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
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
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
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
.
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
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.
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
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
99,162
|
|
|
99,162
|
|
Multi-family
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
124,488
|
|
|
124,488
|
|
1-4 family
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
37,026
|
|
|
37,026
|
|
Commercial and industrial
|
|
974
|
|
|
2,075
|
|
|
—
|
|
|
3,049
|
|
|
417,441
|
|
|
420,490
|
|
Direct financing leases, net
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
29,216
|
|
|
29,216
|
|
Consumer and other:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity and second mortgages
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
7,973
|
|
|
7,973
|
|
Other
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
17,582
|
|
|
17,582
|
|
Total
|
|
$
|
974
|
|
|
$
|
2,125
|
|
|
$
|
—
|
|
|
$
|
3,099
|
|
|
$
|
1,419,223
|
|
|
$
|
1,422,322
|
|
Non-accruing loans and leases
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4,825
|
|
|
$
|
4,825
|
|
|
$
|
2,319
|
|
|
$
|
7,144
|
|
Non-owner occupied
|
|
—
|
|
|
—
|
|
|
1,861
|
|
|
1,861
|
|
|
36
|
|
|
1,897
|
|
Land development
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3,013
|
|
|
3,013
|
|
Construction
|
|
2,872
|
|
|
—
|
|
|
2,481
|
|
|
5,353
|
|
|
—
|
|
|
5,353
|
|
Multi-family
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
1-4 family
|
|
—
|
|
|
548
|
|
|
1,051
|
|
|
1,599
|
|
|
297
|
|
|
1,896
|
|
Commercial and industrial
|
|
—
|
|
|
89
|
|
|
14,156
|
|
|
14,245
|
|
|
3,220
|
|
|
17,465
|
|
Direct financing leases, net
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Consumer and other:
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity and second mortgages
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Other
|
|
—
|
|
|
18
|
|
|
376
|
|
|
394
|
|
|
—
|
|
|
394
|
|
Total
|
|
$
|
2,872
|
|
|
$
|
655
|
|
|
$
|
24,750
|
|
|
$
|
28,277
|
|
|
$
|
8,885
|
|
|
$
|
37,162
|
|
Total loans and leases
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied
|
|
$
|
—
|
|
|
$
|
50
|
|
|
$
|
4,825
|
|
|
$
|
4,875
|
|
|
$
|
178,286
|
|
|
$
|
183,161
|
|
Non-owner occupied
|
|
—
|
|
|
—
|
|
|
1,861
|
|
|
1,861
|
|
|
466,917
|
|
|
468,778
|
|
Land development
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
46,500
|
|
|
46,500
|
|
Construction
|
|
2,872
|
|
|
—
|
|
|
2,481
|
|
|
5,353
|
|
|
99,162
|
|
|
104,515
|
|
Multi-family
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
124,488
|
|
|
124,488
|
|
1-4 family
|
|
—
|
|
|
548
|
|
|
1,051
|
|
|
1,599
|
|
|
37,323
|
|
|
38,922
|
|
Commercial and industrial
|
|
974
|
|
|
2,164
|
|
|
14,156
|
|
|
17,294
|
|
|
420,661
|
|
|
437,955
|
|
Direct financing leases, net
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
29,216
|
|
|
29,216
|
|
Consumer and other:
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity and second mortgages
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
7,973
|
|
|
7,973
|
|
Other
|
|
—
|
|
|
18
|
|
|
376
|
|
|
394
|
|
|
17,582
|
|
|
17,976
|
|
Total
|
|
$
|
3,846
|
|
|
$
|
2,780
|
|
|
$
|
24,750
|
|
|
$
|
31,376
|
|
|
$
|
1,428,108
|
|
|
$
|
1,459,484
|
|
Percent of portfolio
|
|
0.26
|
%
|
|
0.19
|
%
|
|
1.70
|
%
|
|
2.15
|
%
|
|
97.85
|
%
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
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
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
174,236
|
|
|
$
|
174,236
|
|
Non-owner occupied
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
471,549
|
|
|
471,549
|
|
Land development
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
53,198
|
|
|
53,198
|
|
Construction
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
98,288
|
|
|
98,288
|
|
Multi-family
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
92,762
|
|
|
92,762
|
|
1-4 family
|
|
75
|
|
|
—
|
|
|
—
|
|
|
75
|
|
|
43,639
|
|
|
43,714
|
|
Commercial and industrial
|
|
55
|
|
|
468
|
|
|
—
|
|
|
523
|
|
|
437,312
|
|
|
437,835
|
|
Direct financing leases, net
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
30,951
|
|
|
30,951
|
|
Consumer and other:
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity and second mortgages
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
8,412
|
|
|
8,412
|
|
Other
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
15,725
|
|
|
15,725
|
|
Total
|
|
$
|
130
|
|
|
$
|
468
|
|
|
$
|
—
|
|
|
$
|
598
|
|
|
$
|
1,426,072
|
|
|
$
|
1,426,670
|
|
Non-accruing loans and leases
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,183
|
|
|
$
|
1,183
|
|
|
$
|
1,040
|
|
|
$
|
2,223
|
|
Non-owner occupied
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,609
|
|
|
1,609
|
|
Land development
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3,440
|
|
|
3,440
|
|
Construction
|
|
2,482
|
|
|
—
|
|
|
436
|
|
|
2,918
|
|
|
—
|
|
|
2,918
|
|
Multi-family
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
1-4 family
|
|
—
|
|
|
—
|
|
|
1,240
|
|
|
1,240
|
|
|
697
|
|
|
1,937
|
|
Commercial and industrial
|
|
3,345
|
|
|
168
|
|
|
6,740
|
|
|
10,253
|
|
|
2,210
|
|
|
12,463
|
|
Direct financing leases, net
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Consumer and other:
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity and second mortgages
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Other
|
|
186
|
|
|
—
|
|
|
378
|
|
|
564
|
|
|
40
|
|
|
604
|
|
Total
|
|
$
|
6,013
|
|
|
$
|
168
|
|
|
$
|
9,977
|
|
|
$
|
16,158
|
|
|
$
|
9,036
|
|
|
$
|
25,194
|
|
Total loans and leases
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,183
|
|
|
$
|
1,183
|
|
|
$
|
175,276
|
|
|
$
|
176,459
|
|
Non-owner occupied
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
473,158
|
|
|
473,158
|
|
Land development
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
56,638
|
|
|
56,638
|
|
Construction
|
|
2,482
|
|
|
—
|
|
|
436
|
|
|
2,918
|
|
|
98,288
|
|
|
101,206
|
|
Multi-family
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
92,762
|
|
|
92,762
|
|
1-4 family
|
|
75
|
|
|
—
|
|
|
1,240
|
|
|
1,315
|
|
|
44,336
|
|
|
45,651
|
|
Commercial and industrial
|
|
3,400
|
|
|
636
|
|
|
6,740
|
|
|
10,776
|
|
|
439,522
|
|
|
450,298
|
|
Direct financing leases, net
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
30,951
|
|
|
30,951
|
|
Consumer and other:
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity and second mortgages
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
8,412
|
|
|
8,412
|
|
Other
|
|
186
|
|
|
—
|
|
|
378
|
|
|
564
|
|
|
15,765
|
|
|
16,329
|
|
Total
|
|
$
|
6,143
|
|
|
$
|
636
|
|
|
$
|
9,977
|
|
|
$
|
16,756
|
|
|
$
|
1,435,108
|
|
|
$
|
1,451,864
|
|
Percent of portfolio
|
|
0.42
|
%
|
|
0.04
|
%
|
|
0.69
|
%
|
|
1.15
|
%
|
|
98.85
|
%
|
|
100.00
|
%
|
The Corporation’s total impaired assets consisted of the following at
June 30, 2017
and
December 31, 2016
, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
2017
|
|
December 31,
2016
|
|
|
(Dollars in Thousands)
|
Non-accrual loans and leases
|
|
|
|
|
Commercial real estate:
|
|
|
|
|
Commercial real estate — owner occupied
|
|
$
|
7,144
|
|
|
$
|
2,223
|
|
Commercial real estate — non-owner occupied
|
|
1,897
|
|
|
1,609
|
|
Land development
|
|
3,013
|
|
|
3,440
|
|
Construction
|
|
5,353
|
|
|
2,918
|
|
Multi-family
|
|
—
|
|
|
—
|
|
1-4 family
|
|
1,896
|
|
|
1,937
|
|
Total non-accrual commercial real estate
|
|
19,303
|
|
|
12,127
|
|
Commercial and industrial
|
|
17,465
|
|
|
12,463
|
|
Direct financing leases, net
|
|
—
|
|
|
—
|
|
Consumer and other:
|
|
|
|
|
Home equity and second mortgages
|
|
—
|
|
|
—
|
|
Other
|
|
394
|
|
|
604
|
|
Total non-accrual consumer and other loans
|
|
394
|
|
|
604
|
|
Total non-accrual loans and leases
|
|
37,162
|
|
|
25,194
|
|
Foreclosed properties, net
|
|
2,585
|
|
|
1,472
|
|
Total non-performing assets
|
|
39,747
|
|
|
26,666
|
|
Performing troubled debt restructurings
|
|
702
|
|
|
717
|
|
Total impaired assets
|
|
$
|
40,449
|
|
|
$
|
27,383
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
2017
|
|
December 31,
2016
|
Total non-accrual loans and leases to gross loans and leases
|
|
2.55
|
%
|
|
1.74
|
%
|
Total non-performing assets to total gross loans and leases plus foreclosed properties, net
|
|
2.72
|
|
|
1.83
|
|
Total non-performing assets to total assets
|
|
2.25
|
|
|
1.50
|
|
Allowance for loan and lease losses to gross loans and leases
|
|
1.49
|
|
|
1.44
|
|
Allowance for loan and lease losses to non-accrual loans and leases
|
|
58.33
|
|
|
83.00
|
|
As of
June 30, 2017
and
December 31, 2016
,
$12.2 million
and
$12.8 million
of the non-accrual loans and leases were considered troubled debt restructurings, respectively. There were
no
unfunded commitments associated with troubled debt restructured loans and leases as of
June 30, 2017
.
