UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
FORM 10-K
(cid:3)
(cid:1)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2014
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 001-34095
FIRST BUSINESS FINANCIAL SERVICES, INC.
(Exact name of registrant as specified in its charter)
Wisconsin
(State or other jurisdiction of incorporation or organization)
39-1576570
(I.R.S. Employer Identification No.)
401 Charmany Drive, Madison, WI
(Address of principal executive offices)
53719
(Zip Code)
Registrant’s telephone number, including area code: (608) 238-8008
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, $0.01 par value
Common Share Purchase Rights
Name of each exchange on which registered
The NASDAQ Stock Market LLC
The NASDAQ Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes (cid:1) No (cid:3)
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes (cid:1) No (cid:3)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes (cid:3) No
(cid:1)
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.) Yes (cid:3) No
(cid:1)
Indicate by check mark if the disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s
knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. (cid:1)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large
accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer (cid:4)
Accelerated Filer (cid:3)
Non-accelerated filer (cid:4)
(Do not check if a smaller reporting
company)
Smaller Reporting Company (cid:4)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes (cid:1) No (cid:3)
The aggregate market value of the common equity held by non-affiliates computed by reference to the closing price of such common equity, as of the last business day of the
registrant’s most recently completed second fiscal quarter, was approximately $185.5 million .
As of March 3, 2015 , 4,337,476 shares of common stock were outstanding.
Part III – Portions of the Proxy Statement for the Annual Meeting of Shareholders to be held on May 18, 2015 are incorporated by reference into Part III hereof.
DOCUMENTS INCORPORATED BY REFERENCE
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PART I
Item 1. Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Mine Safety Disclosures
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Item 6. Selected Financial Data
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accountant Fees and Services
PART IV
Item 15. Exhibits and Financial Statements Schedules
Signatures
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PART I.
Item 1. Business
General
BUSINESS
First Business Financial Services, Inc. (together with all of its subsidiaries, collectively referred to as “Corporation,” “FBFS,” “we,”
“us,” or “our”) is a registered bank holding company originally incorporated in 1986 under the laws of the State of Wisconsin and engaged in the
commercial banking business through our three wholly-owned bank subsidiaries, First Business Bank (“FBB”), headquartered in Madison,
Wisconsin, First Business Bank-Milwaukee (“FBB-Milwaukee”) headquartered in Brookfield, Wisconsin, and Alterra Bank (“Alterra”),
headquartered in Leawood, Kansas (together with FBB and FBB-Milwaukee, collectively referred to as the “Banks”). All of our operations are
conducted through the Banks and certain subsidiaries of FBB. The Banks operate as business banks focusing on delivering a full line of
commercial banking products, including commercial loans and commercial real estate loans, and services tailored to meet the specific needs of
small- and medium-sized businesses, business owners, executives, professionals and high net worth individuals. The Banks generally target
businesses with annual sales between $2.0 million and $75.0 million. Because of their focus on business banking, the Banks do not utilize an
extensive branch network to attract retail clients and, to supplement their business banking deposit base, the Banks utilize wholesale funding
alternatives to fund a portion of their assets. As of December 31, 2014 , on a consolidated basis, we had total assets of $1.629 billion , total gross
loans and leases of $1.282 billion , total deposits of $1.438 billion and total stockholders’ equity of $137.7 million .
Our Business Lines
Commercial Lending
We strive to meet the specific commercial-lending needs of small- to medium-sized companies in our target market areas of Wisconsin,
Kansas and Missouri, primarily through lines of credit for working capital needs and term loans to businesses with annual sales between
$2.0 million and $75.0 million. Through FBB, we have a strong presence in Madison and its surrounding areas. In 2000, we opened FBB-
Milwaukee to take advantage of the strong commercial base located in Milwaukee and the surrounding communities. In 2006, FBB opened a
loan production office in Appleton to take advantage of the strong commercial environment in Northeast Wisconsin. Since then, FBB opened
additional loan production offices in Oshkosh and Green Bay. In 2014, FBB-Milwaukee opened a loan production office in Kenosha, further
expanding in the southeastern area of Wisconsin. Also in 2014, we acquired Aslin Group, Inc. and its bank subsidiary Alterra to add an
established business focused team serving similar sized businesses in the Kansas City metropolitan area, a new geographic region for us.
Our commercial loans are typically secured by various types of business assets, including inventory, receivables and equipment. We
also originate loans secured by commercial real estate, including non-residential owner-occupied commercial facilities, multi-family housing,
office buildings, retail centers, and, to a lesser extent, commercial real estate construction loans. In very limited cases, we may originate loans on
an unsecured basis. As of December 31, 2014 , our commercial real estate and commercial loans, excluding asset-based lending and equipment
financing, represented approximately 81.2% of our total gross loans and leases receivable.
Asset-Based Financing
First Business Capital Corp. (“FBCC”), a wholly-owned subsidiary of FBB, is focused on asset-based lending to small- to medium-
sized companies. With its sales offices located in several states, FBCC does not limit itself to conducting business in Wisconsin.
FBCC primarily provides revolving lines of credit and term loans for financial and strategic acquisitions (e.g., leveraged or management
buyouts), capital expenditures, working capital to support rapid growth, bank debt refinancing, debt restructuring, corporate turnaround
strategies and debtor-in-possession financing in the course of bankruptcy proceedings or the exit therefrom. As a bank-owned, asset-based lender
with strong underwriting standards, FBCC is positioned to provide cost-effective financing solutions to companies with annual sales between
$2.0 million and $75.0 million who do not have the established stable cash flows necessary to qualify for traditional commercial lending
products. Asset-based lending generally has higher yields than traditional commercial lending. This line of business complements our traditional
commercial loan portfolio and provides us with more diverse income opportunities. As of December 31, 2014 , our asset-based lending business
line represented 12.8% of our total gross loans and leases receivable.
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First Business Factors (“FBF”), a division of FBCC, provides funding to clients by purchasing accounts receivable from them on a full
recourse basis and advances up to 85% of the purchased receivable. FBF provides competitive rates to clients starting up, seeking growth and
needing cash flow support, or who are experiencing financial issues. Factored receivable arrangements typically have contracts of one to two
years. Similar to asset-based lending, factoring generally has higher yields than traditional commercial lending, and complements our traditional
commercial portfolio. The purchase of the accounts receivable on a full recourse basis mitigates our risk. We believe purchasing accounts
receivable from our clients on a full recourse basis is a complimentary line of business to our other credit granting lines of business, and we
believe we will continue to grow this business line in the future. FBF is headquartered in Chicago, Illinois and primarily focuses on businesses in
the Midwest. As of December 31, 2014 , our factored receivable financing business line represented less than 1% of our total gross loans and
leases receivable.
Equipment Financing
First Business Equipment Finance, LLC (“FBEF”), a wholly-owned subsidiary of FBB, delivers a broad range of equipment finance
products, including leases and loans, to address the financing needs of commercial clients in a variety of industries. FBEF’s focus includes
manufacturing equipment, industrial assets, and construction and transportation equipment, in addition to a wide variety of other commercial
equipment. These financings generally range between $1.0 million and $10.0 million with terms of 36 to 84 months. We believe that we will
continue to grow this business line primarily through our existing offices in Wisconsin. As of December 31, 2014 , our equipment financing
business line represented approximately 4.5% of our total gross loans and leases receivable.
Small Business Administration (SBA) Lending
Alterra is an active SBA lender and was designated as an “SBA Preferred Lender” in 2014. Since 2012, Alterra has ranked first among
all SBA lenders in the Kansas City SBA district measured by loan volume according to data published by the SBA.
The SBA guarantees loans originated by lenders to small business borrowers that meet its underwriting guidelines. Specific program
guidelines vary based on the SBA loan program; however, all loans must be underwritten, originated, monitored and serviced according to the
SBA’s Standard Operating Procedures. Generally, the SBA provides a guaranty to the lender ranging from 50% to 85% of principal and interest
as an inducement to the lender to originate the loan.
The majority of the Corporation’s SBA loans are originated using the 7(a) term loan program. This program typically provides a
guaranty of 75% of principal and interest. In the event of default on the loan, the bank can request that the SBA purchase the guaranteed portion
of the loan for an amount equal to outstanding principal plus accrued interest. In addition, the SBA will share on a pro-rata basis in costs of
collection as well as proceeds of liquidation. The Corporation intends to leverage Alterra’s expertise and capacity to package, underwrite,
process, service, and liquidate, if necessary, all SBA loans throughout the Corporation’s other locations.
SBA lending is designed to generate new business opportunities for the Corporation by meeting the needs of clients whose borrowing
needs cannot be met with conventional loans. The Corporation earns income from the note rate of interest, generally a variable rate, and by
gathering deposits from and providing other services to these clients. In addition, Alterra’s SBA strategy, which we intend to implement for the
entire Corporation, generates significant non-interest income from two primary sources. First, Alterra sells the guaranteed portion of its SBA
loans to aggregators who securitize the assets for sale in the secondary market and receives a premium on each loan sold, resulting in the
recognition of a gain in the period of sale. Second, Alterra receives servicing income from the holder of the securitized asset. Whereas past
practices of Alterra have been to sell all guaranteed portions of originated SBA loans, the Corporation’s future practice will include an
evaluation of each loan before designating the loan as held for sale.
Treasury Management Services
The Banks provide comprehensive services for commercial clients to manage their cash and liquidity, including lockbox, accounts
receivable collection services, electronic payment solutions, fraud protection, information reporting, reconciliation and data integration solutions.
The Banks also offer a variety of deposit accounts and balance optimization solutions. As we continue to seek to diversify our income and
increase our non-interest income, we have focused on increasing sales of these services and have emphasized these offerings with new and
existing business clients.
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Trust and Investment Services
FBB, through its First Business Trust & Investments (“FBTI”) division, acts as fiduciary and investment manager for individual and
corporate clients, creating and executing asset allocation strategies tailored to each client’s unique situation. FBTI has full fiduciary powers and
offers trust, estate, financial planning and investment services, acting in a trustee or agent capacity as well as Employee Benefit/Retirement Plan
services. FBTI also provides brokerage and custody-only services, for which it administers and safeguards assets but does not provide
investment advice. At December 31, 2014 , FBTI had $959.7 million of assets under management and administration.
Competition
The Banks encounter strong competition in attracting commercial loan, asset-based lending, factoring, equipment finance, SBA lending
and deposit clients as well as trust and investment clients. Such competition includes banks, savings institutions, mortgage banking companies,
credit unions, finance companies, equipment finance companies, mutual funds, insurance companies, brokerage firms and investment banking
firms. The Banks’ market areas include branches of several commercial banks that are substantially larger in terms of loans and deposits.
Furthermore, credit unions exempt from income taxes operate in the Banks’ market areas and aggressively price their products and services to a
large portion of the market. The Banks also compete with regional and national financial institutions, many of which have greater liquidity,
higher lending limits, greater access to capital, more established market recognition and more resources and collective experience than the
Banks. We believe that the strength of our executive management team, the experience and capabilities of our front-line banking professionals,
the range and quality of the products that we offer and our emphasis on building long-lasting relationships sets us apart from our competitors.
Employees
At December 31, 2014 , we had 231 employees equating to approximately 215 full-time equivalent employees. We believe that our
relationship with our employees is good. At December 31, 2014 , none of our employees were represented by a union or subject to a collective
bargaining agreement.
Our Subsidiaries
First Business Bank
FBB is a state bank chartered in 1909 under the name Kingston State Bank. In 1990, FBB relocated its home office to Madison,
Wisconsin, opened a banking facility in University Research Park, and began focusing on providing high-quality banking services to small- to
medium-sized businesses located in Madison, Wisconsin and the surrounding area. FBB’s business lines include commercial loans, commercial
real estate loans, equipment loans and leases and treasury management services. FBB offers a variety of deposit accounts and personal loans to
business owners, executives, professionals and high net worth individuals. FBB also offers trust and investment services through First Business
Trust & Investments, a division of FBB. FBB has three loan production offices in the Northeast Region of Wisconsin serving Appleton,
Oshkosh, and Green Bay and their surrounding areas.
FBB has four wholly-owned subsidiaries:
• First Business Capital Corp., is an asset-based commercial lending company specializing in providing lines of credit, factored
receivable financing and term loans secured by accounts receivable, inventory, equipment and real estate assets, primarily to
manufacturers and wholesale distribution companies located throughout the country, with a concentration in the Midwest. FBCC
was established in 1995 and has sales offices in several states.
• First Business Equipment Finance, LLC is a commercial equipment finance company offering a full array of finance and leasing
options to commercial clients of which the largest percentage are currently located in Wisconsin. It offers new and replacement
equipment loans and leases, debt restructuring, consolidation, and sale-lease-back transactions through its primary banking
locations in Wisconsin.
• Rimrock Road Investment Fund, LLC (“Rimrock”), formerly known as FBB Real Estate, LLC, is a limited liability company
originally established for the purpose of holding and liquidating real estate and other assets acquired by FBB through foreclosure or
other legal proceedings. In 2014, Rimrock’s purpose was changed to reflect its qualified equity investment in a Madison,
Wisconsin community development project, including the financing and ownership of a property that generates federal new market
tax credits.
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• First Madison Investment Corp. (“FMIC”) is located in and formed under the laws of the state of Nevada, and was organized for
the purpose of managing a portion of FBB’s investment portfolio.
As of December 31, 2014 , FBB had total gross loans and leases of $956.5 million , total deposits of $1.034 billion and total
stockholders’ equity of $119.5 million .
First Business Bank-Milwaukee
FBB-Milwaukee is a state bank chartered in 2000 in Wisconsin. We formed FBB-Milwaukee to focus on commercial banking in the
greater Milwaukee market area. Like FBB, FBB-Milwaukee’s business lines include commercial loans, commercial real estate loans and
treasury management services for similar sized businesses as those served by FBB. FBB-Milwaukee offers a variety of deposit accounts and
personal loans to business owners, executives, professionals and high net worth individuals. FBB-Milwaukee also offers trust and investment
services through a trust service office agreement with FBB. FBB-Milwaukee has one loan production office in Kenosha, Wisconsin and one
wholly-owned subsidiary, FBB-Milwaukee Real Estate, LLC (“FBBMRE”), which is a limited liability company established for the purpose of
holding and liquidating real estate and other assets acquired through foreclosure or other legal proceedings.
As of December 31, 2014 , FBB-Milwaukee had total gross loans of $128.3 million , total deposits of $212.6 million and total
stockholders’ equity of $17.7 million .
Alterra Bank
Alterra is a state bank chartered in 1847 in Kansas. Previously known as 1st Financial Bank, Alterra was recapitalized and rebranded as
a business-focused bank in April 2010, at which time a new management team reduced legacy problem assets, restored profitability and
significantly grew the loan portfolio. We acquired Alterra through the acquisition of its parent, Aslin Group, Inc. on November 1, 2014 (“Alterra
Transaction”) in order to gain an immediate presence in the Kansas City market. Like FBB and FBB-Milwaukee, Alterra’s business lines include
commercial loans, commercial real estate loans and treasury management services for similar sized businesses as those served by FBB and FBB-
Milwaukee. Alterra offers a variety of deposit accounts and personal loans to business owners, executives, professionals and high net worth
individuals. Alterra also offers SBA financing and residential mortgage loans.
As of December 31, 2014 , Alterra had total gross loans of $197.0 million , total deposits of $213.7 million and total stockholders’
equity of $33.4 million .
FBFS Statutory Trust II
In September 2008 , we formed FBFS Statutory Trust II (“Trust II”), a Delaware business trust wholly-owned by FBFS. In 2008 ,
Trust II completed the sale of $10.0 million of 10.5% fixed rate trust preferred securities. Trust II also issued common securities in the amount of
$315,000 to us. Trust II used the proceeds from the offering to purchase $10.3 million of 10.5% junior subordinated notes issued by us. FBFS
has the right to redeem the junior subordinated notes at each interest payment date on or after September 26, 2013 . The preferred securities are
mandatorily redeemable upon the maturity of the junior subordinated notes on September 26, 2038 . FBFS’s ownership interest in Trust II has
not been consolidated into the financial statements.
Corporate Information
Our principal executive offices are located at 401 Charmany Drive, Madison, Wisconsin 53719 and our telephone number is (608) 238-
8008. We maintain an Internet website at www.firstbusiness.com. This Form 10-K and all of our other filings under the Securities Exchange Act
of 1934, as amended (the “Exchange Act”), are available through that website, free of charge, including copies of our proxy statement, annual
reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports, on the date that we
file those materials with, or furnish them to, the Securities and Exchange Commission (“SEC”). These filings are also available to the public on
the internet at the SEC’s website at www.sec.gov. Shareholders may also read and copy any document that we file at the SEC’s public reference
rooms located at 100 F Street, NE, Washington, DC 20549. Shareholders may call the SEC at 1-800-SEC-0300 for further information on the
public reference room.
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Our Market Area
Although certain of our business lines are marketed throughout the Midwest and beyond, our primary market areas lie in Wisconsin,
Kansas and Missouri. Specifically, our three target market areas in Wisconsin consist of Madison and Milwaukee, and their surrounding
communities, and Northeastern Wisconsin, including Appleton, Green Bay and Oshkosh, and their surrounding communities. We serve our
target markets in Kansas and Missouri through our Leawood and Overland Park, Kansas offices which are located in the Kansas City
metropolitan statistical area (“MSA”). Each of our primary markets provides a unique set of economic and demographic characteristics which
provide us with a variety of strategic opportunities. A brief description of each of our primary markets is as follows:
Madison
As the capital of Wisconsin and home of the University of Wisconsin - Madison, our Madison market, specifically Dane County, offers
an appealing economic environment populated by a highly educated workforce (more than 45% of the population of Dane County age 25 or
older holds a bachelor’s degree or higher degree according to the U.S. Census Bureau, as compared to 26% for the State of Wisconsin as a
whole). While the economy of the Madison market is driven in large part by the government and education sectors, there is also a diverse array
of industries outside of these segments, including significant concentration of insurance companies (one of which, American Family Insurance
Group, is a Fortune 500 Company) and agricultural-related industries. Madison is also home to a concentration of research and development
related companies, which benefit from the area’s strong governmental and academic ties, as well as the University of Wisconsin Hospital, which
provides healthcare services to South Central Wisconsin.
According to the U.S. Census Bureau, as of April 1, 2010 (the 2010 Census Date), the Madison MSA, consisting of Dane County,
Columbia County and Iowa County, had a total population of 568,593 and 229,033 total households. Since 2000, the Madison MSA has
experienced population growth of 13%, compared to the State of Wisconsin's population growth rate of 6%. Due to the composition of its
workforce and major economic drivers, the Madison area generally experienced fewer adverse economic effects than many other areas of the
country during the period of challenging economic conditions in recent years. As of April, 2010, the five-year average median household income
level in Dane County - the largest county within the Madison MSA - was $60,519, which compares favorably to the average median household
income levels in the United States and the State of Wisconsin of $51,914 and $51,598, respectively. According to preliminary Bureau of Labor
Statistics data, as of December 2014 , the unadjusted unemployment rate in the Madison MSA was 3.4% compared to the national
unemployment rate of 5.6% and an unemployment rate in the State of Wisconsin of 5.0% . The unemployment rate in the Madison MSA
improved 0.6% from December 2013 , compared to the improvement in the national and Wisconsin averages, which was 0.9% and 0.8% ,
respectively over the same period.
Milwaukee
Our Milwaukee market, the primary commercial and industrial hub for Southeastern Wisconsin, provides a diverse economic base, with
both a highly skilled labor force and significant manufacturing base. The most prominent economic sectors in the Milwaukee market include
manufacturing, financial services, health care, diversified service companies and education. The metropolitan area ranks among the top
manufacturing centers in the United States. The percentage of Milwaukee’s workforce in the manufacturing sector is one of the highest of any
MSA. In addition to this strong manufacturing base, Milwaukee is home to several major hospitals, providing health services to the greater
Southeastern Wisconsin market, several large academic institutions including the University of Wisconsin-Milwaukee and Marquette University,
and a wide variety of small- to medium-size firms with representatives in nearly every industrial classification. The Milwaukee area is also the
home to six Fortune 500 companies, including Johnson Controls, Inc., Harley Davidson, Inc., Kohl’s Corporation, Rockwell Automation, Inc.,
ManPower Group and Northwestern Mutual.
According to the U.S. Census Bureau, as of April 1, 2010 (the 2010 Census Date), the Milwaukee MSA, consisting of Milwaukee
County, Ozaukee County, Washington County, and Waukesha County, had a total population of 1,555,908 and 615,847 total households. Since
2000, the Milwaukee MSA has experienced a population growth of 4%, compared to the State of Wisconsin’s population growth rate of 6%. As
of April, 2010, the five-year average median household income level in Waukesha County - our primary market within the Milwaukee Area -
was $75,064, which compares favorably to the median household income level averages in the United States and the State of Wisconsin of
$51,914 and $51,598, respectively. Despite the period of challenging economic conditions in recent years, the Milwaukee area has begun to
experience improvement in its general economic climate. As of December 2014 , the preliminary unadjusted unemployment rate in the
Milwaukee MSA was 5.2% , compared to the national unemployment rate of 5.6% and an unemployment rate in the State of Wisconsin of
5.0% . The unemployment rate in the Milwaukee MSA improved 1.0% from December 2013 , compared to the improvement in the national and
Wisconsin averages, which was 0.9% and 0.8% , respectively, over the same period.
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Northeastern Wisconsin
The cities of Appleton, Green Bay, and Oshkosh, Wisconsin serve as the primary population centers in our Northeast Wisconsin market
and provide an attractive market to a variety of industries, including transportation, utilities, packaging and diversified services, with the most
significant economic drivers being the manufacturing, packaging and paper goods industries. The most significant individual employers in this
market include Bemis Company, Inc., a packaging company, and Oshkosh Corporation, a specialty truck manufacturer, each of which is a
Fortune 500 company. As the home of the Green Bay Packers football team, tourism is also a meaningful industry in this market.
According to the U.S. Census Bureau, as of April 1, 2010 (the 2010 Census Date), the three major MSAs in our Northeast Wisconsin
market (Appleton, Green Bay and Oshkosh-Neenah) had a total population of 698,901 and total households of 275,674. Since 2000, these MSAs
have experienced a population growth of 9%, compared to the State of Wisconsin’s population growth rate of 6%. As of April, 2010, the five-
year average median household income level in Outagamie County - where our primary loan production office in this region is located - was
$55,914, compared to the median household income level averages in the United States and the State of Wisconsin of $51,914 and $51,598,
respectively. According to the Bureau of Labor Statistics, as of December 2014 , the preliminary unemployment rate in the three major MSAs in
this market ranged from 4.3% to 4.6% , compared to the national unemployment rate of 5.6% and an unemployment rate in the State of
Wisconsin of 5.0% . These unemployment rates improved 0.8% from December 2013 in all three major MSAs in this market, compared to the
improvement in the national and Wisconsin averages, which was 0.9% and 0.8% , respectively, over the same period.
Kansas City
Geographically located in the center of the U.S., the greater Kansas City area enjoys a vibrant and diverse economy. The metropolitan
area includes 18 counties and more than 50 communities in Missouri and Kansas, including a vibrant central business district located in Kansas
City, Missouri and thriving communities on both sides of the state line. The area is known for the diversity of its economic base, with major
employers in manufacturing and distribution, architecture and engineering, technology, telecommunications, financial services and bioscience as
well as local government and higher education. Kansas City is consistently one of the fastest growing major job markets in the Midwest, and
offers lower costs of living than most major metropolitan areas. There are 12 Fortune 1000 companies headquartered in greater Kansas City,
including Sprint, Garmin, H&R Block, and Cerner. In addition, more than 50 Fortune 100 companies have a significant presence in the
community, including Ford and General Motors, both of whom operate assembly plants in greater Kansas City. The area offers a thriving
environment for entrepreneurship and is consistently ranked as one of the best places to start a business. Kansas City is also home to the Ewing
Marion Kauffman Foundation, the largest private foundation in the world dedicated to advancing entrepreneurship.
According to the U.S. Census Bureau, as of April 1, 2010 (the 2010 Census Date,) the Kansas City MSA, consisting of Bates, Caldwell,
Cass, Clay, Clinton, Jackson, Lafayette, Platte and Ray Counties in Missouri and Johnson, Leavenworth, Linn, Miami and Wyandotte Counties
in Kansas, had a total population of 2,035,334 and 970,069 households. Since 2000, the Kansas City MSA has experienced population growth of
18%, compared to population growth of 7% in Missouri and 6% in Kansas. As of April, 2010, the five-year average median household income in
the MSA was $68,846 compared to $51,914 for the U.S. and $47,380 and $51,332 for Missouri and Kansas, respectively. Due to its diverse
economy, the Kansas City region generally exhibits less volatility during any economic cycle, and this was true during the recessionary period
beginning in 2008. According to data published by the Bureau of Labor Statistics, the unemployment rate in the Kansas City MSA reached a
peak of 9.6% in January, 2011, and has since declined to pre-recession levels. As of December, 2014, the unemployment rate for the Kansas City
MSA was 5.0%, below the national unemployment of 5.6%.
Executive Officers of the Registrant
The following contains certain information about the executive officers of FBFS. There are no family relationships between any
directors or executive officers of FBFS.
Corey A. Chambas, age 52 , has served as a director of FBFS since July 2002, as Chief Executive Officer since December 2006 and as
President since February 2005. He served as Chief Operating Officer of FBFS from February 2005 to September 2006 and as Executive Vice
President from July 2002 to February 2005. He served as Chief Executive Officer of FBB from July 1999 to September 2006 and as President of
FBB from July 1999 to February 2005. He also currently serves as a director of our subsidiaries FBCC and First Madison Investment Corp. Mr.
Chambas has over 25 years of commercial
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banking experience. Prior to joining FBFS, he was a Vice President of Commercial Lending with M&I Bank, now known as BMO Harris Bank,
in Madison, Wisconsin.
David A.Papritz, age 52, served as Chief Financial Officer from September 23, 2014 through January 30, 2015 when he resigned for
personal reasons. Prior to joining FBFS Mr. Papritz was Group Senior Vice President and Director of Corporate Development and Investor
Relations with Rosemont, Illinois based Taylor Capital Group, Inc. from 2013 until it was acquired by a third-party financial institution in
August 2014. He also previously served as Managing Director in the Financial Institutions Group of Raymond James & Associates' Chicago
office from September 2007 to March 2013 and Group Senior Vice President with Chicago-based LaSalle National Corporation/ABN Amro
North America from June 1987 to January 2007, with responsibilities including mergers and acquisitions, financial analysis, human resources
and management of the retail mortgage origination channel.
James F. Ropella, age 55, has served as Senior Vice President and Chief Financial Officer of FBFS since September 2000. Mr. Ropella
also serves as the Chief Financial Officer of each of the Banks. He also currently serves as a director of our subsidiaries First Madison
Investment Corp. and Alterra. Mr. Ropella has over 30 years of experience in finance and accounting, primarily in the banking industry. Prior to
joining FBFS, Mr. Ropella was Treasurer of a consumer products company. Prior to that, he was Treasurer of Firstar Corporation, now known as
U.S. Bancorp. On December 30, 2014, Mr. Ropella announced his plans to delay his previously announced retirement and assume the role of
interim Chief Accounting Officer and on January 29, 2015 he also agreed to resume his role as Chief Financial Officer due to the resignation of
David R. Papritz who had been named as Chief Financial Officer to succeed Mr. Ropella. In order to ensure a smooth transition, Mr. Ropella
will remain in his position at FBFS as we conduct a thorough search for his replacement. We anticipate establishing a longer-term consulting
arrangement with Mr. Ropella following his retirement.
Michael J. Losenegger, age 57 , has served as Chief Credit Officer of FBFS since May 2011. Mr. Losenegger also serves as the Chief
Credit Officer of the Banks. He also currently serves as a director for our subsidiaries FBCC, FBEF and FBB-Milwaukee. Prior to being
appointed Chief Credit Officer, Mr. Losenegger served as FBFS’s Chief Operating Officer since September 2006. Mr. Losenegger joined FBFS
in 2003 and has held various positions with FBB, including Chief Executive Officer, Chief Operating Officer and Senior Vice President of
Business Development. Mr. Losenegger has over 25 years of experience in commercial lending. Prior to joining FBFS, Mr. Losenegger was
Senior Vice President of Lending at M&I Bank, now known as BMO Harris Bank, in Madison, Wisconsin.
Barbara M. Conley, age 61 , has served as FBFS’s General Counsel since June 2008 and as Senior Vice President/Corporate Secretary
since December 2007. Ms. Conley also serves as General Counsel, Senior Vice President and Corporate Secretary of the Banks. She has also
served as a Director of FBCC since June 2009. Ms. Conley has over 30 years of experience in commercial banking. Directly prior to joining
FBFS in 2007, Ms. Conley was a Senior Vice President in Corporate Banking with Associated Bank. She had been employed at Associated
Bank since May 1976.
Jodi A. Chandler, age 50 , has served as Senior Vice President-Human Resources & Administration of FBFS since January 2010. Prior
to that, she held the position of Senior Vice President-Human Resources for several years. She has been an employee of FBFS for over 20 years.
Mark J. Meloy, age 53, has served as President and Chief Executive Officer of FBB since December 2007. Mr. Meloy joined FBFS in
2000 and has held various positions including Executive Vice President of FBB and President and Chief Executive Officer of FBB-Milwaukee.
He currently serves as CEO of FBEF. He also currently serves as a director of our subsidiaries FBB and FBEF. Mr. Meloy has over 25 years of
commercial lending experience. Prior to joining FBFS, Mr. Meloy was a Vice President and Senior Relationship Manager with Firstar
Bank, NA, Cedar Rapids, Iowa and Milwaukee, Wisconsin, now known as U.S. Bank, working in their financial institutions group with mergers
and acquisition financing.
Joan A. Burke, age 63, has served as President of FBB’s Trust Division since September 2001. Ms. Burke has over 30 years of
experience in providing trust services, investment management, mutual fund management and brokerage services. Prior to joining FBFS,
Ms. Burke was the President, Chief Executive Officer and Chairperson of the Board of Johnson Trust Company and certain of its affiliates.
Charles H. Batson, age 61, has served as the President and Chief Executive Officer of FBCC since January 2006. He also serves as a
director for FBCC. Mr. Batson has over 30 years of experience in asset-based lending. Directly prior to joining FBCC, Mr. Batson served as
Vice President and Business Development Manager for Wells Fargo Business Credit, Inc. since 1990.
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David J. Vetta, age 60, has served as President and Chief Executive Officer of FBB-Milwaukee since January 2007. He also serves as a
director for FBB-Milwaukee. Prior to joining FBB-Milwaukee, Mr. Vetta was Managing Director at JP Morgan Asset Management since 1992
overseeing National Institutional Investment Sales teams and the Regional Private Client Group, while serving as a member of the executive
committee. Mr. Vetta was affiliated with JP Morgan Chase and its predecessor companies in various other roles from 1976 to 1992.
Pamela R. Berneking, age 55, has served as President and Chief Executive Officer of Alterra since April 2010. She also serves as a
director for Alterra. Prior to joining Alterra, Ms. Berneking was Regional President at M&I Bank, now known as BMO Harris Bank, in Kansas
City, Missouri since 2006. Prior to her position with M&I Bank she was employed by Gold Bank in Kansas City Missouri, which was acquired
by M&I Bank, since 2001. Ms. Berneking’s final position at Gold Bank was Regional President, Missouri.
Below is a brief description of certain laws and regulations that relate to us and the Banks. This narrative does not purport to be
complete and is qualified in its entirety by reference to applicable laws and regulations.
SUPERVISION AND REGULATION
General
Financial institutions, their holding companies and their affiliates are extensively regulated under federal and state law. As a result, our
growth and earnings performance may be affected not only by management decisions and general economic conditions, but also by the
requirements of federal and state statutes and by the regulations and policies of various bank regulatory agencies, including the Division of
Banking of the Wisconsin Department of Financial Institutions (“WDFI”), the Board of Governors of the Federal Reserve System (“Federal
Reserve”), the Federal Deposit Insurance Corporation (“FDIC”) and the Bureau of Consumer Financial Protection (“CFPB”). Our acquisition of
Alterra in Leawood, Kansas, a Kansas state member bank, added the Office of State Bank Commissioner of Kansas (“OSBC”) to our list of bank
regulatory agencies. Furthermore, taxation laws administered by the Internal Revenue Service and state taxing authorities, accounting rules
developed by the Financial Accounting Standards Board, securities laws administered by the Securities and Exchange Commission (“SEC”) and
state securities authorities, and anti-money laundering laws enforced by the U.S. Department of the Treasury (“Treasury”) have an impact on our
business. The effect of these statutes, regulations, regulatory policies and accounting rules are significant to our operations and results, and the
nature and extent of future legislative, regulatory or other changes affecting financial institutions are impossible to predict with any certainty.
