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EX-32 - EXHIBIT 32 - FIRST BUSINESS FINANCIAL SERVICES, INC.fbiz2017630exhibit32.htm
EX-31.2 - EXHIBIT 31.2 - FIRST BUSINESS FINANCIAL SERVICES, INC.fbiz2017630exhibit312.htm
EX-31.1 - EXHIBIT 31.1 - FIRST BUSINESS FINANCIAL SERVICES, INC.fbiz2017630exhibit311.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, 2017
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,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ¨
 
Accelerated filer þ
 
Non-accelerated filer ¨
 
Smaller reporting company ¨
 
Emerging growth company ¨
 
 
 
 
(Do not check if a smaller reporting company)
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
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 23, 2017 was 8,715,063 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,
2017
 
December 31,
2016
 
 
(unaudited)
 
 
 
(In Thousands, Except Share Data)
Assets
 
 
 
 
Cash and due from banks
 
$
17,703

 
$
14,596

Short-term investments
 
46,042

 
62,921

Cash and cash equivalents
 
63,745

 
77,517

Securities available-for-sale, at fair value
 
136,834

 
145,893

Securities held-to-maturity, at amortized cost
 
37,806

 
38,612

Loans held for sale
 
3,491

 
1,111

Loans and leases receivable, net of allowance for loan and lease losses of $21,677 and $20,912, respectively
 
1,436,498

 
1,429,763

Premises and equipment, net
 
2,930

 
3,772

Foreclosed properties
 
2,585

 
1,472

Bank-owned life insurance
 
39,674

 
39,048

Federal Home Loan Bank and Federal Reserve Bank stock, at cost
 
2,815

 
2,131

Goodwill and other intangible assets
 
12,760

 
12,773

Accrued interest receivable and other assets
 
29,790

 
28,607

Total assets
 
$
1,768,928

 
$
1,780,699

Liabilities and Stockholders’ Equity
 
 
 
 
Deposits
 
$
1,474,598

 
$
1,538,855

Federal Home Loan Bank advances and other borrowings
 
106,395

 
59,676

Junior subordinated notes
 
10,012

 
10,004

Accrued interest payable and other liabilities
 
12,689

 
10,514

Total liabilities
 
1,603,694

 
1,619,049

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, 8,962,084 and 8,959,239 shares issued, 8,715,063 and 8,715,856 shares outstanding at June 30, 2017 and December 31, 2016, respectively
 
90

 
90

Additional paid-in capital
 
78,086

 
77,542

Retained earnings
 
94,333

 
91,317

Accumulated other comprehensive loss
 
(491
)
 
(522
)
Treasury stock, 247,021 and 243,383 shares at June 30, 2017 and December 31, 2016, respectively, at cost
 
(6,784
)
 
(6,777
)
Total stockholders’ equity
 
165,234

 
161,650

Total liabilities and stockholders’ equity
 
$
1,768,928

 
$
1,780,699


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,
 
 
2017
 
2016
 
2017
 
2016
 
 
(In Thousands, Except Per Share Data)
Interest income
 
 
 
 
 
 
 
 
Loans and leases
 
$
18,284

 
$
18,701

 
$
35,806

 
$
37,145

Securities income
 
776

 
681

 
1,555

 
1,404

Short-term investments
 
165

 
173

 
311

 
349

Total interest income
 
19,225

 
19,555

 
37,672

 
38,898

Interest expense
 
 
 
 
 
 
 
 
Deposits
 
2,658

 
3,038

 
5,331

 
6,091

Federal Home Loan Bank advances and other borrowings
 
811

 
499

 
1,422

 
973

Junior subordinated notes
 
277

 
277

 
552

 
555

Total interest expense
 
3,746

 
3,814

 
7,305

 
7,619

Net interest income
 
15,479

 
15,741

 
30,367

 
31,279

Provision for loan and lease losses
 
3,656

 
2,762

 
4,228

 
3,287

Net interest income after provision for loan and lease losses
 
11,823

 
12,979

 
26,139

 
27,992

Non-interest income
 
 
 
 
 
 
 
 
Trust and investment services fee income
 
1,648

 
1,344

 
3,277

 
2,618

Gain on sale of Small Business Administration loans
 
535

 
2,131

 
895

 
3,506

Gain on sale of residential mortgage loans
 
15

 
198

 
26

 
342

Service charges on deposits
 
766

 
733

 
1,531

 
1,475

Loan fees
 
675

 
676

 
1,133

 
1,285

Increase in cash surrender value of bank-owned life insurance
 
316

 
243

 
627

 
486

Other non-interest income
 
783

 
498

 
1,312

 
704

Total non-interest income
 
4,738

 
5,823

 
8,801

 
10,416

Non-interest expense
 
 
 
 
 
 
 
