311.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 June 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 July 28, 2016 was 8,703,942 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
 
 
June 30,
2016
 
December 31,
2015
 
 
(unaudited)
 
 
 
(In Thousands, Except Share Data)
Assets
 
 
 
 
Cash and due from banks
 
$
14,700

 
$
14,640

Short-term investments
 
116,911

 
98,924

Cash and cash equivalents
 
131,611

 
113,564

Securities available-for-sale, at fair value
 
137,692

 
140,548

Securities held-to-maturity, at amortized cost
 
36,167

 
37,282

Loans held for sale
 
5,548

 
2,702

Loans and leases receivable, net of allowance for loan and lease losses of $18,154 and $16,316, respectively
 
1,433,661

 
1,414,649

Premises and equipment, net
 
3,969

 
3,954

Foreclosed properties
 
1,548

 
1,677

Cash surrender value of bank-owned life insurance
 
28,784

 
28,298

Investment in Federal Home Loan Bank and Federal Reserve Bank stock, at cost
 
2,163

 
2,843

Accrued interest receivable and other assets
 
25,003

 
24,071

Goodwill and other intangible assets
 
12,923

 
12,493

Total assets
 
$
1,819,069

 
$
1,782,081

Liabilities and Stockholders’ Equity
 
 
 
 
Deposits
 
$
1,607,944

 
$
1,577,231

Federal Home Loan Bank and other borrowings
 
33,570

 
34,740

Junior subordinated notes
 
9,997

 
9,990

Accrued interest payable and other liabilities
 
9,164

 
9,288

Total liabilities
 
1,660,675

 
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, 8,927,006 and 8,922,375 shares issued, 8,703,942 and 8,699,410 shares outstanding, at June 30, 2016 and December 31, 2015, respectively
 
89

 
89

Additional paid-in capital
 
77,127

 
76,549

Retained earnings
 
86,760

 
80,584

Accumulated other comprehensive income (loss)
 
730

 
(80
)
Treasury stock, 223,064 and 222,965 shares at June 30, 2016 and December 31, 2015, respectively, at cost
 
(6,312
)
 
(6,310
)
Total stockholders’ equity
 
158,394

 
150,832

Total liabilities and stockholders’ equity
 
$
1,819,069

 
$
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 June 30,
 
For the Six Months Ended June 30,
 
 
2016
 
2015
 
2016
 
2015
 
 
(In Thousands, Except Per Share Data)
Interest income:
 
 
 
 
 
 
 
 
Loans and leases
 
$
18,701

 
$
16,680

 
$
37,145

 
$
34,005

Securities income
 
681

 
748

 
1,404

 
1,524

Short-term investments
 
173

 
92

 
349

 
207

Total interest income
 
19,555

 
17,520

 
38,898

 
35,736

Interest expense:
 
 
 
 
 
 
 
 
Deposits
 
3,038

 
2,593

 
6,091

 
5,162

Notes payable and other borrowings
 
499

 
461

 
973

 
904

Junior subordinated notes
 
277

 
278

 
555

 
552

Total interest expense
 
3,814

 
3,332

 
7,619

 
6,618

Net interest income
 
15,741

 
14,188

 
31,279

 
29,118

Provision for loan and lease losses
 
2,762

 
520

 
3,287

 
1,204

Net interest income after provision for loan and lease losses
 
12,979

 
13,668

 
27,992

 
27,914

Non-interest income:
 
 
 
 
 
 
 
 
Trust and investment services fee income
 
1,344

 
1,279

 
2,618

 
2,486

Gain on sale of SBA loans
 
2,131

 
842

 
3,506

 
1,347

Gain on sale of residential mortgage loans
 
198

 
222

 
342

 
370

Service charges on deposits
 
733

 
693

 
1,475

 
1,389

Loan fees
 
676

 
499

 
1,285

 
1,001

Increase in cash surrender value of bank-owned life insurance
 
243

 
238

 
486

 
472

Other
 
498

 
353

 
704

 
909

Total non-interest income
 
5,823

 
4,126

 
10,416

 
7,974

Non-interest expense:
 