Federal and state banking laws impose a comprehensive system of supervision, regulation and enforcement on the operations of
financial institutions, their holding companies and affiliates that is intended primarily for the protection of the FDIC-insured deposits and
depositors of banks, rather than shareholders. These federal and state laws, and the regulations of the bank regulatory agencies issued under
them, affect, among other things, the scope of business, the kinds and amounts of investments banks may make, reserve requirements, capital
levels relative to operations, the nature and amount of collateral for loans, the establishment of branches, the ability to merge, consolidate and
acquire, dealings with insiders and affiliates and the payment of dividends.
This supervisory and regulatory framework subjects banks and bank holding companies to regular examination by their respective
regulatory agencies, which results in examination reports and ratings that are not publicly available and that can impact the conduct and growth
of their business. These examinations consider not only compliance with applicable laws and regulations, but also capital levels, asset quality
and risk, management ability and performance, earnings, liquidity, and various other factors. The regulatory agencies generally have broad
discretion to impose restrictions and limitations on the operations of a regulated entity where the agencies determine, among other things, that
such operations are unsafe or unsound, fail to comply with applicable law or are otherwise inconsistent with laws and regulations or with the
supervisory policies of these agencies.
The following is a summary of the material elements of the supervisory and regulatory framework applicable to us and the Banks. It
does not describe all of the statutes, regulations and regulatory policies that apply, nor does it restate all of the requirements of those that are
described. The descriptions are qualified in their entirety by reference to the particular statutory and regulatory provision.
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Financial Regulatory Reform
On July 21, 2010, President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”)
into law. The Dodd-Frank Act represented a sweeping reform of the U.S. supervisory and regulatory framework applicable to financial
institutions and capital markets in the wake of the global financial crisis, certain aspects of which are described below in more detail. In
particular, and among other things, the Dodd-Frank Act: created a Financial Stability Oversight Council as part of a regulatory structure for
identifying emerging systemic risks and improving interagency cooperation; created the CFPB, which is authorized to regulate providers of
consumer credit, savings, payment and other consumer financial products and services; narrowed the scope of federal preemption of state
consumer laws enjoyed by national banks and federal savings associations and expanded the authority of state attorneys general to bring actions
to enforce federal consumer protection legislation; imposed more stringent capital requirements on bank holding companies and subjected
certain activities, including interstate mergers and acquisitions, to heightened capital conditions; with respect to mortgage lending, (i)
significantly expanded requirements applicable to loans secured by 1-4 family residential real property, (ii) imposed strict rules on mortgage
servicing, and (iii) required the originator of a securitized loan, or the sponsor of a securitization, to retain at least 5% of the credit risk of
securitized exposures unless the underlying exposures are qualified residential mortgages or meet certain underwriting standards; repealed the
prohibition on the payment of interest on business checking accounts; restricted the interchange fees payable on debit card transactions for
issuers with $10 billion in assets or greater; in the so-called “Volcker Rule,” subject to numerous exceptions, prohibited depository institutions
and affiliates from certain investments in, and sponsorship of, hedge funds and private equity funds and from engaging in proprietary trading;
provided for enhanced regulation of advisers to private funds and of the derivatives markets; enhanced oversight of credit rating agencies; and
prohibited banking agency requirements tied to credit ratings. These statutory changes shifted the regulatory framework for financial institutions,
impacted the way in which they do business and have the potential to constrain revenues.
Numerous provisions of the Dodd-Frank Act were required to be implemented through rulemaking by the appropriate federal regulatory
agencies. Many of the required regulations have been issued and others have been released for public comment, but are not yet final. Although
the reforms primarily targeted systemically important financial service providers, their influence is expected to filter down in varying degrees to
smaller institutions over time. Our management will continue to evaluate the effect of the Dodd-Frank Act; however, in many respects, the
ultimate impact of the Dodd-Frank Act will not be fully known for years, and no current assurance may be given that the Dodd-Frank Act, or
any other new legislative changes, will not have a negative impact on the results of operations and financial condition of FBFS and the Banks.
The Increasing Regulatory Emphasis on Capital
Regulatory capital represents the net assets of a financial institution available to absorb losses. Because of the risks attendant to their
business, depository institutions are generally required to hold more capital than other businesses, which directly affects earnings capabilities.
While capital has historically been one of the key measures of the financial health of both bank holding companies and banks, its role became
fundamentally more important in the wake of the global financial crisis, as the banking regulators recognized that the amount and quality of
capital held by banks prior to the crisis was insufficient to absorb losses during periods of severe stress. Certain provisions of the Dodd-Frank
Act and Basel III, discussed below, establish strengthened capital standards for banks and bank holding companies, require more capital to be
held in the form of common stock and disallow certain funds from being included in capital determinations. Once fully implemented, these
standards will represent regulatory capital requirements that are meaningfully more stringent than those in place previously.
FBFS and Bank Required Capital Levels. Bank holding companies have historically had to comply with less stringent capital
standards than their bank subsidiaries and have been able to raise capital with hybrid instruments such as trust preferred securities. The Dodd-
Frank Act mandated the Federal Reserve to establish minimum capital levels for bank holding companies on a consolidated basis as stringent as
those required for insured depository institutions. As a consequence, the components of holding company permanent capital known as “Tier 1
Capital” were restricted to those capital instruments that are considered to be Tier 1 Capital for insured depository institutions. A result of this
change is that the proceeds of hybrid instruments, such as trust preferred securities, are being excluded from Tier 1 Capital over a phase-in
period. However, if such securities were issued prior to May 19, 2010 by bank holding companies with less than $15 billion of assets as of
December 31, 2009, they may be retained as Tier I Capital subject to certain restrictions. Because we had assets of less than $15 billion, we are
able to maintain our trust preferred proceeds as Tier 1 Capital but will have to comply with new capital mandates in other respects and will not
be able to raise Tier 1 Capital in the future through the issuance of trust preferred securities.
The minimum capital standards effective for the year ended December 31, 2014 were:
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• A leverage requirement, consisting of a minimum ratio of Tier 1 Capital to total adjusted book assets of 3% for the most highly-rated
banks with a minimum requirement of at least 4% for all others, and
• A risk-based capital requirement, consisting of a minimum ratio of Total Capital to total risk-weighted assets of 8% and a minimum
ratio of Tier 1 Capital to total risk-weighted assets of 4%.
For these purposes, “Tier 1 Capital” consisted primarily of common stock, noncumulative perpetual preferred stock and related surplus
less intangible assets (other than certain loan servicing rights and purchased credit card relationships). “Total Capital” consisted primarily of Tier
1 Capital plus “Tier 2 Capital,” which included other non-permanent capital items, such as certain other debt and equity instruments that do not
qualify as Tier 1 Capital, and a portion of the bank’s allowance for loan and lease losses. Further, risk-weighted assets for the purpose of the
risk-weighted ratio calculations were balance sheet assets and off-balance sheet exposures to which required risk weightings of 0% to 100%
were applied.
The capital standards described above are minimum requirements and were increased beginning January 1, 2015 under Basel III, as
discussed below. Bank regulatory agencies uniformly encourage banks and bank holding companies to be “well-capitalized” and, to that end,
federal law and regulations provide various incentives for banking organizations to maintain regulatory capital at levels in excess of minimum
regulatory requirements. For example, a banking organization that is “well-capitalized” may: (i) qualify for exemptions from prior notice or
application requirements otherwise applicable to certain types of activities; (ii) qualify for expedited processing of other required notices or
applications; and (iii) accept, roll-over or renew brokered deposits. Under the capital regulations of the FDIC and Federal Reserve, in order to be
“well-capitalized,” a banking organization, for the year ended December 31, 2014, must have maintained:
• A leverage ratio of Tier 1 Capital to total assets of 5% or greater,
• A ratio of Tier 1 Capital to total risk-weighted assets of 6% or greater, and
• A ratio of Total Capital to total risk-weighted assets of 10% or greater.
The FDIC and Federal Reserve guidelines also provide that banks and bank holding companies experiencing internal growth or making
acquisitions would be expected to maintain capital positions substantially above the minimum supervisory levels without significant reliance on
intangible assets. Furthermore, the guidelines indicate that the agencies will continue to consider a “tangible Tier 1 leverage ratio” (deducting all
intangibles) in evaluating proposals for expansion or to engage in new activities.
Higher capital levels could also be required if warranted by the particular circumstances or risk profile of individual banking
organizations. For example, the Federal Reserve’s capital guidelines contemplate that additional capital may be required to take adequate
account of, among other things, interest rate risk, or the risks posed by concentrations of credit, nontraditional activities or securities trading
activities. Further, any banking organization experiencing or anticipating significant growth would be expected to maintain capital ratios,
including tangible capital positions ( i.e. , Tier 1 Capital less all intangible assets), well above the minimum levels.
Prompt Corrective Action . A banking organization’s capital plays an important role in connection with regulatory enforcement as well.
Federal law provides the federal banking regulators with broad power to take prompt corrective action to resolve the problems of
undercapitalized institutions. The extent of the regulators’ powers depends on whether the institution in question is “adequately capitalized,”
“undercapitalized,” “significantly undercapitalized” or “critically undercapitalized,” in each case as defined by regulation. Depending upon the
capital category to which an institution is assigned, the regulators’ corrective powers include: (i) requiring the institution to submit a capital
restoration plan; (ii) limiting the institution’s asset growth and restricting its activities; (iii) requiring the institution to issue additional capital
stock (including additional voting stock) or to sell itself; (iv) restricting transactions between the institution and its affiliates; (v) restricting the
interest rate that the institution may pay on deposits; (vi) ordering a new election of directors of the institution; (vii) requiring that senior
executive officers or directors be dismissed; (viii) prohibiting the institution from accepting deposits from correspondent banks; (ix) requiring
the institution to divest certain subsidiaries; (x) prohibiting the payment of principal or interest on subordinated debt; and (xi) ultimately,
appointing a receiver for the institution.
As of December 31, 2014: (i) none of the Banks were subject to a directive from its regulatory agencies to increase capital; and (ii) the
Banks were each “well-capitalized,” as defined by FDIC and Federal Reserve regulations. As of December 31, 2014, FBFS had regulatory
capital in excess of the Federal Reserve’s requirements and met the Dodd-Frank Act requirements.
The Basel International Capital Accords. The current risk-based capital guidelines described above, which apply to the Banks and are
being phased in for FBFS, are based upon the 1988 capital accord known as “Basel I” adopted by the international Basel Committee on Banking
Supervision, a committee of central banks and bank supervisors, as implemented by
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the U.S. federal banking regulators on an interagency basis. In 2008, the banking agencies collaboratively began to phase-in capital standards
based on a second capital accord, referred to as “Basel II,” for large or “core” international banks (generally defined for U.S. purposes as having
total assets of $250 billion or more, or consolidated foreign exposures of $10 billion or more). Basel II emphasized internal assessment of credit,
market and operational risk, as well as supervisory assessment and market discipline in determining minimum capital requirements.
On September 12, 2010, the Group of Governors and Heads of Supervision, the oversight body of the Basel Committee on Banking
Supervision, announced agreement on a strengthened set of capital requirements for banking organizations around the world, known as Basel III,
to address deficiencies recognized in connection with the global financial crisis. Basel III was intended to be effective globally on January 1,
2013, with phase-in of certain elements continuing until January 1, 2019, and it is currently effective in many countries.
U.S. Implementation of Basel III. In July of 2013, the U.S. federal banking agencies approved the implementation of the Basel III
regulatory capital reforms in pertinent part, and, at the same time, promulgated rules effecting certain changes required by the Dodd-Frank Act
(the “Basel III Rule”). In contrast to capital requirements previously, which were in the form of guidelines, Basel III was released in the form of
regulations by each of the federal regulatory agencies. The Basel III Rule is 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 to bank and savings and loan holding
companies other than “small bank holding companies” (generally bank holding companies with consolidated assets of less than $1 billion).
The Basel III Rule not only increased most of the required minimum capital ratios as of January 1, 2015, but it introduced the concept
of “Common Equity Tier 1 Capital,” which consists primarily of common stock, related surplus (net of Treasury stock), retained earnings, and
Common Equity Tier 1 minority interests, subject to certain regulatory adjustments. The Basel III Rule also established more stringent criteria
for instruments to be considered “Additional Tier 1 Capital” (Tier 1 Capital in addition to Common Equity) and Tier 2 Capital. A number of
instruments that qualified as Tier 1 Capital will not qualify, or their qualifications will change. For example, cumulative preferred stock and
certain hybrid capital instruments, including trust preferred securities, will no longer qualify as Tier 1 Capital of any kind, with the exception,
subject to certain restrictions, of such instruments issued before May 10, 2010, by bank holding companies with total consolidated assets of less
than $15 billion as of December 31, 2009. For those institutions, trust preferred securities and other nonqualifying capital instruments currently
included in consolidated Tier 1 Capital were permanently grandfathered under the Basel III Rule, subject to certain restrictions. Noncumulative
perpetual preferred stock, which formerly qualified as simple Tier 1 Capital, will not qualify as Common Equity Tier 1 Capital, but will instead
qualify as Additional Tier 1 Capital. The Basel III Rule also constrained the inclusion of minority interests, mortgage-servicing assets, and
deferred tax assets in capital and requires deductions from Common Equity Tier 1 Capital in the event that such assets exceed a certain
percentage of a banking institution’s Common Equity Tier 1 Capital.
As of January 1, 2015, the Basel III Rule requires:
• A new minimum ratio of Common Equity Tier 1 Capital to risk-weighted assets of 4.5%;
• An increase in the minimum required amount of Tier 1 Capital to 6% of risk-weighted assets;
• A continuation of the current minimum required amount of Total Capital (Tier 1 plus Tier 2) at 8% of risk-weighted assets; and
• A minimum leverage ratio of Tier 1 Capital to total assets equal to 4% in all circumstances.
The Basel III Rule maintained the general structure of the prompt corrective action framework, while incorporating the increased
requirements and adding the Common Equity Tier 1 Capital ratio. In order to be “well-capitalized” under the new regime, a depository
institution must maintain a Common Equity Tier 1 Capital ratio of 6.5% or more; a Tier 1 Capital ratio of 8% or more; a Total Capital ratio of
10% or more; and a leverage ratio of 5% or more.
In addition, institutions that seek the freedom to make capital distributions (including dividends and repurchases of stock) and pay
discretionary bonuses to executive officers without restriction must also maintain 2.5% of risk-weighted assets in Common Equity Tier 1
attributable to a capital conservation buffer to be phased in over three years beginning in 2016. The purpose of the conservation buffer is to
ensure that banking institutions maintain a buffer of capital that can be used to absorb losses during periods of financial and economic stress.
Factoring in the fully phased-in conservation buffer increases the minimum ratios depicted above to 7% for Common Equity Tier 1, 8.5% for
Tier 1 Capital and 10.5% for Total Capital. The leverage ratio is not impacted by the conservation buffer, and a banking institution may be
considered well-capitalized while remaining out of compliance with the capital conservation buffer.
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As discussed above, most of the capital requirements are based on a ratio of specific types of capital to “risk-weighted assets.” Not only
did Basel III change the components and requirements of capital, but, for nearly every class of financial assets, the Basel III Rule requires a more
complex, detailed and calibrated assessment of credit risk and calculation of risk weightings. While Basel III would have changed the risk
weighting for residential mortgage loans based on loan-to-value ratios and certain product and underwriting characteristics, there was concern in
the United States that the proposed methodology for risk weighting residential mortgage exposures and the higher risk weightings for certain
types of mortgage products would increase costs to consumers and reduce their access to mortgage credit. As a result, the Basel III Rule did not
effect this change, and banking institutions will continue to apply a risk weight of 50% or 100% to their exposure from residential mortgages.
Furthermore, there was significant concern noted by the financial industry in connection with the Basel III rulemaking as to the
proposed treatment of accumulated other comprehensive income (“AOCI”). Basel III requires unrealized gains and losses on available-for-sale
securities to flow through to regulatory capital as opposed to the previous treatment, which neutralized such effects. Recognizing the problem for
community banks, the U.S. bank regulatory agencies adopted the Basel III Rule with a one-time election for smaller institutions like FBFS and
the Banks to opt out of including most elements of AOCI in regulatory capital. This opt-out, which must be made in the first quarter of 2015,
would exclude from regulatory capital both unrealized gains and losses on available-for-sale debt securities and accumulated net gains and losses
on cash-flow hedges and amounts attributable to defined benefit post-retirement plans. FBFS and the Banks expect to make this election to avoid
variations in the level of their capital depending on fluctuations in the fair value of their securities portfolio.
Banking institutions (except for large, internationally active financial institutions) became subject to the Basel III Rule on January 1,
2015, and FBFS and the Banks are currently in compliance with the new required ratios. There are separate phase-in/phase-out periods for: (i)
the capital conservation buffer; (ii) regulatory capital adjustments and deductions; (iii) nonqualifying capital instruments; and (iv) changes to the
prompt corrective action rules. The phase-in periods commence on January 1, 2016 and extend until 2019.
FBFS
General. We are a bank holding company registered under the Bank Holding Company Act of 1956, as amended (“BHCA”), and are
subject to regulation, supervision, and examination by the Federal Reserve. We are required to file an annual report with the Federal Reserve and
such other reports as the Federal Reserve may require. In accordance with Federal Reserve policy, and as now codified by the Dodd-Frank Act,
we are legally obligated to act as a source of financial strength to the Banks and to commit resources to support the Banks in circumstances
where we might not otherwise do so. Under the BHCA, we are subject to periodic examination by the Federal Reserve.
Acquisitions, Activities and Change in Control . The primary purpose of a bank holding company is to control and manage banks. The
BHCA generally requires the prior approval of the Federal Reserve for any merger involving a bank holding company or any acquisition by a
bank holding company of another bank or bank holding company. Subject to certain conditions (including deposit concentration limits
established by the BHCA and the Dodd-Frank Act), the Federal Reserve may allow us to acquire banks located in any state of the United States.
In approving interstate acquisitions, the Federal Reserve is required to give effect to applicable state law limitations on the aggregate amount of
deposits that may be held by the acquiring bank holding company and its insured depository institution affiliates in the state in which the target
bank is located (provided that those limits do not discriminate against out-of-state depository institutions or their holding companies) and state
laws that require that the target bank have been in existence for a minimum period of time (not to exceed five years) before being acquired by an
out-of-state bank holding company. Furthermore, in accordance with the Dodd-Frank Act, bank holding companies must be well-capitalized and
well-managed in order to effect interstate mergers or acquisitions. For a discussion of the capital requirements, see “The Increasing Regulatory
Emphasis on Capital” above.
The BHCA limits the amount of our investment in any company that is not a bank and our ability to engage in any business other than
that of banking, managing and controlling banks or furnishing services to banks and their subsidiaries. This limitation is subject to a number of
exceptions. The principal exception allows bank holding companies to engage in, and to own shares of companies engaged in, certain businesses
found by the Federal Reserve prior to November 11, 1999 to be “so closely related to banking. . . as to be a proper incident thereto.” This
authority permits us to engage in a variety of banking-related businesses, including the ownership and operation of a thrift, or any entity engaged
in consumer finance, equipment leasing, the operation of a computer service bureau (including software development) and mortgage banking
and brokerage. The BHCA generally does not place territorial restrictions on the domestic activities of non-bank subsidiaries of bank holding
companies.
Additionally, bank holding companies that meet certain eligibility requirements prescribed by the BHCA and elect to operate as
financial holding companies may engage in, or own shares in companies engaged in, a wider range of non-banking
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activities, including securities and insurance underwriting and sales, merchant banking and any other activity that the Federal Reserve, in
consultation with the Secretary of the Treasury, determines by regulation or order is financial in nature or incidental to any such financial activity
or that the Federal Reserve determines by order to be complementary to any such financial activity and does not pose a substantial risk to the
safety or soundness of depository institutions or the financial system generally. We have not elected to operate as a financial holding company.
Federal law also prohibits any person or company from acquiring “control” of an FDIC-insured depository institution or its holding
company without prior notice to the Banks’ appropriate federal regulator. “Control” is conclusively presumed to exist upon the acquisition of
25% or more of the outstanding voting securities of a bank or bank holding company, but may arise under certain circumstances between 10%
and 24.99% ownership.
Capital Requirements. Bank holding companies are required to maintain capital in accordance with Federal Reserve capital adequacy
requirements, as affected by the Dodd-Frank Act and Basel III. For a discussion of capital requirements, see “The Increasing Regulatory
Emphasis on Capital” above.
Dividend Payments. Our ability to pay dividends to our stockholders may be affected by both general corporate law considerations and
policies of the Federal Reserve applicable to bank holding companies . As a Wisconsin corporation, we are subject to the limitations of the
Wisconsin Business Corporation Law, which prohibit us from paying dividends if such payment would: (i) render us unable to pay our debts as
they become due in the usual course of business, or (ii) result in our assets being less than the sum of our 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. In addition, under the Basel III Rule, institutions that seek the freedom to pay dividends will have to maintain 2.5% in Common Equity
Tier 1 attributable to the capital conservation buffer to be phased in over three years beginning in 2016. See “The Increasing Regulatory
Emphasis on Capital” above.
As a general matter, the Federal Reserve has indicated that the board of directors of a bank holding company should eliminate, defer or
significantly reduce dividends to shareholders if: (i) the company’s net income available to shareholders for the past four quarters, net of
dividends previously paid during that period, is not sufficient to fully fund the dividends; (ii) the prospective rate of earnings retention is
inconsistent with the company’s capital needs and overall current and prospective financial condition; or (iii) the company will not meet, or is in
danger of not meeting, its minimum regulatory capital adequacy ratios. The Federal Reserve also possesses enforcement powers over bank
holding companies and their non-bank subsidiaries to prevent or remedy actions that represent unsafe or unsound practices or violations of
applicable statutes and regulations. Among these powers is the ability to proscribe the payment of dividends by banks and bank holding
companies.
Federal Securities Regulation. Our common stock is registered with the SEC under the Securities Act of 1933, as amended, and the
Securities Exchange Act of 1934, as amended (the “Exchange Act”). Consequently, FBFS is subject to the information, proxy solicitation,
insider trading and other restrictions and requirements of the SEC under the Exchange Act.
Corporate Governance . The Dodd-Frank Act addresses many investor protection, corporate governance and executive compensation
matters that will affect most U.S. publicly traded companies. The Dodd-Frank Act will increase stockholder influence over boards of directors by
requiring companies to give stockholders a non-binding vote on executive compensation and so-called “golden parachute” payments, and
authorizing the SEC to promulgate rules that would allow stockholders to nominate and solicit voters for their own candidates using a
company’s proxy materials. The legislation also directs the Federal Reserve to promulgate rules prohibiting excessive compensation paid to
executives of bank holding companies, regardless of whether such companies are publicly traded.
The Banks
General. The Banks are state-chartered banks, the deposit accounts of which are insured by the FDIC’s Deposit Insurance Fund (“DIF”)
to the maximum extent provided under federal law and FDIC regulations. As Wisconsin-chartered FDIC-insured banks, FBB and FBB-
Milwaukee are subject to the examination, supervision, reporting and enforcement requirements of the WDFI, the chartering authority for
Wisconsin banks, and the FDIC, designated by federal law as the primary federal regulator of insured state banks. FBB and FBB-Milwaukee are
not members of the Federal Reserve System (“non-member banks”). Alterra, acquired November 1, 2014, is subject to examination, supervision,
reporting and enforcement requirements of the OSBC and is a member of the Federal Reserve System, making the Federal Reserve its primary
federal regulator. The Banks are members of the Federal Home Loan Bank System, which provides a central credit facility primarily for member
institutions.
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FBB has total assets of greater than $1 billion, and as a result is subject to further reporting requirements under FDIC rules, specifically
12 C.F.R. Part 363 (“Annual Independent Audits and Reporting Requirements”). Pursuant to these rules, management prepares a report that
contains an assessment by management of the effectiveness of our internal control structure and procedures for financial reporting as of the end
of the fiscal year. FBB is also required to obtain an independent public accountant’s attestation report concerning its internal control structure
over financial reporting that includes the Reports of Condition and Income (a so-called “Call Report”) and/or our FR Y-9C report. In accordance
with FDIC rules, we will satisfy these requirements on behalf of FBB.
Deposit Insurance . As FDIC-insured institutions, the Banks are required to pay deposit insurance premium assessments to the
FDIC. The FDIC has adopted a risk-based assessment system whereby FDIC-insured depository institutions pay insurance premiums at rates
based on their risk classification. An institution’s risk classification is assigned based on its capital levels and the level of supervisory concern
the institution poses to the regulators. For deposit insurance assessment purposes, an insured depository institution is placed in one of four risk
categories each quarter. An institution’s assessment is determined by multiplying its assessment rate by its assessment base. The total base
assessment rates range from 2.5 basis points to 45 basis points. While in the past an insured depository institution’s assessment base was
determined by its deposit base, amendments to the Federal Deposit Insurance Act revised the assessment base so that it is calculated using
average consolidated total assets minus average tangible equity. This change shifted the burden of deposit insurance premiums toward those
large depository institutions that rely on funding sources other than U.S. deposits.
The FDIC has authority to raise or lower assessment rates on insured deposits in order to achieve statutorily required reserve ratios in
the DIF and to impose special additional assessments. In light of the significant increase in depository institution failures in 2008-2010 and the
increase of deposit insurance limits, the DIF incurred substantial losses during recent years. To bolster reserves in the DIF, the Dodd-Frank Act
increased the minimum reserve ratio of the DIF to 1.35% of insured deposits and deleted the statutory cap for the reserve ratio. In December
2010, the FDIC set the designated reserve ratio at 2%, 65 basis points above the statutory minimum. At least semi-annually, the FDIC will
update its loss and income projections for the DIF and, if needed, will increase or decrease the assessment rates, following notice and comment
on proposed rulemaking. As a result, the Banks’ FDIC deposit insurance premiums could increase.
FICO Assessments . In addition to paying basic deposit insurance assessments, insured depository institutions must pay Financing
Corporation (“FICO”) assessments. FICO is a mixed-ownership governmental corporation chartered by the former Federal Home Loan Bank
Board pursuant to the Competitive Equality Banking Act of 1987 to function as a financing vehicle for the recapitalization of the former Federal
Savings and Loan Insurance Corporation. FICO issued 30-year noncallable bonds of approximately $8.1 billion that mature in 2017 through
2019. FICO’s authority to issue bonds ended on December 12, 1991. Since 1996, federal legislation has required that all FDIC-insured
depository institutions pay assessments to cover interest payments on FICO’s outstanding obligations. The FICO assessment rate is adjusted
quarterly and for the fourth quarter of 2014 was approximately 0.620 basis points (62 cents per $100 of assessable deposits).
Supervisory Assessments . All state-chartered banks are required to pay supervisory assessments to the chartering authority to fund
their respective operations. The amount of the assessment is calculated on the basis of total assets. During the year ended December 31, 2014,
FBB and FBB - Milwaukee paid supervisory assessments to the WDFI totaling $47,000 and $9,700, respectively, and Alterra paid $36,000 to the
OSBC.
Capital Requirements. Banks are generally required to maintain capital levels in excess of other businesses. For a discussion of capital
requirements, see “The Increasing Regulatory Emphasis on Capital” above.
Dividend Payments. Under Wisconsin banking law, FBB and FBB-Milwaukee generally may not pay dividends in excess of their
respective undivided profits, and if dividends declared and paid in either of the two immediately preceding years exceeded net income for either
of those two years respectively, they may not declare or pay any dividend in the current year that exceeds year-to-date net income. The current
dividends of any Kansas-chartered bank must be paid from undivided profits after deducting losses, to be ascertained by generally accepted
accounting principles at the time of making such dividend. The directors of Alterra may declare dividends from the undivided profits, but before
the declaration of any dividend Alterra must transfer 25% of its net profits since the last preceding dividend to its surplus fund, until the surplus
fund equals the total capital stock.
The various bank regulatory agencies have authority to prohibit banks under their jurisdiction from engaging in an unsafe or unsound
practice. Under certain circumstances, the payment of a dividend by any of the Banks could be considered an unsafe or unsound practice. In the
event that: (i) the FDIC or the WDFI or OSBC increase minimum required levels of capital; (ii) the total assets of the Bank increases
significantly; (iii) the income of the Bank decreases significantly; or (iv) any
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combination of the foregoing occurs, then the board of directors of the Bank may decide or be required by the FDIC or the WDFI or OSBC to
retain a greater portion of the Bank’s earnings, thereby reducing or eliminating dividends.
The payment of dividends by any financial institution is affected by the requirement to maintain adequate capital pursuant to applicable
capital adequacy guidelines and regulations, and a financial institution generally is prohibited from paying any dividends if, following payment
thereof, the institution would be undercapitalized. In addition, under the Basel III Rule, institutions that seek the freedom to pay dividends will
have to maintain 2.5% in Common Equity Tier 1 attributable to the capital conservation buffer to be phased in over three years beginning in
2016. See “The Increasing Regulatory Emphasis on Capital” above.
Liquidity Requirements. Liquidity is a measure of the ability and ease with which bank assets may be converted to cash. Liquid assets
are those that can be converted to cash quickly if needed to meet financial obligations. To remain viable, financial institutions must have enough
liquid assets to meet their near-term obligations, such as withdrawals by depositors. Because the global financial crisis was in part a liquidity
crisis, Basel III also included a liquidity framework that requires financial institutions to measure their liquidity against specific liquidity tests.
One test, referred to as the Liquidity Coverage Ratio (“LCR”), is designed to ensure that the banking entity has an adequate stock of
unencumbered high-quality liquid assets that can be converted easily and immediately in private markets into cash to meet liquidity needs for a
30-calendar day liquidity stress scenario. The other test, known as the Net Stable Funding Ratio (“NSFR”), is designed to promote more
medium- and long-term funding of the assets and activities of financial institutions over a one-year horizon. These tests provide an incentive for
banks and holding companies to increase their holdings in Treasury securities and other sovereign debt as a component of assets, increase the use
of long-term debt as a funding source and rely on stable funding like core deposits (in lieu of brokered deposits).
In addition to liquidity guidelines already in place, the U.S. bank regulatory agencies implemented the LCR in September 2014, which
requires large financial firms to hold levels of liquid assets sufficient to protect against constraints on their funding during times of financial
turmoil. While the LCR only applies to the largest banking organizations in the country, certain elements are expected to filter down to all
insured depository institutions. FBFS and the Banks are reviewing their liquidity risk management policies in light of the LCR and NSFR.
Insider Transactions. The Banks are subject to certain restrictions imposed by federal law on “covered transactions” between the
Banks and its “affiliates.” We are an affiliate of the Banks for purposes of these restrictions, and covered transactions subject to the restrictions
include extensions of credit to us, investments in our stock or other securities and the acceptance of our stock or other securities as collateral for
loans made by the Banks. The Dodd-Frank Act enhances the requirements for certain transactions with affiliates as of July 21, 2011, including
an expansion of the definition of “covered transactions” and an increase in the amount of time for which collateral requirements regarding
covered transactions must be maintained.
Certain limitations and reporting requirements are also placed on extensions of credit by the Banks to its directors and officers, to our
directors and officers and our subsidiaries, to our principal shareholders and to “related interests” of such directors, officers and principal
shareholders. In addition, federal law and regulations may affect the terms upon which any person who is a director or officer of FBFS or the
Banks, or a principal shareholder of FBFS, may obtain credit from banks with which the Banks maintains a correspondent relationship.
Safety and Soundness Standards/Risk Management. The federal banking agencies have adopted guidelines that establish operational
and managerial standards to promote the safety and soundness of federally insured depository institutions. The guidelines set forth standards for
internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth,
compensation, fees and benefits, asset quality and earnings.