 
Compensation
 
8,382

 
8,447

 
17,065

 
16,818

Occupancy
 
519

 
500

 
994

 
1,008

Professional fees
 
1,041

 
961

 
2,051

 
1,822

Data processing
 
635

 
697

 
1,219

 
1,348

Marketing
 
582

 
448

 
952

 
1,182

Equipment
 
300

 
341

 
583

 
621

Computer software
 
639

 
574

 
1,322

 
1,068

FDIC insurance
 
381

 
254

 
761

 
545

Collateral liquidation costs
 
77

 
68

 
185

 
114

Net loss on foreclosed properties
 

 
93

 

 
93

Impairment of tax credit investments
 
112

 
94

 
225

 
206

Small Business Administration recourse provision
 
774

 
74

 
780

 
160

Other non-interest expense
 
779

 
907

 
1,644

 
1,171

Total non-interest expense
 
14,221

 
13,458

 
27,781

 
26,156

Income before income tax expense
 
2,340

 
5,344

 
7,159

 
12,252

Income tax expense
 
454

 
1,621

 
1,876

 
3,976

Net income
 
$
1,886

 
$
3,723

 
$
5,283

 
$
8,276

Earnings per common share
 
 
 
 
 
 
 
 
Basic
 
$
0.22

 
$
0.43

 
$
0.61

 
$
0.95

Diluted
 
0.22

 
0.43

 
$
0.61

 
$
0.95

Dividends declared per share
 
0.13

 
0.12

 
$
0.26

 
$
0.24

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,
 
 
2017
 
2016
 
2017
 
2016
 
 
(In Thousands)
Net income
 
$
1,886

 
$
3,723

 
$
5,283

 
$
8,276

Other comprehensive income, before tax
 
 
 
 
 
 
 
 
Securities available-for-sale:
 
 
 
 
 
 
 
 
Net unrealized securities gains arising during the period
 
109

 
361

 
26

 
1,237

Securities held-to-maturity:
 
 
 
 
 
 
 
 
Amortization of net unrealized losses transferred from available-for-sale
 
29

 
43

 
55

 
83

Income tax expense
 
(53
)
 
(156
)
 
(50
)
 
(510
)
     Total other comprehensive income
 
$
85

 
$
248

 
$
31

 
$
810

Comprehensive income
 
$
1,971

 
$
3,971

 
$
5,314

 
$
9,086


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, 2015
 
8,699,410

 
$
89

 
$
76,549

 
$
80,584

 
$
(80
)
 
$
(6,310
)
 
$
150,832

Net income
 

 

 

 
8,276

 

 

 
8,276

Other comprehensive income
 

 

 

 

 
810

 

 
810

Share-based compensation - restricted shares, net
 
4,631

 

 
564

 

 

 

 
564

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

 
$
77,113

 
$
86,774

 
$
730

 
$
(6,312
)
 
$
158,394


 
 
Common Shares Outstanding
 
Common
Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Loss
 
Treasury
Stock
 
Total
 
 
(In Thousands, Except Share Data)
Balance at December 31, 2016
 
8,715,856

 
$
90

 
$
77,542

 
$
91,317

 
$
(522
)
 
$
(6,777
)
 
$
161,650

Net income
 

 

 

 
5,283

 

 

 
5,283

Other comprehensive income
 

 

 

 

 
31

 

 
31

Share-based compensation - restricted shares, net
 
(484
)
 

 
544

 

 

 

 
544

Cash dividends ($0.26 per share)
 

 

 

 
(2,267
)
 

 

 
(2,267
)
Treasury stock purchased
 
(309
)
 

 

 

 

 
(7
)
 
(7
)
Balance at June 30, 2017
 
8,715,063

 
$
90

 
$
78,086

 
$
94,333

 
$
(491
)
 
$
(6,784
)
 
$
165,234


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,
 
 
2017
 
2016
 
 
(In Thousands)
Operating activities
 
 
 
 
Net income
 
$
5,283

 
$
8,276

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Deferred income taxes, net
 
(149
)
 
(259
)
Impairment of tax credit investments
 
225

 
206

Provision for loan and lease losses
 
4,228

 
3,287

Depreciation, amortization and accretion, net
 
731

 
650

Share-based compensation
 
544

 
565

Increase in value of bank-owned life insurance policies
 
(627
)
 
(486
)
Origination of loans for sale
 
(14,153
)
 
(52,727
)
Sale of loans originated for sale
 
12,694

 
61,820

Gain on sale of loans originated for sale
 
(921
)
 
(3,848
)
Net loss on foreclosed properties, including impairment valuation
 

 
93

Excess tax benefit from share-based compensation
 
(7
)
 
(13
)
Returns on investments in limited partnerships
 
92

 
250

Net increase in accrued interest receivable and other assets
 
(1,014
)
 