The following table provides the number of loans modified in a troubled debt restructuring and the pre- and post-modification recorded investment by class of receivable as of
June 30, 2017
and
December 31, 2016
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2017
|
|
As of December 31, 2016
|
|
|
Number
of
Loans
|
|
Pre-Modification
Recorded
Investment
|
|
Post-Modification
Recorded
Investment
|
|
Number
of
Loans
|
|
Pre-Modification
Recorded
Investment
|
|
Post-Modification
Recorded
Investment
|
|
|
(Dollars in Thousands)
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate — owner occupied
|
|
3
|
|
$
|
1,065
|
|
|
$
|
900
|
|
|
3
|
|
$
|
1,065
|
|
|
$
|
930
|
|
Commercial real estate — non-owner occupied
|
|
1
|
|
158
|
|
|
36
|
|
|
1
|
|
158
|
|
|
39
|
|
Land development
|
|
1
|
|
5,745
|
|
|
3,013
|
|
|
1
|
|
5,745
|
|
|
3,440
|
|
Construction
|
|
—
|
|
—
|
|
|
—
|
|
|
2
|
|
331
|
|
|
314
|
|
Multi-family
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
1-4 family
|
|
11
|
|
1,287
|
|
|
1,367
|
|
|
11
|
|
1,391
|
|
|
1,393
|
|
Commercial and industrial
|
|
10
|
|
9,420
|
|
|
7,179
|
|
|
10
|
|
8,094
|
|
|
7,058
|
|
Consumer and other:
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity and second mortgage
|
|
1
|
|
37
|
|
|
6
|
|
|
1
|
|
37
|
|
|
8
|
|
Other
|
|
2
|
|
2,094
|
|
|
371
|
|
|
1
|
|
2,076
|
|
|
378
|
|
Total
|
|
29
|
|
$
|
19,806
|
|
|
$
|
12,872
|
|
|
30
|
|
$
|
18,897
|
|
|
$
|
13,560
|
|
All loans and leases modified as a troubled debt restructuring are measured for impairment. The nature and extent of the impairment of restructured loans, including those which have experienced a default, is considered in the determination of an appropriate level of the allowance for loan and lease losses.
As of
June 30, 2017
and
December 31, 2016
, the Corporation’s troubled debt restructurings grouped by type of concession were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2017
|
|
As of December 31, 2016
|
|
|
Number of
Loans
|
|
Recorded Investment
|
|
Number of
Loans
|
|
Recorded Investment
|
|
|
(Dollars in Thousands)
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
Extension of term
|
|
1
|
|
|
$
|
1
|
|
|
1
|
|
|
$
|
8
|
|
Interest rate concession
|
|
1
|
|
|
51
|
|
|
1
|
|
|
52
|
|
Combination of extension of term and interest rate concession
|
|
14
|
|
|
5,265
|
|
|
16
|
|
|
6,056
|
|
Commercial and industrial:
|
|
|
|
|
|
|
|
|
Combination of extension of term and interest rate concession
|
|
10
|
|
|
7,179
|
|
|
10
|
|
|
7,058
|
|
Consumer and other:
|
|
|
|
|
|
|
|
|
Extension of term
|
|
1
|
|
|
353
|
|
|
1
|
|
|
378
|
|
Combination of extension of term and interest rate concession
|
|
2
|
|
|
23
|
|
|
1
|
|
|
8
|
|
Total
|
|
29
|
|
|
$
|
12,872
|
|
|
30
|
|
|
$
|
13,560
|
|
During the three and six months ended
June 30, 2017
,
one
consumer and other and
two
commercial and industrial loans, totaling
$17,000
and
$3.6 million
, respectively, were modified to a troubled debt restructuring.
No
loans were modified to a troubled debt restructuring during the three and six months ended June 30, 2016.
There were
no
loans and leases modified in a troubled debt restructuring during the previous 12 months which subsequently defaulted during the three and six months ended
June 30, 2017
.
The following represents additional information regarding the Corporation’s impaired loans and leases, including performing troubled debt restructurings, by class:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the Six Months Ended June 30, 2017
|
|
|
Recorded
Investment
|
|
Unpaid
Principal
Balance
|
|
Impairment
Reserve
|
|
Average
Recorded
Investment
(1)
|
|
Foregone
Interest
Income
|
|
Interest
Income
Recognized
|
|
Net
Foregone
Interest
Income
|
|
|
(In Thousands)
|
With no impairment reserve recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied
|
|
$
|
6,782
|
|
|
$
|
6,782
|
|
|
$
|
—
|
|
|
$
|
3,954
|
|
|
$
|
302
|
|
|
$
|
—
|
|
|
$
|
302
|
|
Non-owner occupied
|
|
1,897
|
|
|
1,937
|
|
|
—
|
|
|
1,974
|
|
|
68
|
|
|
—
|
|
|
68
|
|
Land development
|
|
3,013
|
|
|
5,683
|
|
|
—
|
|
|
3,363
|
|
|
46
|
|
|
—
|
|
|
46
|
|
Construction
|
|
—
|
|
|
—
|
|
|
—
|
|
|
927
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Multi-family
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2
|
|
|
—
|
|
|
—
|
|
|
—
|
|
1-4 family
|
|
2,524
|
|
|
2,776
|
|
|
—
|
|
|
2,545
|
|
|
43
|
|
|
—
|
|
|
43
|
|
Commercial and industrial
|
|
5,065
|
|
|
9,309
|
|
|
—
|
|
|
7,519
|
|
|
358
|
|
|
—
|
|
|
358
|
|
Direct financing leases, net
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Consumer and other:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity and second mortgages
|
|
6
|
|
|
6
|
|
|
—
|
|
|
7
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Other
|
|
371
|
|
|
1,037
|
|
|
—
|
|
|
424
|
|
|
30
|
|
|
—
|
|
|
30
|
|
Total
|
|
$
|
19,658
|
|
|
$
|
27,530
|
|
|
$
|
—
|
|
|
$
|
20,715
|
|
|
$
|
847
|
|
|
$
|
—
|
|
|
$
|
847
|
|
With impairment reserve recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied
|
|
$
|
422
|
|
|
$
|
422
|
|
|
$
|
29
|
|
|
$
|
429
|
|
|
$
|
13
|
|
|
$
|
—
|
|
|
$
|
13
|
|
Non-owner occupied
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Land development
|
|
—
|
|
|
—
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
—
|
|
Construction
|
|
5,353
|
|
|
5,353
|
|
—
|
|
1,801
|
|
|
3,449
|
|
—
|
|
192
|
|
—
|
|
—
|
|
|
192
|
|
Multi-family
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
1-4 family
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Commercial and industrial
|
|
12,408
|
|
|
12,788
|
|
|
5,733
|
|
|
8,748
|
|
|
310
|
|
|
—
|
|
|
310
|
|
Direct financing leases, net
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Consumer and other:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity and second mortgages
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Other
|
|
23
|
|
|
23
|
|
|
23
|
|
|
4
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
|
$
|
18,206
|
|
|
$
|
18,586
|
|
|
$
|
7,586
|
|
|
$
|
12,630
|
|
|
$
|
515
|
|
|
$
|
—
|
|
|
$
|
515
|
|
Total:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied
|
|
$
|
7,204
|
|
|
$
|
7,204
|
|
|
$
|
29
|
|
|
$
|
4,383
|
|
|
$
|
315
|
|
|
$
|
—
|
|
|
$
|
315
|
|
Non-owner occupied
|
|
1,897
|
|
|
1,937
|
|
|
—
|
|
|
1,974
|
|
|
68
|
|
|
—
|
|
|
68
|
|
Land development
|
|
3,013
|
|
|
5,683
|
|
|
—
|
|
|
3,363
|
|
|
46
|
|
|
—
|
|
|
46
|
|
Construction
|
|
5,353
|
|
|
5,353
|
|
|
1,801
|
|
|
4,376
|
|
|
192
|
|
|
—
|
|
|
192
|
|
Multi-family
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2
|
|
|
—
|
|