 
 
 
 
 
 
 
Compensation
 
8,447

 
6,924

 
16,818

 
14,278

Occupancy
 
500

 
486

 
1,008

 
986

Professional fees
 
961

 
1,515

 
1,822

 
2,504

Data processing
 
697

 
655

 
1,348

 
1,185

Marketing
 
448

 
701

 
1,182

 
1,343

Equipment
 
341

 
298

 
621

 
606

FDIC insurance
 
254

 
220

 
545

 
433

Collateral liquidation costs
 
68

 
78

 
114

 
380

Net loss (gain) on foreclosed properties
 
93

 
1

 
93

 
(15
)
Other
 
1,649

 
1,096

 
2,605

 
2,006

Total non-interest expense
 
13,458

 
11,974

 
26,156

 
23,706

Income before income tax expense
 
5,344

 
5,820

 
12,252

 
12,182

Income tax expense
 
1,628

 
1,962

 
3,990

 
4,132

Net income
 
$
3,716

 
$
3,858

 
$
8,262

 
$
8,050

Earnings per common share:
 
 
 
 
 
 
 
 
Basic
 
$
0.43

 
$
0.45

 
$
0.95

 
$
0.93

Diluted
 
$
0.43

 
$
0.45

 
$
0.95

 
$
0.93

Dividends declared per share
 
$
0.12

 
$
0.11

 
$
0.24

 
$
0.22

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 June 30,
 
For the Six Months Ended June 30,
 
 
2016
 
2015
 
2016
 
2015
 
 
(In Thousands)
 
 
 
 
 
 
 
 
 
Net income
 
$
3,716

 
$
3,858

 
$
8,262

 
$
8,050

Other comprehensive income (loss), before tax
 
 
 
 
 
 
 
 
Securities available-for-sale:
 
 
 
 
 
 
 
 
Net unrealized securities gains (losses) arising during the period
 
361

 
(910
)
 
1,237

 
(145
)
Securities held-to-maturity:
 
 
 
 
 
 
 
 
Amortization of net unrealized losses transferred from available-for-sale
 
43

 
64

 
83

 
127

Income tax (expense) benefit
 
(156
)
 
327

 
(510
)
 
7

     Total other comprehensive income (loss)
 
$
248

 
$
(519
)
 
$
810

 
$
(11
)
Comprehensive income
 
$
3,964

 
$
3,339

 
$
9,072

 
$
8,039


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
(loss) 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
 

 

 

 
8,050

 

 

 
8,050

Other comprehensive income
 

 

 

 

 
(11
)
 

 
(11
)
Exercise of stock options
 
24,000

 

 
300

 

 

 

 
300

Share-based compensation - restricted shares
 
(7,938
)
 

 
449

 

 

 

 
449

Share-based compensation - tax benefits
 

 

 
80

 

 

 

 
80

Cash dividends ($0.22 per share)
 

 

 

 
(1,908
)
 

 

 
(1,908
)
Treasury stock purchased
 
(18,080
)
 

 

 

 

 
(421
)
 
(421
)
Balance at June 30, 2015
 
8,669,836

 
$
45

 
$
75,792

 
$
74,028

 
$
207

 
$
(5,785
)
 
$
144,287


 
 
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
 

 

 

 
8,262

 

 

 
8,262

Other comprehensive income
 

 

 

 

 
810

 

 
810

Share-based compensation - restricted shares
 
4,631

 

 
565

 

 

 

 
565

Share-based compensation - tax benefits
 

 

 
13

 

 

 

 
13

Cash dividends ($0.24 per share)
 

 

 

 
(2,086
)
 

 

 
(2,086
)
Treasury stock purchased
 
(99
)
 

 

 

 

 
(2
)
 
(2
)
Balance at June 30, 2016
 
8,703,942

 
$
89

 
$
77,127

 
$
86,760

 
$
730

 
$
(6,312
)
 
$
158,394


See accompanying Notes to Unaudited Consolidated Financial Statements.