In general, the safety and soundness guidelines prescribe the goals to be achieved in each area, and each institution is responsible for
establishing its own procedures to achieve those goals. If an institution fails to comply with any of the standards set forth in the guidelines, the
financial institution’s primary federal regulator may require the institution to submit a plan for achieving and maintaining compliance. If a
financial institution fails to submit an acceptable compliance plan, or fails in any material respect to implement a compliance plan that has been
accepted by its primary federal regulator, the regulator is required to issue an order directing the institution to cure the deficiency. Until the
deficiency cited in the regulator’s order is cured, the regulator may restrict the financial institution’s rate of growth, require the financial
institution to increase its capital, restrict the rates the institution pays on deposits or require the institution to take any action the regulator deems
appropriate under the circumstances. Noncompliance with the standards established by the safety and soundness guidelines may also constitute
grounds for other enforcement action by the federal bank regulatory agencies, including cease and desist orders and civil money penalty
assessments.
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During the past decade, the bank regulatory agencies have increasingly emphasized the importance of sound risk management processes
and strong internal controls when evaluating the activities of the financial institutions they supervise. Properly managing risks has been
identified as critical to the conduct of safe and sound banking activities and has become even more important as new technologies, product
innovation, and the size and speed of financial transactions have changed the nature of banking markets. The agencies have identified a spectrum
of risks facing a banking institution including, but not limited to, credit, market, liquidity, operational, legal, and reputational risk. In particular,
recent regulatory pronouncements have focused on operational risk, which arises from the potential that inadequate information systems,
operational problems, breaches in internal controls, fraud, or unforeseen catastrophes will result in unexpected losses. New products and
services, third-party risk management and cybersecurity are critical sources of operational risk that financial institutions are expected to address
in the current environment. The Banks are expected to have active board and senior management oversight; adequate policies, procedures, and
limits; adequate risk measurement, monitoring, and management information systems; and comprehensive internal controls.
Branching Authority . The Banks have the authority under Wisconsin and Kansas laws to establish branches anywhere in their home
state, subject to receipt of all required regulatory approvals.
Federal law permits state and national banks to merge with banks in other states subject to: (i) regulatory approval; (ii) federal and state
deposit concentration limits; and (iii) state law limitations requiring the merging banks to have been in existence for a minimum period of time
(not to exceed five years) prior to the merger. The establishment of new interstate branches or the acquisition of individual branches of a bank in
another state (rather than the acquisition of an out-of-state bank in its entirety) has historically been permitted only in those states the laws of
which expressly authorize such expansion. However, the Dodd-Frank Act permits well-capitalized and well-managed banks to establish new
branches across state lines without these impediments.
Transaction Account Reserves. Federal Reserve regulations require insured depository institutions to maintain reserves against their
transaction accounts (primarily NOW and regular checking accounts). For 2015: the first $14.5 million of otherwise reservable balances are
exempt from the reserve requirements; for transaction accounts aggregating more than $14.5 million to $103.6 million, the reserve requirement
is 3% of total transaction accounts; and for net transaction accounts in excess of $103.6 million, the reserve requirement is $2.7 million plus 10%
of the aggregate amount of total transaction accounts in excess of $103.6 million. These reserve requirements are subject to annual adjustment by
the Federal Reserve.
Federal Home Loan Bank System. FBB and FBB-Milwaukee are members of the Federal Home Loan Bank of Chicago and Alterra is
a member of the Federal Home Loan Bank of Topeka (collectively, the “FHLB”), which serve as central credit facilities for their members. The
FHLB is funded primarily from proceeds from the sale of obligations of the FHLB system. They make loans to member banks in the form of
FHLB advances. All advances from the FHLB are required to be fully collateralized as determined by the FHLB.
Community Reinvestment Act Requirements. The Community Reinvestment Act requires each Bank to have a continuing and
affirmative obligation in a safe and sound manner to help meet the credit needs of its entire community, including low- and moderate-income
neighborhoods. Federal regulators regularly assess each Bank’s record of meeting the credit needs of its communities. Applications for
additional acquisitions would be affected by the evaluation of the Banks’ effectiveness in meeting its Community Reinvestment Act
requirements.
Anti-Money Laundering. The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct
Terrorism Act of 2001 (the “Patriot Act”) is designed to deny terrorists and criminals the ability to obtain access to the U.S. financial system and
has significant implications for depository institutions, brokers, dealers and other businesses involved in the transfer of money. The Patriot Act
mandates financial services companies to have policies and procedures with respect to measures designed to address any or all of the following
matters: (i) customer identification programs; (ii) money laundering; (iii) terrorist financing; (iv) identifying and reporting suspicious activities
and currency transactions; (v) currency crimes; and (vi) cooperation between financial institutions and law enforcement authorities.
Concentrations in Commercial Real Estate. Concentration risk exists when financial institutions deploy too many assets to any one
industry or segment. Concentration stemming from commercial real estate is one area of regulatory concern. The interagency Concentrations in
Commercial Real Estate Lending, Sound Risk Management Practices guidance (“CRE Guidance”) provides supervisory criteria, including the
following numerical indicators, to assist bank examiners in identifying banks with potentially significant commercial real estate loan
concentrations that may warrant greater supervisory scrutiny: (i) commercial real estate loans exceeding 300% of capital and increasing 50% or
more in the preceding three years; or (ii) construction and land development loans exceeding 100% of capital. The CRE Guidance does not limit
bank levels of commercial real estate lending activities, but rather guides institutions in developing risk management practices and levels of
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capital that are commensurate with the level and nature of their commercial real estate concentrations. We do not expect the CRE Guidance to
adversely affect our operations or our ability to execute our growth strategy.
Consumer Financial Services
The historical structure of federal consumer protection regulation applicable to all providers of consumer financial products and
services changed significantly on July 21, 2011, when the CFPB commenced operations to supervise and enforce consumer protection laws. The
CFPB has broad rulemaking authority for a wide range of consumer protection laws that apply to all providers of consumer products and
services, including the Banks, as well as the authority to prohibit “unfair, deceptive or abusive” acts and practices. The CFPB has examination
and enforcement authority over providers with more than $10 billion in assets. Banks and savings institutions with $10 billion or less in assets,
like the Banks, will continue to be examined by their applicable bank regulators.
Because abuses in connection with residential mortgages were a significant factor contributing to the financial crisis, many new rules
issued by the CFPB and required by the Dodd-Frank Act address mortgage and mortgage-related products, their underwriting, origination,
servicing and sales. The Dodd-Frank Act significantly expanded underwriting requirements applicable to loans secured by 1-4 family residential
real property and augmented federal law combating predatory lending practices. In addition to numerous disclosure requirements, the Dodd-
Frank Act imposed new standards for mortgage loan originations on all lenders, including banks and savings associations, in an effort to strongly
encourage lenders to verify a borrower’s ability to repay, while also establishing a presumption of compliance for certain “qualified mortgages.”
In addition, the Dodd-Frank Act generally required lenders or securitizers to retain an economic interest in the credit risk relating to loans that
the lender sells, and other asset-backed securities that the securitizer issues, if the loans do not comply with the ability-to-repay standards
described below. The risk retention requirement generally is 5%, but could be increased or decreased by regulation. Due to our limited consumer
mortgage portfolio, we do not currently expect these provisions to have a significant impact on our operations; however, additional compliance
resources will be needed to monitor changes.
Additional Constraints on FBFS and the Banks
Monetary Policy. The monetary policy of the Federal Reserve has a significant effect on the operating results of financial or bank
holding companies and their subsidiaries. Among the tools available to the Federal Reserve to affect the money supply are open market
transactions in U.S. government securities, changes in the discount rate on member bank borrowings and changes in reserve requirements against
member bank deposits. These means are used in varying combinations to influence overall growth and distribution of bank loans, investments
and deposits, and their use may affect interest rates charged on loans or paid on deposits.
The Volcker Rule. In addition to other implications of the Dodd-Frank Act discussed above, the Act amended the BHCA to require the
federal regulatory agencies to adopt rules that prohibit banking entities and their affiliates from engaging in proprietary trading and investing in
and sponsoring certain unregistered investment companies (defined as hedge funds and private equity funds). This statutory provision is
commonly called the “Volcker Rule.” On December 10, 2013, the federal regulatory agencies issued final rules to implement the prohibitions
required by the Volcker Rule. Thereafter, in reaction to industry concern over the adverse impact to community banks of the treatment of certain
collateralized debt instruments in the final rule, the federal regulatory agencies approved an interim final rule to permit financial institutions to
retain interests in collateralized debt obligations backed primarily by trust preferred securities (“TruPS CDOs”) from the investment prohibitions
contained in the final rule. Under the interim final rule, the regulatory agencies permitted the retention of an interest in or sponsorship of covered
funds by banking entities if the following qualifications were met: (i) the TruPS CDO was established, and the interest was issued, before May
19, 2010; (ii) the banking entity reasonably believes that the offering proceeds received by the TruPS CDO were invested primarily in qualifying
TruPS collateral; and (iii) the banking entity's interest in the TruPS CDO was acquired on or before December 10, 2013. This amendment
impacted us favorably as an issuer of TruPS CDOs.
Although the Volcker Rule has significant implications for many large financial institutions, we do not currently anticipate that it will
have a material effect on our operations or on those of the Banks. We may incur costs if we are required to adopt additional policies and systems
to ensure compliance with certain provisions of the Volcker Rule, but any such costs are not expected to be material. Until the application of the
final rules is fully understood, the precise financial impact of the rule on us, the Banks, our clients or the financial industry more generally,
cannot be determined.
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Item 1A. Risk Factors
You should carefully read and consider the following risks and uncertainties. We may encounter risks in addition to those described
below, including risks and uncertainties not currently known to us or that we currently deem to be immaterial. The risks described below, as well
as such additional risks and uncertainties, may impair or materially and adversely affect our business, results of operations and financial
condition.
Risks Related to Our Business
If we do not effectively manage our credit risk, we may experience increased levels of delinquencies, nonperforming loans, and
charge-offs, which would require increases in our provision for loan and lease losses.
There are risks inherent in making any loan or lease, including risks inherent in dealing with individual borrowers, risks of nonpayment,
risks resulting from uncertainties as to the future value of collateral and cash flows available to service debt and risks resulting from changes in
economic and market conditions. We cannot assure you that our credit risk approval and monitoring procedures will identify all of these credit
risks, and they cannot be expected to completely eliminate our credit risks. If the overall economic climate in the United States, generally, or our
market areas, specifically, deteriorates, our borrowers may experience difficulties in repaying their loans and leases, and the level of
nonperforming loans and leases, charge-offs and delinquencies could rise and require increases in the provision for loan and lease losses, which
would cause our net income and return on equity to decrease.
Our allowance for loan and lease losses may not be adequate to cover actual losses.
We establish our allowance for loan and lease losses and maintain it at a level considered appropriate by management based on an
analysis of our portfolio and market environment. The allowance for loan and lease losses represents our estimate of probable losses inherent in
the portfolio at each balance sheet date and is based upon relevant information available to us. The allowance contains provisions for probable
losses that have been identified relating to specific relationships, as well as probable losses inherent in our loan and lease portfolio that are not
specifically identified. Additions to the allowance for loan and lease losses, which are charged to earnings through the provision for loan and
lease losses, are determined based on a variety of factors, including an analysis of our loan and lease portfolio by segment, historical loss
experience and an evaluation of current economic conditions in our market areas. The actual amount of loan and lease losses is affected by
changes in economic, operating and other conditions within our markets, which may be beyond our control, and such losses may exceed current
estimates.
At December 31, 2014 , our allowance for loan and lease losses as a percentage of total loans and leases was 1.12% and as a percentage
of total nonperforming loans and leases was 146.3% . Although management believes that the allowance for loan and lease losses is appropriate,
we may be required to take additional provisions for losses in the future to further supplement the allowance, either due to management’s
decision, based on credit conditions, or requirements by our banking regulators. In addition, bank regulatory agencies will periodically review
our allowance for loan and lease losses and the value attributed to non-accrual loans or to properties acquired through foreclosure. Such
regulatory agencies may require us to adjust our determination of the value for these items. Any significant increases to the allowance for loan
and lease losses may materially decrease our net income, which may adversely affect our business, financial condition and results of operations.
A significant portion of our loan and lease portfolio is comprised of commercial real estate loans, which involve risks specific to real
estate values and the real estate markets in general.
At December 31, 2014 we had $811.8 million of commercial real estate loans, which represented 63.3% of our total loan and lease
portfolio. Because payments on such loans are often dependent on the successful operation or development of the property or business involved,
repayment of such loans is often more sensitive than other types of loans to adverse conditions in the real estate market or the general economy,
which are outside the borrower’s control. In the event that the cash flow from the property is reduced, the borrower’s ability to repay the loan
could be negatively impacted. The deterioration of one or a few of these loans could cause a material increase in our level of nonperforming
loans, which would result in a loss of revenue from these loans and could result in an increase in the provision for loan and lease losses and an
increase in charge-offs, all of which could have a material adverse impact on our net income. Additionally, many of these loans have real estate
as a primary or secondary component of collateral. The market value of real estate can fluctuate significantly in a short period of time as a result
of economic conditions. Adverse developments affecting real estate values in one or more of our markets could impact collateral coverage
associated with the commercial real estate segment of our portfolio, possibly leading to increased specific reserves or charge-offs, which would
adversely affect profitability.
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A large portion of our loan and lease portfolio is comprised of commercial loans secured by various business assets, the
deterioration in value of which could increase our exposure to future probable losses.
At December 31, 2014 , approximately 32.5% , or $416.7 million , of our loan and lease portfolio was comprised of commercial loans
to businesses collateralized by general business assets including accounts receivable, inventory, and equipment. Our commercial loans are
typically larger in amount than loans to individual consumers and, therefore, have the potential for larger losses on an individual loan basis.
Additionally, asset-based borrowers are usually highly leveraged and/or have inconsistent historical earnings. Significant adverse changes in
various industries could cause rapid declines in values and collectability associated with those business assets resulting in inadequate collateral
coverage that may expose us to future losses. An increase in specific reserves and charge-offs may have a material adverse impact on our results
of operations.
Nonperforming assets take significant time to resolve and adversely affect our results of operations and financial condition, and
could result in further losses in the future.
At December 31, 2014 , our nonperforming loans totaled $9.8 million , or 0.76% of our gross loan and lease portfolio, and our
nonperforming assets (which include nonperforming loans and foreclosed properties) totaled $11.5 million , or 0.70% of total assets.
Our nonperforming assets adversely affect our net income in various ways. We do not record interest income on non-accrual loans or
foreclosed properties, thereby adversely affecting our net income and returns on assets and equity, increasing our loan administration costs and
adversely affecting our efficiency ratio. When we take collateral in foreclosure and similar proceedings, we are required to mark the collateral to
its then net realizable value, less estimated selling costs, which may result in a loss. These nonperforming loans and foreclosed properties also
increase our risk profile and the capital our regulators believe is appropriate in light of such risks. The resolution of nonperforming assets
requires significant time commitments from management and can be detrimental to the performance of their other responsibilities. If we
experience increases in nonperforming loans and nonperforming assets, our net interest income may be negatively impacted and our loan
administration costs could increase, each of which could have an adverse effect on our net income and related ratios, such as return on assets and
equity.
Real estate construction and land development loans are based upon estimates of costs and values associated with the completed
project. These estimates may be inaccurate, and we may be exposed to significant losses on loans for these projects.
Real estate construction and land development loans comprised approximately 9.5% of our gross loan and lease portfolio as of
December 31, 2014 , and such lending involves additional risks because funds are advanced upon the as-completed value of the project, which is
uncertain prior to its completion, and costs may exceed realizable values in declining real estate markets. Because of the uncertainties inherent in
estimating construction costs and the realizable market value of the completed project and the effects of governmental regulation of real
property, it is relatively difficult to evaluate accurately the total funds required to complete a project and the related loan-to-value ratio. As a
result, construction loans often involve the disbursement of substantial funds with repayment dependent, in part, on the success of the ultimate
project and the ability of the borrower to sell or lease the property, rather than the ability of the borrower or guarantor to repay principal and
interest. If the appraisal of the completed project’s value proves to be overstated or market values or rental rates decline, we may have
inadequate security for the repayment of the loan upon completion of construction of the project. If we are forced to foreclose on a project prior
to or at completion due to a default, we may not be able to recover all of the unpaid balance of, and accrued interest on, the loan and may incur
related foreclosure and holding costs. In addition, we may be required to fund additional amounts to complete the project and may have to hold
the property for an unspecified period of time while we attempt to dispose of it.
Our business may be adversely affected by conditions in the financial markets and economic conditions generally.
Our operations and profitability are impacted by general business and economic conditions in the United States and, to some extent,
abroad. These conditions include short-term and long-term interest rates, inflation, money supply, political issues, legislative and regulatory
changes, fluctuations in both debt and equity markets, broad trends in industry and finance, the strength of the United States economy, and
uncertainty in financial markets globally relating to the financial crises in the European Union and elsewhere, all of which are beyond our
control. A deterioration in economic conditions could result in an increase in loan delinquencies and non-performing assets, decreases in loan
collateral values, and a decrease in demand for our products and services, among other things, any of which could have a material adverse
impact on our financial condition and results of operations.
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Our business is concentrated in and largely dependent upon the continued growth and welfare of the general geographical markets
in which we operate.
Our operations are heavily concentrated in the South Central region of Wisconsin and to a lesser extent the Southeastern and
Northeastern regions of Wisconsin and the greater Kansas City area and, as a result, our financial condition, results of operations and cash flows
are significantly impacted by changes in the economic conditions in those areas. Our success depends to a significant extent upon the business
activity, population, income levels, deposits and real estate activity in these markets. Although our clients’ business and financial interests may
extend well beyond these market areas, adverse economic conditions that affect these market areas could reduce our growth rate, affect the
ability of our clients to repay their loans to us, affect the value of collateral underlying loans and generally affect our financial condition and
results of operations. Because of our geographic concentration, we are less able than other regional or national financial institutions to diversify
our credit risks across multiple markets. Although, in general, the economy and real estate market we operate in were not affected as severely as
some other areas of the United States during the challenging economic environment of recent years, they are not immune to challenging
economic conditions that affect the United States and world economies.
Our financial condition and results of operations could be negatively affected if we fail to effectively execute our strategic plan or
manage the growth called for in our strategic plan.
Among other things, our strategic plan currently calls for maintaining strong asset quality while we continue to grow, generating in-
market core deposits to improve our net interest margin and increasing fee income. Our ability to increase profitability in accordance with this
plan will depend on a variety of factors including the identification of desirable business opportunities, competitive responses from financial
institutions in our market areas and our ability to manage liquidity and funding sources. While we believe we have the management resources
and internal systems in place to successfully execute our strategic plan, we cannot guarantee that opportunities will be available and that the
strategic plan will be successful or effectively executed.
Although we do not have any current definitive plans to do so, in implementing our strategic plan we may expand into additional
communities or attempt to strengthen our position in our current markets through opportunistic acquisitions of similar or complementary
financial services organizations. To the extent that we open new offices or undertake acquisitions, we are likely to experience the effects of
higher operating expenses relative to operating income from the new operations, which may have an adverse effect on our levels of reported net
income, return on average equity and return on average assets. Other effects of engaging in such growth strategies may include potential
diversion of our management’s time and attention and general disruption to our business.
To the extent that we grow through additional office openings, including our recent acquisition of Alterra, we cannot assure you that we
will be able to adequately and profitably manage this growth. Acquiring other banks and businesses will involve similar risks to those commonly
associated with branching, but may also involve additional risks, including potential exposure to unknown or contingent liabilities of banks and
businesses we acquire and exposure to potential asset quality issues of the acquired bank or related business.
Monetary policies and regulations of the Federal Reserve could adversely affect our business, financial condition and results of
operations.
In addition to being affected by general economic conditions, our earnings and growth are affected by the policies of the Federal
Reserve. An important function of the Federal Reserve is to regulate the money supply and credit conditions. Among the instruments used by the
Federal Reserve to implement these objectives are open market operations in U.S. government securities, adjustments of the discount rate and
changes in reserve requirements against bank deposits. These instruments are used in varying combinations to influence overall economic
growth and the distribution of credit, bank loans, investments and deposits. Their use also affects interest rates charged on loans or paid on
deposits.
The monetary policies and regulations of the Federal Reserve have had a significant effect on the operating results of commercial banks
in the past and are expected to continue to do so in the future. The effects of such policies upon our business, financial condition and results of
operations cannot be predicted.
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We operate in a highly regulated industry and the laws and regulations that govern our operations, corporate governance, executive
compensation and accounting principles, or changes in them, or our failure to comply with them, may adversely affect us.
We are subject to extensive regulation and supervision that govern almost all aspects of our operations. Intended to protect clients, these
laws and regulations, among other matters, prescribe minimum capital requirements, impose limitations on our business activities, limit the
dividends or distributions that we can pay, restrict the ability of institutions to guarantee our debt and impose certain specific accounting
requirements that may be more restrictive and may result in greater or earlier charges to earnings or reductions in our capital than generally
accepted accounting principles. Compliance with laws and regulations can be difficult and costly and changes to laws and regulations often
impose additional compliance costs. Further, our failure to comply with these laws and regulations, even if the failure was inadvertent or reflects
a difference in interpretation, could subject us to restrictions on our business activities, fines and other penalties, any of which could adversely
affect our results of operations, capital base and the price of our securities.
Recent legislative and regulatory reforms applicable to the financial services industry may have a significant impact on our
business, financial condition and results of operations.
The laws, regulations, rules, policies and regulatory interpretations governing us are constantly evolving and may change significantly
over time as Congress and various regulatory agencies react to adverse economic conditions or other matters. The global financial crisis of 2008-
09 served as a catalyst for a number of significant changes in the financial services industry, including the Dodd-Frank Act, which reformed the
regulation of financial institutions in a comprehensive manner, and the Basel III regulatory capital reforms, which will increase both the amount
and quality of capital that financial institutions must hold.
The Dodd-Frank Act, together with the regulations developed and to be developed thereunder, affects large and small financial
institutions alike, including several provisions that impact how community banks, thrifts and small bank and thrift holding companies will
operate in the future. Among other things, the Dodd-Frank Act changes the base for FDIC insurance assessments to a bank’s average
consolidated total assets minus average tangible equity, rather than its deposit base, permanently raises the current standard deposit insurance
limit to $250,000, and expands the FDIC’s authority to raise the premiums we pay for deposit insurance. The legislation allows financial
institutions to pay interest on business checking accounts, contains provisions on mortgage-related matters (such as steering incentives,
determinations as to a borrower’s ability to repay and prepayment penalties) and establishes the CFPB as an independent entity within the
Federal Reserve. This entity has broad rulemaking, supervisory and enforcement authority over consumer financial products and services,
including deposit products, residential mortgages, home-equity loans and credit cards. Moreover, the Dodd-Frank Act includes provisions that
affect corporate governance and executive compensation at all publicly traded companies.
In addition, in July 2013, the U.S. federal banking authorities approved the implementation of the Basel III Rule. The Basel III Rule is
applicable to all U.S. banks that are subject to minimum capital requirements as well as to bank and saving and loan holding companies, other
than “small bank holding companies” (generally bank holding companies with consolidated assets of less than $1 billion). The Basel III Rule
became effective on January 1, 2015 with a phase-in period through January 1, 2019 for many of the changes.
The Basel III Rule not only increased most of the required minimum regulatory capital ratios, it introduced a new Common Equity
Tier 1 Capital ratio and the concept of a capital conservation buffer. The Basel III Rule also expanded the current definition of capital by
establishing additional criteria that capital instruments must meet to be considered Additional Tier 1 Capital (i.e., Tier 1 Capital in addition to
Common Equity) and Tier 2 Capital. A number of instruments that now generally qualify as Tier 1 Capital will not qualify or their qualifications
will change when the Basel III Rule is fully implemented. However, the Basel III Rule permits banking organizations with less than $15 billion
in assets to retain, through a one-time election, the existing treatment for accumulated other comprehensive income, which currently does not
affect regulatory capital. The Basel III Rule has maintained the general structure of the current prompt corrective action thresholds while
incorporating the increased requirements, including the Common Equity Tier 1 Capital ratio. In order to be a “well-capitalized” depository
institution under the new regime, an institution must maintain a Common Equity Tier 1 Capital ratio of 6.5% or more, a Tier 1 Capital ratio of
8% or more, a Total Capital ratio of 10% or more, and a leverage ratio of 5% or more. Institutions must also maintain a capital conservation
buffer consisting of Common Equity Tier 1 Capital.
Although we believe we are currently in compliance with the Basel III Rule, implementation of these provisions, as well as any other
aspects of current or proposed regulatory or legislative changes to laws applicable to the financial industry, will impact the profitability of our
business activities and may change certain of our business practices, including the ability to offer new products, obtain financing, attract
deposits, make loans, and achieve satisfactory interest spreads, and could expose
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us to additional costs, including increased compliance costs. These changes also may require us to invest significant management attention and
resources to make any necessary changes to operations in order to comply, and could therefore also materially and adversely affect our business,
financial condition and results of operations. Our management has been actively reviewing and monitoring the implementation of these
provisions, many of which are to be phased-in over the next several months and years, and assessing the probable impact on our operations.
However, although we believe we are currently in compliance with these provisions, the ultimate effect of these changes on the financial services
industry in general, and us in particular, is uncertain at this time.
We face a risk of noncompliance and enforcement action with the Bank Secrecy Act and other anti-money laundering statutes and
regulations.
The Bank Secrecy Act, the Patriot Act and other laws and regulations require financial institutions, among other duties, to institute and
maintain effective anti-money laundering programs and file suspicious activity and currency transaction reports as appropriate. The Financial
Crimes Enforcement Network, established by Treasury to administer the Bank Secrecy Act, is authorized to impose significant civil money
penalties for violations of those requirements and has recently engaged in coordinated enforcement efforts with the individual federal banking
regulators, as well as the U.S. Department of Justice, Drug Enforcement Administration and Internal Revenue Service. There is also increased
scrutiny of compliance with the rules enforced by the Office of Financial Crimes Enforcement Network. Federal and state bank regulators also
focus on compliance with Bank Secrecy Act and anti-money laundering regulations.
If our policies, procedures and systems are deemed deficient or the policies, procedures and systems of the financial institutions that we
have already acquired or may acquire in the future are deficient, we would be subject to liability, including fines and regulatory actions such as
restrictions on our ability to pay dividends and the necessity to obtain regulatory approvals to proceed with certain aspects of our business plan
which would negatively impact our financial condition and results of operations. Failure to maintain and implement adequate programs to
combat money laundering and terrorist financing could also have serious reputational consequences for us.
We are periodically subject to examination and scrutiny by a number of banking agencies and, depending upon the findings and
determinations of these agencies, we may be required to make adjustments to our business that could adversely affect us.
Federal and state banking agencies periodically conduct examinations of our business, including compliance with applicable laws and
regulations. If, as a result of an examination, a federal banking agency was to determine that the financial condition, capital resources, asset
quality, asset concentration, earnings prospects, management, liquidity, sensitivity to market risk or other aspects of any of our operations has
become unsatisfactory, or that we or our management is in violation of any law or regulation, it could take a number of different remedial actions
as it deems appropriate. These actions include the power to enjoin “unsafe or unsound” practices, to require affirmative actions to correct any
conditions resulting from any violation or practice, to issue an administrative order that can be judicially enforced, to direct an increase in our
capital, to restrict our growth, to change the asset composition of our portfolio or balance sheet, to assess civil monetary penalties against our
officers or directors, to remove officers and directors and, if it is concluded that such conditions cannot be corrected or there is an imminent risk
of loss to depositors, to terminate our deposit insurance. If we become subject to such regulatory actions, our business, results of operations and
reputation may be negatively impacted.
Liquidity risks could affect operations and jeopardize our business, financial condition, and results of operations.
Our ability to implement our business strategy will depend on our liquidity and ability to obtain funding for loan originations, working
capital and other general purposes. An inability to raise funds through deposits, borrowings, the sale of loans and other sources could have a
substantial negative effect on our liquidity. Our preferred source of funds consists of customer deposits, which we supplement with other sources
such as wholesale deposits made up of brokered deposits and deposits gathered through internet listing services. Such account and deposit
balances can decrease when clients perceive alternative investments as providing a better risk/return tradeoff. If clients move money out of bank
deposits and into other investments, we may increase our utilization of wholesale deposits, FHLB advances and other wholesale funding sources
necessary to fund desired growth levels. Because these funds generally are more sensitive to interest rate changes than our in-market deposits,
they are more likely to move to the highest rate available. In addition, the use of brokered deposits without regulatory approval is limited to
banks that are “well capitalized” according to regulation. If the Banks are unable to maintain their capital levels at “well capitalized” minimums,
we could lose a significant source of funding, which would force us to utilize different wholesale funding or potentially sell assets at a time when
pricing may be unfavorable, increasing our funding costs and reducing our net interest income and net income.
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Our access to funding sources in amounts adequate to finance or capitalize our activities or on terms that are acceptable to us could be
impaired by factors that affect us directly or the financial services industry or economy in general, such as disruptions in the financial markets or
negative views and expectations about the prospects for the financial services industry. Regional and community banks generally have less
access to the capital markets than do national and super-regional banks because of their smaller size and limited analyst coverage. During
periods of economic turmoil or decline, the financial services industry and the credit markets generally may be materially and adversely affected
by declines in asset values and by diminished liquidity. As demonstrated by the recent financial crisis, under such circumstances the liquidity
issues are often particularly acute for regional and community banks, as larger financial institutions may curtail their lending to regional and
community banks to reduce their exposure to the risks of other banks. Correspondent lenders may also reduce or even eliminate federal funds
lines for their correspondent clients in difficult economic times.
As a result, we rely on our ability to generate deposits and effectively manage the repayment and maturity schedules of our loans and
investment securities, respectively, to ensure that we have adequate liquidity to fund our operations. Any decline in available funding could
adversely impact our ability to originate loans, invest in securities, meet our expenses, pay dividends to our shareholders or fulfill obligations
such as repaying our borrowings or meeting deposit withdrawal demands, any of which could have a material adverse impact on our liquidity,
business, financial condition and results of operations.
We rely on our management, and the loss of one or more of those managers may harm our business.
Our success has been and will be greatly influenced by our continuing ability to retain the services of our existing senior management
and, if we expand, to attract and retain additional qualified senior and middle management. The unexpected loss of key management personnel
or the inability to recruit and retain qualified personnel in the future could have an adverse effect on our business and financial results. In
addition, our failure to develop and/or maintain an effective succession plan will impede our ability to quickly and effectively react to
unexpected loss of key management and in turn may have an adverse effect on our business.
On February 20, 2014, Mr. James F. Ropella, our Senior Vice President and Chief Financial Officer announced his plans to retire from
his position during the fourth quarter of 2014. Mr. Ropella’s successor, David A. Papritz, was named in September 2014 and subsequently
resigned in January 2015. Mr. Ropella agreed to delay his retirement and fill the position of Chief Financial Officer as we conduct a thorough
search for Mr. Papritz’s replacement, and we anticipate establishing a longer-term consulting arrangement with Mr. Ropella following his
retirement. There can be no guarantee that we will find a suitable successor by the fourth quarter of 2015. Additionally, the search for a
successor will require time and focus from our senior management and board of directors, which could affect our business if we fail to pursue
other beneficial opportunities due to the demands of conducting such a search.
Interest rate shifts may reduce net interest income and otherwise negatively impact our financial condition and results of operations.
Shifts in short-term interest rates may reduce net interest income, which is the principal component of our earnings. Net interest income
is the difference between the amounts received by us on our interest-earning assets and the interest paid by us on our interest-bearing liabilities.
In certain scenarios, when interest rates rise, the rate of interest we pay on our liabilities may rise more quickly than the rate of interest that we
receive on our interest-bearing assets, which could cause our profits to decrease. However, the structure of our balance sheet and resultant
sensitivity to interest rates in various scenarios may change in the future.
Additionally, interest rate increases often result in larger payment requirements for our borrowers, which increases the potential for
default. At the same time, the marketability of underlying collateral may be adversely affected by any reduced demand resulting from higher
interest rates. In a declining interest rate environment, there may be an increase in prepayments on certain loans as borrowers refinance at lower
rates.
Changes in interest rates also can affect the value of loans. An increase in interest rates that adversely affects the ability of borrowers to
pay the principal or interest on loans may lead to an increase in nonperforming assets and a reduction of income recognized, which could have a
material adverse effect on our results of operations and cash flows. Further, when we place a loan on non-accrual status, we reverse any accrued
but unpaid interest receivable, which decreases interest income. Subsequently, we continue to have a cost to fund the loan, which is reflected as
interest expense, without any interest income to offset the associated funding expense. Thus, an increase in the amount of nonperforming assets
would have an adverse impact on net interest income.