(1,113
)
Net increase (decrease) in accrued interest payable and other liabilities
 
2,174

 
(855
)
Net cash provided by operating activities
 
9,100

 
15,846

Investing activities
 
 
 
 
Proceeds from maturities, redemptions and paydowns of available-for-sale securities
 
19,541

 
20,419

Proceeds from maturities, redemptions and paydowns of held-to-maturity securities
 
1,814

 
1,843

Proceeds from sale of available-for-sale securities
 
5,063

 
2,191

Purchases of available-for-sale and held-to-maturity securities
 
(16,957
)
 
(19,797
)
Proceeds from sale of foreclosed properties
 

 
35

Net increase in loans and leases
 
(10,803
)
 
(30,041
)
Investments in limited partnerships
 
(500
)
 
(750
)
Returns of investments in limited partnerships
 

 
438

Investment in Federal Home Loan Bank and Federal Reserve Bank Stock
 
(7,454
)
 
(387
)
Proceeds from the sale of Federal Home Loan Bank Stock
 
6,770

 
1,066

Purchases of leasehold improvements and equipment, net
 
(635
)
 
(400
)
Net cash used in investing activities
 
(3,161
)
 
(25,383
)
Financing activities
 
 
 
 
Net (decrease) increase in deposits
 
(64,241
)
 
30,799

Repayment of Federal Home Loan Bank advances
 
(260,916
)
 
(2,500
)
Proceeds from Federal Home Loan Bank advances
 
309,415

 

Proceeds from issuance of subordinated notes payable
 
9,090

 

Repayment of subordinated notes payable
 
(7,877
)
 

Net (decrease) increase in other borrowed funds
 
(2,908
)
 
1,373

Cash dividends paid
 
(2,267
)
 
(2,086
)
Purchase of treasury stock
 
(7
)
 
(2
)
Net cash (used in) provided by financing activities
 
(19,711
)
 
27,584

Net (decrease) increase in cash and cash equivalents
 
(13,772
)
 
18,047

Cash and cash equivalents at the beginning of the period
 
77,517

 
113,564

Cash and cash equivalents at the end of the period
 
$
63,745

 
$
131,611

Supplementary cash flow information
 
 
 
 
Cash paid during the period for:
 
 
 
 
Interest paid on deposits and borrowings
 
$
7,359

 
$
7,624

Income taxes paid
 
339

 
3,385

Non-cash investing and financing activities:
 
 
 
 
Transfer of loans from held-to-maturity to held-for-sale
 
6,966

 
8,091

Transfer from premises and equipment to foreclosed properties
 
1,113

 

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”), through our wholly-owned subsidiary, First Business Bank (“FBB” or the “Bank”), has been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). FBB operates as a commercial banking institution primarily in the Wisconsin and greater Kansas City markets. FBB also offers trust and investment services through First Business Trust & Investments (“FBTI”), a division of FBB. The Bank provides a full range of financial services to businesses, business owners, executives, professionals and high net worth individuals. The Bank is subject to competition from other financial institutions and service providers and is 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”), Mitchell Street Apartments Investment, LLC (“Mitchell Street”) and FBB – Milwaukee Real Estate, LLC (“FBBMRE”). FMIC is located in and was formed under the laws of the state of Nevada.
Effective June 1, 2017, we completed the consolidation of our three bank charters into a single charter and rebranded Alterra Bank to First Business Bank.
Basis of Presentation. The accompanying unaudited Consolidated Financial Statements were prepared in accordance with GAAP and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements and should be read in conjunction with the Corporation’s Consolidated Financial Statements and footnotes thereto included in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2016. The unaudited Consolidated Financial Statements include the accounts of the Corporation and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. 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.
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 securities, level of the allowance for loan and lease losses, lease residuals, property under operating leases, goodwill, level of the Small Business Administration (“SBA”) recourse reserve and income taxes. The results of operations for the six month period ended June 30, 2017 are not necessarily indicative of results that may be expected for any other interim period or the entire fiscal year ending December 31, 2017. Certain amounts in prior periods may have been reclassified to conform to the current presentation. Subsequent events have been evaluated through the date of the issuance of the unaudited Consolidated Financial Statements. No significant subsequent events have occurred through this date requiring adjustment to the financial statements or disclosures.
The Corporation has not changed its significant accounting and reporting policies from those disclosed in the Corporation’s Form 10-K for the year ended December 31, 2016.
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 to 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, May and December 2016, the FASB also issued ASU No. 2016-10, No. 2016-12 and No. 2016-20, respectively, related to Topic 606. The amendments do not change the core principles of the previously issued guidance, but instead further clarify and provide implementation guidance for certain aspects of the original ASU. The Corporation intends to adopt the accounting standards during the first quarter of 2018, as required. The Corporation has conducted its initial assessment and is currently evaluating contracts to assess