4


First Business Financial Services, Inc.
Consolidated Statements of Cash Flows (Unaudited)
 
 
For the Six Months Ended June 30,
 
 
2016
 
2015
 
 
(In Thousands)
Operating activities
 
 
 
 
Net income
 
$
8,262

 
$
8,050

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Deferred income taxes, net
 
(259
)
 
490

Provision for loan and lease losses
 
3,287

 
1,204

Depreciation, amortization and accretion, net
 
856

 
(604
)
Share-based compensation
 
565

 
449

Increase in cash surrender value of bank-owned life insurance
 
(486
)
 
(472
)
Origination of loans for sale
 
(52,727
)
 
(32,473
)
Sale of loans originated for sale
 
61,820

 
34,256

Gain on sale of loans originated for sale
 
(3,848
)
 
(1,717
)
Net loss (gain) on foreclosed properties, including impairment valuation
 
93

 
(15
)
Excess tax benefit from share-based compensation
 
(13
)
 
(80
)
(Increase) decrease in accrued interest receivable and other assets
 
(1,106
)
 
192

(Decrease) increase in accrued interest payable and other liabilities
 
(855
)
 
1,514

Net cash provided by operating activities
 
15,589

 
10,794

Investing activities
 
 
 
 
Proceeds from maturities, redemptions and paydowns of available-for-sale securities
 
20,419

 
21,777

Proceeds from maturities, redemptions and paydowns of held-to-maturity securities
 
1,843

 
2,175

Proceeds from sale of available-for-sale securities
 
2,184

 

Purchases of available-for-sale securities
 
(19,797
)
 
(24,189
)
Proceeds from sale of foreclosed properties
 
36

 
143

Net increase in loans and leases
 
(30,041
)
 
(69,107
)
Investment in limited partnerships
 
(750
)
 

Distributions from limited partnerships
 
688

 
332

Investment in FHLB and FRB Stock
 
(387
)
 
(928
)
Proceeds from sale of FHLB Stock
 
1,066

 
377

Purchases of leasehold improvements and equipment, net
 
(400
)
 
(420
)
Net cash used in investing activities
 
(25,139
)
 
(69,840
)
Financing activities
 
 
 
 
Net increase in deposits
 
30,799

 
33,106

Repayment of FHLB advances
 
(2,500
)
 

Proceeds from FHLB advances
 

 
13,000

Net increase in short-term borrowed funds
 
1,373

 
500

Excess tax benefit from share-based compensation
 
13

 
80

Cash dividends paid
 
(2,086
)
 
(1,908
)
Exercise of stock options
 

 
300

Purchase of treasury stock
 
(2
)
 
(421
)
Net cash provided by financing activities
 
27,597

 
44,657

Net increase (decrease) in cash and cash equivalents
 
18,047

 
(14,389
)
Cash and cash equivalents at the beginning of the period
 
113,564

 
103,237

Cash and cash equivalents at the end of the period
 
$
131,611

 
$
88,848

Supplementary cash flow information
 
 
 
 
Cash paid during the period for:
 
 
 
 
Interest paid on deposits and borrowings
 
$
7,624

 
$
6,574

Income taxes paid
 
3,385

 
1,469

Non-cash investing and financing activities:
 
 
 