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Rising interest rates may also result in a decline in value of our fixed-rate debt securities. The unrealized losses resulting from holding
these securities would be recognized in other comprehensive income and reduce total stockholders’ equity. If debt securities in an unrealized loss
position are sold, such losses become realized and will reduce our regulatory capital ratios.
The risk of net interest margin compression is typically heightened during prolonged periods of low short-term interest rates, such as
that which the financial service industry has been experiencing in recent years and is expected to continue to face in the near future. This may
have a material adverse effect on our net interest income and our results of operations.
We could recognize losses on securities held in our securities portfolio, particularly if interest rates increase or economic and
market conditions deteriorate.
As of December 31, 2014 , the fair value of our securities portfolio was approximately $186.4 million . Factors beyond our control can
significantly influence the fair value of securities in our portfolio and can cause potential adverse changes to the fair value of these securities. For
example, fixed-rate securities acquired by us are generally subject to decreases in market value when interest rates rise. Additional factors
include, but are not limited to, rating agency downgrades of the securities, defaults by the issuer or individual mortgagors with respect to the
underlying securities, and instability in the credit markets. Any of the foregoing factors could cause other-than-temporary impairment in future
periods and result in realized losses. The process for determining whether impairment is other-than-temporary usually requires difficult,
subjective judgments about the future financial performance of the issuer and any collateral underlying the security in order to assess the
probability of receiving all contractual principal and interest payments on the security. Because of changing economic and market conditions
affecting interest rates, the financial condition of issuers of the securities and the performance of the underlying collateral, we may recognize
realized and/or unrealized losses in future periods, which could have an adverse effect on our financial condition and results of operations.
The Company is a bank holding company and its sources of funds necessary to meet its obligations are limited.
The Company is a bank holding company, and its operations are primarily conducted by the Banks, which are subject to significant
federal and state regulation. Cash available to pay dividends to our shareholders, pay our obligations and meet our debt service requirements is
derived primarily from our existing cash flow sources, our third party line of credit, dividends received from the Banks, or a combination
thereof. Future dividend payments by the Banks to us will require generation of future earnings by the Banks and are subject to certain
regulatory guidelines. If the Banks are unable to pay dividends to us, we may not have the resources or cash flow to pay or meet all of our
obligations.
Competition from other financial institutions could adversely affect our profitability.
We encounter heavy competition in attracting commercial loan, equipment finance and deposit clients as well as trust and investment
clients. We believe the principal factors that are used to attract quality clients and distinguish one financial institution from another include
value-added relationships, interest rates and rates of return, types of accounts, service fees, flexibility, and quality of service.
Our competition includes banks, savings institutions, mortgage banking companies, credit unions, finance companies, equipment
finance companies, mutual funds, insurance companies, brokerage firms and investment banking firms. We also compete with regional and
national financial institutions that have a substantial presence in our market areas, many of which have greater liquidity, higher lending limits,
greater access to capital, more established market recognition and more resources and collective experience than we do. In addition, some larger
financial institutions that have not historically competed with us directly have substantial excess liquidity and have sought, and may continue to
seek, smaller lending relationships in our target markets. Furthermore, tax-exempt credit unions operate in most of our market areas and
aggressively price their products and services to a large portion of the market. Finally, technology has also lowered the barriers to entry and
made it possible for non-banks to offer products and services we have traditionally offered, such as automatic funds transfer and automatic
payment systems. Our profitability depends, in part, upon our ability to successfully maintain and increase market share.
We may be adversely affected by the soundness of other financial institutions.
Financial services institutions are interrelated as a result of trading, clearing, counterparty, or other relationships. We have exposure to
many different industries and counterparties and routinely execute transactions with counterparties in the financial services industry, including
commercial banks, brokers and dealers, investment banks, and other institutional clients. Many of these transactions expose us to credit risk in
the event of a default by a counterparty or client. Any such losses could have a material adverse effect on our financial condition and results of
operations.
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Our framework for managing risks may not be effective in mitigating risk and loss to us.
Our risk management framework seeks to mitigate risk and loss to us. We have established processes and procedures intended to
identify, measure, monitor, report and analyze the types of risk to which we are subject, including liquidity risk, credit risk, market risk, interest
rate risk, operational risk, compensation risk, legal and compliance risk, and reputational risk, among others. However, as with any risk
management framework, there are inherent limitations to our risk management strategies as there may exist, or develop in the future, risks that
we have not appropriately anticipated or identified. Our ability to successfully identify and manage risks facing us is an important factor that can
significantly impact our results. If our risk management framework proves ineffective, we could suffer unexpected losses and could be materially
adversely affected.
We are subject to certain operational risks, including, but not limited to, clients or employee fraud and data processing system
failures and errors.
Employee errors and employee and client misconduct, including the improper disclosure or use of client information, could subject us
to financial losses or regulatory sanctions and seriously harm our reputation. Misconduct by our employees could include hiding unauthorized
activities from us, improper or unauthorized activities on behalf of our clients or improper use of confidential information. It is not always
possible to prevent employee errors and misconduct, and the precautions we take to prevent and detect this activity may not be effective in all
cases. Employee errors or misconduct could also subject us to financial claims for negligence.
We maintain a system of internal controls and insurance coverage to mitigate our operational risks, including data processing system
failures and errors and client or employee fraud. If our internal controls fail to prevent or detect an occurrence, or if any resulting loss is not
insured or exceeds applicable insurance limits, it could have a material adverse effect on our business, financial condition and results of
operations.
If we are unable to keep pace with technological advances in our industry, our ability to attract and retain clients could be adversely
affected.
The banking industry is constantly subject to technological changes with frequent introductions of new technology-driven products and
services. In addition to better serving clients, the effective use of technology increases our efficiency and enables us to reduce costs. Our future
success will depend in part on our ability to address the needs of our clients by using technology to provide products and services that will
satisfy client demands for convenience as well as create additional efficiencies in our operations. A number of our competitors have substantially
greater resources to invest in technological improvements, as well as significant economies of scale. There can be no assurance that we will be
able to implement and offer new technology-driven products and services to our clients. If we fail to do so, our ability to attract and retain clients
may be adversely affected.
Our information systems may experience an interruption or breach in security and cyber-attacks, all if which could have a material
adverse effect on our business.
The Corporation relies heavily on internal and outsourced technologies, communications, and information systems to conduct its
business. Additionally, in the normal course of business, the Corporation collects, processes and retains sensitive and confidential information
regarding our customers. As our reliance on technology has increased, so have the potential risks of a technology-related operation interruption
(such as disruptions in our customer relationship management, general ledger, deposit, loan, or other systems) or the occurrence of a cyber-
attacks (such as unauthorized access to our systems). These risks have increased for all financial institutions as new technologies, the use of the
Internet and telecommunications technologies (including mobile devices) to conduct financial and other business transactions have increased,
and the sophistication and activities of organized crime, perpetrators of fraud, hackers, terrorists and others have increased. In addition to cyber-
attacks or other security breaches involving the theft of sensitive and confidential information, hackers recently have engaged in attacks against
large financial institutions, particularly denial of service attacks, that are designed to disrupt key business services, such as customer-facing web
sites. We are not able to anticipate or implement effective preventive measures against all security breaches of these types, especially because the
techniques used change frequently and because attacks can originate from a wide variety of sources. However, applying guidance from FFIEC,
the Corporation has analyzed and will continue to analyze security related to device specific considerations, user access topics, transaction-
processing and network integrity.
The Corporation also faces risks related to cyber-attacks and other security breaches in connection with credit card and debit card
transactions that typically involve the transmission of sensitive information regarding our customers through various third parties, including
merchant acquiring banks, payment processors, payment card networks and its processors. Some of these parties have in the past been the target
of security breaches and cyber-attacks, and because the transactions involve third
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parties and environments such as the point of sale that the Corporation does not control or secure, future security breaches or cyber-attacks
affecting any of these third parties could impact us through no fault of its own, and in some cases it may have exposure and suffer losses for
breaches or attacks relating to them. Further cyber-attacks or other breaches in the future, whether affecting us or others, could intensify
consumer concern and regulatory focus and result in reduced use of payment cards and increased costs, all of which could have a material
adverse effect on our business. To the extent we are involved in any future cyber-attacks or other breaches, our reputation could be affected,
which could also have a material adverse effect on our business, financial condition or results of operations.
We are dependent upon outside third parties for the processing and handling of our records and data.
We rely on software developed by third-party vendors to process various transactions. In some cases, we have contracted with third
parties to run their proprietary software on our behalf. These systems include, but are not limited to, general ledger, payroll, wealth management
record keeping and securities portfolio management. While we perform a review of controls instituted by the vendor over these programs in
accordance with industry standards and institute our own controls, we must rely on the expertise of outside parties for the security of our records
and data, including our customer data. We may incur a temporary disruption in our ability to conduct our business or process our transactions,
or incur damage to our reputation if the third-party vendor fails to adequately maintain internal controls or institute necessary changes to the
systems. Such disruption or breach of security may have a material adverse effect on our financial condition and results of operations.
Our business continuity plans could prove to be inadequate, resulting in a material interruption in or disruption to, our business and
a negative impact on our results of operations.
We rely heavily on communications and information systems to conduct our business, and our operations are dependent on our ability
to protect our systems against damage from fire, power loss or telecommunication failure. The computer systems and network infrastructure we
use could be vulnerable to unforeseen problems. These problems may arise in both our internally developed systems and the systems of our
third-party service providers. Any failure or interruption of these systems, whether due to severe weather, natural disasters, acts of war or
terrorism, criminal activity or other factors, could result in failures or disruptions in general ledger, deposit, loan, client relationship management
and other systems. While we have a business continuity plan and other policies and procedures designed to prevent or limit the effect of a failure,
interruption or security breach of our information systems, there can be no assurance that any such failures or interruptions will not occur or, if
they do occur, that they will be adequately addressed. The occurrence of any failures or interruptions of our information systems could damage
our reputation, result in a loss of clients, subject us to additional regulatory scrutiny, or expose us to civil litigation and possible financial
liability, any of which could have a material adverse effect on our results of operations.
Our trust and investment services operations may be negatively impacted by changes in economic and market conditions.
Our trust and investment services operations may be negatively impacted by changes in general economic conditions and the conditions
in the financial and securities markets, including the values of assets held under management. Our management contracts generally provide for
fees payable for services based on the market value of assets under management. Because most of our contracts provide for a fee based on
market values of securities, declines in securities prices will generally have an adverse effect on our results of operations from this business.
Market declines and reductions in the value of our clients’ trust and investment services accounts could result in us losing trust and investment
services clients, including those who are also banking clients.
We are subject to claims and litigation pertaining to our fiduciary responsibilities.
Some of the services we provide, such as trust and investment services, require us to act as fiduciaries for our clients and others. From
time to time, third parties could make claims and take legal action against us pertaining to the performance of our fiduciary responsibilities. If
fiduciary investment decisions are not appropriately documented to justify action taken or trades are placed incorrectly, among other possible
claims, and if these claims and legal actions are not resolved in a manner favorable to us, we may be exposed to significant financial liability
and/or our reputation could be damaged. Either of these results may adversely impact demand for our products and services or otherwise have a
harmful effect on our business and, in turn, on our financial condition and results of operations.
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Negative publicity could damage our reputation and adversely impact our business and financial results.
Reputation risk, or the risk to our earnings and capital due to negative publicity, is inherent in our business. Negative publicity can
result from our actual or alleged conduct in a number of activities, including lending practices, information security, management actions,
corporate governance, and actions taken by government regulators and community organizations in response to those activities. Negative
publicity can adversely affect our ability to keep and attract clients, and can expose us to litigation and regulatory action, all of which could have
a material adverse effect on our business, financial condition and results of operations.
We may fail to realize all of the anticipated benefits of the merger with Aslin Group.
The success of the merger will depend, in part, on our ability to successfully combine Aslin Group’s organization, including the
operations of Alterra, into our own. If we are not able to achieve this objective, the anticipated benefits of the merger may not be realized fully or
at all or may take longer than expected to be realized.
Prior to the completion of the merger on November 1, 2014, we and Aslin Group operated independently. It is possible that the process
of integrating our operations or other factors could result in the loss or departure of key employees, the disruption of our ongoing business or that
of Alterra or inconsistencies in standards, controls, procedures and policies, including the manner in which Alterra manages its SBA lending
business. It is also possible that clients, customers, depositors and counterparties of Aslin Group prior to the merger could choose to discontinue
their relationships with the combined company post-merger which would adversely affect the future performance of the combined company.
These transition matters could have an adverse effect on us for an undetermined period of time.
The combined company has incurred, and may continue to incur, substantial expenses related to the merger with Aslin Group.
The combined company has incurred, and may continue to incur, substantial expenses in connection with completing the merger with
Aslin Group. Although we have assumed that a certain level of transaction and combination expenses would be incurred, there are a number of
factors beyond our control that could affect the total amount or the timing of our combination expenses. Many of the expenses to be incurred, by
their nature, are difficult to estimate. Due to these factors, the transaction and integration expenses associated with the merger could, particularly
in the near term, exceed the savings that the combined company expects to achieve from the elimination of duplicative expenses and the
realization of economies of scale and cost savings related to the combination of the businesses. The charges to be taken in connection with the
merger were principally incurred prior to December 31, 2014. The remaining costs associated with compensation expense for certain employees
retained at Alterra to assist in the merger transition are immaterial and projected to finish mid-year 2015.
Potential acquisitions may disrupt our business and dilute stockholder value.
While we remain committed to organic growth, we also may consider additional acquisition opportunities involving complementary
financial service organizations if the right situation were to arise. Various risks commonly associated with acquisitions, include, among other
things:
• Potential exposure to unknown or contingent liabilities of the target company.
• Exposure to potential asset quality issues of the target company.
• Potential disruption to our business.
• Potential diversion of our management’s time and attention.
• Possible loss of key employees and clients of the target company.
• Difficulty in estimating the value of the target company.
• Potential changes in banking or tax laws or regulations that may affect the target company.
Acquisitions may involve the payment of a premium over book and market values, and, therefore, some dilution of our tangible book
value and net income per common share may occur in connection with any future transaction. Furthermore, failure to realize the expected
revenue increases, cost savings, increases in geographic or product presence, and/or other projected benefits from an acquisition could have a
material adverse effect on our business, financial condition and results of operations.
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We are subject to changes in accounting principles, policies or guidelines.
Our financial performance is impacted by accounting principles, policies and guidelines. Some of these policies require the use of
estimates and assumptions that may affect the value of our assets or liabilities and financial results. Some of our accounting policies are critical
because they require management to make difficult, subjective and complex judgments about matters that are inherently uncertain and because it
is likely that materially different amounts would be reported under different conditions or using different assumptions. If such estimates or
assumptions underlying our financial statements are incorrect, we may experience material losses.
From time to time, the Financial Accounting Standards Board and the SEC change the financial accounting and reporting standards or
the interpretation of those standards that govern the preparation of our financial statements. These changes are beyond our control, can be
difficult to predict and could materially impact how we report our financial condition and results of operations. Changes in these standards are
continuously occurring, and given recent economic conditions, more drastic changes may occur. The implementation of such changes could have
a material adverse effect on our financial condition and results of operations.
Our internal controls may be ineffective.
Management regularly reviews and updates its internal controls, disclosure controls and procedures, and corporate governance policies
and procedures. Any system of controls, however well designed and operated, is based in part on certain assumptions and can provide only
reasonable, not absolute, assurances that the objectives of the controls are met. In addition, if we continue to grow the Corporation, our controls
will also need to be updated to keep up with such growth. Any failure or circumvention of our controls and procedures or failure to comply with
regulations related to controls and procedures could cause us to report a material weakness in internal control over financial reporting and
conclude that our controls and procedures are not effective, which could have a material adverse effect on our business, results of operations, and
financial condition.
Risks Related to Investing in Our Common Stock
Our stock is thinly traded and our stock price can fluctuate.
Although our common stock is listed for trading on the NASDAQ Global Select Market, low volume of trading activity and volatility in
the price of our common stock may make it difficult for our shareholders to sell common stock when desired and at prices they find attractive.
Our stock price can fluctuate significantly in response to a variety of factors including, among other things:
actual or anticipated variations in our quarterly results of operations;
recommendations by securities analysts;
•
•
• operating and stock price performance of other companies that investors deem comparable to us;
• news reports relating to trends, concerns and other issues in the financial services industry;
• perceptions in the marketplace regarding us or our competitors and other financial services companies;
• new technology used, or services offered, by competitors; and
•
changes in government regulations.
General market fluctuations, industry factors and general economic and political conditions and events, such as economic slowdowns or
recessions, interest rate changes or credit loss trends, could also cause our stock price to decrease regardless of our operating results.
To maintain adequate capital levels, we may be required to raise additional capital in the future, but that capital may not be
available when it is needed and/or could be dilutive to our existing shareholders.
We are required by regulatory authorities to maintain adequate levels of capital to support our operations. In order to ensure our ability
to support the operations of the Banks we may need to limit or terminate cash dividends that can be paid to our shareholders. In addition, we may
need to raise capital in the future. Our ability to raise capital, if needed, will depend in part on our financial performance and conditions in the
capital markets at that time, and accordingly, we cannot guarantee our ability to raise capital on terms acceptable to us. In addition, if we decide
to raise equity capital in the future, the interests of our shareholders could be diluted. Any issuance of common stock would dilute the ownership
percentage of our current shareholders and any issuance of common stock at prices below tangible book value would dilute the tangible book
value of each existing share of our common stock held by our current shareholders. The market price of our common stock could also decrease
as a result of the sale of a large number of shares or similar securities, or the perception that such sales could occur. If
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we cannot raise capital when needed, our ability to serve as a source of strength to the Banks, pay dividends, maintain adequate capital levels and
liquidity, or further expand our operations could be materially impaired.
If equity research analysts publish research or reports about our business with unfavorable commentary or downgrade our common
stock, the price and trading volume of our common stock could decline.
The trading market for our common stock could be affected by whether equity research analysts publish research or reports about us
and our business and what is included in such research or reports. If equity analysts publish research reports about us containing unfavorable
commentary, downgrade our stock or cease publishing reports about our business, the price of our stock could decline. If any analyst electing to
cover us downgrades our stock, our stock price could decline rapidly. If any analyst electing to cover us ceases coverage of us, we could lose
visibility in the market, which in turn could cause our common stock price or trading volume to decline and our common stock to be less liquid.
Item 1B. Unresolved Staff Comments
None
Item 2. Properties
The following table provides certain summary information with respect to the principal properties in which we conduct our operations,
all of which were leased, as of December 31, 2014 :
Location
401 Charmany Drive, Madison, WI
18500 W. Corporate Drive, Brookfield, WI
11300 Tomahawk Creek Pkwy, Leawood, KS
Function
Full service banking location of FBB and office of FBFS
Full service banking location of FBB - Milwaukee
Full service banking location of Alterra Bank
Expiration
Date
2028
2020
2023
As of December 31, 2014 , the Corporation had loan production offices in Oshkosh, WI, Green Bay, WI, Appleton, WI and Kenosha,
WI under lease agreements to facilitate additional business development opportunities. In addition, the Corporation also owns a full service
branch located in Overland Park, Kansas.
For the purpose of generating business development opportunities in asset-based financing, office space is also leased in the following
metropolitan areas: Minneapolis, Minnesota; Detroit, Michigan; Denver, Colorado; San Antonio, Texas; Atlanta, Georgia and Charlotte, North
Carolina under shorter-term lease agreements, which generally have terms of less than one year.
Item 3. Legal Proceedings
We believe that no litigation is threatened or pending in which we face potential loss or exposure which could materially affect our
consolidated financial position, consolidated results of operations or cash flows. Since our subsidiaries act as depositories of funds, lenders and
fiduciaries, they are occasionally named as defendants in lawsuits involving a variety of claims. This and other litigation is incidental to our
business.
Item 4. Mine Safety Disclosures
Not applicable.
29
Table of Contents
PART II.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Holders, Price Range and Dividends Declared
The common stock of the Corporation is traded on the NASDAQ Global Select Market under the symbol “FBIZ.” As of February 27,
2015, there were 406 registered shareholders of record of the Corporation’s common stock. Certain of the Corporation’s shares are held in
“nominee” or “street” name and the number of beneficial owners of such shares is approximately 585.
The following table presents the range of high and low sale prices of our common stock for each quarter within the two most recent
fiscal years, according to information provided by NASDAQ, and cash dividends declared in such years.
2014
1st Quarter
2nd Quarter
3rd Quarter
4th Quarter
2013
1st Quarter
2nd Quarter
3rd Quarter
4th Quarter
High
Low
Dividend Declared
$
$
48.14 $
49.13
48.01
48.03
27.99 $
30.10
33.95
38.65
36.79 $
39.96
40.52
42.73
22.84 $
25.51
29.03
29.97
0.21
0.21
0.21
0.21
0.14
0.14
0.14
0.14
Stock Performance Graph
The chart shown below depicts total return to stockholders during the period beginning December 31, 2009 and ending December 31,
2014. Total return includes appreciation or depreciation in market value of the Corporation’s common stock as well as actual cash and stock
dividends paid to common stockholders. Indices shown below, for comparison purposes only, are the Total Return Index for the NASDAQ
Composite, which is a broad nationally recognized index of stock performance by publicly traded companies and the SNL Bank NASDAQ ,
which is an index that contains securities of NASDAQ-listed companies classified according to the Industry Classification Benchmark as banks.
The chart assumes that the value of the investment in FBIZ common stock and each of the three indices was $100 on December 31, 2009, and
that all dividends were reinvested in FBIZ common stock.
30
Table of Contents
Index
First Business Financial Services, Inc.
NASDAQ Composite
SNL Bank NASDAQ
Dividend Policy
Year Ended December 31,
$
2009
100.00 $
100.00
100.00
2010
143.37 $
118.15
117.98
2011
179.74 $
117.22
104.68
2012
253.20 $
138.02
124.77
2013
422.79 $
193.47
179.33
2014
548.80
222.16
185.73
It has been our practice to pay a dividend to common shareholders. Dividends historically have been declared in the month following
the end of each calendar quarter. However, the timing and amount of future dividends are at the discretion of the Board of Directors of the
Corporation (the “Board”) and will depend upon the consolidated earnings, financial condition, liquidity and capital requirements of the
Corporation and its subsidiaries, the amount of cash dividends paid to the Corporation by its subsidiaries, applicable government regulations and
policies, supervisory actions and other factors considered relevant by the Board. Refer to Item 1 - Business - Supervision and Regulation -
FBFS - Dividend Payments for additional discussion regarding the limitations on dividends and other capital contributions by the Banks to the
Corporation. The Board anticipates it will continue to declare dividends as appropriate based on the above factors.
31
Table of Contents
Equity Compensation Plan Information
The following table summarizes certain information with respect to compensation plans under which equity securities of the
Corporation are authorized for issuance as of December 31, 2014 .
Plan category
Equity compensation plans approved by security holders
Equity compensation plans not approved by security holders
Issuer Purchases of Securities
Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights
Weighted-average
exercise price of
outstanding options,
warrants and rights
Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding
securities reflected in
column (a))
(a)
(b)
(c)
12,000 $
—
25.00
—
174,769
—
The following table sets forth information about the Corporation's purchases of its common stock during the three months ended
December 31, 2014 .
Period
October 1, 2014 - October 31, 2014
November 1, 2014 - November 30, 2014
December 1, 2014 - December 31, 2014
Total
Total Number of
Shares Purchased
(1)
Average Price Paid
Per Share
22,936 $
6,208
—
29,144
45.94
45.40
—
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Approximate
Dollar Value of
Shares that May
Yet Be Purchased
Under the Plans or
Programs
— $
—
—
—
—
—
—
(1) All of the shares in this column represent: (i) the 10,860 shares that were surrendered to us to satisfy income tax withholding obligations
in connection with the vesting of restricted shares; and (ii) 18,284 shares used to exercise stock options as part of a cashless exercise.
32
Table of Contents
Item 6. Selected Financial Data
Five Year Comparison of Selected Consolidated Financial Data
As of and for the Year Ended December 31,
2014
2013
2012
2011
2010
(Dollars In Thousands, Except Per Share Data)
$
$
$
INCOME STATEMENT:
Interest income
Interest expense
Net interest income
Provision for loan and lease losses
Non-interest income
Non-interest expense
Endowment to First Business Charitable
Foundation
Goodwill impairment
Net (gain) loss on foreclosed properties
Income tax expense
Net income
Yield on earning assets
Cost of funds
Interest rate spread
Net interest margin
Return on average assets
Return on average equity
ENDING BALANCE SHEET:
Total assets
Securities
Loans and leases, net
Deposits
FHLB advances and other borrowings
Junior subordinated notes
Stockholders’ equity
FINANCIAL CONDITION ANALYSIS:
Allowance for loan and lease losses to year-
end loans
Allowance to non-accrual loans and leases
Net charge-offs to average loans and leases
Non-accrual loans to gross loans and leases
Average equity to average assets
STOCKHOLDERS’ DATA:
Basic earnings per common share (1)
Diluted earnings per common share (1)
Book value per share at end of period
Tangible book value per share at end of period
$
Dividend declared per share
Dividend payout ratio
Shares outstanding
$
57,701
11,571
46,130
1,236
10,103
33,785
—
—
(10 )
7,083
14,139
$
4.45 %
1.07 %
3.38 %
3.56 %
1.04 %
11.78 %
$
53,810
11,705
42,105
(959 )
8,442
29,188
1,300
—
(117 )
7,389
13,746
$
4.52 %
1.18 %
3.34 %
3.54 %
1.10 %
13.12 %
54,766
16,885
37,881
4,243
8,699
28,076
—
—
585
4,750
8,926
$
$
4.86 %
1.75 %
3.11 %
3.36 %
0.75 %
12.65 %
56,217
20,756
35,461
4,250
7,060
25,977
—
—
420
3,449
8,425
$
$
5.22 %
2.20 %
3.02 %
3.29 %
0.75 %
14.03 %
56,626
24,675
31,951
7,044
6,743
25,465
—
2,689
206
2,349
941
5.39 %
2.57 %
2.82 %
3.04 %
0.09 %
1.67 %
$
1,629,387
186,261
1,266,438
1,438,268
33,994
10,315
137,748
$
1,268,655
180,118
967,050
1,129,855
11,936
10,315
109,275
$
1,226,108
200,596
896,560
1,092,254
12,405
10,315
99,539
$
1,177,165
170,386
836,687
1,051,312
40,292
10,315
64,214
1,107,057
153,379
860,935
988,298
41,504
10,315
55,335
1.12 %
146.33 %
0.08 %
0.76 %
8.79 %
$
3.52
3.51
31.77
29.01
0.84
23.93 %
1.42 %
87.68 %
0.06 %
1.61 %
8.39 %
$
3.50
3.49
27.71
27.71
0.56
16.05 %
1.69 %
109.05 %
0.35 %
1.55 %
5.96 %
$
3.30
3.29
25.41
25.41
0.28
8.51 %
1.66 %
65.03 %
0.74 %
2.56 %
5.32 %
3.23
3.23
24.46
24.46
0.28
8.67 %
1.85 %
42.37 %
0.57 %
4.37 %
5.11 %
0.37
0.37
21.30
21.29
0.28
75.68 %
4,335,927
3,943,997
3,916,667
2,625,569
2,597,820
(1) Basic and diluted earnings per share reflect earnings per common share as calculated under the two-class method due to the existence of participating
securities.
33
Table of Contents
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
When used in this report the words or phrases “may,” “could,” “should,” “hope,” “might,” “believe,” “expect,” “plan,” “assume,”
“intend,” “estimate,” “anticipate,” “project,” “likely,” or similar expressions are intended to identify “forward-looking statements.” Such
statements are subject to risks and uncertainties, including, without limitation, changes in economic conditions in the market areas of FBB, FBB
- Milwaukee or Alterra, changes in policies by regulatory agencies, fluctuation in interest rates, demand for loans in the market areas of FBB,
FBB - Milwaukee or Alterra, borrowers defaulting in the repayment of loans and competition. These risks could cause actual results to differ
materially from what we have anticipated or projected. These risk factors and uncertainties should be carefully considered by our shareholders
and potential investors. See Item 1A—Risk Factors for discussion relating to risk factors impacting us. Investors should not place undue
reliance on any such forward-looking statements, which speak only as of the date made. The factors described within this Form 10-K could
affect our financial performance and could cause actual results for future periods to differ materially from any opinions or statements expressed
with respect to future periods.
Where any such forward-looking statement includes a statement of the assumptions or bases underlying such forward-looking
statement, we caution that, while our management believes such assumptions or bases are reasonable and are made in good faith, assumed facts
or bases can vary from actual results, and the differences between assumed facts or bases and actual results can be material, depending on the
circumstances. Where, in any forward-looking statement, an expectation or belief is expressed as to future results, such expectation or belief is
expressed in good faith and believed to have a reasonable basis, but there can be no assurance that the statement of expectation or belief will be
achieved or accomplished.
We do not intend to, and specifically disclaim any obligation to, update any forward-looking statements.
The following discussion and analysis is intended as a review of significant events and factors affecting the financial condition and
results of operations for the periods indicated. The discussion should be read in conjunction with the Consolidated Financial Statements and the
Notes thereto and the Selected Consolidated Financial Data presented in this Form 10-K.
34
Table of Contents
OVERVIEW
We are a registered bank holding company incorporated under the laws of the State of Wisconsin and are engaged in the commercial
banking business through our wholly-owned banking subsidiaries, FBB, FBB-Milwaukee and Alterra. All of our operations are conducted
through the Banks and certain subsidiaries of FBB. We operate as a business bank focusing on delivering a full line of commercial banking
products and services tailored to meet the specific needs of small- and medium-sized businesses, business owners, executives, professionals and
high net worth individuals. Business lines include commercial lending, SBA lending, asset-based lending, equipment financing, factoring, trust
and investment services, treasury management services and a broad range of deposit products. We do not utilize a branch network to attract retail
clients. Our operating philosophy is focused on local decision-making and local client service from each of our primary banking locations in
Madison, Brookfield and Appleton, Wisconsin and Leawood, Kansas combined with the efficiency of centralized administrative functions such
as support for information technology, loan and deposit operations, finance and accounting and human resources. We believe we have a unique
niche business banking model and we consistently operate within our model. This allows us to provide a great deal of expertise in offering
financial solutions to our clients with an experienced staff who serve our clients on an ongoing basis.
Our 2014 strategic initiatives included, but were not limited to, maintaining strong asset quality while we continue to grow, as well as
increasing the number and volume of transaction accounts in an effort to support ongoing efforts to increase fee revenue associated with treasury
management services and maintaining our efficiency ratio. We have achieved success on all points of this strategic plan by posting record net
income and non-GAAP pre-tax adjusted earnings while continuing to grow the balance sheet, maintaining strong asset quality, and maintaining
our overall operating efficiency.
In addition, on November 1, 2014 we completed our acquisition of the Aslin Group and its banking subsidiary Alterra (the “Alterra
Transaction”). As of September 30, 2014, Alterra had total assets of approximately $238.2 million. While the Alterra Transaction did not
materially increase the size of the Corporation, it did affect our financial statements for the two months we operated it in 2014. We expect the
Alterra Transaction will have a more significant impact in 2015 as we continue to integrate it into our operations.
In 2015, we plan to continue to diligently focus on maintaining asset quality while organically growing our loan and lease portfolio,
increasing the number and volume of transaction accounts in an effort to support ongoing efforts to increase fee revenue associated with treasury
management services, trust and investment services and SBA lending activity and investing in and utilizing technology to support these
initiatives thereby maintaining efficiency as we grow. Our efficient operating model will remain intact; however, we believe timely investments
in technology and people are imperative as we continue to scale the Corporation to keep pace with our strategic growth trajectory. We believe
this strategy will continue to create opportunities to capitalize on economic expansion as well as any disruption to our competitors' businesses in
our core Wisconsin and Kansas City markets. We believe significant opportunity remains for this type of organic growth in our commercial
business lines, particularly within our new Kansas City market and our Milwaukee and Northeast Wisconsin markets.
OPERATIONAL HIGHLIGHTS
• Our total assets increased to $1.629 billion as of December 31, 2014 , a 28.4% increase from $1.269 billion at December 31, 2013 .