|
—
|
|
|
—
|
|
1-4 family
|
|
2,524
|
|
|
2,776
|
|
|
—
|
|
|
2,545
|
|
|
43
|
|
|
—
|
|
|
43
|
|
Commercial and industrial
|
|
17,473
|
|
|
22,097
|
|
|
5,733
|
|
|
16,267
|
|
|
668
|
|
|
—
|
|
|
668
|
|
Direct financing leases, net
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Consumer and other:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity and second mortgages
|
|
6
|
|
|
6
|
|
|
—
|
|
|
7
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Other
|
|
394
|
|
|
1,060
|
|
|
23
|
|
|
428
|
|
|
30
|
|
|
—
|
|
|
30
|
|
Grand total
|
|
$
|
37,864
|
|
|
$
|
46,116
|
|
|
$
|
7,586
|
|
|
$
|
33,345
|
|
|
$
|
1,362
|
|
|
$
|
—
|
|
|
$
|
1,362
|
|
|
|
(1)
|
Average recorded investment is calculated primarily using daily average balances.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the Year Ended December 31, 2016
|
|
|
Recorded
Investment
|
|
Unpaid
Principal
Balance
|
|
Impairment
Reserve
|
|
Average
Recorded
Investment
(1)
|
|
Foregone
Interest
Income
|
|
Interest
Income
Recognized
|
|
Net
Foregone
Interest
Income
|
|
|
(In Thousands)
|
With no impairment reserve recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied
|
|
$
|
1,788
|
|
|
$
|
1,788
|
|
|
$
|
—
|
|
|
$
|
3,577
|
|
|
$
|
328
|
|
|
$
|
118
|
|
|
$
|
210
|
|
Non-owner occupied
|
|
1,609
|
|
|
1,647
|
|
|
—
|
|
|
1,318
|
|
|
91
|
|
|
79
|
|
|
12
|
|
Land development
|
|
3,440
|
|
|
6,111
|
|
|
—
|
|
|
3,898
|
|
|
107
|
|
|
—
|
|
|
107
|
|
Construction
|
|
436
|
|
|
438
|
|
|
—
|
|
|
291
|
|
|
20
|
|
|
—
|
|
|
20
|
|
Multi-family
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
134
|
|
|
(133
|
)
|
1-4 family
|
|
2,379
|
|
|
2,379
|
|
|
—
|
|
|
2,755
|
|
|
125
|
|
|
94
|
|
|
31
|
|
Commercial and industrial
|
|
1,307
|
|
|
1,307
|
|
|
—
|
|
|
709
|
|
|
79
|
|
|
62
|
|
|
17
|
|
Direct financing leases, net
|
|
—
|
|
|
—
|
|
|
—
|
|
|
6
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Consumer and other:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity and second mortgages
|
|
8
|
|
|
8
|
|
|
—
|
|
|
307
|
|
|
16
|
|
|
127
|
|
|
(111
|
)
|
Other
|
|
378
|
|
|
1,044
|
|
|
—
|
|
|
510
|
|
|
71
|
|
|
—
|
|
|
71
|
|
Total
|
|
$
|
11,345
|
|
|
$
|
14,722
|
|
|
$
|
—
|
|
|
$
|
13,371
|
|
|
$
|
838
|
|
|
$
|
614
|
|
|
$
|
224
|
|
With impairment reserve recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied
|
|
$
|
499
|
|
|
$
|
499
|
|
|
$
|
70
|
|
|
$
|
111
|
|
|
$
|
28
|
|
|
$
|
—
|
|
|
$
|
28
|
|
Non-owner occupied
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Land development
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Construction
|
|
2,482
|
|
|
2,482
|
|
|
1,790
|
|
|
834
|
|
|
45
|
|
|
—
|
|
|
45
|
|
Multi-family
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
1-4 family
|
|
193
|
|
|
199
|
|
|
39
|
|
|
203
|
|
|
5
|
|
|
—
|
|
|
5
|
|
Commercial and industrial
|
|
11,166
|
|
|
11,166
|
|
|
3,700
|
|
|
8,448
|
|
|
701
|
|
|
—
|
|
|
701
|
|
Direct financing leases, net
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Consumer and other:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity and second mortgages
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Other
|
|
226
|
|
|
226
|
|
|
—
|
|
|
19
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
|
$
|
14,566
|
|
|
$
|
14,572
|
|
|
$
|
5,599
|
|
|
$
|
9,615
|
|
|
$
|
779
|
|
|
$
|
—
|
|
|
$
|
779
|
|
Total:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied
|
|
$
|
2,287
|
|
|
$
|
2,287
|
|
|
$
|
70
|
|
|
$
|
3,688
|
|
|
$
|
356
|
|
|
$
|
118
|
|
|
$
|
238
|
|
Non-owner occupied
|
|
1,609
|
|
|
1,647
|
|
|
—
|
|
|
1,318
|
|
|
91
|
|
|
79
|
|
|
12
|
|
Land development
|
|
3,440
|
|
|
6,111
|
|
|
—
|
|
|
3,898
|
|
|
107
|
|
|
—
|
|
|
107
|
|
Construction
|
|
2,918
|
|
|
2,920
|
|
|
1,790
|
|
|
1,125
|
|
|
65
|
|
|
—
|
|
|
65
|
|
Multi-family
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
134
|
|
|
(133
|
)
|
1-4 family
|
|
2,572
|
|
|
2,578
|
|
|
39
|
|
|
2,958
|
|
|
130
|
|
|
94
|
|
|
36
|
|
Commercial and industrial
|
|
12,473
|
|
|
12,473
|
|
|
3,700
|
|
|
9,157
|
|
|
780
|
|
|
62
|
|
|
718
|
|
Direct financing leases, net
|
|
—
|
|
|
—
|
|
|
—
|
|
|
6
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Consumer and other:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity and second mortgages
|
|
8
|
|
|
8
|
|
|
—
|
|
|
307
|
|
|
16
|
|
|
127
|
|
|
(111
|
)
|
Other
|
|
604
|
|
|
1,270
|
|
|
—
|
|
|
529
|
|
|
71
|
|
|
—
|
|
|
71
|
|
Grand total
|
|
$
|
25,911
|
|
|
$
|
29,294
|
|
|
$
|
5,599
|
|
|
$
|
22,986
|
|
|
$
|
1,617
|
|
|
$
|
614
|
|
|
$
|
1,003
|
|
|
|
(1)
|
Average recorded investment is calculated primarily using daily average balances.
|
The difference between the recorded investment of loans and leases and the unpaid principal balance of
$8.3 million
and
$3.4 million
as of
June 30, 2017
and
December 31, 2016
, respectively, represents partial charge-offs of loans and leases resulting from losses due to the appraised value of the collateral securing the loans and leases being below the carrying values of the loans and leases. Impaired loans and leases also included
$702,000
and
$717,000
of loans as of
June 30, 2017
and
December 31, 2016
, respectively, that were performing troubled debt restructurings, and although not on non-accrual, were reported as impaired due to the concession in terms. When a loan is placed on non-accrual, interest accrual is discontinued and previously accrued but uncollected interest is deducted from interest income. Cash payments collected on non-accrual loans are first applied to such loan’s principal. Foregone interest represents the interest that was contractually due on the loan but not received or recorded. To the extent the amount of principal on a non-accrual loan is fully collected and additional cash is received, the Corporation will recognize interest income.
To determine the level and composition of the allowance for loan and lease losses, the Corporation categorizes the portfolio into segments with similar risk characteristics. First, the Corporation evaluates loans and leases for potential impairment classification. The Corporation analyzes each loan and lease determined to be impaired on an individual basis to determine a specific reserve based upon the estimated value of the underlying collateral for collateral-dependent loans, or alternatively, the present value of expected cash flows. The Corporation applies historical trends from established risk factors to each category of loans and leases that has not been individually evaluated for the purpose of establishing the general portion of the allowance.