6


and quantify accounting methodology changes resulting from the adoption of this standard. The adoption of this accounting standard is not expected to have a material impact on the Corporation's consolidated financial statements. The FASB continues to release new accounting guidance related to the adoption of this standard, which could impact the Corporation's initial assessment and may change the conclusions reached as to the application of this new guidance.
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).” The ASU intends to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities and disclosing key information about leasing arrangements. The ASU will require lessees to recognize the following for all leases (with the exception of short-term leases) at the commencement date: (1) a lease liability, which is a lessees’ obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. Certain targeted improvements were made to align, where necessary, lessor accounting with the lessee accounting model and Topic 606, Revenue from Contracts with Customers. The new lease guidance simplifies the accounting for sale and leaseback transactions primarily because lessees must recognize lease assets and lease liabilities. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. The ASU is effective for public companies for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. The Corporation intends to adopt the accounting standard during the first quarter of 2019, as required, and is currently evaluating the impact on its results of operations, financial position and liquidity.
In June 2016, the FASB issued ASU No. 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.
In May 2017, the FASB issued ASU No. 2017-09, “Compensation- Stock Compensation (Topic 718).” The ASU provides clarity about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. The ASU is effective for all entities for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. The Corporation is in the process of evaluating the impact of this standard but does not expect this standard to have a material 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, 2017 and 2016.

7


 
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
 
2017
 
2016
 
2017
 
2016
 
 
(Dollars in Thousands, Except Share Data)
Basic earnings per common share
 
 
 
 
 
 
 
 
Net income
 
$
1,886

 
$
3,723

 
$
5,283

 
$
8,276

Less: earnings allocated to participating securities
 
25

 
58

 
70

 
128

Basic earnings allocated to common shareholders
 
$
1,861

 
$
3,665

 
$
5,213

 
$
8,148

Weighted-average common shares outstanding, excluding participating securities
 
8,601,379

 
8,566,718

 
8,601,002

 
8,565,933

Basic earnings per common share
 
$
0.22

 
$
0.43

 
$
0.61

 
$
0.95

 
 
 
 
 
 
 
 
 
Diluted earnings per common share
 
 
 
 
 
 
 
 
Earnings allocated to common shareholders, diluted
 
$
1,861

 
$
3,665

 
$
5,213

 
$
8,148

Weighted-average diluted common shares outstanding, excluding participating securities
 
8,601,379

 
8,566,718

 
8,601,002

 
8,565,933

Diluted earnings per common share
 
$
0.22

 
$
0.43

 
$
0.61

 
$
0.95


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, 2017, 275,065 shares were available for future grants under the Plan. Shares covered by awards that expire, terminate or lapse will again be available for the grant of awards under the Plan. The Corporation may issue new shares and shares from its treasury stock for shares delivered under the Plan.
Restricted Stock
Under the Plan, the Corporation may grant restricted stock to plan participants, subject to forfeiture upon the occurrence of certain events until the dates specified in the participant’s award agreement. While restricted stock is subject to forfeiture, with the exception of restricted stock units, which do not have voting rights and are provided dividend equivalents, restricted stock participants may exercise full voting rights and will receive all dividends and other distributions paid with respect to the 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 stock, the benefit of tax deductions in excess of recognized compensation expense is reflected as an income tax benefit in the unaudited Consolidated Statements of Income.

8


Restricted stock activity for the year ended December 31, 2016 and the six months ended June 30, 2017 was as follows:
 
 
Number of
Restricted Shares/Units
 
Weighted Average
Grant-Date
Fair Value
Nonvested balance as of December 31, 2015
 
135,471

 
$
20.13

Granted
 
60,415

 
22.74

Vested
 
(56,090
)
 
18.71

Forfeited
 
(23,551
)
 
20.90

Nonvested balance as of December 31, 2016
 
116,245

 
21.13

Granted
 
7,135

 
24.09

Vested
 
(4,043
)
 
23.97

Forfeited
 
(7,619
)
 
21.57

Nonvested balance as of June 30, 2017
 
111,718

 
$
20.55


As of June 30, 2017, the Corporation had $1.7 million of deferred unvested compensation expense, which the Corporation expects to recognize over a weighted-average period of approximately 2.44 years.