• Net income for the year ended December 31, 2014 was a record $14.1 million , 2.9% higher than the previous record of $13.7 million
earned for the year ended December 31, 2013 .
• Diluted earnings per common share were $3.51 for the year ended December 31, 2014 compared to $3.49 earned in the prior year.
• Net interest margin was 3.56% for the year ended December 31, 2014 , improving 2 basis points compared to the year ended
December 31, 2013 .
• Top line revenue, which consists of net interest income and non-interest income, of $56.2 million for the year ended December 31, 2014
increased 11.2% compared to $50.5 million for the same period in 2013 .
• Return on average assets and return on average equity for the year ended December 31, 2014 were 1.04% and 11.78% respectively,
compared to 1.10% and 13.12% for 2013 .
• Non-GAAP pre-tax adjusted earnings, defined as pre-tax income excluding the effects of provision for loan and lease losses, other
identifiable costs of credit and other discrete items unrelated to our primary business activities, increased 5.1% to a record level of $22.4
million for the year ended December 31, 2014 as compared to $21.4 million for the year ended December 31, 2013 .
• We recorded a $1.2 million provision for loan and lease losses for the year ended December 31, 2014 as compared to a negative
provision of $959,000 for the year ended December 31, 2013 .
35
Table of Contents
• Net loans and leases at December 31, 2014 increased $299.4 million , or 31.0% , to $1.266 billion from $967.1 million as of
December 31, 2013 .
• Non-performing assets were $11.5 million and 0.70% of total assets as of December 31, 2014 , compared to $16.2 million and 1.28% of
total assets as of December 31, 2013 .
• Net charge-offs as a percentage of average loans was 0.08% for the year ended December 31, 2014 compared to 0.06% for the year
ended December 31, 2013 .
• Trust and investment services fee income increased by $678,000 , or 18.1% , to $4.4 million for the year ended December 31, 2014
compared to $3.8 million for the year ended December 31, 2013 .
• Average in-market deposits of $791.8 million , or 65.5% of total deposits, for the year ended December 31, 2014 increased 11.2% ,
compared to $712.3 million , or 64.4% of total deposits, for the same period in 2013 .
• Effective November 1, 2014, we completed the acquisition of the Aslin Group and its banking subsidiary Alterra with approximately
$260 million in assets, $200 million in gross loans and $210 million in deposits.
36
Table of Contents
Top Line Revenue
RESULTS OF OPERATION
Top line revenue is comprised of net interest income and non-interest income. This measurement is also commonly referred to as
operating revenue. In 2014 , top line revenue increased by approximately 11.2% from the prior year due in part to the Alterra Transaction. The
components of top line revenue were as follows:
For the Year Ended December 31,
2013
Change
2014
Net interest income
Non-interest income
Total top line revenue
Net interest income
Non-interest income
Total top line revenue
Non-GAAP Pre-Tax Adjusted Earnings
$
$
$
$
(Dollars In Thousands)
42,105
8,442
50,547
46,130 $
10,103
56,233 $
9.6 %
19.7
11.2
For the Year Ended December 31,
2012
Change
2013
(Dollars In Thousands)
42,105 $
8,442
50,547 $
37,881
8,699
46,580
11.2 %
(3.0 )
8.5
Non-GAAP pre-tax adjusted earnings is comprised of our pre-tax income adding back (1) our provision for loan and lease losses, (2)
other identifiable costs of credit and (3) other discrete items that are unrelated to our primary business activities. Even though the provision for
loan and lease losses and other identifiable costs of credit are regular and normal expenses for our industry, in our judgment, the presentation of
non-GAAP pre-tax adjusted earnings allows our management team, investors and analysts to better assess the growth of our business by
removing the volatility associated with these items and other discrete items. Non-GAAP pre-tax adjusted earnings is a non-GAAP financial
measure that should not be considered as an alternative to net income derived in accordance with GAAP. Our non-GAAP pre-tax adjusted
earnings metric improved by 5.1% when comparing the year ended December 31, 2014 to the year ended December 31, 2013 .
For the Year Ended December 31,
2013
Change
2014
Net income before taxes
Add back:
Provision for loan and lease losses
Net gain on foreclosed properties
Endowment to First Business Charitable Foundation
Non-GAAP pre-tax adjusted earnings
Net income before taxes
Add back:
Provision for loan and lease losses
Net (gain) loss on foreclosed properties
Endowment to First Business Charitable Foundation
Non-GAAP pre-tax adjusted earnings
$
$
$
$
21,222 $
(Dollars in Thousands)
21,135
1,236
(10 )
—
22,448 $
(959 )
(117 )
1,300
21,359
0.4 %
NM
NM
NM
5.1 %
For the Year Ended December 31,
2012
Change
2013
21,135 $
(Dollars in Thousands)
13,676
(959 )
(117 )
1,300
21,359 $
4,243
585
—
18,504
54.5 %
NM
NM
NM
15.4 %
NM = Not meaningful
37
Table of Contents
Return on Average Assets and Return on Average Equity
Return on average assets (“ROAA”) was 1.04% for the year ended December 31, 2014 compared to 1.10% for the year ended
December 31, 2013 . The decrease in ROAA was primarily due to relatively stable net income with a larger average asset base. Net income
increased 2.9% year over year, primarily due to improved net interest income and non-interest income, which reflects record trust and investment
services fee income. ROAA is a critical metric used by us to measure the profitability of our organization and how efficiently our assets are
deployed. ROAA also allows us to better benchmark our profitability to our peers without the need to consider different degrees of leverage
which can ultimately influence return on equity measures.
Return on average equity (“ROAE”) for the year ended December 31, 2014 was 11.78% compared to 13.12% for the year ended
December 31, 2013 . ROAE decreased as a result of relatively stable net income with a larger average equity base primarily as a result of the
Alterra Transaction, in which we paid a combination of $13.5 million in cash and 360,081 shares of our common stock, which added $16.6
million million to our equity. We view ROAE as an important measurement for monitoring profitability, and continue to focus on improving our
return to our shareholders by enhancing the overall profitability of our client relationships, controlling our expenses and minimizing our costs of
credit.
Net Interest Income
Net interest income levels depend on the amounts of and yields on interest-earning assets as compared to the amounts of and rates paid
on interest-bearing liabilities. Net interest income is sensitive to changes in market rates of interest and the asset/liability management processes
to prepare for and respond to such changes. The table below shows our average balances, interest, average rates, net interest margin and the
spread between combined average rates earned on our interest-earning assets and cost of interest-bearing liabilities for the periods indicated. The
average balances are derived from average daily balances and were affected in 2014 by the November 1, 2014 closing of the Alterra Transaction.
38
Table of Contents
Interest-earning assets
Commercial real estate and other
mortgage loans (1)
$
Commercial and industrial loans (1)
Direct financing leases (1)
Consumer and other loans (1)
Total loans and leases receivable (1)
Mortgage-related securities (2)
Other investment securities (3)
$
$
FHLB and FRB stock
Short-term investments
Total interest-earning assets
Non-interest-earning assets
Total assets
Interest-bearing liabilities
Transaction accounts
Money market
Certificates of deposit
Wholesale deposits
Total interest-bearing deposits
FHLB advances
Other borrowings
Junior subordinated notes
Total interest-bearing liabilities
Non-interest-bearing demand
deposit accounts
Other non-interest-bearing
liabilities
Total liabilities
Stockholders’ equity
Total liabilities and stockholders’
equity
Net interest income
Net interest spread
For the Year Ended December 31,
2014
2013
2012
Average
balance
Interest
Average
yield/
cost
Average
balance
Interest
Average
yield/
cost
Average
balance
Interest
Average
yield/
cost
(Dollars In Thousands)
665,213
332,591
29,395
16,862
1,044,061
156,144
28,458
1,512
67,281
1,297,456
67,507
1,364,963
83,508
493,322
60,284
416,202
1,053,316
5,017
13,688
10,315
1,082,336
154,687
7,918
1,244,941
120,022
$ 32,066
19,962
1,367
652
54,047
2,894
448
14
298
57,701
4.82 % $
6.00 %
4.65 %
3.87 %
5.18 %
1.85 %
1.57 %
0.94 %
0.44 %
4.45 %
633,605
268,376
17,413
16,446
935,840
159,188
33,990
1,402
59,737
1,190,157
58,536
$ 1,248,693
$ 32,021
16,739
844
634
50,238
2,841
474
4
253
53,810
185
2,553
536
6,196
9,470
22
967
1,112
11,571
0.22 % $
0.52 %
0.89 %
1.49 %
0.90 %
0.45 %
7.06 %
10.78 %
1.07 %
126
2,398
611
6,604
9,739
13
842
1,111
11,705
62,578
450,558
60,276
393,726
967,138
6,471
12,196
10,315
996,120
138,920
8,909
1,143,949
104,744
5.05 % $
6.24 %
4.85 %
3.86 %
5.37 %
1.78 %
1.39 %
0.29 %
0.42 %
4.52 %
$
0.20 % $
0.53 %
1.01 %
1.68 %
1.01 %
0.19 %
6.90 %
10.78 %
1.18 %
583,594
245,706
15,873
16,899
862,072
171,043
17,532
1,537
74,493
1,126,677
56,313
1,182,990
34,180
395,259
82,430
400,695
912,564
2,034
39,384
10,315
964,297
137,117
11,019
1,112,433
70,557
$ 31,667
17,916
888
654
51,125
3,168
249
4
220
54,766
94
3,023
968
8,941
13,026
32
2,712
1,115
16,885
5.43 %
7.29 %
5.59 %
3.87 %
5.93 %
1.85 %
1.42 %
0.28 %
0.30 %
4.86 %
0.28 %
0.76 %
1.17 %
2.23 %
1.43 %
1.59 %
6.89 %
10.81 %
1.75 %
$
1,364,963
$ 1,248,693
$
1,182,990
$ 46,130
$ 42,105
$ 37,881
Net interest-earning assets
$
215,120
Net interest margin
Average interest-earning assets to
average interest-bearing
liabilities
Return on average assets
Return on average equity
Average equity to average assets
Non-interest expense to average
assets
119.88 %
1.04 %
11.78 %
8.79 %
2.47 %
3.38 %
$
3.56 %
194,037
3.34 %
3.54 %
162,380
3.11 %
3.36 %
119.48 %
1.10 %
13.12 %
8.39 %
2.43 %
116.84 %
0.75 %
12.65 %
5.96 %
2.42 %
(1) The average balances of loans and leases include non-performing loans and leases. Interest income related to non-performing loans and leases is recognized when
collected.
(2) Includes amortized cost basis of assets available for sale and held to maturity.
(3) Yields on tax-exempt municipal obligations are not presented on a tax-equivalent basis in this table.
39
Table of Contents
The following table provides information with respect to (1) the change in interest income attributable to changes in rate (changes in
rate multiplied by prior volume), (2) the change in interest income attributable to changes in volume (changes in volume multiplied by prior rate)
and (3) the change in rate/volume (changes in rate multiplied by changes in volume) for the year ended December 31, 2014 compared to the year
ended December 31, 2013 and for the year ended December 31, 2013 compared to the year ended December 31, 2012 .
Rate/Volume Analysis
Interest-earning assets
Commercial real estate and other
mortgage loans
Commercial and industrial loans
Direct financing leases
Consumer and other loans
Total loans and leases receivable
Mortgage-related securities
Other investment securities
FHLB and FRB Stock
Short-term investments
Total net change in income on
interest-earning assets
Interest-bearing liabilities
Transaction accounts
Money market
Certificates of deposit
Wholesale deposits
Total deposits
FHLB advances
Other borrowings
Junior subordinated notes
Increase (Decrease) for the Year Ended December 31,
2014 compared to 2013
2013 compared to 2012
Rate
Volume
Rate/
Volume
Net
Rate
Volume
(In Thousands)
Rate/
Volume
Net
$ (1,479 ) $ 1,597 $
(631 )
(34 )
2
(2,142 )
109
61
9
12
4,005
581
16
6,199
(54 )
(77 )
—
32
(73 ) $
(151 )
(24 )
—
(248 )
(2 )
(10 )
1
1
45 $ (2,173 ) $ 2,714 $
3,223
523
18
3,809
53
(26 )
10
45
(2,591 )
(119 )
(3 )
(4,886 )
(117 )
(5 )
—
94
1,653
86
(18 )
4,435
(220 )
234
—
(44 )
(187 ) $
(239 )
(11 )
1
(436 )
10
(4 )
—
(17 )
354
(1,177 )
(44 )
(20 )
(887 )
(327 )
225
—
33
(1,951 )
6,100
(258 )
3,891
(4,914 )
4,405
(447 )
(956 )
13
(66 )
(75 )
(743 )
(871 )
15
20
1
42
228
—
377
647
(3 )
103
—
4
(7 )
—
(42 )
(45 )
(3 )
2
—
59
155
(75 )
(408 )
(269 )
9
125
1
(25 )
(919 )
(132 )
(2,220 )
(3,296 )
(28 )
4
—
78
423
(260 )
(156 )
85
70
(1,872 )
—
(21 )
(129 )
35
39
(76 )
(61 )
(2 )
(4 )
32
(625 )
(357 )
(2,337 )
(3,287 )
(19 )
(1,870 )
(4 )
(5,180 )
(143 )
(304 ) $ 4,224
Total net change in expense on
interest-bearing liabilities
(835 )
747
Net change in net interest income $ (1,116 ) $ 5,353 $
(46 )
(212 ) $ 4,025 $ (1,594 ) $ 6,122
(3,320 )
(134 )
(1,717 )
$
Net interest income increased by $4.0 million , or 9.6% , for the year ended December 31, 2014 compared to the same period in 2013 .
The increase in net interest income during the year was primarily attributable to favorable volume variances from commercial and industrial
loans, commercial real estate and other mortgage loans and direct financing leases, although it was partially offset by an unfavorable rate
variance on the loan and lease portfolio. The yield on average earning assets for the year ended December 31, 2014 was 4.45% compared to
4.52% for the year ended December 31, 2013 . The decline in the yield on average earning assets was principally due to the overall decline in the
yield on the loan and lease portfolio which declined 19 basis points to 5.18% for the year ended December 31, 2014 from 5.37% for the year
ended December 31, 2013 .
A significant portion of the commercial real estate portfolio is comprised of fixed rate loans with terms generally up to five years. As
these loans reached their maturity in 2014 and 2013 they were renewed at current market rates, which were generally lower than the original rate
of the loan, and subject to competitive pricing pressures. As a result, the overall yield on the commercial real estate portfolio continued to
decline in 2014. The marketplace for commercial and industrial loans also continues to be subject to competitive pricing pressures, contributing
to the decline in yield on this portfolio. Irregular prepayment activity and the associated fees collected in lieu of interest partially offset the
decline in yields.
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Table of Contents
The average balance of the short-term investment portfolio was $67.3 million with a yield of 0.44% for the year ended December 31,
2014 as compared to $59.7 million with a yield of 0.42% for the year ended December 31, 2013 . As we strive to reduce on-balance-sheet
liquidity, we may on occasion use other sources available to us to fund asset growth. Other sources may include temporary use of FHLB short-
term advances and orderly issuance of long-term wholesale certificates of deposit designed to mitigate interest rate risk as we provide fixed rate
loan alternatives to our clients.
The overall weighted average rate paid on interest-bearing liabilities was 1.07% for the year ended December 31, 2014 , a decrease of
11 basis points from 1.18% for the year ended December 31, 2013 . The decrease in the overall rate on the interest-bearing liabilities was
primarily caused by the replacement of certain maturing certificates of deposit, principally wholesale certificates of deposit, at lower current
market rates partially offset by unfavorable volume-related variances in wholesale certificates of deposits and money market deposits. The
continued low rate environment combined with the maturity structure of our wholesale certificates of deposit provided us the opportunity to be
able to manage our liability structure in both maturity terms and rate to deliver an enhanced net interest margin during 2014 relative to 2013.
Further, our continued success of attracting in-market non-interest bearing demand deposits through new business relationships and increased
client deposit balances contributed to the overall decline in our cost of funds. Average in-market client deposits - comprised of all transaction
accounts, money market accounts, and non-wholesale deposits - increased 11.2% to $791.8 million for the year ended December 31, 2014 from
$712.3 million for the year ended December 31, 2013 .
Net interest margin increased 2 basis points to 3.56% for the year ended December 31, 2014 from 3.54% for the year ended
December 31, 2013 .
Provision for Loan and Lease Losses
We recorded a provision for loan and lease losses in the amount of $1.2 million for the year ended December 31, 2014 as compared to a
negative provision of $959,000 for the year ended December 31, 2013 . We determine our provision for loan and lease losses based upon credit
risk and other subjective factors pursuant to our allowance for loan and lease loss methodology, the magnitude of current and historical net
charge-offs recorded in the period and the amount of reserves established for impaired loans that present collateral shortfall positions.
During the years ended December 31, 2014 , 2013 and 2012 , the factors influencing the provision for loan and lease losses were the
following:
Changes in the provision for loan and lease losses associated with:
(Release) addition of specific reserves on impaired loans, net
Net decrease in allowance for loan and lease loss reserve due to subjective factor changes
Charge-offs in excess of specific reserves
Recoveries
Change in inherent risk of the loan and lease portfolio
Total provision for loan and lease losses
$
$
For the Year Ended December 31,
2013
2012
2014
(In Thousands)
(19 ) $
(878 )
1,233
(425 )
1,325
1,236 $
(381 ) $
(492 )
180
(374 )
108
(959 ) $
1,901
—
2,206
(481 )
617
4,243
The (release) addition of specific reserves on impaired loans represents new specific reserves established on impaired loans for which,
although collateral shortfalls are present, we believe we will be able to recover our principal and/or it represents the release of previously
established reserves that are no longer required. A decrease in allowance for loan and lease losses due to subjective factor changes reflects
management’s evaluation of the level of risk within the portfolio based upon the level and trend of certain criteria such as delinquencies, volume
and average loan size, average risk rating, technical defaults, geographic concentrations, loans and leases on management attention watch lists,
unemployment rates in our market areas, experience in credit granting functions, and changes in underwriting standards. As overall asset quality
metrics improve and the level and trend of the factors improve for a sustainable period of time, the level of general reserve due to these factors
may be reduced causing an overall reduction in the level of the required reserve deemed to be appropriate by management. Conversely, increases
in the level and trend of these factors may warrant an increase to our overall allowance for loan and lease losses. Charge-offs in excess of
specific reserves represent an additional provision for loan and lease losses required to maintain the allowance for loan and lease losses at a level
deemed appropriate by management. This amount is net of the release of any specific reserve that may have already been provided. Charge-offs
in excess of specific reserves can occur in situations where:
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Table of Contents
(i) a loan has previously been partially written down to its estimated fair value and continues to decline, (ii) rapid deterioration of a credit
requires an immediate partial or full charge-off, or (iii) the specific reserve was not adequate to cover the amount of the required charge-off.
Change in the inherent risk of the portfolio is primarily influenced by the overall growth in gross loans and leases and a migration analysis of the
loans previously charged off, as well as, movement of existing loans and leases in and out of an impaired loan classification where a specific
evaluation of a particular credit may be required rather than the application of a general reserve ratio. Refer to Impaired Assets for further
information regarding the overall credit quality of our loan and lease portfolio.
Non-Interest Income
Non-interest income, consisting primarily of fees earned for trust and investment services, service charges on deposits, loan fee income,
gain on sale of loans and leases and income from bank-owned life insurance, increased by $1.7 million , or 19.7% , to $10.1 million for the year
ended December 31, 2014 , from $8.4 million for the year ended December 31, 2013 .
Trust and investment services fee income increased by $678,000 , or 18.1% , to $4.4 million for the year ended December 31, 2014
compared to $3.8 million for the year ended December 31, 2013 . Trust and investment services fee income is primarily driven by the amount of
assets under management and administration as well as the mix of business at different fee structures and can be positively or negatively
influenced by the timing and magnitude of volatility within the capital markets.
At December 31, 2014 , our trust assets under management were $773.2 million , or 1.2% more than the trust assets under management
of $763.9 million at December 31, 2013 , while our assets under administration declined approximately 4.4% , to $186.5 million at
December 31, 2014 from $195.1 million at December 31, 2013 . During 2014 we underwent a strategic plan to change the mix of our business.
We exited low margin business and added more relationships at wider margins, which was a major contributor to the 18.1% increase in revenue
year over year. We expect to continue to increase our revenue from assets under management and administration, but market volatility may also
affect the actual change in revenue.
Loan fees increased by approximately $282,000 , or 21.8% , to $1.6 million for the year ended December 31, 2014 from $1.3 million
for the year ended December 31, 2013 . The increase in loan fees is primarily attributable to fees earned for issuing letters of credit on behalf of
our clients.
Increase in cash surrender value of bank-owned life insurance increased by $17,000 , or 2.0% , to $862,000 for the year ended
December 31, 2014 from $845,000 for the year ended December 31, 2013 . In December 2012, we purchased a new $4.0 million bank-owned
life insurance policy and the increase in this account is directly related to the earnings generated from this additional policy.
Gain on sale of loans and leases for the year ended December 31, 2014 totaled $392,000 , an increase of $392,000 from the year ended
December 31, 2013 which is primarily attributable to the gain on sale of the guaranteed portion of originated SBA loans, a new source of non-
interest income resulting from the Alterra Transaction.
Other non-interest income decreased by $14,000 , or 5.1% , to $261,000 for the year ended December 31, 2014 from $275,000 for the
year ended December 31, 2013 . The decrease in other income is primarily due to a non-recurring item recorded in 2013 relating to fees earned
upon early termination of interest rate swaps with various clients.
Non-Interest Expense
Non-interest expense increased by $3.4 million , or 11.2% , to $33.8 million for the year ended December 31, 2014 from $30.4 million for
the comparable period of 2013 , primarily due to an increase in compensation and professional fees, partially offset by a decrease in other
expenses where we recognized, in 2013, a $1.3 million contribution to the First Business Charitable Foundation (the “Foundation”).
Compensation expense increased by $3.2 million , or 17.5% , to $21.5 million for the year ended December 31, 2014 from $18.3
million for the year ended December 31, 2013 . The increase in compensation expense was primarily due to the Alterra Transaction, annual merit
increases and new staff hired in support of strategic initiatives. The number of full-time equivalent employees as of December 31, 2014 and 2013
was 215 and 145 , respectively. Most of the increase was the result of new employees gained from the Alterra Transaction.
Professional fees expense increased by $1.4 million , or 73.0% , to $3.4 million for the year ended December 31, 2014 from $2.0
million for the year ended December 31, 2013 . The increase in professional fees was primarily due to specifically identified costs totaling
$990,000 related to the Alterra transaction.
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Table of Contents
During the years ended December 31, 2014 and 2013, we recognized a net gain on foreclosed properties of $10,000 and $117,000
respectively.
Other non-interest expense decreased by $2.2 million , or 48.2% , to $2.4 million for the year ended December 31, 2014 compared to
$4.7 million for the same time period of 2013 . The decrease in other non-interest expense was primarily due to a one-time endowment to the
Foundation in the amount of $1.3 million in 2013, combined with the carrying value adjustment in 2014 made on one of our limited partnerships
to reflect the redistribution of expenses to new partners as they were added after expenses were incurred and a 2013 carrying value adjustment of
another limited partnership to reflect the proper allocation of the partnerships returns to the general partner after the fund attained certain
preferred rates of return.
FDIC insurance expense increased by $17,000 , or 2.3% , to $758,000 for the year ended December 31, 2014 compared to $741,000 for
the year ended December 31, 2013 primarily resulting from the acquisition of Alterra and the resulting increase in average total assets. FDIC
insurance expense is based upon a formula that incorporates a variety of factors, including but not limited to, average total assets, average
tangible equity and the overall risk profile of the institution. A change in any one of these risk elements during the comparative reporting periods
may cause the underlying assessment base rate to fluctuate and therefore influence the total expense accrued.
Collateral liquidation costs increased by $124,000 , or 63.3% , to $320,000 for the year ended December 31, 2014 from $196,000 for
the year ended December 31, 2013 . Collateral liquidation costs are expenses incurred by us to facilitate resolution of impaired loans and leases.
The amount of collateral liquidation costs recorded in any particular period is influenced by the timing and level of effort required for each
individual loan. Our ability to recoup these costs from our clients is uncertain and therefore expensed as incurred through our consolidated
results of operations. To the extent we are successful in recouping these expenses from our clients, the recovery of expense is shown as a net
reduction to this line item.
Income Taxes
Income tax expense was $7.1 million for the year ended December 31, 2014 compared to $7.4 million for the year ended December 31,
2013 . The overall decrease in tax expense is primarily due to usage of federal new market tax credits, partially offset by an increased level of
pre-tax income in comparison to the prior year. The effective tax rate for the year ended December 31, 2014 was 33.4% compared to 35.0% for
the year ended December 31, 2013 .
During the fourth quarter of 2014, we invested in a federal new market tax credit. These credits are typically purchased at 70-90% of
the amount of the credit and are generally utilized to offset taxes payable over ten-year and seven-year periods, respectively. During the year
ended December 31, 2014, the tax credit used to reduce our tax expense totaled $375,000. We did not utilize any federal new market tax credits
in 2013 or 2012. The net result of this transaction was a decrease to income tax expense, which positively impacted our effective tax rate.
The effective tax rate differs from the federal statutory corporate tax rate as follows:
Statutory federal tax rate
State taxes, net of federal benefit
Bank owned life insurance
Tax-exempt security and loan income, net of TEFRA adjustments
Federal new market tax credit
Non-deductible transaction costs
Discrete items
Other
For the Year Ended December 31,
2012
2013
2014
34.4 %
4.7
(1.4 )
(3.5 )
(1.8 )
0.6
(0.2 )
0.6
33.4 %
34.4 %
4.6
(1.4 )
(3.2 )
—
—
0.1
0.5
35.0 %
34.0 %
4.7
(1.7 )
(3.2 )
—
—
0.3
0.6
34.7 %
The Corporation’s effective tax rate may fluctuate as it is impacted by the level and timing of the Corporation’s utilization of federal
new market tax credits and the level of tax-exempt investments and loans.
43
Table of Contents
General
FINANCIAL CONDITION
At December 31, 2014 our total assets were $1.629 billion , an increase of $360.7 million , or 28.4% , from $1.269 billion at
December 31, 2013 . This increase reflects the addition of approximately $250 million in assets due to the Alterra Transaction.
Short-term investments
Short-term investments increased by $20.3 million to $88.4 million at December 31, 2014 from $68.1 million at December 31, 2013 .
Our short-term investments primarily consist of interest-bearing deposits held at the FRB, which increased by $17.5 million to $70.5 million at
December 31, 2014. We value the safety and soundness provided by the FRB, and therefore we incorporate short-term investments in our on-
balance-sheet liquidity program. In general, the level of our short-term investments is influenced by the timing of deposit gathering, scheduled
maturities of wholesale deposits, funding of loan and lease growth when opportunities are presented, and the level of our securities portfolio.
Although the majority of our short-term investments consist of deposits with the FRB, we also make investments in commercial paper and FDIC
insured certificates of deposit acquired through brokers. We approach our decisions to purchase commercial paper with similar rigor and
underwriting standards applied to our loan and lease portfolio. The original maturities of the commercial paper are typically sixty days or less
and provide an attractive yield in comparison to other short-term alternatives. These investments also assist us in maintaining a shorter duration
of our overall investment portfolio which we believe is necessary to take advantage of an anticipated rising rate environment. Please refer to
Liquidity and Capital Resources for further discussion.
Securities
Total securities, including available-for-sale and held-to-maturity, increased by $6.1 million to $186.3 million at December 31, 2014
from $180.1 million at December 31, 2013 . As of December 31, 2014, our total securities portfolio had a duration of approximately 3.2 years.
Our investment portfolio primarily consists of collateralized mortgage obligations and agency obligations and is used to provide a source of
liquidity, including the ability to pledge securities for possible future cash advances, while contributing to the earnings potential of the Banks.
The overall duration of the securities portfolio is established and maintained to further mitigate interest rate risk present within our balance sheet
as identified through our asset/liability simulations. We purchase investment securities intended to protect our net interest margin while
maintaining an acceptable risk profile. In addition, we will purchase investments to utilize our cash position effectively within appropriate policy
guidelines and estimates of future cash demands. While collateralized mortgage obligations present prepayment risk and extension risk, we
believe the overall credit risk associated with these investments is minimal, as the majority of the obligations we hold are guaranteed by the
Government National Mortgage Association (“GNMA”), a U.S. government agency. The estimated repayment streams associated with this
portfolio also allow us to better match our short-term liabilities. The Banks’ investment policies allow for various types of investments, including
tax-exempt municipal securities. The ability to invest in tax-exempt municipal securities provides for further opportunity to improve our overall
yield on our securities portfolio. We evaluate the credit risk of the municipal obligations prior to purchase and generally limit our exposure to
general obligation issuances from municipalities, primarily in Wisconsin.
As we evaluate the level of on-balance-sheet liquidity, we continue to purchase U.S. Government agency obligations, primarily those
obligations issued by Federal Home Loan Mortgage Corporation (“FHLMC”) and Federal National Mortgage Association (“FNMA”). We have
structured these purchases to have final maturities within two to four years from the issue date. Some of the securities contain either quarterly or
one-time call features. The maturity structure of our securities portfolio allows us to effectively manage the cash flows of these securities along
with the collateralized mortgage obligations to be able to meet loan demand in the near future without the need to immediately borrow funds
from our various funding sources and proactively adjust the portfolio should interest rates rise within the next two to four years. Our
management deems these securities to be creditworthy and believes they exhibit appropriate market yields for the risks assumed. We expect to
continue to purchase these types of approved securities with appropriate maturity terms when they are available in the market.
During the year ended December 31, 2014 , we recognized unrealized holding gains of $1.6 million before income taxes through other
comprehensive income. These gains were the result of the decrease in longer term interest rates. During the second quarter of 2014, we
transfered approximately $43.7 million of certain U.S. Government agency obligations, collateralized mortgage obligations and municipal
obligations from the available-for-sale portfolio to the held-to-maturity portfolio. This transfer was completed to assist with general interest rate
risk management and provides some flexibility in enhancing yield on the investment portfolio without taking on additional economic risk which
may negatively affect our overall equity position. As of the transfer date, the unrealized holding loss on the securities transfered was
approximately $874,000. This unrealized loss will continue to be reported as a separate component of stockholders’ equity and will be amortized
over the
44
Table of Contents
remaining life of the securities as an adjustment to the yield. The corresponding discount on these securities will offset this adjustment to yield
which results in no impact to the income statement. The securities identified and transferred were primarily securities with greater price risk in
rising rate environments.
The majority of the securities we hold have active trading markets; therefore, we have not experienced difficulties in pricing our
securities. We use a third-party pricing service as our primary source of market prices for our securities portfolio. On a quarterly basis, we
validate the reasonableness of prices received from this source through independent verification of a representative sample of the portfolio, data
integrity validation through comparison of current price to prior period prices, and an expectation-based analysis of movement in prices based
upon the changes in the related yield curves and other market factors. On a periodic basis, we review the third-party pricing vendor’s
methodology for pricing relevant securities and the results of its internal control assessments. Our securities portfolio is sensitive to fluctuations
in the interest rate environment and has limited sensitivity to credit risk due to the nature of the issuers and guarantors of our securities as
previously discussed. If interest rates decline and the credit quality of the securities remains constant or improves, the fair value of our debt
securities portfolio would likely improve, thereby increasing our total comprehensive income. If interest rates increase and the credit quality of
the securities remains constant or deteriorates, the fair value of our debt securities portfolio would likely decline and therefore decrease our total
comprehensive income. The magnitude of the fair value change will be based upon the duration of the portfolio. A securities portfolio with a
longer average duration will exhibit greater market price volatility movements than a securities portfolio with a shorter average duration in a
changing rate environment. No securities within our portfolio were deemed to be other-than-temporarily impaired as of December 31, 2014 .
There were no sales of securities during the years ended December 31, 2014 and 2013 . As of December 31, 2013, no securities were classified
as held to maturity and as of December 31, 2014 and 2013 no securities were classified as trading securities.
At December 31, 2014 , $32.7 million of our mortgage-related securities were pledged to secure our various obligations including
outstanding advances or unused borrowing capacity with the FHLB and interest rate swap contracts.
The table below sets forth information regarding the amortized cost and fair values of our investments and mortgage-related securities
at the dates indicated.