A summary of the activity in the allowance for loan and lease losses by portfolio segment is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the Three Months Ended June 30, 2017
|
|
|
Commercial
Real Estate
|
|
Commercial
and
Industrial
|
|
Consumer
and Other
|
|
Total
|
|
|
(Dollars in Thousands)
|
Beginning balance
|
|
$
|
12,817
|
|
|
$
|
7,943
|
|
|
$
|
906
|
|
|
$
|
21,666
|
|
Charge-offs
|
|
(51
|
)
|
|
(3,706
|
)
|
|
—
|
|
|
(3,757
|
)
|
Recoveries
|
|
46
|
|
|
66
|
|
|
—
|
|
|
112
|
|
Net (charge-offs) recoveries
|
|
$
|
(5
|
)
|
|
$
|
(3,640
|
)
|
|
$
|
—
|
|
|
$
|
(3,645
|
)
|
Provision for credit losses
|
|
(809
|
)
|
|
4,787
|
|
|
(322
|
)
|
|
3,656
|
|
Ending balance, gross
|
|
$
|
12,003
|
|
|
$
|
9,090
|
|
|
$
|
584
|
|
|
$
|
21,677
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the Three Months Ended June 30, 2016
|
|
|
Commercial
Real Estate
|
|
Commercial
and
Industrial
|
|
Consumer
and Other
|
|
Total
|
|
|
(Dollars in Thousands)
|
Beginning balance
|
|
$
|
11,480
|
|
|
$
|
4,488
|
|
|
$
|
716
|
|
|
$
|
16,684
|
|
Charge-offs
|
|
(894
|
)
|
|
(456
|
)
|
|
—
|
|
|
(1,350
|
)
|
Recoveries
|
|
55
|
|
|
2
|
|
|
1
|
|
|
58
|
|
Net (charge-offs) recoveries
|
|
$
|
(839
|
)
|
|
$
|
(454
|
)
|
|
$
|
1
|
|
|
$
|
(1,292
|
)
|
Provision for credit losses
|
|
795
|
|
|
1,983
|
|
|
(16
|
)
|
|
2,762
|
|
Ending balance, gross
|
|
$
|
11,436
|
|
|
$
|
6,017
|
|
|
$
|
701
|
|
|
$
|
18,154
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the Six Months Ended June 30, 2017
|
|
|
Commercial
Real Estate
|
|
Commercial
and
Industrial
|
|
Consumer
and Other
|
|
Total
|
|
|
(Dollars in Thousands)
|
Beginning balance
|
|
$
|
12,384
|
|
|
$
|
7,970
|
|
|
$
|
558
|
|
|
$
|
20,912
|
|
Charge-offs
|
|
(118
|
)
|
|
(3,761
|
)
|
|
(87
|
)
|
|
(3,966
|
)
|
Recoveries
|
|
150
|
|
|
312
|
|
|
41
|
|
|
503
|
|
Net (charge-offs) recoveries
|
|
$
|
32
|
|
|
$
|
(3,449
|
)
|
|
$
|
(46
|
)
|
|
$
|
(3,463
|
)
|
Provision for credit loss
|
|
(413
|
)
|
|
4,569
|
|
|
72
|
|
|
4,228
|
|
Ending balance, gross
|
|
$
|
12,003
|
|
|
$
|
9,090
|
|
|
$
|
584
|
|
|
$
|
21,677
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the Six Months Ended June 30, 2016
|
|
|
Commercial
Real Estate
|
|
Commercial
and
Industrial
|
|
Consumer
and Other
|
|
Total
|
|
|
(Dollars in Thousands)
|
Beginning balance
|
|
$
|
11,220
|
|
|
$
|
4,387
|
|
|
$
|
709
|
|
|
$
|
16,316
|
|
Charge-offs
|
|
(935
|
)
|
|
(652
|
)
|
|
(7
|
)
|
|
(1,594
|
)
|
Recoveries
|
|
139
|
|
|
2
|
|
|
4
|
|
|
145
|
|
Net (charge-offs) recoveries
|
|
$
|
(796
|
)
|
|
$
|
(650
|
)
|
|
$
|
(3
|
)
|
|
$
|
(1,449
|
)
|
Provision for credit loss
|
|
1,012
|
|
|
2,280
|
|
|
(5
|
)
|
|
3,287
|
|
Ending balance, gross
|
|
$
|
11,436
|
|
|
$
|
6,017
|
|
|
$
|
701
|
|
|
$
|
18,154
|
|
The following tables provide information regarding the allowance for loan and lease losses and balances by type of allowance methodology.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2017
|
|
|
Commercial
Real Estate
|
|
Commercial
and
Industrial
|
|
Consumer
and Other
|
|
Total
|
|
|
(Dollars in Thousands)
|
Allowance for loan and lease losses:
|
|
|
|
|
|
|
|
|
Collectively evaluated for impairment
|
|
$
|
10,173
|
|
|
$
|
3,357
|
|
|
$
|
561
|
|
|
$
|
14,091
|
|
Individually evaluated for impairment
|
|
1,830
|
|
|
5,733
|
|
|
23
|
|
|
7,586
|
|
Loans acquired with deteriorated credit quality
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
|
$
|
12,003
|
|
|
$
|
9,090
|
|
|
$
|
584
|
|
|
$
|
21,677
|
|
Loans and lease receivables:
|
|
|
|
|
|
|
|
|
Collectively evaluated for impairment
|
|
$
|
946,374
|
|
|
$
|
449,697
|
|
|
$
|
25,549
|
|
|
$
|
1,421,620
|
|
Individually evaluated for impairment
|
|
18,881
|
|
|
17,467
|
|
|
400
|
|
|
36,748
|
|
Loans acquired with deteriorated credit quality
|
|
1,109
|
|
|
7
|
|
|
—
|
|
|
1,116
|
|
Total
|
|
$
|
966,364
|
|
|
$
|
467,171
|
|
|
$
|
25,949
|
|
|
$
|
1,459,484
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2016
|
|
|
Commercial
Real Estate
|
|
Commercial
and
Industrial
|
|
Consumer
and Other
|
|
Total
|
|
|
(Dollars in Thousands)
|
Allowance for loan and lease losses:
|
|
|
|
|
|
|
|
|
Collectively evaluated for impairment
|
|
$
|
10,485
|
|
|
$
|
4,270
|
|
|
$
|
558
|
|
|
$
|
15,313
|
|
Individually evaluated for impairment
|
|
1,899
|
|
|
3,700
|
|
|
—
|
|
|
5,599
|
|
Loans acquired with deteriorated credit quality
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
|
$
|
12,384
|
|
|
$
|
7,970
|
|
|
$
|
558
|
|
|
$
|
20,912
|
|
Loans and lease receivables:
|
|
|
|
|
|
|
|
|
Collectively evaluated for impairment
|
|
$
|
933,048
|
|
|
$
|
468,776
|
|
|
$
|
24,129
|
|
|
$
|
1,425,953
|
|
Individually evaluated for impairment
|
|
11,222
|
|
|
12,452
|
|
|
612
|
|
|
24,286
|
|
Loans acquired with deteriorated credit quality
|
|
1,604
|
|
|
21
|
|
|
—
|
|
|
1,625
|
|
Total
|
|
$
|
945,874
|
|
|
$
|
481,249
|
|
|
$
|
24,741
|
|
|
$
|
1,451,864
|
|
Note 6 — Other Assets
The Corporation is a limited partner in several limited partnership investments. The Corporation is not the general partner, does not have controlling ownership and is not the primary beneficiary in any of these limited partnerships and the limited partnerships have not been consolidated. These investments are accounted for using the equity method of accounting and are evaluated for impairment at the end of each reporting period. For historic rehabilitation tax credits, the Corporation begins to evaluate its investments for impairment at the time the credit is earned, which is typically in the year the project is placed in service, through the end of its five-year compliance period. New market tax credits are also evaluated for impairment beginning at the time the tax credits are earned on the project through the seven-year compliance period.
Historic Rehabilitation Tax Credits
In 2015, the Corporation invested in a development entity through BOC, a wholly-owned subsidiary of FBB, to acquire, rehabilitate and operate a historic building in Madison, Wisconsin. At
June 30, 2017
and
December 31, 2016
the net carrying value of the investment was
$174,000
.
In 2016, the Corporation also invested in a development entity through Mitchell Street, a wholly-owned subsidiary of FBB, to rehabilitate a historic building in Milwaukee, Wisconsin. At
June 30, 2017
and
December 31, 2016
, the net carrying value of the investment was
$563,000
. The aggregate capital contributions to the project will depend upon the final amount of the certified project costs, but are expected to approximate
$5.5 million
. The Corporation is also anticipating the sale of a portion of the state credits associated with the investment to a third party.
No
historic tax credits were received at
June 30, 2017
. The credits are expected to be taken in the fourth quarter of
2017
when the project is placed in service and are subject to a five-year recapture period.
New Market Tax Credits
The Corporation invested in a community development entity (“CDE”) through Rimrock Road, a wholly-owned subsidiary of FBB, to develop and operate a real estate project located in a low-income community. At
June 30, 2017
and
December 31, 2016
, Rimrock had one CDE investment with a net carrying value of
$6.8 million
and
$7.1 million
, respectively. The investment provides federal new market tax credits over a
seven
-year credit allowance period through 2020. The remaining federal new market tax credit to be utilized over a maximum of
seven
years was
$1.6 million
as of
June 30, 2017
. The Corporation’s use of the federal new market tax credit during the
six
months ended
June 30, 2017
and
2016
was
$225,000
and
$188,000
, respectively.
Other Investments
The Corporation had an equity investment in Aldine Capital Fund, LP, a mezzanine fund, of
$918,000
and
$883,000
recorded as of
June 30, 2017
and
December 31, 2016
, respectively. The Corporation’s equity investment in Aldine Capital Fund II, LP, also a mezzanine fund, totaled
$3.6 million
and
$3.1 million
as of
June 30, 2017
and
December 31, 2016
, respectively. The
Corporation’s share of these partnerships’ income included in the unaudited Consolidated Statements of Income for the
six
months ended
June 30, 2017
and
2016
was
$169,000
and
$379,000
, respectively.
The Corporation is the sole owner of
$315,000
of common securities issued by Trust II, a Delaware business trust. The purpose of Trust II was to complete the sale of
$10.0 million
of
10.50%
fixed rate preferred securities. Trust II, a wholly owned subsidiary of the Corporation, is not consolidated into the financial statements of the Corporation. The investment in Trust II of
$315,000
as of
June 30, 2017
and
December 31, 2016
is included in accrued interest receivable and other assets.