 
Transfer of loans from held-to-maturity to held-for-sale
 
8,091

 
2,130

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 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 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 foreclosed property, lease residuals, property under operating leases, securities, income taxes and the level of the allowance for loan and lease losses. The results of operations for the six-month period ended June 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 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 May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606),” with an original effective date for annual reporting periods beginning after December 15, 2016. The ASU is a converged standard between the FASB and the IASB that provides a single comprehensive revenue recognition model for all contracts with customers across transactions and industries. The primary objective of the ASU is revenue recognition that represents the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In August 2015, the FASB issued ASU No. 2015-14, which defers the effective date of ASU 2014-09 to annual and interim reporting periods in fiscal years beginning after December 15, 2017. Earlier application is permitted only as of annual and interim reporting periods in fiscal years beginning after December 15, 2016. In March 2016, the FASB issued ASU No. 2016-08, “Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net.” The ASU intends to improve the operability and understandability of the implementation guidance of ASU 2014-09 on principal versus agent considerations. In April and May 2016, the FASB also issued ASU No. 2016-10 and No. 2016-12 related to Topic 606. The amendments do not change the core principals of the previously issued guidance, but instead further clarify and provide implementation guidance for certain aspects of the original

6


ASU. The Corporation intends to adopt the accounting standards during the first quarter of 2018, as required, and is currently evaluating the impact on its results of operations, financial position, and liquidity.
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments- Credit Losses (Topic 326).” The ASU replaces the incurred loss impairment methodology for recognizing credit losses with a methodology that reflects all expected credit losses. The ASU also requires consideration of a broader range of information to inform credit loss estimates, including such factors as past events, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. The amendments affect loans, debt securities, trade receivables, net investments in leases, off-balance-sheet credit exposures, and any other financial asset not excluded from the scope that have the contractual right to receive cash. Entities will apply the amendments in the ASU through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. The ASU is effective for public companies for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted as of the fiscal years beginning after December 15, 2018. The Corporation intends to adopt the accounting standard during the first quarter of 2020, as required, and is currently evaluating the impact on its results of operations, financial position, and liquidity.


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 six month periods ended June 30, 2016 and 2015.
 
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
 
2016
 
2015
 
2016
 
2015
 
 
(Dollars in Thousands, Except Per Share Data)
Basic earnings per common share
 
 
 
 
 
 
 
 
Net income
 
$
3,716

 
$
3,858

 
$
8,262

 
$
8,050

Less: earnings allocated to participating securities
 
58

 
65

 
128

 
138

Basic earnings allocated to common shareholders
 
$
3,658

 
$
3,793

 
$
8,134

 
$
7,912

 
 
 
 
 
 
 
 
 
Weighted-average common shares outstanding, excluding participating securities
 
8,566,718

 
8,522,254

 
8,565,933

 
8,522,436

 
 
 
 
 
 
 
 
 
Basic earnings per common share
 
$
0.43

 
$
0.45

 
$
0.95

 
$
0.93

 
 
 
 
 
 
 
 
 
Diluted earnings per common share
 
 
 
 
 
 
 
 
Earnings allocated to common shareholders, diluted
 
$
3,658

 
$
3,793

 
$
8,134

 
$
7,912

 
 
 
 
 
 
 
 
 
Weighted-average common shares outstanding, excluding participating securities
 
8,566,718

 
8,522,254

 
8,565,933

 
8,522,436

Dilutive effect of share-based awards
 

 

 

 
1,121

Weighted-average diluted common shares outstanding, excluding participating securities
 
8,566,718

 
8,522,254

 
8,565,933

 
8,523,557

 
 
 
 
 
 
 
 
 
Diluted earnings per common share
 
$
0.43

 
$
0.45

 
$
0.95

 
$
0.93



7


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 June 30, 2016, 306,814 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.
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 Plan 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 have been granted since the Corporation became a reporting company under the Securities Exchange Act of 1934, as amended, and no Stock Options have been modified, repurchased or canceled since such time. For that reason, no stock-based compensation expense related to Stock Options was recognized in the Consolidated Financial Statements for the six months ended June 30, 2016 and 2015. The benefits of tax deductions as a result of disqualifying dispositions upon exercise of stock options are recognized as a financing cash flow. No Stock Options remained outstanding as of June 30, 2016 and December 31, 2015.
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 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 six months ended June 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
 
15,565

 
23.15

Vested
 
(3,496
)
 
22.41

Forfeited
 
(10,934
)
 
18.29

Nonvested balance as of June 30, 2016
 
136,606

 
$
19.31


As of June 30, 2016, the Corporation had $1.9 million of deferred unvested compensation expense, which the Corporation expects to recognize over a weighted-average period of approximately 2.48 years. As of June 30, 2016, all restricted shares that vested were issued.