2014
2013
2012
Amortized cost
Fair value
Amortized cost
Fair value
Amortized cost
Fair value
As of December 31,
(In Thousands)
Available-for-sale:
U.S. Government agency obligations - government-
sponsored enterprises
$
Municipal obligations
Asset-backed securities
Collateralized mortgage obligations - government issued
Collateralized mortgage obligations - government-
9,046 $
573
1,514
67,740
8,965 $
578
1,510 $
68,874
16,380 $
16,207
1,517 $
111,010
16,244 $
15,489
1,494
111,969
19,667 $
11,897
—
148,369
19,721
12,033
—
151,645
sponsored enterprises
64,763
17,197
$ 143,636 $ 144,698 $ 180,675 $ 180,118 $ 197,061 $ 200,596
17,128
35,561
64,771
34,922
As of December 31,
2014
2013
2012
Amortized cost Fair value
Amortized cost
Fair value
Amortized cost Fair value
(In Thousands)
Held-to-maturity:
U.S. Government agency obligations - government-
sponsored enterprises
$
Municipal obligations
Collateralized mortgage obligations - government issued
Collateralized mortgage obligations - government-
1,490 $
16,088
14,505
1,473 $
16,155
14,531
sponsored enterprises
9,480
41,563 $
9,535
41,694 $
$
45
— $
—
—
—
— $
— $
—
—
—
— $
— $
—
—
—
— $
—
—
—
—
—
Table of Contents
U.S. Government agency obligations - government-sponsored enterprises represent securities issued by the FHLMC and FNMA.
Collateralized mortgage obligations - government issued represent securities guaranteed by GNMA. Collateralized mortgage obligations -
government-sponsored enterprises include securities guaranteed by FHLMC and the FNMA. Asset-backed securities represent securities issued
by the Student Loan Marketing Association (“SLMA”) and are 97% guaranteed by the U.S. government. Municipal obligations include
securities issued by various municipalities located primarily within the State of Wisconsin and are primarily general obligation bonds that are
tax-exempt in nature. As of December 31, 2014 , no issuer's securities exceeded 10% of our total stockholders' equity.
The following table sets forth the contractual maturity and weighted average yield characteristics of the fair value of our available for
sale securities and the amortized cost of our held to maturity securities at December 31, 2014 , classified by remaining contractual maturity.
Actual maturities may differ from contractual maturities because issuers have the right to call or prepay obligations without call or prepayment
penalties. Yields on tax-exempt obligations have not been computed on tax equivalent basis.
Less than One Year
One to Five Years
Five to Ten Years
Over Ten Years
Balance
Weighted
Average
Yield
Balance
Weighted
Average
Yield
Balance
Weighted
Average
Yield
Balance
Weighted
Average
Yield
Total
(Dollars In Thousands)
Available-for-sale:
U.S. Government agency obligations -
government-sponsored enterprises
$
Municipal obligations
Asset-backed securities
Collateralized mortgage obligations -
government issued
Collateralized mortgage obligations -
government-sponsored enterprises
—
—
—
—
7,971
—
—
198
—% $
—
—%
—
—
994
578
1,510
18,793
0.84 % $
—
—%
3.94
0.93
—
—
$
651
8,820
$
49,969
$ 71,844
2.04 % $
1.67
0.91 %
—
—
—
—% $
—
—%
2.41
1.68
49,883
14,151
$ 64,034
2.21
1.33
64,771
$ 144,698
8,965
578
1,510
68,874
Less than One Year
One to Five Years
Five to Ten Years
Over Ten Years
Balance
Weighted
Average
Yield
Balance
Weighted
Average
Yield
Balance
Weighted
Average
Yield
Balance
Weighted
Average
Yield
Total
Held-to-maturity:
U.S. Government agency obligations -
government-sponsored enterprises
$
Municipal obligations
Collateralized mortgage obligations -
government issued
Collateralized mortgage obligations -
government-sponsored enterprises
Derivative Activities
—
—
—
1,490
799
—
—% $
—
—
—
—
—
$
—
2,289
$
(Dollars In Thousands)
1.07 % $
1.99
—
—
—
14,314
—
—
—% $
1.93
—
—
—
975
14,505
9,480
$ 14,314
$ 24,960
—% $
2.19
1.57
1.63
1,490
16,088
14,505
9,480
$ 41,563
The Banks’ investment policies allow the Banks to participate in hedging strategies or use financial futures, options or forward
commitments or interest rate swaps with prior Board approval. The Banks utilize, from time to time, derivative instruments in the course of their
asset/liability management. As of December 31, 2014 and 2013 , the Banks did not hold any derivative instruments that were designated as cash
flow or fair value hedges. The derivative portfolio consists of interest rate swaps offered directly to qualified commercial borrowers which
allowed the Banks to provide a fixed rate alternative to their clients while mitigating interest rate risk by keeping a variable rate loan in their
portfolios. The Banks economically hedge client derivative transactions by entering into equal and offsetting interest rate swap contracts
executed with dealer counterparties. The economic hedge with the dealer counterparties allows the Banks to primarily offset the fixed rate
interest rate risk. Derivative transactions executed through this program are not designated as accounting hedge relationships and are marked to
market through earnings each period.
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Table of Contents
As of December 31, 2014 , the aggregate amortizing notional value of interest rate swaps with various commercial borrowers was
approximately 27.5 million . We receive fixed rates and pay floating rates based upon LIBOR on the swaps with commercial borrowers. These
swaps mature between March 2016 and February 2023 . Commercial borrower swaps are completed independently with each borrower and are
not subject to master netting arrangements. All of these commercial borrower swaps were reported on the Consolidated Balance Sheets as a
derivative asset of $575,000 , included in accrued interest receivable and other assets as of December 31, 2014 . On the offsetting swap contracts
with dealer counterparties, we pay fixed rates and receive floating rates based upon LIBOR. These interest rate swaps also have maturity dates
between March 2016 and February 2023 . Dealer counterparty swaps are subject to master netting agreements among the contracts within each
of our banks and are reported on the Consolidated Balance Sheets as a derivative liability of $575,000 . The value of these swaps was included in
accrued interest payable and other liabilities on the Consolidated Balance Sheets as of December 31, 2014 .
Loans and Leases Receivable
Loans and leases receivable, net of allowance for loan and lease losses, increased by $299.4 million , or 31.0% , to $1.266 billion at
December 31, 2014 from $967.1 million at December 31, 2013 . This growth is primarily related to the addition of approximately $200 million
from the Alterra Transaction. We principally originate commercial and industrial loans and commercial real estate loans. The overall mix of our
portfolio remained fairly consistent in 2014 when compared to 2013 . As of December 31, 2014 and 2013 , approximately 63.3% and 65.7% of
our loan and lease portfolio, respectively, was concentrated in commercial real estate loans primarily in our owner-occupied and non-owner-
occupied classes. We were successful in growing both our commercial real estate and commercial and industrial portfolios through the Alterra
Transaction as well as through growth in our Wisconsin banks. Our commercial real estate portfolio increased by $166.7 million , or 25.8% , to
$811.8 million at December 31, 2014 from $645.1 million at December 31, 2013 . Our commercial and industrial portfolio increased $123.1
million , or 41.9% , to $416.7 million at December 31, 2014 from $293.6 million at December 31, 2013 . We have emphasized actively pursuing
commercial and industrial loans as this segment of our loan and lease portfolio provides an attractive yield commensurate with an appropriate
level of credit risk and creates opportunities for in-market deposit and trust and investment relationships which generate additional fee revenue.
Given the measured pace of improvement in economic conditions and what we believe to be an increased source of confidence within our
marketplace, we are beginning to observe evidence of increased loan demand. While we continue to experience significant competition as banks
operating in our primary geographic area attempt to deploy excess liquidity, we remain committed to our underwriting standards and will not
deviate from those standards for the sole purpose of growing our loan and lease portfolio. We expect our new loan and lease activity to be more
than adequate to replace normal amortization and to continue to grow in future quarters.
Credit underwriting through a committee process is a key component of our operating philosophy. Business development officers have
relatively low individual lending authority limits, and thus a significant portion of our new credit extensions require approval from a loan
approval committee regardless of the type of loan or lease, amount of the credit, or the related complexities of each proposal. In addition, we
make every effort to ensure that there is appropriate collateral or a government guarantee at the time of origination to protect our interest in the
related loan or lease. To monitor the ongoing credit quality of our loans and leases each credit is evaluated for proper risk rating using a nine
grade risk rating system at the the time of origination, subsequent renewal, evaluation of updated financial information from our borrowers, or as
other circumstances dictate.
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The following table presents information concerning the composition of the Banks’ consolidated loans and leases at the dates indicated.
2014
2013
2012
2011
2010
As of December 31,
% of
Total
Loans and
Leases
% of
Total
Loans and
Leases
Amount
Outstanding
Amount
Outstanding
(Dollars in Thousands)
% of
Total
Loans and
Amount
Outstanding
Leases
% of
Total
Loans and
Leases
% of
Total
Loans and
Leases
Amount
Outstanding
Amount
Outstanding
Commercial real estate
loans
Commercial real estate —
owner occupied
Commercial real estate —
non-owner occupied
Construction and land
development
Multi-family
1-4 family
Total commercial real
estate loans
Commercial and
industrial loans
Direct financing leases,
net
Consumer and other
Home equity loans and
second mortgage loans
Other
Total consumer and other
Total gross loans and
lease receivables
$
163,884
12.8 % $
141,164
14.4 % $
144,988
15.9 % $
150,528
17.7 % $
152,560
17.4 %
417,962
32.5
341,695
34.8
323,660
35.5
304,597
35.8
307,307
35.0
121,160
72,578
36,182
811,766
416,654
34,165
7,866
11,341
19,207
9.5
5.7
2.8
63.3
32.5
2.7
0.6
0.9
1.5
68,708
62,758
30,786
645,111
293,552
26,065
5,272
11,972
17,244
7.0
6.4
3.1
65.7
29.9
2.7
0.5
1.2
1.7
64,966
58,454
31,943
624,011
256,458
15,926
4,642
11,671
16,313
7.1
6.4
3.5
68.4
28.1
1.7
0.5
1.3
1.8
38,124
43,905
43,513
580,667
237,099
17,128
4,970
11,682
16,652
4.5
5.2
5.1
68.2
27.8
2.0
0.6
1.4
2.0
61,645
43,012
53,849
618,373
225,921
19,288
5,091
9,315
14,406
7.0
4.9
6.1
70.4
25.7
2.2
0.6
1.1
1.6
1,281,792
100.0 %
981,972
100.0 %
912,708
100.0 %
851,546
100.0 %
877,988
100.0 %
Less:
Allowance for loan and
lease losses
Deferred loan fees
Loans and lease
receivables, net
14,329
1,025
13,901
1,021
15,400
748
14,155
704
16,271
782
$ 1,266,438
$
967,050
$
896,560
$
836,687
$
860,935
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The following table shows the scheduled contractual maturities of the Banks’ consolidated gross loans and leases, as well as the dollar
amount of such loans and leases which are scheduled to mature after one year which have fixed or adjustable interest rates, as of December 31,
2014 .
Commercial real estate
Owner-occupied
Non-owner occupied
Construction and land development
Multi-family
1-4 family
Commercial and industrial
Direct financing leases
Consumer and other
Amounts Due
In One Year
or Less
After One
Year through
Five Years
After Five
Years
Interest Terms On Amounts Due
after One Year
Total
Fixed Rate
Variable Rate
(In Thousands)
$
$
23,384 $
81,901
53,332
12,435
14,771
149,012
1,297
9,751
345,883 $
100,911 $
212,037
51,949
34,010
21,406
219,349
22,921
9,456
672,039 $
39,589 $
124,024
15,879
26,133
5
48,293
9,947
—
163,884 $
417,962
121,160
72,578
36,182
416,654
34,165
19,207
263,870 $ 1,281,792 $
101,918 $
284,133
22,688
51,453
19,184
86,370
32,868
8,593
607,207 $
38,582
51,928
45,140
8,690
2,227
181,272
—
863
328,702
Commercial Real Estate Loans. The Banks originate owner-occupied and non-owner-occupied commercial real estate loans which
have fixed or adjustable rates and generally terms of up to five years and amortizations of up to twenty-five years on existing commercial real
estate and new construction. The Banks also originate loans to construct commercial properties and complete land development projects.
The Banks’ construction loans generally have terms of six to 24 months with fixed or adjustable interest rates and fees that are due at
the time of origination. Loan proceeds are disbursed in increments as construction progresses and as project inspections warrant. Multi-family
loans are primarily secured by apartment buildings and are mostly located in Dane and Waukesha counties. One-to-four family first mortgage
loans are generally secured by properties held for investment and primary and secondary residences of our clients.
Commercial real estate lending typically involves larger loan principal amounts than that for residential mortgage loans or consumer
loans. The repayment of these loans generally is dependent on sufficient income from the properties securing the loans to cover operating
expenses and debt service. Because payments on commercial real estate loans are often dependent on external market conditions impacting the
successful operation or development of the property or business involved, repayment of such loans is often more sensitive than other types of
loans to adverse conditions in the real estate market or the general economy, which are outside the borrower’s control. In the event that the cash
flow from the property is reduced, the borrower’s ability to repay the loan could be negatively impacted. The deterioration of one or a few of
these loans could cause a material increase in our level of nonperforming loans, which would result in a loss of revenue from these loans and
could result in an increase in the provision for loan and lease losses and an increase in charge-offs, all of which could have a material adverse
impact on our net income. Additionally, many of these loans have real estate as a primary or secondary component of collateral. The market
value of real estate can fluctuate significantly in a short period of time as a result of economic conditions. Adverse developments affecting real
estate values in one or more of our markets could impact collateral coverage associated with the commercial real estate segment of our portfolio,
possibly leading to increased specific reserves or charge-offs, which would adversely affect profitability.
Commercial and Industrial Loans. The Banks’ commercial and industrial loan portfolio is comprised of loans for a variety of purposes
which principally are secured by inventory, accounts receivable, equipment, machinery and other corporate assets and are advanced within limits
prescribed by our loan policy. The majority of such loans are secured and typically backed by personal guarantees of the owners of the
borrowing business. Of the $416.7 million of commercial and industrial loans, including asset-based loans, outstanding as of December 31,
2014 , $144.7 million were originated by FBCC, our asset-based lending subsidiary and $650,000 were originated by FBF, our factored
receivable business line. These asset-based loans, including accounts receivable purchased on a full recourse basis, are typically secured by the
borrower’s accounts receivable and inventory. These loans generally have higher interest rates and non-origination fees collected in lieu of
interest and the collateral supporting the credit is closely monitored. Asset-based loans secured by owner-occupied real estate amounted to $19.0
million as of December 31, 2014 and are included in the owner-occupied commercial real estate loan portfolio.
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Table of Contents
Our commercial loans are typically larger in amount than loans to individual consumers and, therefore, have the potential for larger
losses on a per loan basis. Additionally, asset-based borrowers are usually highly leveraged and/or have inconsistent historical earnings.
Significant adverse changes in various industries could cause rapid declines in values and collectability associated with those business assets
resulting in inadequate collateral coverage that may expose us to future losses. An increase in specific reserves and charge-offs may have a
material adverse impact on our results of operations.
Leases. Leases initiated through FBEF are originated with a fixed rate and typically a term of seven years or less. It is customary in the
leasing industry to provide 100% financing; however, FBEF will, from time-to-time, require a down payment or lease deposit to provide a credit
enhancement. All equipment leases must have an additional insured endorsement and a loss payable clause in the interest of FBEF and must
carry sufficient physical damage and liability insurance.
FBEF leases machinery and equipment to clients under leases which qualify as direct financing leases for financial reporting and as
operating leases for income tax purposes. Under the direct financing method of accounting, the minimum lease payments to be received under
the lease contract, together with the estimated unguaranteed residual value (approximating 3 to 20% of the cost of the related equipment), are
recorded as lease receivables when the lease is signed and the lease property is delivered to the client. The excess of the minimum lease
payments and residual values over the cost of the equipment is recorded as unearned lease income. Unearned lease income is recognized over the
term of the lease on a basis which results in a level rate of return on the unrecovered lease investment. Lease payments are recorded when due
under the lease contract. Residual value is the estimated fair market value of the equipment on lease at lease termination. In estimating the
equipment’s fair value, FBEF relies on historical experience by equipment type and manufacturer, published sources of used equipment pricing,
internal evaluations and, when available, valuations by independent appraisers, adjusted for known trends.
Our commercial leases are typically larger in amount than leases to individual consumers and, therefore, have the potential for larger
losses on an individual basis. Significant adverse changes in various industries could cause rapid declines in values of leased equipment resulting
in inadequate collateral coverage that may expose us to future losses. An increase in specific reserves and charge-offs may have a material
adverse impact on our results of operations.
Consumer and Other Loans. The Banks originate a small amount of consumer loans consisting of home equity, second mortgage,
credit card and other personal loans for professional and executive clients of the Banks.
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Impaired Assets
Non-performing loans decreased $6.1 million , or 38.2% , to $9.8 million at December 31, 2014 compared to $15.9 million at
December 31, 2013 . Management continues to execute a disciplined credit resolution process and has successfully managed exits of certain
previously identified non-performing credits.
Our total impaired assets consisted of the following as of the dates indicated. Balances reported for 2014 include the effects of the
Alterra Transaction.
Non-accrual loans and leases
Commercial real estate:
Commercial real estate – owner occupied
Commercial real estate – non-owner occupied
Construction and land development
Multi-family
1-4 family
Total non-accrual commercial real estate
Commercial and industrial
Direct financing leases, net
Other:
Home equity and second mortgage
Other
Total non-accrual other loans
Total non-accrual loans and leases
Foreclosed properties, net
Total non-performing assets
Performing troubled debt restructurings
Total impaired assets
As of December 31,
2014
2013
2012
2011
2010
(Dollars In Thousands)
$
$
$
500
286
4,932
17
690
6,425
2,318
—
339
283
5,422
31
521
6,596
8,011
—
$
769
2,871
4,946
46
1,006
9,638
2,842
—
$
2,972
2,249
7,229
2,009
3,506
17,965
1,558
18
329
720
1,049
9,792
1,693
11,485
2,003
$ 13,488
453
795
1,248
15,855
333
16,188
371
$ 16,559
612
1,030
1,642
14,122
1,574
15,696
1,105
$ 16,801
1,002
1,223
2,225
21,766
2,236
24,002
111
$ 24,113
$
6,283
5,144
9,275
4,186
4,237
29,125
6,436
—
939
1,906
2,845
38,406
1,750
40,156
718
40,874
Total non-accrual loans and leases to gross loans and leases
Total non-performing assets to gross loans and leases plus foreclosed
properties, net
Total non-performing assets to total assets
Allowance for loan and lease losses to gross loans and leases
Allowance for loan and lease losses to non-accrual loans and leases
0.76 %
1.61 %
1.55 %
2.56 %
4.37 %
0.89 %
0.70 %
1.12 %
146.33 %
1.65 %
1.28 %
1.42 %
87.68 %
1.72 %
1.28 %
1.69 %
109.05 %
2.81 %
2.04 %
1.66 %
65.03 %
4.57 %
3.63 %
1.85 %
42.37 %
As of December 31, 2014 and 2013 , $7.4 million and $8.1 million of the non-accrual loans were considered troubled debt
restructurings, respectively. As noted in the table above, non-performing assets consisted of non-accrual loans and leases and foreclosed
properties totaling $11.5 million , or 0.70% of total assets, as of December 31, 2014 , a decrease in non-performing assets of 29.1% , or $4.7
million , from December 31, 2013 . Impaired loans and leases as of December 31, 2014 and 2013 also included $2.0 million and $371,000 of
loans that are performing troubled debt restructurings which are considered impaired, due to the concession in terms, but are meeting the
restructured payment terms and therefore are not on non-accrual status.
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Table of Contents
A summary of the 2014 non-accrual loan and lease activity is as follows:
(In Thousands)
Non-accrual loans and leases as of December 31, 2013
Non-accrual loans and leases acquired in acquisition, at fair value
Loans and leases transferred into non-accrual status
Non-accrual loans and leases returned to accrual status
Non-accrual loans and leases transferred to foreclosed properties
Non-accrual loans and leases partially or fully charged-off
Cash received and applied to principal of non-accrual loans and leases
Non-accrual loans and leases as of December 31, 2014
$
$
15,855
1,221
2,889
(309 )
—
(1,231 )
(8,633 )
9,792
We use a wide variety of available metrics to assess the overall asset quality of the portfolio and no one metric is used independently to
make a final conclusion as to the asset quality of the portfolio. Non-performing assets as a percentage of total assets improved to 0.70% at
December 31, 2014 from 1.28% at December 31, 2013 . This is primarily due to cash collections on previously identified impaired loans,
partially offset by the identification of a new impaired loan and the Alterra Transaction. Total non-performing assets to total loans and leases and
foreclosed properties as of December 31, 2014 and December 31, 2013 were 0.89% and 1.65% , respectively. We believe this improvement
provides further insight to our success in working problem assets through the entire process and eliminating further losses and improving overall
asset quality.
We also monitor early stage delinquencies to provide insight into potential future problems. As of December 31, 2014 , the payment
performance did not point to any new areas of concern, as approximately 99.8% of the loan and lease portfolio was in a current payment status.
This metric can change rapidly however, if factors unknown to us change. We also monitor our asset quality through our established categories
as defined in Note 5 of our Consolidated Financial Statements.We are seeing positive trends with improving percentages of loans and leases in
our higher quality loan categories which is indicative of overall credit quality improvement. While overall asset quality has improved, we will
continue to actively monitor the credit quality of our loan and lease portfolios. Through this monitoring effort, we may identify additional loans
and leases for which the borrowers or lessees are having difficulties making the required principal and interest payments based upon factors
including, but not limited to, the inability to sell the underlying collateral, inadequate cash flow from the operations of the underlying businesses,
liquidation events, or bankruptcy filings and therefore, we expect to continue to experience additions to non-accrual loans. We are proactively
working with our impaired loan borrowers to find meaningful solutions to difficult situations that are in the best interests of the Banks. Given our
current level of non-accrual loans, any improvement in reducing this balance will likely be at a slower pace than what has been accomplished
over the last several years. We don’t expect any material changes in non-accrual loans as a percentage of gross loans and leases; however, we
may experience some volatility from time to time.
In 2014 , as well as in the previous five fiscal years, there were no loans over 90 days past due and still accruing interest. Loans and
leases greater than 90 days past due are considered impaired and are placed on non-accrual status. Cash received while a loan or a lease is on
non-accrual status is generally applied solely against the outstanding principal. If collectability of the contractual principal and interest is not in
doubt, payments received may be applied to both interest due on a cash basis and principal.
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Table of Contents
Additional information about impaired loans as of and for the years indicated was as follows:
Impaired loans and leases with no impairment reserves
Impaired loans and leases with impairment reserves required
Total impaired loans and leases
Less:
Impairment reserve (included in allowance for loan and lease
losses)
Net impaired loans and leases
Average impaired loans and leases
2014
2013
As of December 31,
2012
(In Thousands)
2011
2010
$
11,270 $
525
11,795
8,200 $
8,026
16,226
11,006 $
4,221
15,227
18,888 $
2,989
21,877
19,749
19,375
39,124
290
11,505 $
14,474 $
402
15,824 $
12,084 $
1,517
13,710 $
17,945 $
888
20,989 $
33,793 $
3,459
35,665
29,714
$
$
2014
For the years ended December 31,
2011
2012
2013
2010
(In Thousands)
Interest income attributable to impaired loans and leases
Less: Interest income recognized on impaired loans and leases
Net foregone interest income on impaired loans and leases
$
$
870 $
740
130 $
887 $
221
666 $
1,432 $
321
1,111 $
2,682 $
787
1,895 $
2,702
102
2,600
Loans with no specific reserves required represent impaired loans where the collateral, based upon current information, is deemed to be
sufficient or that have been partially charged-off to reflect our net realizable value of the loan. When analyzing the adequacy of collateral, we
obtain external appraisals. Our policy regarding commercial real estate appraisals requires the utilization of appraisers from our approved list, the
performance of independent reviews to monitor the quality of such appraisals and receipt of new appraisals for impaired loans at least annually,
or more frequently as circumstances warrant. We make adjustments to the appraisals for appropriate selling costs. In addition, the ordering of
appraisals and review of the appraisals are performed by individuals who are independent of the business development process. Based on the
specific evaluation of the collateral of each impaired loan, we believe the reserve for impaired loans was appropriate at December 31, 2014 .
However, we cannot provide assurance that the facts and circumstances surrounding each individual impaired loan will not change and that the
specific reserve or current carrying value will not be different in the future which may require additional charge-offs or specific reserves to be
recorded.
Foreclosed properties are recorded at the lower of cost or net realizable value. If, at the time of foreclosure, the fair value less cost to
sell is lower than the carrying value of the loan, the difference, if any, is charged to the allowance for loan and lease losses prior to transfer to
foreclosed property. The fair value is based on appraisals, discounted cash flow analysis (the majority of which is based on current occupancy
and lease rates) or verifiable offers to purchase. After foreclosure, valuation allowances or future write-downs to net realizable value are charged
directly to non-interest expense. Foreclosed properties were $1.7 million , an increase of 408.4% , at December 31, 2014 from $333,000 at
December 31, 2013 . The increase in foreclosed properties is primarily attributable to properties acquired in the Alterra Transaction. We
recorded impairment losses of approximately $4,000 for the year ended December 31, 2014 . Net gains on sales of existing foreclosed property
inventory were $14,000 for the year ended December 31, 2014 . We continue to evaluate possible exit strategies on our impaired loans when
foreclosure action may be probable and our level of foreclosed assets may increase in the future. Loans are transferred to foreclosed properties
when we claim ownership rights to the properties.
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A summary of foreclosed properties activity for the years ended December 31, 2014 and 2013 is as follows:
Balance at the beginning of the period
Foreclosed properties acquired in acquisition, at fair value
Transfer of loans to foreclosed properties, at lower of cost or fair value
Impairment adjustments
Net book value of properties sold
Balance at the end of the period
Allowance for Loan and Lease Losses
For the Year Ended December 31,
2014
2013
(In Thousands)
333 $
1,605
—
(4 )
(241 )
1,693 $
1,574
—
1,381
(59 )
(2,563 )
333
$
$
The allowance for loan and lease losses as a percentage of gross loans and leases was 1.12% as of December 31, 2014 and 1.42% as of
December 31, 2013 . Non-accrual loans and leases as a percentage of gross loans and leases decreased to 0.76% at December 31, 2014 compared
to 1.61% at December 31, 2013 . This decrease is partially due to the effect of adding approximately $200 million of loans from the Alterra
Transaction at fair value as of the purchase date and therefore not adding an allowance for loan loss for these loans. During the year ended
December 31, 2014 , we recorded net charge-offs on impaired loans and leases of approximately $808,000 , comprised of $1.2 million of charge-
offs and $425,000 of recoveries. During the year ended December 31, 2013 , we recorded net charge-offs on impaired loans and leases of
approximately $540,000 , comprised of $914,000 of charge-offs and $374,000 of recoveries.
As of December 31, 2014 and 2013 , our allowance for loan and lease losses to total non-accrual loans and leases was 146.33% and
87.68% , respectively. Impaired loans and leases exhibit weaknesses that inhibit repayment in compliance with the original terms of the note or
lease. However, the measurement of impairment on loans and leases may not always result in a specific reserve included in the allowance for
loan and lease losses. As part of the underwriting process, as well as our ongoing monitoring efforts, we try to ensure that we have appropriate
collateral to protect our interest in the related loan or lease. As a result of this practice, a significant portion of our outstanding balance of non-
performing loans or leases either does not require additional specific reserves or requires only a minimal amount of required specific reserve, as
we believe the loans and leases are adequately collateralized as of the measurement period. In addition, management is proactive in recording
charge-offs to bring loans to their net realizable value in situations where it is determined with certainty that we will not recover the entire
amount of our principal. This practice may lead to a lower allowance for loan and lease loss to non-accrual loans and leases ratio as compared to
our peers or industry expectations. As asset quality remains strong, our allowance for loan and lease loss is measured more through general
characteristics, including historical loss experience, of our portfolio rather than through specific identification and we therefore expect to see this
ratio continue to rise. Conversely, if we identify further impaired loans, this ratio could fall if the impaired loans are adequately collateralized
and therefore require no specific or general reserve. Given our business practices and evaluation of our existing loan and lease portfolio, we
believe this coverage ratio is appropriate for the probable losses inherent in our loan and lease portfolio as of December 31, 2014 .
To determine the level and composition of the allowance for loan and lease losses, we break out the portfolio by segments and risk
ratings. First, we evaluate loans and leases for potential impairment classification. We analyze 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. We apply 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. Established risk factors
include delinquencies, volume and average size of loan relationships, average risk rating, technical defaults, geographic concentrations, loans
and leases on management attention watch lists, unemployment rates in our market areas, experience in the credit granting functions, changes in
underwriting standards and level of non-performing assets and related fair value of underlying collateral. Further, we complete a historical
charge-off migration analysis utilizing the most recent three years of net charge-offs and trace the migration of the risk rating from origination
through charge-off. The historical percentage of the amounts charged-off for each risk rating is averaged for the three-year period giving greater
weight in the calculation to the recent years. We then apply these percentages to the current loan and lease portfolio as an indicator of probable
losses within the portfolio. In 2013, based on the results of our continuous risk assessment and monitoring process, we refined our methodology
of establishing the general portion of the allowance for loan and lease losses attributable to the historical loss migration by shortening the
historical loss period from five years to three years and increasing the historical loss factor applied to Category III loans. Both changes were
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implemented to more accurately reflect the estimate of incurred losses for the collectively evaluated loans as of the balance sheet date. Given our
asset quality improvements and a relatively low level of net charge-offs as a percentage of total loans, our prescribed methodology warranted a
reduction in the overall level of allowance for loan and lease losses as of the measurement date. In addition, as previously mentioned, a result of
the Alterra Transaction was that approximately $200 million of loans are accounted for at fair value and as of the acquisition date required no
loss reserve. This accounting treatment was the primary factor in reducing the level of allowance for loan and lease losses to gross loans and
leases to 1.12% at December 31, 2014 as compared to 1.42% at December 31, 2013 .
When it is determined that we will not receive our entire contractual principal or the loss is confirmed, we record a charge against the
allowance for loan and lease loss reserve to bring the loan or lease to its net realizable value. When estimated proceeds from the sales of property
securing collateral dependent loans are deemed insufficient to repay the related debt, we confirm our inability to receive our entire contractual
principal on certain commercial real estate loans. Many of the impaired loans as of December 31, 2014 are collateral dependent. It is part of our
routine process to obtain appraisals on all impaired loans at least annually, or more frequently as circumstances warrant. As we have completed
new appraisals and/or market evaluations, we have found that in general real estate values have stabilized; however, in specific situations current
fair values collateralizing certain impaired loans were inadequate to support the entire amount of the outstanding debt. Foreclosure actions may
have been initiated on certain of these commercial real estate and other mortgage loans.
As a result of our review process, we have concluded that an appropriate allowance for loan and lease loss reserve for the existing loan
and lease portfolio was $14.3 million or 1.12% of gross loans and leases, at December 31, 2014 . Taking into consideration net charge-offs of
$808,000 , the required provision for loan and lease losses was $1.2 million for the year ended December 31, 2014 . However, given ongoing
complexities with current workout situations and the measured pace of improvement in economic conditions, further charge-offs and increased
provisions for loan and lease losses may be recorded if additional facts and circumstances lead us to a different conclusion. In addition, various
federal and state regulatory agencies review the allowance for loan and lease losses. These agencies could require certain loan and lease balances
to be classified differently or charged off when their credit evaluations differ from those of management, based on their judgments about
information available to them at the time of their examination.