A summary of accrued interest receivable and other assets is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
December 31, 2016
|
|
|
(In Thousands)
|
Accrued interest receivable
|
|
$
|
4,428
|
|
|
$
|
4,677
|
|
Net deferred tax asset
|
|
4,166
|
|
|
4,052
|
|
Investment in historic development entities
|
|
737
|
|
|
737
|
|
Investment in a CDE
|
|
6,846
|
|
|
7,106
|
|
Investment in limited partnerships
|
|
4,540
|
|
|
3,963
|
|
Investment in Trust II
|
|
315
|
|
|
315
|
|
Fair value of interest rate swaps
|
|
873
|
|
|
352
|
|
Prepaid expenses
|
|
3,394
|
|
|
3,074
|
|
Other assets
|
|
4,491
|
|
|
4,331
|
|
Total accrued interest receivable and other assets
|
|
$
|
29,790
|
|
|
$
|
28,607
|
|
Note 7 — Deposits
The composition of deposits at
June 30, 2017
and
December 31, 2016
is shown below. Average balances represent year-to-date averages.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
December 31, 2016
|
|
|
Balance
|
|
Average
Balance
|
|
Average Rate
|
|
Balance
|
|
Average
Balance
|
|
Average Rate
|
|
|
(Dollars in Thousands)
|
Non-interest-bearing transaction accounts
|
|
$
|
241,577
|
|
|
$
|
229,894
|
|
|
—
|
%
|
|
$
|
252,638
|
|
|
$
|
246,182
|
|
|
—
|
%
|
Interest-bearing transaction accounts
|
|
231,074
|
|
|
212,118
|
|
|
0.49
|
|
|
183,992
|
|
|
169,571
|
|
|
0.27
|
|
Money market accounts
|
|
593,487
|
|
|
607,882
|
|
|
0.43
|
|
|
627,090
|
|
|
642,784
|
|
|
0.48
|
|
Certificates of deposit
|
|
54,067
|
|
|
54,959
|
|
|
0.96
|
|
|
58,454
|
|
|
65,608
|
|
|
0.90
|
|
Wholesale deposits
|
|
354,393
|
|
|
388,031
|
|
|
1.66
|
|
|
416,681
|
|
|
467,826
|
|
|
1.62
|
|
Total deposits
|
|
$
|
1,474,598
|
|
|
$
|
1,492,884
|
|
|
0.71
|
|
|
$
|
1,538,855
|
|
|
$
|
1,591,971
|
|
|
0.74
|
|
Note 8 — FHLB Advances, Other Borrowings and Junior Subordinated Notes
The composition of borrowed funds at
June 30, 2017
and
December 31, 2016
is shown below. Average balances represent year-to-date averages.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
December 31, 2016
|
|
|
Balance
|
|
Weighted Average
Balance
|
|
Weighted
Average Rate
|
|
Balance
|
|
Weighted Average
Balance
|
|
Weighted
Average Rate
|
|
|
(Dollars in Thousands)
|
Federal funds purchased
|
|
$
|
—
|
|
|
$
|
122
|
|
|
1.16
|
%
|
|
$
|
—
|
|
|
$
|
178
|
|
|
0.92
|
%
|
FHLB advances
|
|
82,000
|
|
|
74,118
|
|
|
1.17
|
|
|
33,578
|
|
|
14,485
|
|
|
0.97
|
|
Line of credit
|
|
10
|
|
|
651
|
|
|
3.60
|
|
|
1,010
|
|
|
2,079
|
|
|
3.26
|
|
Other borrowings
(1)
|
|
675
|
|
|
1,816
|
|
|
16.65
|
|
|
2,590
|
|
|
1,739
|
|
|
7.64
|
|
Subordinated notes payable
|
|
23,710
|
|
|
22,615
|
|
|
7.25
|
|
|
22,498
|
|
|
22,467
|
|
|
7.13
|
|
Junior subordinated notes
|
|
10,012
|
|
|
10,007
|
|
|
11.03
|
|
|
10,004
|
|
|
9,997
|
|
|
11.07
|
|
|
|
$
|
116,407
|
|
|
$
|
109,329
|
|
|
3.61
|
|
|
$
|
69,680
|
|
|
$
|
50,945
|
|
|
6.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term borrowings
|
|
$
|
26,010
|
|
|
|
|
|
|
$
|
20,588
|
|
|
|
|
|
Long-term borrowings
|
|
90,397
|
|
|
|
|
|
|
49,092
|
|
|
|
|
|
|
|
$
|
116,407
|
|
|
|
|
|
|
$
|
69,680
|
|
|
|
|
|
|
|
(1)
|
Weighted average rate of other borrowings reflects the cost of prepaying a secured borrowing during the second quarter of 2017.
|
As of
June 30, 2017
and
December 31, 2016
, the Corporation was in compliance with its debt covenants under its third-party secured senior line of credit. Per the promissory note dated February 19, 2017, the Corporation pays a commitment fee on this line of credit. During both the
six
months ended
June 30, 2017
and
2016
, the Corporation incurred interest expense due to this fee of
$7,000
.
Note 9 — Commitments and Contingencies
In the ordinary course of business, the Corporation sells the guaranteed portion of SBA loans, as well as participation interests in other originated loans, to third parties. The Corporation has a continuing involvement in each of the transferred lending arrangements by way of relationship management and 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. In the event of a loss resulting from default and a determination by the SBA that there is a deficiency in the manner in which the loan was originated, funded or serviced by the Corporation, the SBA may require the Corporation to repurchase the loan, deny its liability under the guaranty, reduce the amount of the guaranty, or, if it has already paid under the guaranty, seek recovery of the principal loss related to the deficiency from the Corporation. The Corporation must comply with applicable SBA regulations in order to maintain the guaranty. In addition, the Corporation retains the option to repurchase the sold guaranteed portion of an SBA loan if the loan defaults.
Management has assessed estimated losses inherent in the outstanding guaranteed portion of SBA loans sold in accordance with ASC 450,
Contingencies
, and determined a recourse reserve based on the probability of future losses for these loans to be
$1.7 million
at
June 30, 2017
, which is reported in accrued interest payable and other liabilities on the unaudited Consolidated Balance Sheets. During the
six
months ended
June 30, 2017
, a
$780,000
recourse provision was recorded.
The summary of the activity in the SBA recourse reserve is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the Six Months Ended June 30, 2017
|
|
As of and for the Year Ended December 31, 2016
|
|
|
(In Thousands)
|
Balance at the beginning of the period
|
|
$
|
1,750
|
|
|
$
|
—
|
|
SBA recourse provision
|
|
780
|
|
|
2,068
|
|
Charge-offs, net
|
|
(795
|
)
|
|
(318
|
)
|
Balance at the end of the period
|
|
$
|
1,735
|
|
|
$
|
1,750
|
|
In the normal course of business, various legal proceedings involving the Corporation are pending. Management, based upon advice from legal counsel, does not anticipate any significant losses as a result of these actions. Management believes that any liability arising from any such proceedings currently existing or threatened will not have a material adverse effect on the Corporation’s financial position, results of operations and cash flows.
Note 10 — Fair Value Disclosures
The Corporation determines the fair values of its financial instruments based on the fair value hierarchy established in ASC Topic 820, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Fair value is defined as the price that would be received in an orderly transaction that is not a forced liquidation or distressed sale at the measurement date and is based on exit prices. Fair value includes assumptions about risk, such as nonperformance risk in liability fair values, and is a market-based measurement, not an entity-specific measurement. The standard describes three levels of inputs that may be used to measure fair value.
Level 1
— Level 1 inputs are unadjusted quoted prices in active markets for identical assets or liabilities that the Corporation has the ability to access at the measurement date.
Level 2
— Level 2 inputs are inputs, other than quoted prices included with Level 1, that are observable for the asset or liability either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3
— Level 3 inputs are supported by little or no market activity and are significant to the fair value of the assets or liabilities.
In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Corporation’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.
Assets and liabilities measured at fair value on a recurring basis, segregated by fair value hierarchy level, are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
|
Fair Value Measurements Using
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
|
(In Thousands)
|
Assets:
|
|
|
|
|
|
|
|
|
Securities available-for-sale:
|
|
|
|
|
|
|
|
|
U.S. Government agency obligations - government-sponsored enterprises
|
|
$
|
—
|
|
|
$
|
5,306
|
|
|
$
|
—
|
|
|
$
|
5,306
|
|
Municipal obligations
|
|
—
|
|
|
7,670
|
|
|
—
|
|
|
7,670
|
|
Asset backed securities
|
|
—
|
|
|
1,009
|
|
|
—
|
|
|
1,009
|
|
Collateralized mortgage obligations - government issued
|
|
—
|
|
|
25,234
|
|
|
—
|
|
|
25,234
|
|
Collateralized mortgage obligations - government-sponsored enterprises
|
|
—
|
|
|
97,615
|
|
|
—
|
|
|
97,615
|
|
Interest rate swaps
|
|
—
|
|
|
873
|
|
|
—
|
|
|
873
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
—
|
|
|
873
|
|
|
—
|
|
|
873
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
Fair Value Measurements Using
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
|
(In Thousands)
|
Assets:
|
|
|
|
|
|
|
|
|
Securities available-for-sale:
|
|
|
|
|
|
|
|
|
U.S. Government agency obligations - government-sponsored enterprises
|
|
$
|
—
|
|
|
$
|
6,295
|
|
|
$
|
—
|
|
|
$
|
6,295
|
|
Municipal obligations
|
|
—
|
|
|
8,156
|
|
|
—
|
|
|
8,156
|
|
Asset backed securities
|
|
—
|
|
|
1,081
|
|
|
—
|
|
|
1,081
|
|
Collateralized mortgage obligations - government issued
|
|
—
|
|
|
31,213
|
|
|
—
|
|
|
31,213
|
|
Collateralized mortgage obligations - government-sponsored enterprises
|
|
—
|
|
|
99,148
|
|
|
—
|
|
|
99,148
|
|
Interest rate swaps
|
|
—
|
|
|
352
|
|
|
—
|
|
|
352
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
—
|
|
|
352
|
|
|
—
|
|
|
352
|
|
For assets and liabilities measured at fair value on a recurring basis, there were
no
transfers between the levels during the
six
months ended
June 30, 2017
or the year ended
December 31, 2016
related to the above measurements.