For the three and six months ended June 30, 2017 and 2016, share-based compensation expense related to restricted stock included in the unaudited Consolidated Statements of Income was as follows:
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
 
(In Thousands)
Share-based compensation expense
$
268

 
$
269

 
$
544

 
$
565

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

 
 
As of June 30, 2017
 
 
Amortized Cost
 
Gross
Unrealized Gains
 
Gross
Unrealized Losses
 
Fair Value
 
 
(In Thousands)
Available-for-sale:
 
 
 
 
 
 
 
 
U.S. Government agency obligations - government-sponsored enterprises
 
$
5,299

 
$
12

 
$
(5
)
 
$
5,306

Municipal obligations
 
7,692

 
8

 
(30
)
 
7,670

Asset-backed securities
 
1,018

 

 
(9
)
 
1,009

Collateralized mortgage obligations - government issued
 
25,046

 
336

 
(148
)
 
25,234

Collateralized mortgage obligations - government-sponsored enterprises
 
98,320

 
137

 
(842
)
 
97,615

 
 
$
137,375

 
$
493

 
$
(1,034
)
 
$
136,834



9


 
 
As of December 31, 2016
 
 
Amortized Cost
 
Gross
Unrealized Gains
 
Gross
Unrealized Losses
 
Fair Value
 
 
(In Thousands)
Available-for-sale:
 
 
 
 
 
 
 
 
U.S. Government agency obligations - government-sponsored enterprises
 
$
6,298

 
$
7

 
$
(10
)
 
$
6,295

Municipal obligations
 
8,246

 
2

 
(92
)
 
8,156

Asset-backed securities
 
1,116

 

 
(35
)
 
1,081

Collateralized mortgage obligations - government issued
 
30,936

 
423

 
(146
)
 
31,213

Collateralized mortgage obligations - government-sponsored enterprises
 
99,865

 
252

 
(969
)
 
99,148

 
 
$
146,461

 
$
684

 
$
(1,252
)
 
$
145,893


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

 
 
As of June 30, 2017
 
 
Amortized Cost
 
Gross
Unrealized Gains
 
Gross
Unrealized Losses
 
Fair Value
 
 
(In Thousands)
Held-to-maturity:
 
 
 
 
 
 
 
 
U.S. Government agency obligations - government-sponsored enterprises
 
$
1,498

 
$
1

 
$
(5
)
 
$
1,494

Municipal obligations
 
21,953

 
398

 
(13
)
 
22,338

Collateralized mortgage obligations - government issued
 
8,198

 
19

 
(27
)
 
8,190

Collateralized mortgage obligations - government-sponsored enterprises
 
6,157

 
11

 
(38
)
 
6,130

 
 
$
37,806

 
$
429

 
$
(83
)
 
$
38,152


 
 
As of December 31, 2016
 
 
Amortized Cost
 
Gross
Unrealized Gains
 
Gross
Unrealized Losses
 
Fair Value
 
 
(In Thousands)
Held-to-maturity:
 
 
 
 
 
 
 
 
U.S. Government agency obligations - government-sponsored enterprises
 
$
1,497

 
$
2

 
$
(5
)
 
$
1,494

Municipal obligations
 
21,173

 
62

 
(78
)
 
21,157

Collateralized mortgage obligations - government issued
 
9,148

 
17

 
(38
)
 
9,127

Collateralized mortgage obligations - government-sponsored enterprises
 
6,794

 
6

 
(58
)
 
6,742

 
 
$
38,612

 
$
87

 
$
(179
)
 
$
38,520


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”). 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. Asset-backed securities represent securities issued by the Student Loan Marketing Association (“SLMA”) which are 97% guaranteed by the U.S. Government. Collateralized mortgage obligations - government issued represent securities guaranteed by the Government National Mortgage Association (“GNMA”). Collateralized mortgage

10


obligations - government-sponsored enterprises include securities guaranteed by the FHLMC and the FNMA. There were six sales of available-for-sale securities that occurred during the six months ended June 30, 2017 and three sales of available-for-sale securities that occurred during the six months ended June 30, 2016.

At June 30, 2017 and December 31, 2016, securities with a fair value of $18.9 million and $22.4 million, respectively, were pledged to secure interest rate swap contracts, outstanding Federal Home Loan Bank (“FHLB”) advances and additional FHLB availability.
The amortized cost and fair value of securities by contractual maturity at June 30, 2017 are shown below. Actual maturities may differ from contractual maturities because issuers have the right to call or prepay certain obligations with or without call or prepayment penalties.
 
 
Available-for-Sale
 
Held-to-Maturity
 
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
 
 
(In Thousands)
Due in one year or less
 
$
7,250

 
$
7,242

 
$

 
$

Due in one year through five years
 
13,409

 
13,422

 
11,191

 
11,313

Due in five through ten years
 
56,104

 
56,171

 
12,302

 
12,533

Due in over ten years
 
60,612

 
59,999

 
14,313

 
14,306

 
 
$
137,375

 
$
136,834

 
$
37,806

 
$
38,152


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, 2017 and December 31, 2016. At June 30, 2017, the Corporation held 123 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, 2017, the Corporation held 16 available-for-sale securities that had been in a continuous unrealized loss position for twelve months or greater.