8


For the six months ended June 30, 2016 and 2015, share-based compensation expense related to restricted stock included in the Consolidated Statements of Income was as follows:
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
 
(In Thousands)
Share-based compensation expense
$
269

 
$
215

 
565

 
449

 
  
Note 4 — Securities
The amortized cost and estimated 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 June 30, 2016
 
 
Amortized cost
 
Gross
unrealized
holding gains
 
Gross
unrealized
holding losses
 
Estimated
fair value
 
 
(In Thousands)
Available-for-sale:
 
 
 
 
 
 
 
 
U.S. Government agency obligations - government-sponsored enterprises
 
$
7,298

 
$
48

 
$
(5
)
 
$
7,341

Municipal obligations
 
6,147

 
27

 
(4
)
 
6,170

Asset-backed securities
 
1,223

 

 
(50
)
 
1,173

Collateralized mortgage obligations - government issued
 
35,026

 
763

 
(21
)
 
35,768

Collateralized mortgage obligations - government-sponsored enterprises
 
86,418

 
849

 
(27
)
 
87,240

 
 
$
136,112

 
$
1,687

 
$
(107
)
 
$
137,692


 
 
As of December 31, 2015
 
 
Amortized cost
 
Gross
unrealized
holding gains
 
Gross
unrealized
holding losses
 
Estimated
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 estimated fair value of securities held-to-maturity and the corresponding amounts of gross unrecognized gains and losses were as follows:


9


 
 
As of June 30, 2016
 
 
Amortized cost
 
Gross
unrecognized
holding gains
 
Gross
unrecognized
holding losses
 
Estimated
fair value
 
 
(In Thousands)
Held-to-maturity:
 
 
 
 
 
 
 
 
U.S. Government agency obligations - government-sponsored enterprises
 
$
1,496

 
$
8

 
$

 
$
1,504

Municipal obligations
 
16,727

 
499

 
(2
)
 
17,224

Collateralized mortgage obligations - government issued
 
10,487

 
171

 

 
10,658

Collateralized mortgage obligations - government-sponsored enterprises
 
7,457

 
166

 

 
7,623

 
 
$
36,167

 
$
844

 
$
(2
)
 
$
37,009


 
 
As of December 31, 2015
 
 
Amortized cost
 
Gross
unrecognized
holding gains
 
Gross
unrecognized
holding losses
 
Estimated
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 municipalities located primarily within the State of Wisconsin and are primarily general obligation bonds that are tax-exempt in nature. For the six months ended June 30, 2016, a gain of $7,000 was recorded from the sale of 3 available-for-sale securities. No sales of available for sale securities occurred during the six months ended June 30, 2015.

At June 30, 2016 and December 31, 2015, securities with a fair value of $19.0 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 estimated fair value of securities by contractual maturity at June 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.

10


 
 
As of June 30, 2016
 
 
Available-for-Sale
 
Held-to-Maturity
 
 
Amortized cost
 
Estimated
fair value
 
Amortized cost
 
Estimated
fair value
 
 
(In Thousands)
Due in one year or less
 
$
2,510

 
$
2,510

 
$

 
$

Due in one year through five years
 
12,180

 
12,278

 
5,700

 
5,786

Due in five through ten years
 
85,137

 
86,292

 
12,522

 
12,942

Due in over ten years
 
36,285

 
36,612

 
17,945

 
18,281

 
 
$
136,112

 
$
137,692

 
$
36,167

 
$
37,009


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 June 30, 2016 and December 31, 2015. At June 30, 2016 , the Corporation held 25 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 June 30, 2016, the Corporation held 10 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 Consolidated Statements of Income for the six months ended June 30, 2016 and 2015.