Assets and liabilities measured at fair value on a non-recurring basis, segregated by fair value hierarchy are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
|
Fair Value Measurements Using
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
|
(In Thousands)
|
Impaired loans
|
|
$
|
—
|
|
|
$
|
10,988
|
|
|
$
|
6,416
|
|
|
$
|
17,404
|
|
Foreclosed properties
|
|
—
|
|
|
2,873
|
|
|
—
|
|
|
2,873
|
|
Loan servicing rights
|
|
—
|
|
|
—
|
|
|
1,919
|
|
|
1,919
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
Fair Value Measurements Using
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
|
(In Thousands)
|
Impaired loans
|
|
$
|
—
|
|
|
$
|
12,268
|
|
|
$
|
1,097
|
|
|
$
|
13,365
|
|
Foreclosed properties
|
|
—
|
|
|
1,472
|
|
|
—
|
|
|
1,472
|
|
Loan servicing rights
|
|
—
|
|
|
—
|
|
|
1,906
|
|
|
1,906
|
|
Impaired loans were written down to the fair value of their underlying collateral less costs to sell of
$17.4 million
and
$13.4 million
at
June 30, 2017
and
December 31, 2016
, respectively, through the establishment of specific reserves or by recording charge-offs when the carrying value exceeded the fair value of the underlying collateral of impaired loans. Valuation techniques consistent with the market approach, income approach or cost approach were used to measure fair value and primarily included observable inputs for the individual impaired loans being evaluated such as current appraisals, recent sales of similar assets or other observable market data, and are reflected within Level 2 of the hierarchy. In cases where an input is unobservable, specifically when discounts are applied to appraisal values to adjust such values to current market conditions or to reflect net realizable value, the impaired loan balance is reflected within Level 3 of the hierarchy. The quantification of unobservable inputs for Level 3 impaired loan values range from
15%
-
90%
as of the measurement date of
June 30, 2017
. The weighted average of those unobservable inputs was
21%
. The majority of the impaired loans in the Level 3 category are considered collateral dependent loans or are supported by a SBA guaranty.
Foreclosed properties, upon initial recognition, are remeasured and reported at fair value through a charge-off to the allowance for loan and lease losses, if deemed necessary, based upon the fair value of the foreclosed property. The fair value of a foreclosed property, upon initial recognition, is estimated using a market approach or Level 2 inputs based on observable market data, typically a current appraisal, or Level 3 inputs based upon assumptions specific to the individual property or equipment. Level 3 inputs typically include unobservable inputs such as management applied discounts used to further reduce values to a net realizable value and may be used in situations when observable inputs become stale. Foreclosed property fair value inputs may transition to Level 1 upon receipt of an accepted offer for the sale of the related foreclosed property.
Loan servicing rights represent the asset retained upon sale of the guaranteed portion of certain SBA loans. When SBA loans are sold, servicing rights are initially recorded at fair value with the income statement effect recorded in gains on sales of loans. The servicing rights are subsequently measured using the amortization method, which requires amortization into interest income in proportion to, and over the period of, the estimated future net servicing income of the underlying loans.
The Corporation periodically reviews this portfolio for impairment and engages a third-party valuation firm to assess the fair value of the overall servicing rights portfolio. Loan servicing rights do not trade in an active, open market with readily observable prices. While sales of loan servicing rights do occur, the precise terms and conditions typically are not readily available to allow for a “quoted price for similar assets” comparison. Accordingly, the Corporation utilizes an independent valuation from a third party which uses a discounted cash flow model to estimate the fair value of its loan servicing rights. The valuation model incorporates prepayment assumptions to project loan servicing rights cash flows based on the current interest rate scenario, which is then discounted to estimate an expected fair value of the loan servicing rights. The valuation model considers portfolio characteristics of the underlying serviced portion of the SBA loans and uses the following significant unobservable inputs: (1) constant prepayment rate (“CPR”) assumptions based on the SBA loans sold pools historical CPR as quoted in Bloomberg and (2) a discount rate of 10%. Due to the nature of the valuation inputs, loan servicing rights are classified in Level 3 of the fair value hierarchy.
Fair Value of Financial Instruments
The Corporation is required to disclose estimated fair values for its financial instruments. Fair value estimates, methods and assumptions, consistent with exit price concepts for fair value measurements, are set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
|
Carrying
Amount
|
|
Fair Value
|
|
|
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
|
(In Thousands)
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
63,745
|
|
|
$
|
63,763
|
|
|
$
|
46,515
|
|
|
$
|
17,248
|
|
|
$
|
—
|
|
Securities available-for-sale
|
|
136,834
|
|
|
136,834
|
|
|
—
|
|
|
136,834
|
|
|
—
|
|
Securities held-to-maturity
|
|
37,806
|
|
|
38,152
|
|
|
—
|
|
|
38,152
|
|
|
—
|
|
Loans held for sale
|
|
3,491
|
|
|
3,840
|
|
|
—
|
|
|
3,840
|
|
|
—
|
|
Loans and lease receivables, net
|
|
1,436,498
|
|
|
1,448,491
|
|
|
—
|
|
|
10,988
|
|
|
1,437,503
|
|
Bank-owned life insurance
|
|
39,674
|
|
|
39,674
|
|
|
39,674
|
|
|
—
|
|
|
—
|
|
Federal Home Loan Bank and Federal Reserve Bank stock
|
|
2,815
|
|
|
2,815
|
|
|
—
|
|
|
—
|
|
|
2,815
|
|
Accrued interest receivable
|
|
4,428
|
|
|
4,428
|
|
|
4,428
|
|
|
—
|
|
|
—
|
|
Interest rate swaps
|
|
873
|
|
|
873
|
|
|
—
|
|
|
873
|
|
|
—
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
1,474,598
|
|
|
1,475,442
|
|
|
1,066,143
|
|
|
409,299
|
|
|
—
|
|
Federal Home Loan Bank advances and other borrowings
|
|
106,395
|
|
|
105,885
|
|
|
—
|
|
|
105,885
|
|
|
—
|
|
Junior subordinated notes
|
|
10,012
|
|
|
8,867
|
|
|
—
|
|
|
—
|
|
|
8,867
|
|
Accrued interest payable
|
|
1,735
|
|
|
1,735
|
|
|
1,735
|
|
|
—
|
|
|
—
|
|
Interest rate swaps
|
|
873
|
|
|
873
|
|
|
—
|
|
|
873
|
|
|
—
|
|
Off-balance-sheet items:
|
|
|
|
|
|
|
|
|
|
|
Standby letters of credit
|
|
89
|
|
|
89
|
|
|
—
|
|
|
—
|
|
|
89
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
Carrying
Amount
|
|
Fair Value
|
|
|
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
|
(In Thousands)
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
77,517
|
|
|
$
|
77,517
|
|
|
$
|
55,622
|
|
|
$
|
21,895
|
|
|
$
|
—
|
|
Securities available-for-sale
|
|
145,893
|
|
|
145,893
|
|
|
—
|
|
|
145,893
|
|
|
—
|
|
Securities held-to-maturity
|
|
38,612
|
|
|
38,520
|
|
|
—
|
|
|
38,520
|
|
|
—
|
|
Loans held for sale
|
|
1,111
|
|
|
1,222
|
|
|
—
|
|
|
1,222
|
|
|
—
|
|
Loans and lease receivables, net
|
|
1,429,763
|
|
|
1,447,044
|
|
|
—
|
|
|
12,268
|
|
|
1,434,776
|
|
Bank-owned life insurance
|
|
39,048
|
|
|
39,048
|
|
|
—
|
|
|
39,048
|
|
|
—
|
|
Federal Home Loan Bank and Federal Reserve Bank stock
|
|
2,131
|
|
|
2,131
|
|
|
—
|
|
|
2,131
|
|
|
—
|
|
Accrued interest receivable
|
|
4,677
|
|
|
4,677
|
|
|
4,677
|
|
|
—
|
|
|
—
|
|
Interest rate swaps
|
|
352
|
|
|
352
|
|
|
—
|
|
|
352
|
|
|
—
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
1,538,855
|
|
|
1,539,413
|
|
|
1,063,720
|
|
|
475,693
|
|
|
—
|
|
Federal Home Loan Bank advances and other borrowings
|
|
59,676
|
|
|
60,893
|
|
|
—
|
|
|
60,893
|
|
|
—
|
|
Junior subordinated notes
|
|
10,004
|
|
|
9,072
|
|
|
—
|
|
|
—
|
|
|
9,072
|
|
Accrued interest payable
|
|
1,765
|
|
|
1,765
|
|
|
1,765
|
|
|
—
|
|
|
—
|
|
Interest rate swaps
|
|
352
|
|
|
352
|
|
|
—
|
|
|
352
|
|
|
—
|
|
Off-balance-sheet items:
|
|
|
|
|
|
|
|
|
|
|
Standby letters of credit
|
|
58
|
|
|
58
|
|
|
—
|
|
|
—
|
|
|
58
|
|
Disclosure of fair value information about financial instruments, for which it is practicable to estimate that value, is required whether or not recognized in the unaudited Consolidated Balance Sheets. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instruments. Certain financial instruments and all non-financial instruments are excluded from the disclosure requirements. Accordingly, the aggregate fair value amounts presented do not necessarily represent the underlying value of the Corporation.