The Corporation has not specifically identified available-for-sale securities in a loss position that it intends to sell in the near term and does not believe that it will be required to sell any such securities. The Corporation reviews its securities on a quarterly basis to monitor its exposure to other-than-temporary impairment. Consideration is given to such factors as the length of time and extent to which the security has been in an unrealized loss position, changes in security ratings and an evaluation of the present value of expected future cash flows, if necessary. Based on the Corporation’s evaluation, it is expected that the Corporation will recover the entire amortized cost basis of each security. Accordingly, no other-than-temporary impairment was recorded in the unaudited Consolidated Statements of Income for the six months ended June 30, 2017 and 2016.

11



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, 2017
 
 
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
 
$
4,295

 
$
5

 
$

 
$

 
$
4,295

 
$
5

Municipal obligations
 
4,956

 
28

 
756

 
2

 
5,712

 
30

Asset-backed securities
 

 

 
1,009

 
9

 
1,009

 
9

Collateralized mortgage obligations - government issued
 
9,159

 
134

 
452

 
14

 
9,611

 
148

Collateralized mortgage obligations - government-sponsored enterprises
 
63,427

 
696

 
8,049

 
146

 
71,476

 
842

 
 
$
81,837

 
$
863

 
$
10,266

 
$
171

 
$
92,103

 
$
1,034


 
 
As of December 31, 2016
 
 
Less than 12 Months
 
12 Months or Longer
 
Total
 
 
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
 
 
(In Thousands)
Available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Government agency obligations - government-sponsored enterprises
 
$
1,991

 
$
10

 
$

 
$

 
$
1,991

 
$
10

Municipal obligations
 
7,207

 
89

 
406

 
3

 
7,613

 
92

Asset-backed securities
 

 
$

 
1,081

 
35

 
1,081

 
35

Collateralized mortgage obligations - government issued
 
10,552

 
130

 
493

 
16

 
11,045

 
146

Collateralized mortgage obligations - government-sponsored enterprises
 
54,843

 
931

 
1,819

 
38

 
56,662

 
969

 
 
$
74,593

 
$
1,160

 
$
3,799

 
$
92

 
$
78,392

 
$
1,252


The tables below show the Corporation’s gross unrealized 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, 2017 and December 31, 2016. At June 30, 2017, the Corporation held 17 held-to-maturity 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. There were five held-to-maturity securities that had been in a continuous loss position for twelve months or greater as of June 30, 2017. It is expected that the Corporation will recover the entire amortized cost basis of each held-to-maturity security based upon an evaluation of aforementioned factors. Accordingly, no other-than-temporary impairment was recorded in the unaudited Consolidated Statements of Income for the six months ended June 30, 2017 and 2016.

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


12


 
 
As of June 30, 2017
 
 
Less than 12 Months
 
12 Months or Longer
 
Total
 
 
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
 
 
(In Thousands)
Held-to-maturity:
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Government agency obligations - government-sponsored enterprises
 
$
1,000

 
$
5

 
$

 
$

 
$
1,000

 
$
5

Municipal obligations
 
1,257

 
8

 
261

 
5

 
1,518

 
13

Collateralized mortgage obligations - government issued
 
4,177

 
15

 
796

 
12

 
4,973

 
27

Collateralized mortgage obligations - government-sponsored enterprises
 
2,260

 
19

 
2,042

 
19

 
4,302

 
38

 
 
$
8,694

 
$
47

 
$
3,099

 
$
36

 
$
11,793

 
$
83


 
 
As of December 31, 2016
 
 
Less than 12 Months
 
12 Months or Longer
 
Total
 
 
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
 
 
(In Thousands)
Held-to-maturity:
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Government agency obligations - government-sponsored enterprises
 
$
1,000

 
$
5

 
$

 
$

 
$
1,000

 
$
5

Municipal obligations
 
9,472

 
78

 

 

 
9,472

 
78

Collateralized mortgage obligations - government issued
 
6,980

 
38

 

 

 
6,980

 
38

Collateralized mortgage obligations - government-sponsored enterprises
 
4,682

 
58

 

 

 
4,682

 
58

 
 
$
22,134

 
$
179

 
$

 
$

 
$
22,134

 
$
179



13


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,
2017
 
December 31,
2016
 
 
(In Thousands)
Commercial real estate:
 
 
 
 
Commercial real estate — owner occupied
 
$
183,161

 
$
176,459

Commercial real estate — non-owner occupied
 
468,778

 
473,158

Land development
 
46,500

 
56,638

Construction
 
104,515

 
101,206

Multi-family
 
124,488

 
92,762

1-4 family
 
38,922

 
45,651

Total commercial real estate
 
966,364

 
945,874

Commercial and industrial
 
437,955

 
450,298

Direct financing leases, net
 
29,216

 
30,951

Consumer and other:
 
 
 