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 June 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
 
$
999

 
$
1

 
$
1,996

 
$
4

 
$
2,995

 
$
5

Municipal obligations
 
1,391

 
2

 
412

 
2

 
1,803

 
4

Asset-backed securities
 

 

 
1,173

 
50

 
1,173

 
50

Collateralized mortgage obligations - government issued
 
730

 
1

 
2,731

 
20

 
3,461

 
21

Collateralized mortgage obligations - government-sponsored enterprises
 
6,602

 
20

 
961

 
7

 
7,563

 
27

 
 
$
9,722

 
$
24

 
$
7,273

 
$
83

 
$
16,995

 
$
107



11


 
 
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 June 30, 2016 and December 31, 2015. At June 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 June 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 six months ended June 30, 2016 and 2015.

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

 
 
As of June 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:
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Government agency obligations - government-sponsored enterprises
 
$

 
$

 
$

 
$

 
$

 
$

Municipal obligations
 
264

 
(2
)
 

 

 
264

 
(2
)
Collateralized mortgage obligations - government issued
 

 

 

 

 

 

Collateralized mortgage obligations - government-sponsored enterprises
 

 

 

 

 

 

 
 
$
264

 
$
(2
)
 
$

 
$

 
$
264

 
$
(2
)


12


 
 
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





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,
2016
 
December 31,
2015
 
 
(In Thousands)
Commercial real estate
 
 
 
 
Commercial real estate — owner occupied
 
$
167,936

 
$
176,322

Commercial real estate — non-owner occupied
 
502,378

 
436,901

Land development
 
60,599

 
59,779

Construction
 
88,339

 
100,625

Multi-family
 
73,239

 
80,254

1-4 family
 
47,289

 
50,304

Total commercial real estate
 
939,780

 
904,185

Commercial and industrial
 
456,297

 
472,193

Direct financing leases, net
 
30,698

 
31,093

Consumer and other
 
 
 
 
Home equity and second mortgages
 
7,372

 
8,237

Other
 
18,743

 
16,319

Total consumer and other
 
26,115

 
24,556

Total gross loans and leases receivable
 
1,452,890

 
1,432,027

Less:
 
 
 
 
   Allowance for loan and lease losses
 
18,154

 
16,316

   Deferred loan fees
 
1,075

 
1,062

Loans and leases receivable, net
 
$
1,433,661

 
$
1,414,649


Loans transferred to third parties consist of the guaranteed portion of Small Business Administration (“SBA”) loans 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 June 30, 2016 and 2015 was $18.6 million and $7.2 million, respectively. For the six months ended June 30, 2016 and 2015, $31.0 million and $10.1 million of the guaranteed portion of SBA loans were sold to third parties,

13


respectively. Each of the transfers of these financial assets met the qualifications for sale accounting, and therefore all of the loans transferred during the six months ended June 30, 2016 and 2015 have been derecognized in the unaudited Consolidated Financial Statements. The Corporation has a continuing involvement in each of the agreements 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 June 30, 2016 and December 31, 2015 was $97.3 million and $73.4 million, respectively. As of June 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 $30.6 million and $24.6 million, respectively. As of June 30, 2016, $2.4 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 June 30, 2016 and 2015 was $9.7 million and $24.8 million, respectively. For the six months ended June 30, 2016 and 2015, $15.4 million and $36.5 million of these participation interests were transferred to third parties, respectively, all of which was treated as a sale and derecognized under the applicable accounting guidance at the time of transfer. The Corporation’s continuing involvement with these loans is by way of partial ownership, relationship management and all servicing responsibilities; however, there are no further obligations of the Corporation, other than standard representations and warranties to the sold amount, that would preclude the application of sale accounting treatment. 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 June 30, 2016 and December 31, 2015 was $103.3 million and $95.8 million, respectively. As of June 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 $106.8 million and $112.2 million, respectively. No loans in this participation portfolio were considered impaired as of June 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 June 30, 2016 and December 31, 2015 was $459,000 and $467,000, respectively.