Cash and Cash Equivalents:
The carrying amount reported for cash and due from banks and interest-bearing deposits held by the Corporation approximates fair value because of its immediate availability and because it does not present unanticipated credit concerns. As of
June 30, 2017
and
December 31, 2016
, the Corporation held
$14.9 million
and
$20.3 million
, respectively, of commercial paper. The fair value of commercial paper is classified as a Level 2 input due to the lack of available independent pricing sources. The carrying value of brokered certificates of deposit purchased approximates the fair value for these instruments. The fair value of brokered certificates of deposits purchased is based on the discounted value of contractual cash flows using a discount rate reflective of rates currently offered for deposits of similar remaining maturities. As of both
June 30, 2017
and
December 31, 2016
, the Corporation held
$2.3 million
and
$1.6 million
of brokered certificates of deposits, respectively.
Securities:
The fair value measurements of investment securities are determined by a third-party pricing service which considers observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, trade execution data, market consensus prepayment speeds, credit information and the securities’ terms and conditions, among other things. The fair value measurements are subject to independent verification by another pricing source on a quarterly basis to review for reasonableness. Any significant differences in pricing are reviewed with appropriate members of management who have the relevant technical expertise to assess the results. The Corporation has determined that these valuations are classified in Level 2 of the fair value hierarchy. When the independent pricing service does not provide a fair value measurement for a particular security, the Corporation will estimate the fair value based on specific information about each security. Fair values derived in this manner are classified in Level 3 of the fair value hierarchy.
Loans Held for Sale:
Loans held for sale, which consist of the guaranteed portion of SBA loans, are carried at the lower of cost or estimated fair value. The estimated fair value is based on what secondary markets are currently offering for portfolios with similar characteristics.
Loans and Lease Receivables, net:
The fair value estimation process for the loan portfolio uses an exit price concept and reflects discounts that the Corporation believes are consistent with liquidity discounts in the market place. Fair values are estimated for portfolios of loans with similar financial characteristics. The fair value of performing and nonperforming loans is calculated by discounting scheduled and expected cash flows through the estimated maturity using estimated market rates that reflect the credit and interest rate risk inherent in the portfolio of loans and then applying a discount factor based upon the embedded credit risk of the loan and the fair value of collateral securing nonperforming loans when the loan is collateral dependent. The estimate of maturity is based on the Bank’s historical experience with repayments for each loan classification, modified, as required, by an estimate of the effect of current economic and lending conditions. Significant unobservable inputs include, but are not limited to, discounts (investor yield premiums) applied to fair value calculations to further determine the exit price value of a portfolio of loans.
Federal Home Loan Bank and Federal Reserve Bank Stock:
The carrying amount of FHLB and FRB stock equals its fair value because the shares may be redeemed by the FHLB and the FRB at their carrying amount of $100 per share.
Bank-Owned Life Insurance:
The carrying amount of the cash surrender value of life insurance approximates its fair value as the carrying value represents the current settlement amount.
Accrued Interest Receivable and Accrued Interest Payable:
The carrying amounts reported for accrued interest receivable and accrued interest payable approximate fair value because of their immediate availability and because they do not present unanticipated credit concerns.
Deposits:
The fair value of deposits with no stated maturity, such as demand deposits and money market accounts, is equal to the amount payable on demand. The fair value of time deposits is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities. The fair value estimates do not include the intangible value that results from the funding provided by deposit liabilities compared to borrowing funds in the market.
Borrowed Funds:
Market rates currently available to the Corporation and Bank for debt with similar terms and remaining maturities are used to estimate fair value of existing debt.
Interest Rate Swaps:
The carrying amount and fair value of existing derivative financial instruments are based upon independent valuation models, which use widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each derivative contract. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. The Corporation incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Corporation considers the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts and guarantees.
Financial Instruments with Off-Balance-Sheet Risks:
The fair value of the Corporation’s off-balance-sheet instruments is based on quoted market prices and fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the credit standing of the related counterparty. Commitments to extend credit and standby letters of credit are generally not marketable. Furthermore, interest rates on any amounts drawn under such commitments would generally be established at market rates at the time of the draw. Fair value would principally derive from the present value of fees received for those products.
Limitations:
Fair value estimates are made at a discrete point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Corporation’s entire holding of a particular financial instrument. Because no market exists for a significant portion of the Corporation’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
Fair value estimates are based on existing balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and are not considered in the estimates.
Note 11 — Derivative Financial Instruments
The Corporation offers interest rate swap products directly to qualified commercial borrowers. The Corporation economically hedges client derivative transactions by entering into offsetting interest rate swap contracts executed with a third party. Derivative transactions executed as part of this program are not designated as accounting hedge relationships and are marked- to-market through earnings each period. The derivative contracts have mirror-image terms, which results in the positions’ changes in fair value primarily offsetting through earnings each period. The credit risk and risk of non-performance embedded in the fair value calculations is different between the dealer counterparties and the commercial borrowers which may result in a difference in the changes in the fair value of the mirror-image swaps. The Corporation incorporates credit valuation adjustments to appropriately reflect both its own non-performance risk and the counterparty’s risk in the fair value measurements. When evaluating the fair value of its derivative contracts for the effects of non-performance and credit risk, the Corporation considered the impact of netting and any applicable credit enhancements such as collateral postings, thresholds and guarantees.
At
June 30, 2017
, the aggregate amortizing notional value of interest rate swaps with various commercial borrowers was
$51.4 million
. The Corporation receives fixed rates and pays floating rates based upon LIBOR on the swaps with commercial borrowers. These interest rate swaps mature between
August 2018
and
July 2027
. Commercial borrower swaps are completed independently with each borrower and are not subject to master netting arrangements. These commercial borrower swaps were reported on the unaudited Consolidated Balance Sheets as a derivative asset of
$873,000
, included in accrued interest receivable and other assets as of
June 30, 2017
. In the event of default on a commercial borrower interest rate swap by the counterparty, a right of offset exists to allow for the commercial borrower to set off amounts due against the related commercial loan. As of
June 30, 2017
,
no
interest rate swaps were in default and therefore all values for the commercial borrower swaps are recorded on a gross basis on the unaudited Consolidated Balance Sheets.
At
June 30, 2017
, the aggregate amortizing notional value of interest rate swaps with dealer counterparties was also
$51.4 million
. The Corporation pays fixed rates and receives floating rates based upon LIBOR on the swaps with dealer counterparties. These interest rate swaps mature in
August 2018
through
July 2027
. Dealer counterparty swaps are subject to master netting agreements among the contracts within our Bank and were reported on the unaudited Consolidated Balance Sheets as a net derivative liability of
$873,000
. The value of these swaps was included in accrued interest payable and other liabilities as of
June 30, 2017
. The gross amount of dealer counterparty swaps was also
$873,000
as no right of offset existed with the dealer counterparty swaps as of
June 30, 2017
.
The table below provides information about the balance sheet location and fair value of the Corporation’s derivative instruments as of
June 30, 2017
and
December 31, 2016
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Swap Contracts
|
|
|
Asset Derivatives
|
|
Liability Derivatives
|
|
|
Balance Sheet Location
|
|
Fair Value
|
|
Balance Sheet Location
|
|
Fair Value
|
|
|
(In Thousands)
|
Derivatives not designated as hedging instruments
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
Accrued interest receivable and other assets
|
|
$
|
873
|
|
|
Accrued interest payable and other liabilities
|
|
$
|
873
|
|
December 31, 2016
|
|
Accrued interest receivable and other assets
|
|
$
|
352
|
|
|
Accrued interest payable and other liabilities
|
|
$
|
352
|
|
No
derivative instruments held by the Corporation for the
six
months ended
June 30, 2017
were considered hedging instruments. All changes in the fair value of these instruments are recorded in
other non-interest income
. Given the mirror-image terms of the outstanding derivative portfolio, the change in fair value for the
six
months ended
June 30, 2017
and
2016
had an insignificant impact on the unaudited Consolidated Statements of Income.
Note 12 — Regulatory Capital
The Corporation and the Bank are subject to various regulatory capital requirements administered by Federal, State of Wisconsin and State of Kansas banking agencies.
Failure to meet minimum capital requirements can result in certain mandatory, and possibly additional discretionary actions on the part of regulators, that if undertaken, could have a direct material effect on the Bank’s assets, liabilities and certain off-balance-sheet items as calculated under regulatory practices.
The Corporation’s and the Bank’s capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. The Corporation regularly reviews and updates when appropriate its Capital and Liquidity Action Plan (the “Capital Plan”), which is designed to help ensure appropriate capital adequacy, to plan for future capital needs and to ensure that the Corporation serves as a source of financial strength to the Bank. The Corporation’s and the Bank’s Boards of Directors and management teams adhere to the appropriate regulatory guidelines on decisions which affect their respective capital positions, including but not limited to, decisions relating to the payment of dividends and increasing indebtedness.
As a bank holding company, the Corporation’s ability to pay dividends is affected by the policies and enforcement powers of the Board of Governors of the Federal Reserve system (the “Federal Reserve”). Federal Reserve guidance urges financial institutions to strongly consider eliminating, deferring or significantly reducing dividends if: (i) net income available to common shareholders for the past four quarters, net of dividends previously paid during that period, is not sufficient to fully fund the dividend; (ii) the prospective rate of earnings retention is not consistent with the bank holding company’s capital needs and overall current prospective financial condition; or (iii) the bank holding company will not meet, or is in danger of not meeting, its minimum regulatory capital ratios. Management intends, when appropriate under regulatory guidelines, to consult with the Federal Reserve Bank of Chicago and provide it with information on the Corporation’s then-current and prospective earnings and capital position in advance of declaring any cash dividends. As a Wisconsin corporation, the Corporation is subject to the limitations of the Wisconsin Business Corporation Law, which prohibit the Corporation from paying dividends if such payment would: (i) render the Corporation unable to pay its debts as they become due in the usual course of business, or (ii) result in the Corporation’s assets being less than the sum of its total liabilities plus the amount needed to satisfy the preferential rights upon dissolution of any stockholders with preferential rights superior to those stockholders receiving the dividend.