 
Home equity and second mortgages
 
7,973

 
8,412

Other
 
17,976

 
16,329

Total consumer and other
 
25,949

 
24,741

Total gross loans and leases receivable
 
1,459,484

 
1,451,864

Less:
 
 
 
 
   Allowance for loan and lease losses
 
21,677

 
20,912

   Deferred loan fees
 
1,309

 
1,189

Loans and leases receivable, net
 
$
1,436,498

 
$
1,429,763

As of June 30, 2017 and December 31, 2016, the total amount of the Corporation’s ownership of SBA loans on the Consolidated Balance Sheets comprised of the following:
 
 
June 30,
2017
 
December 31,
2016
 
 
(In Thousands)
Retained, unguaranteed portion of sold SBA loans
 
$
32,716

 
$
30,418

Other SBA loans(1)
 
31,446

 
31,728

Total SBA loans
 
$
64,162

 
$
62,146

(1)
Primarily consisted of SBA Express loans and partially funding 7(a) program loans, which were not saleable as of June 30, 2017 and December 31, 2016, respectively.
As of June 30, 2017 and December 31, 2016, $11.6 million and $5.5 million of loans in this portfolio were considered impaired, respectively.
Loans transferred to third parties consist of the guaranteed portion of SBA loans which the Corporation sold in the secondary market, participation interests in other originated loans and residential real estate loans. The total principal amount of the guaranteed portion of SBA loans sold during the three months ended June 30, 2017 and 2016 was $5.9 million and $20.0 million, respectively. The total principal amount of the guaranteed portion of SBA loans sold during the six months ended June 30, 2017 and 2016 was $9.2 million and $33.1 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 three and six months ended June 30, 2017 and 2016 have been derecognized in the unaudited Consolidated Financial Statements. 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, 2017 and December 31, 2016 was $101.2 million and $105.1 million, respectively.

14



The total principal amount of transferred participation interests in other originated commercial loans during the three months ended June 30, 2017 and 2016 was $2.4 million and $9.4 million, respectively. The total principal amount of transferred participation interests in other originated commercial loans during the six months ended June 30, 2017 and 2016 was $7.9 million and $9.8 million, respectively, all of which were treated as sales and derecognized under the applicable accounting guidance at the time of transfer. No gain or loss was recognized on participation interests in other originated loans as they were transferred at or near the date of loan origination and the payments received for servicing the portion of the loans participated represents adequate compensation. The total outstanding balance of these transferred loans at June 30, 2017 and December 31, 2016 was $89.8 million and $102.7 million, respectively. As of June 30, 2017 and December 31, 2016, the total amount of the Corporation’s partial ownership of these transferred loans on the unaudited Consolidated Balance Sheets was $144.7 million and $106.1 million, respectively. No loans in this participation portfolio were considered impaired as of June 30, 2017 and December 31, 2016. The Corporation does not share in the participant’s portion of any potential charge-offs. The total amount of loan participations purchased on the unaudited Consolidated Balance Sheets as of June 30, 2017 and December 31, 2016 was $688,000 and $1.2 million, respectively.

The Corporation also previously sold 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, 2017 and 2016 was $597,000 and $8.0 million, respectively. The total principal amount of residential real estate loans sold during the six months ended June 30, 2017 and 2016 was $1.6 million and $15.2 million, respectively. Each of the transfers of these financial assets met the qualifications for sale accounting, and therefore all of the loans transferred have been derecognized in the unaudited Consolidated Financial Statements. 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.

The following tables illustrate 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, 2017 and December 31, 2016:
 
 
June 30, 2017
 
 
Category
 
 
 
 
I
 
II
 
III
 
IV
 
Total
 
 
(Dollars in Thousands)
Commercial real estate:
 
 
 
 
 
 
 
 
 
 
Commercial real estate — owner occupied
 
$
145,360

 
$
18,750

 
$
11,847

 
$
7,204

 
$
183,161

Commercial real estate — non-owner occupied
 
440,470

 
24,943

 
1,468

 
1,897

 
468,778

Land development
 
42,399

 
804

 
284

 
3,013

 
46,500

Construction
 
97,939

 
792

 
431

 
5,353

 
104,515

Multi-family
 
124,488

 

 

 

 
124,488

1-4 family
 
27,102

 
7,914

 
1,382

 
2,524

 
38,922

      Total commercial real estate
 
877,758

 
53,203

 
15,412

 
19,991

 
966,364

Commercial and industrial
 
331,529

 
33,596

 
55,357

 
17,473

 
437,955

Direct financing leases, net
 
26,677

 
2,539

 

 

 
29,216

Consumer and other:
 
 
 
 
 
 
 
 
 

Home equity and second mortgages
 
7,957

 

 
10

 
6

 
7,973

Other
 
17,582

 

 

 
394

 
17,976

      Total consumer and other
 
25,539

 