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A summary of the activity in the allowance for loan and lease losses follows:
2014
Year Ended December 31,
2012
2011
2013
2010
Allowance at beginning of period
Charge-offs:
Commercial real estate
Commercial real estate — owner occupied
Commercial real estate — non-owner occupied
Construction and land development
Multi-family
1-4 family
Commercial and industrial
Direct financing leases
Consumer and other
Home equity and second mortgage
Other
Total charge-offs
Recoveries:
Commercial real estate
Commercial real estate — owner occupied
Commercial real estate — non-owner occupied
Construction and land development
Multi-family
1-4 family
Commercial and industrial
Direct financing leases
Consumer and other
Home equity and second mortgage
Other
Total recoveries
Net charge-offs
Provision for loan and lease losses
Allowance at end of period
$ 13,901
$ 15,400
(Dollars In Thousands)
$ 14,155
$ 16,271
$ 14,124
—
(631 )
—
—
—
(600 )
—
—
(2 )
(1,233 )
—
(792 )
(71 )
—
(33 )
(14 )
—
—
(4 )
(914 )
(113 )
—
(47 )
(130 )
(322 )
(2,739 )
—
(1,376 )
(1,612 )
(2,091 )
(312 )
(942 )
(475 )
—
(72 )
(56 )
(3,479 )
(113 )
(309 )
(7,230 )
(258 )
—
(2,110 )
(1,059 )
(596 )
(352 )
—
(142 )
(693 )
(5,210 )
8
5
—
14
17
369
—
1
61
281
—
10
11
5
5
192
101
—
77
66
—
—
—
13
289
—
473
19
—
—
23
—
16
265
8
12
—
425
(808 )
1,236
$ 14,329
5
—
374
(540 )
(959 )
11
29
481
(2,998 )
4,243
$ 15,400
68
2
864
(6,366 )
4,250
$ 14,155
1
—
313
(4,897 )
7,044
$ 16,271
$ 13,901
Net charge-offs as a % of average gross loans and leases
0.08 %
0.06 %
0.35 %
0.74 %
0.57 %
We review our methodology and periodically adjust allocation percentages of allowance by segment, as reflected in the following table,
based upon historical results. Within the specific categories, certain loans or leases have been identified for specific reserve allocations as well as
the whole category of that loan type or lease being reviewed for a general reserve based on the foregoing analysis of trends and overall balance
growth within that category.
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The table below shows our allocation of the allowance for loan and lease losses by loan portfolio segments at the dates indicated.
As of December 31,
2014
2013
2012
2011
2010
Allowance
for loan
and lease
losses
Percent of
loans in
each
category to
total loans
Allowance
for loan
and lease
losses
Percent of
loans in
each
category to
total loans
Allowance
for loan
and lease
losses
Percent of
loans in
each
category to
total loans
Allowance
for loan
and lease
losses
Percent of
loans in
each
category to
total loans
Allowance
for loan
and lease
losses
Percent of
loans in
each
category to
total loans
(Dollars In Thousands)
$
8,619
63.33 % $
9,055
65.70 % $
10,693
68.37 % $
9,554
68.19 % $
11,267
70.43 %
5,067
32.50 %
4,235
29.89 %
4,129
28.10 %
3,977
27.84 %
4,277
25.73 %
425
218
14,329
2.67 %
1.50 %
100.00 % $
338
273
13,901
2.65 %
1.76 %
100.00 % $
207
371
15,400
1.74 %
1.79 %
100.00 % $
240
384
14,155
2.01 %
1.96 %
100.00 % $
245
482
16,271
2.20 %
1.64 %
100.00 %
Loan segments:
Commercial real estate
Commercial and
industrial
Direct financing leases,
net
Consumer and other
Total
$
Although we believe the allowance for loan and lease losses was appropriate based on the current level of loan and lease delinquencies,
non-accrual loans and leases, trends in charge-offs, economic conditions and other factors as of December 31, 2014 , there can be no assurance
that future adjustments to the allowance will not be necessary. We adhere to high underwriting standards in order to maintain strong asset quality
and continue to pursue practical and legal methods of collection, repossession and disposal of any such troubled assets.
Deposits
As of December 31, 2014 , deposits increased by $308.4 million to $1.438 billion from $1.130 billion at December 31, 2013 . The
increase in deposits was primarily the result of the Alterra Transaction which added approximatively $210 million of deposits. The total increase
in deposits was split between wholesale certificates of deposit, which increased by $33.8 million to $427.3 million at December 31, 2014 from
$393.5 million at December 31, 2013 and by an increase in the level of in-market deposits of $274.6 million to $1.011 billion at December 31,
2014 from $736.3 million at December 31, 2013 . Deposits continue to be the primary source of the Banks’ fundings for lending and other
investment activities. A variety of accounts are designed to attract both short- and long-term deposits. These accounts include non-interest-
bearing transaction accounts, interest-bearing transaction accounts, money market accounts and time deposits. Deposit terms offered by the
Banks vary according to the minimum balance required, the time period the funds must remain on deposit, the rates and products offered by
competitors and the interest rates charged on other sources of funds, among other factors. With three separately chartered banks within our
Corporation, we have the ability to offer our clients additional FDIC insurance coverage by maintaining separate deposits with each Bank.
Our strategic efforts continue to be focused on adding in-market relationships and related transaction deposit accounts. We measure the
success of in-market deposit gathering efforts based on the number and average balances of our deposit accounts as compared to ending balances
due to the volatility of some of our larger relationships. Our Banks’ in-market deposits are obtained primarily from the South Central,
Northeastern and Southeastern regions of Wisconsin and the greater Kansas City area. Of our total average deposits for the year ended
December 31, 2014 , approximately $791.8 million , or 65.5% , were considered in-market deposits. This compares to in-market deposits of
$712.3 million , or 64.4% , for 2013 . Refer to Note 9 - Deposits in our Consolidated Financial Statements for additional information regarding
our deposit composition.
The Banks’ liquidity policies limit the amount of wholesale certificates of deposit to 75% of total deposits, with an operating goal of
50% or less of wholesale certificates of deposit to total deposits. At December 31, 2014 , the ratio of wholesale certificates of deposit to total
deposits was 29.7% . We will continue to use wholesale deposits in specific maturity periods needed, typically three to five years, to effectively
mitigate the interest rate risk measured through our asset/liability management process and to support asset growth initiatives while taking into
consideration our operating goals and desired level of usage of wholesale certificates of deposit. Deposit ending balances associated with in-
market relationships will fluctuate based upon maturity of time deposits, client demands for the use of their cash, our ability to service and
maintain client relationships and new client deposit relationships.
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The following table sets forth the amount and maturities of the Banks’ certificates of deposit, including wholesale deposits, at
December 31, 2014 .
Interest rate
0.00% to 0.99%
1.00% to 1.99%
2.00% to 2.99%
3.00% to 3.99%
4.00% to 4.99%
5.00% and greater
Three months and
less
Over three months
through six months
Over six months
through twelve
months
(In Thousands)
Over twelve
months
Total
$
$
26,529 $
14,622
7,538
—
—
—
48,689 $
41,172 $
14,149
12,860
—
—
—
68,181 $
77,810 $
40,931
5,930
—
—
—
124,671 $
95,482 $
131,967
78,217
6,768
—
—
312,434 $
240,993
201,669
104,545
6,768
—
—
553,975
At December 31, 2014 , time deposits included $116.3 million of certificates of deposit in denominations greater than or equal to
$100,000. Of these certificates, $15.6 million are scheduled to mature in three months or less, $22.4 million in greater than three through six
months, $48.7 million in greater than six through twelve months and $29.6 million in greater than twelve months.
Of the total time deposits outstanding as of December 31, 2014 , $241.5 million are scheduled to mature in 2015 , $115.3 million in
2016 , $61.7 million in 2017 , $47.7 million in 2018 , $21.2 million in 2019 , and $66.6 million thereafter. As of December 31, 2014 , we have
$97.7 million of wholesale certificates of deposit which the Banks have the right to call prior to the scheduled maturity. These certificates have
original maturities ranging from 3-19 years with options to call after the first six to twelve months of holding the certificates with monthly,
quarterly, or semi-annually call options thereafter.
Borrowings
We had total borrowings of $44.3 million as of December 31, 2014 , an increase of $22.1 million , or 99.1% , from $22.3 million at
December 31, 2013 . The increase in total borrowings is primarily related to the Alterra Transaction. Alterra had $9.4 million of borrowings
included in our balance sheet as of December 31, 2014 and we issued $15.0 million of new subordinated debentures to fund the cash
consideration paid to the selling shareholders with the remainder of the consideration being made up of equity. Partially offsetting these
increases, in a separate transaction, we paid off $4.0 million of subordinated debt in the first quarter of 2014.
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The following table sets forth the outstanding balances, weighted average balances and weighted average interest rates for our
borrowings (short-term and long-term) as indicated.
December 31, 2014
December 31, 2013
December 31, 2012
Balance
Weighted
average
balance
Weighted
average
rate
Balance
Weighted
average
balance
Weighted
average
rate
Balance
Weighted
average
balance
Weighted
average
rate
$
— $
237
0.82 % $
— $
260
0.74 % $
— $
237
0.82 %
(Dollars In Thousands)
10,058
1,010
22,926
10,315
5,093
13
13,362
10,315
$ 44,309 $ 29,020
0.56
3.30
7.07
10.78
7.24
—
10
11,926
10,315
6,471
10
11,926
10,315
$ 22,251 $ 28,982
0.19
3.41
6.92
10.78
6.78
469
10
11,926
10,315
2,034
1,666
37,481
10,315
$ 22,720 $ 51,733
1.59 %
4.07 %
7.02 %
10.81 %
7.46 %
Federal funds purchased
FHLB advances and other
borrowings
Line of credit
Subordinated notes payable
Junior subordinated notes
Short-term borrowings
Long-term borrowings
$
2,010
42,299
$ 44,309
$
10
22,241
$ 22,251
$
479
22,241
$ 22,720
The following table sets forth maximum amounts outstanding at each month-end for specific types of borrowings for the periods
indicated.
Maximum month-end balance:
FHLB advances
Federal funds purchased
Stockholders’ Equity
Year Ended December 31,
2014
2013
2012
(In Thousands)
$
26,000 $
—
26,500 $
—
15,474
—
As of December 31, 2014 , stockholders’ equity was $137.7 million , or 8.5% of total assets, compared to stockholders’ equity of
$109.3 million , or 8.6% of total assets, as of December 31, 2013 . Stockholders’ equity increased by $28.5 million during the year ended
December 31, 2014 attributable to $16.6 million of equity paid as partial consideration to the sellers of Alterra with the remainder paid in cash
and record net income of $14.1 million for the year ended December 31, 2014 , partially offset by dividend declarations of $3.4 million .
Non-bank Consolidated Subsidiaries
First Madison Investment Corp. FMIC is a wholly-owned operating subsidiary of FBB that was incorporated in the State of Nevada
in 1993. FMIC was organized for the purpose of managing a portion of FBB’s investment portfolio. FMIC invests in marketable securities. As
an operating subsidiary, FMIC’s results of operations are consolidated with FBB’s for financial and regulatory purposes. FBB’s investment in
FMIC was $150.3 million at December 31, 2014 . FMIC had net income of $1.8 million for the year ended December 31, 2014 . This compares
to a total investment of $148.1 million at December 31, 2013 and net income of $1.7 million for the year ended December 31, 2013 .
First Business Capital Corp. FBCC is a wholly-owned subsidiary of FBB formed in 1995 and headquartered in Madison, Wisconsin.
FBCC is an asset-based financing company established to meet the financing needs of companies that are generally unable to obtain traditional
commercial lending products. FBCC underwrites its loans with additional emphasis placed on collateral coverage as the companies it finances
are growing rapidly, highly leveraged, or undergoing a turn-around period. Through its FBF division, FBCC purchases accounts receivable on a
full recourse basis as one additional alternative to meet the financing needs of its client base. FBB’s investment in FBCC at December 31, 2014
was $27.1 million , gross loans outstanding were $164.4 million and net income for the year ended December 31, 2014 was $2.3 million . This
compares to a
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total investment of $24.7 million , gross loans of $131.7 million and net income of $2.4 million at and for the year ended December 31, 2013 .
First Business Equipment Finance, LLC. FBEF, headquartered in Madison, Wisconsin, was formed in 1998 for the purpose of
originating leases and extending credit in the form of loans to small- and medium-sized companies nationwide and is a wholly-owned subsidiary
of FBB. FBB’s total investment in FBEF at December 31, 2014 was $6.9 million , gross loans and leases outstanding were $57.6 million and
FBEF had net income of $364,000 for the year ended December 31, 2014 . This compares to a total investment of $6.5 million , gross loans and
leases outstanding of $53.4 million and net income of $27,000 at and for the year ended December 31, 2013 .
Rimrock Road Investment Fund, LLC . Rimrock, formerly known as FBB Real Estate, LLC, is a wholly-owned subsidiary of FBB
and was originally formed in 2009 for the purpose of holding and liquidating real estate and other assets acquired through foreclosure or other
legal proceedings. In 2014, Rimrock’s purpose was changed to reflect its qualified equity investment in a Madison, Wisconsin community
development project, including the financing and ownership of a property that generates federal new market tax credits. FBB’s total investment
in Rimrock at December 31, 2014 was $2.6 million and Rimrock had net income of $375,000 for the year ended December 31, 2014 . This
compares to a total investment of $688,000 and a net loss of $11,000 at and for the year ended December 31, 2013 .
FBB-Milwaukee Real Estate LLC. FBBMRE is a wholly-owned subsidiary of FBB – Milwaukee and was formed in 2009 for the
purpose of holding and liquidating real estate and other assets acquired through foreclosure or other legal proceedings. FBB-Milwaukee’s total
investment in FBBMRE was $10,000 at December 31, 2014 and FBBMRE had no income or loss for the year ended December 31, 2014 . This
compares to a total investment of $355,000 and net income of $16,000 at and for the year ended December 31, 2013 .
LIQUIDITY AND CAPITAL RESOURCES
We expect to meet our liquidity needs through existing cash on hand, established cash flow sources, our third party senior line of credit
and dividends received from the Banks. While the Banks are subject to certain regulatory limitations regarding their ability to pay dividends to
the Corporation, we do not believe that the Corporation will be adversely affected by these dividend limitations. The Corporation’s principal
liquidity requirements at December 31, 2014 were the interest payments due on subordinated and junior subordinated notes. During 2014 and
2013, FBB declared and paid dividends totaling $8.0 million per year. The capital ratios of the Corporation and its subsidiaries met all applicable
regulatory capital adequacy requirements in effect on December 31, 2014 , and continue to meet the heightened requirements imposed by Basel
III, which went into effect on January 1, 2015. The Corporation’s and the Banks’ respective Boards of Directors and management teams adhere
to the appropriate regulatory guidelines on decisions which affect their capital positions, including but not limited to, decisions relating to the
payment of dividends and increasing indebtedness.
The Banks maintain liquidity by obtaining funds from several sources. The Banks’ primary sources of funds are principal and interest
payments on loans receivable and mortgage-related securities, deposits and other borrowings, such as federal funds and FHLB advances. The
scheduled payments of loans and mortgage-related securities are generally a predictable source of funds. Deposit flows and loan prepayments,
however, are greatly influenced by general interest rates, economic conditions and competition.
We view on-balance-sheet liquidity as a critical element to maintaining adequate liquidity to meet our cash and collateral obligations.
We define our on-balance-sheet liquidity as the total of our short-term investments, our unencumbered securities available-for-sale and our
unencumbered pledged loans. As of December 31, 2014 and 2013 , our immediate on-balance-sheet liquidity was $290.8 million and $272.6
million , respectively. At December 31, 2014 and 2013 , the Banks had $70.5 million and $53.0 million on deposit with the FRB, respectively.
Any excess funds not used for loan funding or satisfying other cash obligations were maintained as part of our on-balance-sheet liquidity in our
interest-bearing accounts with the FRB, as we value the safety and soundness provided by the FRB. We plan to utilize excess liquidity to fund
loan and lease portfolio growth, pay down maturing debt, allow run off of maturing wholesale certificates of deposit, or invest in securities to
maintain adequate liquidity at an improved margin.
We had $427.3 million of outstanding wholesale deposits at December 31, 2014 , compared to $393.5 million of wholesale deposits as
of December 31, 2013 , which represented 29.7% and 34.8% , respectively, of ending balance total deposits. While we are committed to our
continued efforts to raise in-market deposits and maintain our overall mix of wholesale certificates of deposit and in-market deposits, wholesale
certificates of deposit continue to be an efficient source of funding for the Banks and allow them to gather funds across a larger geographic base
at price levels and maturities that are
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more attractive than single service deposits when required to raise a similar level of in-market deposits within a short time period. Access to such
deposits allows us the flexibility to refrain from pursuing single service deposit relationships in markets that have experienced unfavorable
pricing levels. In addition, the administrative costs associated with wholesale certificates of deposit are considerably lower than those that would
be incurred to administer a similar level of local deposits with a similar maturity structure. During the time frames necessary to accumulate
wholesale deposits in an orderly manner, we will use FHLB short-term advances to meet our temporary funding needs. The FHLB short-term
advances will typically have terms of one week to one month to cover the overall expected funding demands.
Our in-market relationships remain stable; however, deposit balances associated with those relationships will fluctuate. We expect to
establish new client relationships and continue marketing efforts aimed at increasing the balances in existing clients’ deposit accounts.
Nonetheless, we will continue to use wholesale deposits in specific maturity periods, typically three to five years, needed to effectively mitigate
the interest rate risk measured through our asset/liability management process or in shorter time periods if in-market deposit balances decline. In
order to provide for ongoing liquidity and funding, all of our brokered deposits are certificates of deposit which do not allow for withdrawal at
the option of the depositor before the stated maturity and our deposits accumulated through the internet listing service have the same early
withdrawal privileges and fees as other in-market deposits. The Banks’ liquidity policies limit the amount of wholesale deposits to 75% of total
deposits, with an operating goal of 50% or less of wholesale deposits to total deposits. The Banks were in compliance with the policy limits and
the operating goal as of December 31, 2014 and 2013 .
The Banks were able to access the wholesale certificate of deposit market as needed at rates and terms comparable to market standards
during the year ended December 31, 2014 . In the event that there is a disruption in the availability of wholesale deposits at maturity, the Banks
have managed the maturity structure, in compliance with our approved liquidity policy, so at least one year of maturities could be funded
through on-balance-sheet liquidity. These potential funding sources include deposits maintained at the FRB and borrowings from the FHLB or
Federal Reserve Discount Window utilizing currently unencumbered securities and acceptable loans as collateral. As of December 31, 2014 , the
available liquidity was in excess of the stated policy minimum. As on-balance-sheet liquidity is utilized to fund growth, asset quality continues
to improve and the ratio of in-market deposits to total deposits remains within an acceptable range, management may continue to be comfortable
reducing the number of months of maturity coverage closer to the policy minimum while remaining confident in its ability to manage the
maturities of wholesale certificates of deposits in the event of a disruption in the wholesale market. We believe the Banks will also have access
to the unused federal funds lines, cash flows from borrower repayments, and cash flows from security maturities. The Banks also have the ability
to raise local market deposits by offering attractive rates to generate the level required to fulfill their liquidity needs.
The Banks are required by federal regulation to maintain sufficient liquidity to ensure safe and sound operations. We believe that the
Banks have sufficient liquidity to match the balance of net withdrawable deposits and short-term borrowings in light of present economic
conditions and deposit flows.
During the year ended December 31, 2014 , operating activities resulted in a net cash inflow of $11.9 million . Operating cash flows
included net income of $14.1 million . Net cash used in investing activities for the year ended December 31, 2014 was approximately $332.7
million which consisted primarily of cash outflows from net purchases of securities available for sale, funding of net loan growth and the Alterra
Transaction. Net cash provided by financing activities for the year ended December 31, 2014 was $342.8 million primarily from net increases in
deposits related to organic growth and the Alterra Transaction.
Refer to Note 11 - Stockholders’ Equity and Regulatory Capital for a summary of the Corporation’s and the Banks’ capital ratios
and the ratios required by their federal regulators at December 31, 2014 and 2013 .
Off-Balance-Sheet Arrangements
As of December 31, 2014 , the Banks had outstanding commitments to originate $406.2 million of loans and commitments to extend
funds to or on behalf of clients pursuant to standby letters of credit of $17.6 million . As of December 31, 2014 , the Banks had $190.3 million of
commitments to extend funds which extend beyond one year. We do not expect any losses as a result of these funding commitments. We have
evaluated outstanding commitments associated with loans that were identified as impaired loans and concluded that there are no additional losses
required to be recorded with these unfunded commitments as of December 31, 2014 . We believe that additional commitments will not be
granted or additional collateral will be provided to support any additional funds advanced. The Banks also utilize interest rate swaps for the
purposes of interest rate risk management, as described further in Note 18 – Derivative Financial Instruments to the Consolidated Financial
Statements.
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Additionally the Corporation has remaining commitments of $960,000 to Aldine Capital Fund, LP (“Aldine”) and $2.8 million to
Aldine Capital Fund II, LP (“Aldine II”), which are private equity mezzanine funding limited partnerships in which we have invested. Aldine
began its operations in October 2006 and Aldine II began its operations in March 2013.
We believe adequate capital and liquidity are available from various sources to fund projected commitments.
Contractual Obligations
The following table summarizes our contractual cash obligations at December 31, 2014 :
Operating lease obligations
Time deposits
Line of credit
Subordinated notes
Junior subordinated notes
FHLB advances and other borrowings
Total contractual obligations
Total
Less than 1
Year
Payments Due by Period
1-3 Years
4-5 Years
(In Thousands)
More than 5
Years
$
$
11,995 $
553,975
1,010
22,926
10,315
10,058
610,279 $
1,198 $
241,541
1,010
—
—
1,000
244,749 $
2,194 $
177,006
—
—
—
8,383
187,583 $
2,056 $
68,872
—
—
—
—
70,928 $
6,547
66,556
—
22,926
10,315
675
107,019
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in conformity with GAAP requires management 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 and the
reported amounts of revenues and expenses during the reporting period. By their nature, changes in these assumptions and estimates could
significantly affect the financial position or results of operations for FBFS. Actual results could differ from those estimates. Discussed below are
certain policies that are critical to FBFS. We view critical accounting policies to be those which are highly dependent on subjective or complex
judgments, estimates, and assumptions, and where changes in those estimates and assumptions could have a significant impact on the financial
statements.
Allowance for Loan and Lease Losses. The allowance for loan and lease losses represents our recognition of the risks of extending
credit and our evaluation of the quality of the loan and lease portfolio and as such, requires the use of judgment as well as other systematic
objective and quantitative methods which may include additional assumptions and estimates. The risks of extending credit and the accuracy of
our evaluation of the quality of the loan and lease portfolio are neither static nor mutually exclusive and could result in a material impact on our
Consolidated Financial Statements. We may over-estimate the quality of the loan and lease portfolio resulting in a lower allowance for loan and
lease losses than necessary, overstating net income and equity. Conversely, we may under-estimate the quality of the loan and lease portfolio,
resulting in a higher allowance for loan and lease losses than necessary, understating net income and equity. The allowance for loan and lease
losses is a valuation allowance for probable credit losses, increased by the provision for loan and lease losses and decreased by charge-offs, net
of recoveries. We estimate the allowance reserve balance required and the related provision for loan and lease losses based on monthly
evaluations of the loan and lease portfolio, with particular attention paid to loans and leases that have been specifically identified as needing
additional management analysis because of the potential for further problems. During these evaluations, consideration is also given to such
factors as the level and composition of impaired and other non-performing loans and leases, historical loss experience, results of examinations by
regulatory agencies, independent loan and lease reviews, our estimate of the fair value of the underlying collateral taking into consideration
various valuation techniques and qualitative adjustments to inputs to those estimates of fair value, the strength and availability of guarantees,
concentration of credits and other factors. Allocations of the allowance may be made for specific loans or leases, but the entire allowance is
available for any loan or lease that, in our judgment, should be charged off. Loan and lease losses are charged against the allowance when we
believe that the uncollectability of a loan or lease balance is confirmed. See Note 1 – Nature of Operations and Summary of Significant
Accounting Policies in the Consolidated Financial Statements for further discussion of the allowance for loan and lease losses.
We also continue to exercise our legal rights and remedies as appropriate in the collection and disposal of non-performing assets, and
adhere to rigorous underwriting standards in our origination process in order to continue to maintain strong asset quality. Although we believe
that the allowance for loan and lease losses was appropriate as of December 31, 2014
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based upon the evaluation of loan and lease delinquencies, non-performing assets, charge-off trends, economic conditions and other factors,
there can be no assurance that future adjustments to the allowance will not be necessary. If the quality of loans or leases deteriorates, then the
allowance for loan and lease losses would generally be expected to increase relative to total loans and leases. If loan or lease quality improves,
then the allowance would generally be expected to decrease relative to total loans and leases.
Income Taxes. FBFS and its wholly owned subsidiaries file a consolidated federal income tax return, a combined Wisconsin state tax
return and a Kansas state tax return. Deferred income taxes are recognized for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and their respective tax bases. The determination of current and deferred
income taxes is based on complex analysis of many factors, including the interpretation of federal and state income tax laws, the difference
between the tax and financial reporting basis of assets and liabilities (temporary differences), estimates of amounts currently due or owed, such
as the timing of reversals of temporary differences, and current accounting standards. We apply a more likely than not approach to each of our
tax positions when determining the amount of tax benefit to record in our Consolidated Financial Statements. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be
recovered or settled. The effect of a change in tax rates on deferred taxes is recognized in income in the period that includes the enactment date.
We have made our best estimate of valuation allowances utilizing positive and negative evidence and evaluation of sources of taxable income
including tax planning strategies and expected reversals of timing differences to determine if valuation allowances were needed for deferred tax
assets. Realization of deferred tax assets over time is dependent on our ability to generate sufficient taxable earnings in future periods and a
valuation allowance may be necessary if management determines that it is more likely than not that the deferred asset will not be utilized. These
estimates and assumptions are subject to change. Changes in these estimates and assumptions could adversely affect future consolidated results
of operations.
The federal and state taxing authorities who make assessments based on their determination of tax laws may periodically review our
interpretation of federal and state income tax laws. Tax liabilities could differ significantly from the estimates and interpretations used in
determining the current and deferred income tax liabilities based on the completion of examinations by taxing authorities.
Item 7A.
Quantitative and Qualitative Disclosures about Market Risk
Our primary market risk is interest rate risk, which arises from exposure of our financial position to changes in interest rates. It is our
strategy to reduce the impact of interest rate risk on net interest margin by maintaining a favorable match between the maturities and repricing
dates of interest-earning assets and interest-bearing liabilities. This strategy is monitored by the respective Banks’ Asset/Liability Management
Committees, in accordance with policies approved by the respective Banks’ Boards. These committees meet regularly to review the sensitivity of
their respective Bank’s assets and liabilities to changes in interest rates, liquidity needs and sources, and pricing and funding strategies.
We use two techniques to measure interest rate risk. The first is simulation of earnings. In this measurement technique the balance sheet
is modeled as an ongoing entity whereby future growth, pricing, and funding assumptions are implemented. These assumptions are modeled
under different rate scenarios that include a simultaneous, instant and sustained change in interest rates.
The following table illustrates the potential impact of changes in market rates on our net interest income for the next twelve months, as
of December 31, 2014 . Given the current low interest rate environment, we do not expect that interest rates will fall by greater than 50 basis
points from December 31, 2014 levels. We also assume that managed rate liability prices will rise at an amount less than the instantaneous rate
shock in the Up 100 and Up 200 scenarios below, while rising at an amount equivalent to the instantaneous rate shock in the Up 300 and Up 400
scenarios. This model assumption is consistent with our expectation on how depositors will react to rapidly rising interest rates and our desire to
maintain core deposit client relationships.
Change in interest rates in basis points
Impact on net interest income
Down 50
(1.27 )%
No Change
—
Up 100
Up 200
Up 300
Up 400
0.72 %
4.19 %
2.38 %
4.40 %
The second measurement technique used is static gap analysis. Gap analysis involves measurement of the difference in asset and
liability repricing on a cumulative basis within a specified time frame. In general, a positive gap indicates that more interest-earning assets than
interest-bearing liabilities reprice/mature in a time frame and a negative gap indicates the opposite. As shown in the cumulative gap position in
the table presented below, at December 31, 2014 , our interest-bearing liabilities have the general characteristics that will allow them to reprice
faster than interest-earning assets over the next 12 months while
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our interest-earning assets will reprice faster than interest-bearing-liabilities thereafter. In addition to the gap position, other determinants of net
interest income are the shape of the yield curve, general rate levels and the corresponding effect of contractual interest rate floors, reinvestment
spreads, balance sheet growth and mix, and interest rate spreads. Our success in attracting in-market deposits adds to the interest rate liability
sensitivity of the organization. During recent years a portion of our variable rate loans and certain of our variable rate borrowings have been
priced at a rate equivalent to a fixed spread above a market rate index combined with an interest rate floor. These interest rate floors restrict the
rate from repricing in tandem with the market rates. As rates increase, these interest rate floors will restrict the subject assets and liabilities from
experiencing rate increases until the interest rate floor is exceeded which may put pressure on net interest margin.
We manage the structure of interest-earning assets and interest-bearing liabilities by adjusting their mix, yield, maturity and/or repricing
characteristics based on market conditions. Wholesale certificates of deposit are a significant source of funds. We use a variety of maturities to
augment our management of interest rate exposure. Currently, we do not employ any derivatives to assist in managing our interest rate risk
exposure; however, management has the authorization, as permitted within applicable approved policies, and ability to utilize such instruments
should they be appropriate to manage interest rate exposure.
The following table illustrates our static gap position.
Assets:
Short-term investments
Investment securities
Commercial loans
Real estate loans
Asset-based loans
Lease receivables
Consumer loans
Total earning assets
Liabilities
Interest-bearing transaction
Money market accounts
Time deposits under $250,000
Time deposits $250,000 and over
FHLB advances
Short-term borrowings
Long-term debt
Total interest-bearing liabilities
Interest rate gap
Cumulative interest rate gap
Within 3 months
3-12 months
1-5 years
After 5 years
Total
Estimated Maturity or Repricing at December 31, 2014
(Dollars In Thousands)
$
$
$
$
$
$
81,801
14,835
185,429
303,149
162,985
1,304
864
750,367
104,199
575,766
26,006
2,895
—
1,010
1,711
711,587
38,780
38,780
$
$
$
$
$
$
2,695
32,875
31,379
88,151
—
2,586
590
158,276
—
—
199,143
11,423
1,000
—
—
211,566
(53,290 )
(14,510 )
$
$
$
$
$
$
3,860
95,351
77,228
310,808
—
14,317
92
501,656
—
—
241,202
6,088
8,000
—
15,000
270,290
231,366
216,856
$
$
$
$
$
$
$
88,356
183,254
298,380
795,244
162,985
18,207
1,546
$ 1,547,972
$
104,199
575,766
532,907
20,406
9,000
1,010
33,916
$ 1,277,204
270,768
$
—
40,193
4,344
93,136
—
—
—
137,673
—
—
66,556
—
—
—
17,205
83,761
53,912
270,768
Cumulative interest rate gap to total earning assets
2.51 %
(0.94 )%
14.01 %
17.49 %
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Item 8.
Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS OF FIRST BUSINESS FINANCIAL SERVICES
Consolidated Financial Statements
Page No.
Consolidated Balance Sheets as of December 31, 2014 and 2013
Consolidated Statements of Income for the Years Ended December 31, 2014, 2013 and 2012
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2014, 2013 and 2012
Consolidated Statements of Changes in Stockholders’ Equity for the Years Ended December 31, 2014, 2013 and 2012
Consolidated Statements of Cash Flows for the Years Ended December 31, 2014, 2013 and 2012
Notes to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
65
66
67
68
69
70
72
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Table of Contents
First Business Financial Services, Inc.
Consolidated Balance Sheets
Assets
Cash and due from banks
Short-term investments
Cash and cash equivalents
Securities available-for-sale, at fair value
Securities held-to-maturity, at amortized cost
Loans and leases receivable, net of allowance for loan and lease losses of $14,329 and
$13,901, respectively
Premises and equipment, net
Foreclosed properties
Cash surrender value of bank-owned life insurance
Investment in Federal Home Loan Bank and Federal Reserve Bank stock, at cost
Accrued interest receivable and other assets
Goodwill and other intangible assets
Total assets
Liabilities and Stockholders’ Equity
Deposits
Federal Home Loan Bank and other borrowings
Junior subordinated notes
Accrued interest payable and other liabilities
Total liabilities
Commitments and contingencies
Stockholders’ equity:
Preferred stock, $0.01 par value, 2,500,000 shares authorized, none issued or outstanding
Common stock, $0.01 par value, 25,000,000 shares authorized, 4,537,426 and 4,106,084
shares issued, 4,335,927 and 3,943,997 shares outstanding at December 31, 2014 and
2013, respectively
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income (loss)
Treasury stock (201,499 and 162,087 shares at December 31, 2014 and 2013, respectively),
at cost
Total stockholders’ equity
Total liabilities and stockholders’ equity
$
$
$
$
December 31,
2014
December 31,
2013
(In Thousands, Except Share Data)
14,881 $
88,356
103,237
144,698
41,563
1,266,438
3,943
1,693
27,314
2,340
26,217
11,944
1,629,387 $
1,438,268 $
33,994
10,315
9,062
1,491,639
13,219
68,067
81,286
180,118
—
967,050
1,155
333
23,142
1,255
14,316
—
1,268,655
1,129,855
11,936
10,315
7,274
1,159,380
—
—
45
74,963
67,886
218
(5,364 )
137,748
1,629,387 $
41
56,002
57,143
(342 )
(3,569 )
109,275
1,268,655
See accompanying Notes to Consolidated Financial Statements.