The Bank is also subject to certain legal, regulatory and other restrictions on their ability to pay dividends to the Corporation. As a bank holding company, the payment of dividends by the Bank to the Corporation is one of the sources of funds the Corporation could use to pay dividends, if any, in the future and to make other payments. Future dividend decisions by the Bank and the Corporation will continue to be subject to compliance with various legal, regulatory and other restrictions as defined from time to time.
Qualitative measures established by regulation to ensure capital adequacy require the Corporation and the Bank to maintain minimum amounts and ratios of Total, Common Equity Tier 1 and Tier 1 capital to risk-weighted assets and of Tier 1 capital to adjusted total assets. These risk-based capital requirements presently address credit risk related to both recorded and off-balance-sheet commitments and obligations.
In July 2013, the FRB and the FDIC approved the final rules implementing the Basel Committee on Banking Supervision’s (“BCBS”) capital guidelines for U.S. banks. These rules are applicable to all financial institutions that are subject to minimum capital requirements, including federal and state banks and savings and loan associations, as well as bank and savings and loan holding companies other than “small bank holding companies” (generally non-publicly traded bank holding companies with consolidated assets of less than $1 billion). Under the final rules, minimum requirements increased for both the quantity and quality of capital held by the Corporation. The rules include a new Common Equity Tier 1 capital to risk-weighted assets minimum ratio of 4.5%, raise the minimum ratio of Tier 1 capital to risk-weighted assets from 4.0% to 6.0%, require a minimum ratio of Total Capital to risk-weighted assets of 8.0%, and require a minimum Tier 1 leverage ratio of 4.0%. The rules also permit banking organizations with less than $15 billion in assets to retain, through a one-time election, the past treatment for accumulated other comprehensive income, which did not affect regulatory capital. The Corporation elected to retain this treatment, which reduces the volatility of regulatory capital ratios. A new capital conservation buffer, comprised of Common Equity Tier 1 capital, was also established above the regulatory minimum capital requirements. This capital conservation buffer will be phased in beginning
January 1, 2016
at
0.625%
of risk-weighted assets and will increase each subsequent year by an additional
0.625%
until reaching its final level of
2.5%
on
January 1, 2019
. As of
June 30, 2017
, both the Corporation’s and the Bank’s capital levels remained characterized as well capitalized under the new rules.
The following table summarizes both the Corporation’s and Bank’s capital ratios and the ratios required by their federal regulators at
June 30, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual
|
|
Minimum Required for Capital Adequacy Purposes
|
|
For Capital Adequacy Purposes Plus Capital Conservation Buffer
|
|
Minimum Required to Be Well
Capitalized Under Prompt Corrective Action Requirements
|
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
|
(Dollars in Thousands)
|
As of June 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital
(to risk-weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
209,791
|
|
|
11.91
|
%
|
|
$
|
140,904
|
|
|
8.00
|
%
|
|
162,921
|
|
|
9.250
|
%
|
|
N/A
|
|
|
N/A
|
|
First Business Bank
|
|
207,707
|
|
|
11.83
|
|
|
140,476
|
|
|
8.00
|
|
|
162,426
|
|
|
9.250
|
|
|
$
|
175,596
|
|
|
10.00
|
%
|
Tier 1 capital
(to risk-weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
164,404
|
|
|
9.33
|
%
|
|
$
|
105,678
|
|
|
6.00
|
%
|
|
$
|
127,694
|
|
|
7.250
|
%
|
|
N/A
|
|
|
N/A
|
|
First Business Bank
|
|
186,030
|
|
|
10.59
|
|
|
105,357
|
|
|
6.00
|
|
|
127,307
|
|
|
7.250
|
|
|
$
|
140,476
|
|
|
8.00
|
%
|
Common equity tier 1 capital
(to risk-weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
154,392
|
|
|
8.77
|
%
|
|
$
|
79,259
|
|
|
4.50
|
%
|
|
$
|
101,275
|
|
|
5.750
|
%
|
|
N/A
|
|
|
N/A
|
|
First Business Bank
|
|
186,030
|
|
|
10.59
|
|
|
79,018
|
|
|
4.50
|
|
|
100,967
|
|
|
5.750
|
|
|
$
|
114,137
|
|
|
6.50
|
%
|
Tier 1 leverage capital
(to adjusted assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
164,404
|
|
|
9.28
|
%
|
|
$
|
70,899
|
|
|
4.00
|
%
|
|
$
|
70,899
|
|
|
4.00
|
%
|
|
N/A
|
|
|
N/A
|
|
First Business Bank
|
|
186,030
|
|
|
10.52
|
|
|
70,714
|
|
|
4.00
|
|
|
70,714
|
|
|
4.00
|
|
|
$
|
88,393
|
|
|
5.00
|
%
|
The following table summarizes both the Corporation’s and the Corporation’s legacy bank charters’ ratios and the ratios required by their federal regulators at December 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual
|
|
Minimum Required for Capital Adequacy Purposes
|
|
For Capital Adequacy Purposes Plus Capital Conservation Buffer
|
|
Minimum Required to Be Well
Capitalized Under Prompt Corrective Action Requirements
|
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
|
(Dollars in Thousands)
|
As of December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital
(to risk-weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
204,117
|
|
|
11.74
|
%
|
|
$
|
139,101
|
|
|
8.00
|
%
|
|
$
|
149,968
|
|
|
8.625
|
%
|
|
N/A
|
|
|
N/A
|
|
First Business Bank
|
|
147,811
|
|
|
11.55
|
|
|
102,362
|
|
|
8.00
|
|
|
110,360
|
|
|
8.625
|
|
|
$
|
127,953
|
|
|
10.00
|
%
|
First Business Bank — Milwaukee
|
|
24,347
|
|
|
11.02
|
|
|
17,680
|
|
|
8.00
|
|
|
19,062
|
|
|
8.625
|
|
|
22,101
|
|
|
10.00
|
|
Alterra Bank
|
|
31,699
|
|
|
13.27
|
|
|
19,106
|
|
|
8.00
|
|
|
20,599
|
|
|
8.625
|
|
|
23,882
|
|
|
10.00
|
|
Tier 1 capital
(to risk-weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
160,964
|
|
|
9.26
|
%
|
|
$
|
104,326
|
|
|
6.00
|
%
|
|
$
|
115,193
|
|
|
6.625
|
%
|
|
N/A
|
|
|
N/A
|
|
First Business Bank
|
|
134,208
|
|
|
10.49
|
|
|
76,772
|
|
|
6.00
|
|
|
84,769
|
|
|
6.625
|
|
|
$
|
102,362
|
|
|
8.00
|
%
|
First Business Bank — Milwaukee
|
|
22,323
|
|
|
10.10
|
|
|
13,260
|
|
|
6.00
|
|
|
14,642
|
|
|
6.625
|
|
|
17,680
|
|
|
8.00
|
|
Alterra Bank
|
|
28,685
|
|
|
12.01
|
|
|
14,329
|
|
|
6.00
|
|
|
15,822
|
|
|
6.625
|
|
|
19,106
|
|
|
8.00
|
|
Common equity tier 1 capital
(to risk-weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
150,960
|
|
|
8.68
|
%
|
|
$
|
78,244
|
|
|
4.50
|
%
|
|
$
|
89,111
|
|
|
5.125
|
%
|
|
N/A
|
|
|
N/A
|
|
First Business Bank
|
|
134,208
|
|
|
10.49
|
|
|
57,579
|
|
|
4.50
|
|
|
65,576
|
|
|
5.125
|
|
|
$
|
83,170
|
|
|
6.50
|
%
|
First Business Bank — Milwaukee
|
|
22,323
|
|
|
10.10
|
|
|
9,945
|
|
|
4.50
|
|
|
11,327
|
|
|
5.125
|
|
|
14,365
|
|
|
6.50
|
|
Alterra Bank
|
|
28,685
|
|
|
12.01
|
|
|
10,747
|
|
|
4.50
|
|
|
12,240
|
|
|
5.125
|
|
|
15,524
|
|
|
6.50
|
|
Tier 1 leverage capital
(to adjusted assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
160,964
|
|
|
9.07
|
%
|
|
$
|
70,985
|
|
|
4.00
|
%
|
|
$
|
70,985
|
|
|
4.00
|
%
|
|
N/A
|
|
|
N/A
|
|
First Business Bank
|
|
134,208
|
|
|
10.40
|
|
|
51,600
|
|
|
4.00
|
|
|
51,600
|
|
|
4.00
|
|
|
$
|
64,500
|
|
|
5.00
|
%
|
First Business Bank — Milwaukee
|
|
22,323
|
|
|
9.15
|
|
|
9,758
|
|
|
4.00
|
|
|
9,758
|
|
|
4.00
|
|
|
12,198
|
|
|
5.00
|
|
Alterra Bank
|
|
28,685
|
|
|
10.58
|
|
|
10,842
|
|
|
4.00
|
|
|
10,842
|
|
|
4.00
|
|
|
13,552
|
|
|
5.00
|
|