 
10

 
400

 
25,949

Total gross loans and leases receivable
 
$
1,261,503

 
$
89,338

 
$
70,779

 
$
37,864

 
$
1,459,484

Category as a % of total portfolio
 
86.44
%
 
6.12
%
 
4.85
%
 
2.59
%
 
100.00
%

15


 
 
December 31, 2016
 
 
Category
 
 
 
 
I
 
II
 
III
 
IV
 
Total
 
 
(Dollars in Thousands)
Commercial real estate:
 
 
 
 
 
 
 
 
 
 
Commercial real estate — owner occupied
 
$
142,704

 
$
20,294

 
$
11,174

 
$
2,287

 
$
176,459

Commercial real estate — non-owner occupied
 
447,895

 
20,933

 
2,721

 
1,609

 
473,158

Land development
 
52,082

 
823

 
293

 
3,440

 
56,638

Construction
 
93,510

 
3,154

 
1,624

 
2,918

 
101,206

Multi-family
 
87,418

 
1,937

 
3,407

 

 
92,762

1-4 family
 
38,504

 
3,144

 
1,431

 
2,572

 
45,651

      Total commercial real estate
 
862,113

 
50,285

 
20,650

 
12,826

 
945,874

Commercial and industrial
 
348,201

 
42,949

 
46,675

 
12,473

 
450,298

Direct financing leases, net
 
29,351

 
1,600

 

 

 
30,951

Consumer and other:
 
 
 
 
 
 
 
 
 
 
Home equity and second mortgages
 
8,271

 
121

 
12

 
8

 
8,412

Other
 
15,714

 

 
11

 
604

 
16,329

      Total consumer and other
 
23,985

 
121

 
23

 
612

 
24,741

Total gross loans and leases receivable
 
$
1,263,650

 
$
94,955

 
$
67,348

 
$
25,911

 
$
1,451,864

Category as a % of total portfolio
 
87.04
%
 
6.54
%
 
4.64
%
 
1.78
%
 
100.00
%

Credit underwriting through a committee process is a key component of the Corporation’s operating philosophy. Commercial lenders have relatively low individual lending authority limits, and thus a significant portion of the Corporation’s new credit extensions require approval from a loan approval committee regardless of the type of loan or lease, asset quality grade of the credit, amount of the credit or the related complexities of each proposal.
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 the Corporation’s 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 and 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. In addition to its nine grade risk rating system, the Corporation groups loans into four loan and related risk categories which determine the level and nature of review by management.
Category I — Loans and leases in this category are performing in accordance with the terms of the contract and generally exhibit no immediate concerns regarding the security and viability of the underlying collateral, financial stability of the borrower, integrity or strength of the borrowers’ management team or the industry in which the borrower operates. The Corporation monitors Category I loans and leases through payment performance, continued maintenance of its personal relationships with such borrowers and continued review of such borrowers’ compliance with the terms of their respective agreements.
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 or 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 considered performing but are monitored frequently by the assigned business development officer and by subcommittees of the Bank’s loan committee.
Category III — Loans and leases in this category are identified by 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 Bank. 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 contractual principal and interest in accordance with the original terms of the contracts relating to the loans and leases in this category, and therefore

16


Category III loans are considered performing with no specific reserves established for this category. Category III loans are monitored by management and the Bank’s loan committee on a monthly basis and the Bank’s board of directors at each of their regularly scheduled meetings.
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 Bank will receive the contractual principal and interest in accordance with the original 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 by management and the Bank’s loan committee on a monthly basis and the Bank’s board of directors at each of their regularly scheduled meetings.
Utilizing regulatory classification terminology, the Corporation identified $39.0 million and $34.3 million of loans and leases as Substandard as of June 30, 2017 and December 31, 2016, respectively. The Corporation identified $6.7 million of loans and leases as Doubtful as of June 30, 2017. No loans and leases were considered Doubtful as of December 31, 2016. Additionally, no loans were considered Special Mention, or Loss as of either June 30, 2017 or December 31, 2016. The population of Substandard loans is a subset of Category III and Category IV loans.
The delinquency aging of the loan and lease portfolio by class of receivable as of June 30, 2017 and December 31, 2016 was as follows:

17


 
 
June 30, 2017
 
 
30-59
Days Past Due
 
60-89
Days Past Due
 
Greater
Than 90 Days Past Due
 
Total Past Due
 
Current
 
Total Loans and Leases
 
 
(Dollars in Thousands)
Accruing loans and leases
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 
 
 
 
 
 
 
 
 
 
 
Owner occupied
 
$

 
$
50

 
$

 
$
50

 
$
175,967

 
$
176,017

Non-owner occupied
 

 

 

 

 
466,881

 
466,881

Land development
 

 

 

 

 
43,487

 
43,487

Construction