The Corporation sells residential real estate loans, servicing released, in the secondary market. The total principal amount of residential real estate loans sold during the three months ended June 30, 2016 and 2015 was $8.0 million and $10.3 million, respectively. For the six months ended June 30, 2016 and 2015 the total principal amount of residential real estate loans sold was $15.2 million and $19.5 million, respectively. Each of the transfers of these financial assets met the qualifications for sale accounting, and therefore all of the loans transferred during the six months ended June 30, 2016 and 2015 have been derecognized in the unaudited Consolidated Financial Statements. The Corporation has a continuing involvement in each of the transactions, including by way of relationship management and standard representations and warranties related to the sold amount; however, there are no further obligations of the Corporation that would would preclude the application of sale accounting treatment. The loans were transferred at their fair value and the related gain was recognized as non-interest income upon the transfer in the unaudited Consolidated Financial Statements.

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 credit 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.


14


The following table reflects the contractually required payments receivable and fair value of the Corporation’s purchased credit impaired loans as of June 30, 2016 and December 31, 2015:
 
June 30,
2016
 
December 31,
2015
 
(In Thousands)
Contractually required payments
$
4,123

 
$
5,291

Fair value of purchased credit impaired loans
$
2,263

 
$
3,250

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

 
$
676

Accretion recognized in earnings
(87
)
 
(50
)
Reclassification to nonaccretable difference for loans with changing cash flows(1)
(204
)
 
(60
)
Changes in accretable yield for non-credit related changes in expected cash flows(2)
69

 
(152
)
Accretable yield, end of period
$
192

 
$
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.



15


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, 2016 and December 31, 2015:
 
 
Category
 
 
As of June 30, 2016
 
I
 
II
 
III
 
IV
 
Total
 
 
(Dollars in Thousands)
Commercial real estate:
 
 
 
 
 
 
 
 
 
 
Commercial real estate — owner occupied
 
$
136,996

 
$
14,018

 
$
13,061

 
$
3,861

 
$
167,936

Commercial real estate — non-owner occupied
 
473,644

 
24,218

 
2,546

 
1,970

 
502,378

Land development
 
55,275

 
839

 
656

 
3,829

 
60,599

Construction
 
78,088

 
5,745

 
4,227

 
279

 
88,339

Multi-family
 
72,726

 
513

 

 

 
73,239

1-4 family
 
40,279

 
2,517

 
1,624

 
2,869

 
47,289

      Total commercial real estate
 
857,008

 
47,850

 
22,114

 
12,808

 
939,780

 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
 
376,286

 
35,026

 
35,118

 
9,867

 
456,297

 
 
 
 
 
 
 
 
 
 
 
Direct financing leases, net
 
29,529

 
783

 
386

 

 
30,698

 
 
 
 
 
 
 
 
 
 
 
Consumer and other:
 
 
 
 
 
 
 
 
 

Home equity and second mortgages
 
6,407

 
570

 
137

 
258

 
7,372

Other
 
18,145

 
63

 

 
535

 
18,743

      Total consumer and other
 
24,552

 
633

 
137

 
793

 
26,115

 
 
 
 
 
 
 
 
 
 
 
Total gross loans and leases receivable
 
$
1,287,375

 
$
84,292

 
$
57,755

 
$
23,468

 
$
1,452,890

Category as a % of total portfolio
 
88.60
%
 
5.80
%
 
3.98
%
 
1.62
%
 
100.00
%



16


 
 
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