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Table of Contents
Interest income
Loans and leases
Securities income
Short-term investments
Total interest income
Interest expense
Deposits
Notes payable and other borrowings
Junior subordinated notes
Total interest expense
Net interest income
Provision for loan and lease losses
Net interest income after provision for loan and lease losses
Non-interest income
Trust and investment services fee income
Service charges on deposits
Loan fees
Increase in cash surrender value of bank-owned life insurance
Gain on sale of loans and leases
Other
Total non-interest income
Non-interest expense
Compensation
Occupancy
Professional fees
Data processing
Marketing
Equipment
FDIC insurance
Collateral liquidation costs
Net (gain) loss on foreclosed properties
Other
Total non-interest expense
Income before income tax expense
Income tax expense
Net income
Earnings per common share:
Basic
Diluted
Dividends declared per share
First Business Financial Services, Inc.
Consolidated Statements of Income
For the Year Ended December 31,
2013
2012
2014
(In Thousands, Except Share Data)
$
$
$
54,047 $
3,342
312
57,701
9,470
989
1,112
11,571
46,130
1,236
44,894
4,434
2,469
1,577
862
392
369
10,103
21,477
1,391
3,405
1,710
1,662
650
758
320
(10 )
2,412
33,775
21,222
7,083
14,139 $
3.52 $
3.51
0.84
50,238 $
3,315
257
53,810
9,739
855
1,111
11,705
42,105
(959 )
43,064
3,756
2,150
1,295
845
—
396
8,442
18,278
1,268
1,968
1,500
1,355
528
741
196
(117 )
4,654
30,371
21,135
7,389
13,746 $
3.50 $
3.49
0.56
51,125
3,417
224
54,766
13,026
2,744
1,115
16,885
37,881
4,243
33,638
2,927
2,028
2,026
703
147
868
8,699
17,018
1,270
1,634
1,319
1,224
490
1,732
655
585
2,734
28,661
13,676
4,750
8,926
3.30
3.29
0.28
See accompanying Notes to Consolidated Financial Statements
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Table of Contents
First Business Financial Services, Inc.
Consolidated Statements of Comprehensive Income
For the Year Ended December 31,
2013
2012
2014
Net income
Other comprehensive loss, before tax
Securities available-for-sale:
$
14,139 $
13,746 $
8,926
Unrealized securities losses arising during the period
Securities held-to-maturity:
Unrealized losses transferred during the period
Amortization of net unrealized losses transferred during the period
Income tax (expense) benefit
Comprehensive income
1,619
(4,092 )
(503 )
(874 )
167
(352 )
14,699 $
—
—
1,567
11,221 $
—
—
195
8,618
$
See accompanying Notes to Consolidated Financial Statements
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First Business Financial Services, Inc.
Consolidated Statements of Changes in Stockholders’ Equity
Common
shares
outstanding
Common
stock
Additional
paid-in
capital
Retained
earnings
Accumulated
other
comprehensive
income (loss)
Treasury
stock
Total
(In Thousands, Except Share Data)
25,843 $ 37,501 $
Balance at December 31, 2011
Net income
Other comprehensive loss
Issuance of common stock
Exercise of stock options
Share-based compensation - restricted shares
Share-based compensation - tax benefits
Cash dividends ($0.28 per share)
Treasury stock purchased
Treasury stock re-issued
Balance at December 31, 2012
Net income
Other comprehensive loss
Exercise of stock options
Share-based compensation - restricted shares
Share-based compensation - tax benefits
Cash dividends ($0.56 per share)
Treasury stock purchased
Balance at December 31, 2013
Net income
Other comprehensive loss
Issuance of common stock
Exercise of stock options
Share-based compensation - restricted shares
Share-based compensation - tax benefits
Cash dividends ($0.84 per share)
Treasury stock purchased
Balance at December 31, 2014
2,625,569 $
—
—
1,265,000
1,000
30,385
—
—
(9,445 )
4,158
3,916,667 $
—
—
69,684
25,030
—
—
(67,384 )
3,943,997 $
—
—
360,081
39,000
32,261
—
—
(39,412 )
4,335,927 $
27 $
—
—
13
—
—
—
—
—
—
40 $
—
—
1
—
—
—
—
41 $
—
—
3
1
—
—
—
—
45
$
—
—
27,061
22
548
107
—
—
(77 )
8,926
—
—
—
—
—
(828 )
—
—
53,504 $ 45,599 $
—
—
1,473
660
365
—
—
13,746
—
—
—
—
(2,202 )
—
56,002 $ 57,143 $
—
—
16,554
936
887
584
—
—
14,139
—
—
—
—
—
(3,396 )
—
74,963
$ 67,886
$
2,491 $
—
(308 )
—
—
—
—
—
—
—
2,183 $
—
(2,525 )
—
—
—
—
—
(342 ) $
—
560
—
—
—
—
—
—
218
$
(1,648 ) $ 64,214
8,926
(308 )
27,074
22
548
107
(828 )
—
—
—
—
—
—
—
(216 )
77
(216 )
—
(1,787 ) $ 99,539
13,746
(2,525 )
1,474
660
365
(2,202 )
—
—
—
—
—
—
(1,782 )
(1,782 )
(3,569 ) $ 109,275
14,139
560
16,557
937
887
584
(3,396 )
—
—
—
—
—
—
—
(1,795 )
(1,795 )
(5,364 ) $ 137,748
See accompanying Notes to Consolidated Financial Statements.
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Table of Contents
First Business Financial Services, Inc.
Consolidated Statements of Cash Flows
Operating activities
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Deferred income taxes, net
Provision for loan and lease losses
Depreciation, amortization and accretion, net
Share-based compensation
Increase in cash surrender value of bank-owned life insurance
Origination of loans for sale
Sale of loans originated for sale
Gain on sale of loans originated for sale
Net (gain) loss on foreclosed properties, including impairment valuation
Excess tax benefit from share-based compensation
(Increase) decrease in accrued interest receivable and other assets
Increase (decrease) in accrued interest payable and other liabilities
Net cash provided by operating activities
Investing activities
Proceeds from maturities, redemptions and paydowns of available-for-sale securities
Proceeds from maturities, redemptions and paydowns of held-to-maturity securities
Purchases of available-for-sale securities
Proceeds from sale of foreclosed properties
Payments to priority lien holders of foreclosed properties
Net increase in loans and leases
Net cash associated with the Alterra Bank acquisition
Investment in community development entity
Investments in limited partnerships
Distributions from limited partnerships
Investment in FHLB and FRB Stock
Proceeds from sale of FHLB Stock
Purchases of leasehold improvements and equipment, net
Proceeds from sale of leasehold improvements and equipment, net
Increase in bank owned life insurance policies
Premium payment on bank owned life insurance policies
Proceeds from surrender of bank owned life insurance policies
Net cash used in investing activities
Financing activities
Net increase in deposits
Repayment of FHLB advances
Increase in FHLB advances
Net increase (decrease) in short-term borrowed funds
Net increase in long-term borrowed funds
Proceeds from issuance of subordinated notes payable, net of issuance costs
Repayment of subordinated notes payable
Excess tax benefit from share-based compensation
Common stock issuance
Cash dividends paid
Exercise of stock options
For the Year Ended December 31,
2014
2013
2012
(In Thousands)
$
14,139 $
13,746 $
8,926
1,389
1,236
1,870
887
(862 )
(9,392 )
6,651
(392 )
(10 )
(584 )
(5,448 )
2,390
11,874
44,148
2,211
(52,947 )
255
—
(299,095 )
(11,957 )
(7,500 )
(1,000 )
722
(1,459 )
373
(3,190 )
—
(3,285 )
(25 )
—
(332,749 )
308,413
—
9,383
1,000
675
14,469
(4,000 )
584
16,557
(3,396 )
936
2,428
(959 )
2,322
660
(845 )
—
—
—
(117 )
(365 )
2,713
(3,681 )
15,902
62,520
—
(48,048 )
2,739
—
(70,912 )
—
—
(1,250 )
672
(1,185 )
1,074
(531 )
30
—
(25 )
—
(54,916 )
37,601
(469 )
—
—
—
—
—
365
—
(2,475 )
1,474
(1,906 )
4,243
3,054
548
(703 )
(1,548 )
1,695
(147 )
585
(107 )
646
712
15,998
56,992
—
(90,407 )
1,955
(367 )
(65,628 )
—
—
—
893
—
1,223
(561 )
—
(4,000 )
(25 )
116
(99,809 )
40,942
(13 )
—
(800 )
—
6,215
(33,289 )
107
27,074
(738 )
22
Purchase of treasury stock
(1,795 )
(1,782 )
(216 )
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Table of Contents
First Business Financial Services, Inc.
Consolidated Statements of Cash Flows
Net cash provided by financing activities
Net decrease in cash and cash equivalents
Cash and cash equivalents at the beginning of the period
Cash and cash equivalents at the end of the period
Supplementary cash flow information
Cash paid during the period for:
Interest paid on deposits and borrowings
Income taxes paid
Non-cash investing and financing activities:
Transfer of securities from available-for-sale to held-to-maturity
Unrealized loss on transfer from available-for-sale to held-to-maturity
Foreclosed properties acquired in acquisition, at fair value
Transfer to foreclosed properties
Reissuance of treasury stock
$
$
For the Year Ended December 31,
2014
2013
2012
(In Thousands)
342,826
21,951
81,286
103,237 $
34,714
(4,300 )
85,586
81,286 $
39,304
(44,507 )
130,093
85,586
11,048 $
7,221
12,365 $
6,089
44,587
(874 )
1,605
—
—
—
—
—
1,381
—
17,800
5,716
—
—
—
1,511
77
See accompanying Notes to Consolidated Financial Statements.
71
Table of Contents
First Business Financial Services, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 – Nature of Operations and Summary of Significant Accounting Policies
Nature of Operations. Effective November 1, 2014, the Corporation completed its acquisition of Aslin Group, Inc. (“Aslin Group”) (the
“Merger”), including Alterra Bank, Aslin Group’s wholly-owned subsidiary (“Alterra”), pursuant to the Merger Agreement and Plan of Merger
entered into on May 22, 2014. As a result of the Merger, Alterra Bank has become a wholly-owned subsidiary of the Corporation. See Note 2 for
additional information on the merger.
The accounting and reporting practices of First Business Financial Services, Inc. (the “Corporation”), its wholly-owned subsidiaries, First
Business Bank (“FBB”), First Business Bank – Milwaukee (“FBB – Milwaukee”) and Alterra Bank (“Alterra”) have been prepared in
accordance with U.S. generally accepted accounting principles (“GAAP”). FBB, FBB – Milwaukee and Alterra are sometimes referred to
together as the “Banks.” FBB operates as a commercial banking institution in the Madison, Wisconsin market, consisting primarily of Dane
County and the surrounding areas, with loan production offices in Oshkosh, Appleton, and Green Bay, Wisconsin. FBB also offers trust and
investment services through First Business Trust & Investments (“FBTI”), a division of FBB. FBB – Milwaukee operates as a commercial
banking institution in the Milwaukee, Wisconsin market, consisting primarily of Waukesha County and the surrounding areas, with a loan
production office in Kenosha, Wisconsin. Alterra operates as a commercial banking institution in the Kansas City market and the surrounding
areas. The Banks provide a full range of financial services to businesses, business owners, executives, professionals and high net worth
individuals. The Banks are subject to competition from other financial institutions and service providers and are also subject to state and federal
regulations. FBB has the following wholly-owned subsidiaries: First Business Capital Corp. (“FBCC”), First Madison Investment Corp.
(“FMIC”), First Business Equipment Finance, LLC (“FBEF”) and Rimrock Road Investment Fund, LLC (“Rimrock Road”). FMIC is located in
and was formed under the laws of the state of Nevada. FBB-Milwaukee has one subsidiary, FBB – Milwaukee Real Estate, LLC (“FBBMRE”).
Basis of Financial Statement Presentation. The Consolidated Financial Statements include the accounts of the Corporation and its wholly-
owned subsidiaries. In accordance with the provisions of Accounting Standards Codification (“ASC”) Topic 810, the Corporation’s ownership
interest in FBFS Statutory Trust II (“Trust II”) has not been consolidated into the financial statements. All significant intercompany balances and
transactions have been eliminated in consolidation.
Management of the Corporation is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial statements as well as reported amounts of revenues and expenses during
the reporting period. Actual results could differ significantly from those estimates. Material estimates that could experience significant changes
in the near-term include the value of foreclosed property, lease residuals, property under operating leases, securities, income taxes and the level
of the allowance for loan and lease losses. Certain amounts in prior periods may have been reclassified to conform to current presentation.
Subsequent events have been evaluated through the issuance of the Consolidated Financial Statements. No significant subsequent events have
occurred through this date requiring adjustment to the financial statements or disclosures.
Cash and Cash Equivalents. The Corporation considers federal funds sold, interest-bearing deposits and short-term investments that have
original maturities of three months or less to be cash equivalents.
Securities. The Corporation classifies its investment and mortgage-related securities as available-for-sale, held-to-maturity and trading. Debt
securities that the Corporation has the positive intent and ability to hold to maturity are classified as held-to-maturity and are stated at amortized
cost. Debt and equity securities bought expressly for the purpose of selling in the near term are classified as trading securities and are measured
at fair value with unrealized gains and losses reported in earnings. Debt and equity securities not classified as held-to-maturity or as trading are
classified as available-for-sale. Available-for-sale securities are measured at fair value with unrealized gains and losses reported as a separate
component of stockholders’ equity, net of tax. Realized gains and losses, and declines in value judged to be other than temporary, are included in
the consolidated statements of income as a component of non-interest income. The cost of securities sold is based on the specific identification
method. The Corporation did not hold any trading securities at December 31, 2014 and 2013 .
Discounts and premiums on investment and mortgage-backed securities are accreted and amortized into interest income using the effective yield
method over the weighted average life of the securities.
Declines in the fair value of investment securities (with certain exceptions for debt securities noted below) that are deemed to be other-than-
temporary are charged to earnings as a realized loss, and a new cost basis for the securities is established. In evaluating other-than-temporary
impairment, management considers the length of time and extent to which the fair value has been less than cost, the financial condition and near-
term prospects of the issuer, and the intent and ability of the Corporation to retain its investment in the issuer for a period of time sufficient to
allow for any anticipated recovery in fair value in the near
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term. Declines in the fair value of debt securities below amortized cost are deemed to be other-than-temporary in circumstances where: (1) the
Corporation has the intent to sell a security; (2) it is more likely than not that the Corporation will be required to sell the security before recovery
of its amortized cost basis; or (3) the Corporation does not expect to recover the entire amortized cost basis of the security. If the Corporation
intends to sell a security or if it is more likely than not that the Corporation will be required to sell the security before recovery, an other-than-
temporary impairment write-down is recognized in earnings equal to the difference between the security’s amortized cost basis and its fair value.
If the Corporation does not intend to sell the security or it is not more likely than not that it will be required to sell the security before recovery,
the other-than-temporary impairment write-down is separated into an amount representing credit loss, which is recognized in earnings, and an
amount related to all other factors, which is recognized in other comprehensive income.
Loans and Leases. Loans and leases which management has the intent and ability to hold for the foreseeable future or until maturity are
reported at their outstanding principal balance with adjustments for partial charge-offs, the allowance for loan and lease losses, deferred fees or
costs on originated loans and leases, and unamortized premiums or discounts on any purchased loans. Loans originated or purchased and
intended for sale in the secondary market are carried at the lower of cost or estimated fair value in the aggregate. Unrealized losses on such loans
are recognized through a valuation allowance by a charge to other non-interest income. Gains and losses on the sale of loans are also included in
other non-interest income.
A loan or a lease is accounted for as a troubled debt restructuring if the Corporation, for economic or legal reasons related to the borrower’s
financial condition, grants a concession to the borrower that it would not otherwise consider. A troubled debt restructuring may involve the
receipt of assets from the debtor in partial or full satisfaction of the loan or lease, or a modification of terms such as a reduction of the stated
interest rate or face amount of the loan or lease, a reduction of accrued interest, an extension of the maturity date at a stated interest rate lower
than the current market rate for a new loan or lease with similar risk, or some combination of these concessions. Restructured loans can involve
loans remaining on non-accrual, moving to non-accrual, or continuing on accrual status, depending on individual facts and circumstances. Non-
accrual restructured loans are included and treated with all other non-accrual loans. In addition, all accruing restructured loans are reported as
troubled debt restructurings which are considered and accounted for as impaired loans. Generally, restructured loans remain on non-accrual until
the borrower has attained a sustained period of repayment performance under the modified loan terms (generally a minimum of six months).
However, performance prior to the restructuring, or significant events that coincide with the restructuring, are considered in assessing whether
the borrower can meet the new terms and whether the loan should be returned to or maintained on accrual status. If the borrower’s ability to meet
the revised payment schedule is not reasonably assured, the loan remains on non-accrual.
Interest on non-impaired loans and leases is accrued and credited to income on a daily basis based on the unpaid principal balance and is
calculated using the effective interest method. Per policy, a loan or a lease is considered impaired and placed on a non-accrual status when it
becomes 90 days past due or it is doubtful that contractual principal and interest will be collected in accordance with the terms of the contract. A
loan or lease is determined to be past due if the borrower fails to meet a contractual payment and will continue to be considered past due until all
contractual payments are received. When a loan or lease is placed on non-accrual, interest accrual is discontinued and previously accrued but
uncollected interest is deducted from interest income. If collectability of the contractual principal and interest is in doubt, payments received are
first applied to reduce loan principal. If collectability of the contractual payments is not in doubt, payments may be applied to interest for interest
amounts due on a cash basis. As soon as it is determined with certainty that the principal of an impaired loan or lease is uncollectable either
through collections from the borrower or disposition of the underlying collateral, the portion of the carrying balance that exceeds the estimated
measurement value of the loan or lease is charged off. Loans or leases are returned to accrual status when they are brought current in terms of
both principal and accrued interest due, have performed in accordance with contractual terms for a reasonable period of time, and when the
ultimate collectability of total contractual principal and interest is no longer doubtful.
Transfers of assets, including but not limited to participation interests in originated loans, that upon completion of the transfer satisfy the
conditions to be reported as a sale, including legal isolation, are derecognized from the Consolidated Financial Statements. Transfers of assets
that upon completion of the transfer do not meet the conditions of a sale are recorded on a gross basis with a secured borrowing identified to
reflect the amount of the transferred interest.
Loan and lease origination fees as well as certain direct origination costs are deferred and amortized as an adjustment to loan yields over the
stated term of the loan or lease. Loans or leases that result from a refinance or restructuring, other than a troubled debt restructuring, where terms
are at least as favorable to the Corporation as the terms for comparable loans to other borrowers with similar collection risks and result in an
essentially new loan or lease, are accounted for as a new loan or lease. Any unamortized net fees, costs, or penalties are recognized when the
new loan or lease is originated. Unamortized net loan or lease fees or costs for loans and leases that result from a refinance or restructure with
only minor modifications to the original loan or lease contract are carried forward as a part of the net investment in the new loan or lease. For
troubled debt
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restructurings all fees received in connection with a modification of terms are applied as a reduction of the loan or lease and any related costs,
including direct loan origination costs, are charged to expense as incurred.
The Corporation purchased an individual loan in 2013 and a group of loans in connection with the Alterra acquisition which have shown
evidence of credit deterioration since origination. These purchased loans are recorded at fair value, such that there is no carryover of the seller’s
allowance for loan losses. After acquisition, losses are recognized by an increase in the allowance for loan losses. Such purchased loans are
accounted for individually. The Corporation estimates the amount and timing of expected cash flows for each purchased loan, and the expected
cash flows in excess of fair value are recorded as interest income over the remaining life of the loan (accretable yield). The excess of the loan’s
contractual principal and interest over expected cash flows is not recorded (nonaccretable difference).
Over the life of the loan, expected cash flows continue to be estimated. If the present value of expected cash flows is less than the carrying
amount, a provision for loan loss is recorded. If the present value of expected cash flows is greater than the carrying amount, it is recognized as
part of future interest income.
Allowance for Loan and Lease Losses. The allowance for loan and lease losses is maintained at a level that management deems appropriate to
absorb probable and estimable losses inherent in the loan and lease portfolios. Such inherent losses stem from the size and current risk
characteristics of the loan and lease portfolio, an assessment of individual impaired and other problem loans and leases, actual loss experience,
estimated fair value of underlying collateral, adverse situations that may affect the borrower’s ability to repay, and current geographic or
industry-specific current economic events. Some impaired and other loans and leases have risk characteristics that are unique to an individual
borrower and the loss must be estimated on an individual basis. Other impaired and problem loans and leases may have risk characteristics
similar to other loans and leases and bear similar inherent risk of loss. Such loans and leases, which are not individually reviewed and measured
for impairment, are aggregated and historical loss statistics are used to determine the risk of loss.
The measurement of the estimate of loss is reliant upon historical experience, information about the ability of the individual debtor to pay and
the appraisal of loan collateral in light of current economic conditions. An estimate of loss is an approximation of what portion of all amounts
receivable, according to the contractual terms of that receivable, is deemed uncollectible. Determination of the allowance is inherently subjective
because it requires estimation of amounts and timing of expected future cash flows on impaired and other problem loans and leases, estimation
of losses on types of loans and leases based on historical losses and consideration of current economic trends, both local and national. Based on
management’s periodic review using all previously mentioned pertinent factors, a provision for loan and lease losses is charged to expense when
it is determined an increase in the allowance for loan and lease losses is appropriate. A negative provision for loan and lease losses may be
recognized if management determines a reduction in the level of allowance for loan and lease losses is appropriate. Loan and lease losses are
charged against the allowance and recoveries are credited to the allowance.
The allowance for loan and lease losses contains specific allowances established for expected losses on impaired loans and leases. Impaired
loans and leases are defined as loans and leases for which, based on current information and events, it is probable that the Corporation will be
unable to collect scheduled principal and interest payments according to the contractual terms of the loan or lease agreement. Loans and leases
subject to impairment are defined as non-accrual and restructured loans and leases exclusive of smaller homogeneous loans such as home equity,
installment and 1-4 family residential loans. Impaired loans and leases are evaluated on an individual basis to determine the amount of specific
reserve or charge-off required, if any.
The measurement value of impaired loans and leases is determined based on the present value of expected future cash flows discounted at the
loan’s effective interest rate (the contractual interest rate adjusted for any net deferred loan fees or costs, premium, or discount existing at the
origination or acquisition of the loan), the market price of the loan or lease, or the fair value of the underlying collateral less costs to sell, if the
loan or lease is collateral dependent. A loan or lease is collateral dependent if repayment is expected to be provided principally by the underlying
collateral. A loan’s effective interest rate may change over the life of the loan based on subsequent changes in rates or indices or may be fixed at
the rate in effect at the date the loan was determined to be impaired.
Subsequent to the initial impairment, any significant change in the amount or timing of an impaired loan or lease’s future cash flows will result
in a reassessment of the valuation allowance to determine if an adjustment is necessary. Measurements based on observable market price or fair
value of the collateral may change over time and require a reassessment of the valuation allowance if there is a significant change in either
measurement base. Any increase in the present value of expected future cash flows attributable to the passage of time is recorded as interest
income accrued on the net carrying amount of the loan or lease at the effective interest rate used to discount the impaired loan or lease’s
estimated future cash flows. For the year ended December 31, 2014 , no interest income was recognized due to the increase of the present value
of future cash flows attributable to the passage of time. Any change in present value attributable to changes in the amount or timing of expected
future cash flows is recorded as loan loss expense in the same manner in which impairment was initially recognized or as a reduction of loan loss
expense that otherwise would be reported. Where the level of loan or lease impairment is measured using observable
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market price or fair value of collateral, any change in the observable market price of an impaired loan or lease or fair value of the collateral of an
impaired collateral-dependent loan or lease is recorded as loan loss expense in the same manner in which impairment was initially recognized.
Any increase in the observable market value of the impaired loan or lease or fair value of the collateral in an impaired collateral-dependent loan
or lease is recorded as a reduction in the amount of loan loss expense that otherwise would be reported.
Loans Held for Sale. Residential real estate loans which are originated and intended for sale in the secondary market in the foreseeable future
are classified as held for sale. These loans are carried at the lower of cost or estimated market value in the aggregate. As assets specifically
originated for sale, the origination of, disposition of, and gain/loss on these loans are classified as operating activities in the statement of cash
flows. Fees received from the borrower and direct costs to originate the loan are deferred and recognized as part of the gain or loss on sale. There
was $1.3 million in loans held for sale outstanding at December 31, 2014 . There were no loans held for sale outstanding at December 31, 2013 .
Net Investment in Direct Financing Leases. Net investment in direct financing lease agreements represents total undiscounted payments plus
estimated unguaranteed residual value (approximating 3% to 20% of the cost of the related equipment) and is recorded as lease receivables when
the lease is signed and the leased property is delivered to the client. The excess of the minimum lease payments and residual values over the cost
of the equipment is recorded as unearned lease income. Unearned lease income is recognized over the term of the lease on a basis which results
in an approximate level rate of return on the unrecovered lease investment. Lease payments are recorded when due under the lease contract.
Residual values are established at lease inception equal to the estimated value to be received from the equipment following termination of the
initial lease and such estimated value considers all relevant information and circumstances regarding the equipment. In estimating the
equipment’s fair value at lease termination, the Corporation relies on internally or externally prepared appraisals, published sources of used
equipment prices and historical experience adjusted for known current industry and economic trends. The Corporation’s estimates are
periodically reviewed to ensure reasonableness; however, the amounts the Corporation will ultimately realize could differ from the estimated
amounts. When there are other than temporary declines in the Corporation’s carrying amount of the unguaranteed residual value, the carrying
value is reduced and charged to non-interest expense.
Operating Leases. Machinery and equipment are leased to clients under operating leases and are recorded at cost. Equipment under such leases
is depreciated over the estimated useful life or term of the lease, if shorter. The impairment loss, if any, would be charged to expense in the
period it becomes evident. Rental income is recorded on the straight-line accrual basis as other non-interest income.
Leasehold Improvements and Equipment. The cost of capitalized leasehold improvements is amortized on the straight-line method over the
lesser of the term of the respective lease or estimated economic life. Equipment is stated at cost less accumulated depreciation and amortization
which is calculated by the straight-line method over the estimated useful lives of three to ten years. Maintenance and repair costs are charged to
expense as incurred. Improvements which extend the useful life are capitalized and depreciated over the remaining useful life of the assets.
Foreclosed Properties. Property acquired by repossession, foreclosure or by deed in lieu of foreclosure is carried at the lower of the recorded
investment in the loan at the time of acquisition or the fair value of the underlying property, less costs to sell. Any write-down in the carrying
value of a loan or lease at the time of acquisition is charged to the allowance for loan and lease losses. Any subsequent write-downs to reflect
current fair value, as well as gains and losses on disposition and revenues are recorded in non-interest expense. Costs relating to the development
and improvement of the property are capitalized while holding period costs are charged to other non-interest expense. Foreclosed properties are
included in foreclosed properties, net in the consolidated balance sheets.
Bank-Owned Life Insurance. Bank-owned life insurance (“BOLI”) is reported at the amount that would be realized if the life insurance
policies were surrendered on the balance sheet date. BOLI policies owned by the Banks are purchased with the objective to fund certain future
employee benefit costs with the death benefit proceeds. The cash surrender value of such policies is recorded in cash surrender value of life
insurance on the consolidated balance sheets and changes in the value are recorded in non-interest income. The total death benefit of all of the
BOLI policies was $67.1 million as of December 31, 2014 . There are no restrictions on the use of BOLI proceeds nor are there any contractual
restrictions on the ability to surrender the policy. As of each of December 31, 2014 and 2013 , there were no borrowings against the cash
surrender value of the BOLI policies.
Federal Home Loan Bank and Federal Reserve Bank Stock.
The Banks own shares in their regional Federal Home Loan Bank (“FHLB”) as required for membership to the FHLB. The minimum required
investment was $2.3 million as of December 31, 2014 . Alterra, as a state chartered member of the Federal Reserve Bank of Kansas City
(“FRB”), is required to own shares of FRB Stock. The minimum required investment was $532,700 as of December 31, 2014 . FHLB and FRB
stock is carried at cost which approximates its fair value because the
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shares can be resold to other member banks at their $100 per share par amount. The Corporation periodically evaluates its holding in FHLB and
FRB stock for impairment. Should the stock be impaired, it would be written down to its estimated fair value. There were no impairments
recorded on FHLB and FRB stock during the years ended December 31, 2014 and 2013 .
Goodwill and Other Intangible Assets. The excess of the cost of the acquisition of Alterra over the fair value of the net assets acquired consists
primarily of goodwill, core deposit intangibles and loan servicing rights. Core deposit intangibles have estimated finite lives and are amortized
on an accelerated basis to expense over a period of seven years. Loan servicing rights, when purchased, are initially recorded at fair value and
subsequently amortized in proportion to and over the period of estimated net servicing income. The Corporation reviews other intangible assets
for impairment at least annually, or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be
recoverable, in which case an impairment charge would be recorded.
Goodwill is not amortized but is subject to impairment tests on at least an annual basis. Any impairment of goodwill will be recognized as an
expense in the period of impairment.
Other Investments. The Corporation owns certain equity investments in other corporate organizations which are not consolidated because the
Corporation does not own more than a 50% interest or exercise control over the organization. Such investments are not variable interest entities.
Investments in corporations representing at least a 20% interest are generally accounted for using the equity method and investments in
corporations representing less than 20% interest are generally accounted for at cost. Investments in limited partnerships representing from at
least a 3% up to a 50% interest in the entity are generally accounted for using the equity method and investments in limited partnerships
representing less than 3% are generally accounted for at cost. All of these investments are periodically evaluated for impairment. Should an
investment be impaired, it would be written down to its estimated fair value. The equity investments are reported in other assets and the income
and expense from such investments, if any, is reported in non-interest income and non-interest expense.
Derivative Instruments. The Corporation uses derivative instruments to protect against the risk of adverse price or interest rate movements on
the value of certain assets, liabilities, future cash flows and economic hedges for written client derivative contracts. Derivative instruments
represent contracts between parties that usually require little or no initial net investment and result in one party delivering cash to the other party
based on a notional amount and an underlying as specified in the contract and may be subject to master netting agreements. A notional amount
represents the number of units of a specific item, such as currency units. An underlying represents a variable, such as an interest rate. The
amount of cash delivered from one party to the other is determined based on the interaction of the notional amount of the contract with the
underlying.
Market risk is the risk of loss arising from an adverse change in interest rates, exchange rates or equity prices. The Corporation’s primary market
risk is interest rate risk. Instruments designed to manage interest rate risk include interest rate swaps, interest rate options and interest rate caps
and floors with indices that relate to the pricing of specific assets and liabilities. The nature and volume of the derivative instruments used to
manage interest rate risk depend on the level and type of assets and liabilities on the balance sheet and the risk management strategies for the
current and anticipated rate environments. Counterparty risk with respect to derivative instruments occurs when a counterparty to a derivative
contract with an unrealized gain fails to perform according to the terms of the agreement. Counterparty risk is managed by limiting the
counterparties to highly rated dealers, requiring collateral postings when values are in deficit positions, applying uniform credit standards to all
activities with credit risk and monitoring the size and the maturity structure of the derivative portfolio.
All derivative instruments are to be carried at fair value on the consolidated balance sheets. The accounting for the gain or loss due to changes in
the fair value of a derivative instrument depends on whether the derivative instrument qualifies as a hedge. If the derivative instrument does not
qualify as a hedge, the gains or losses are reported in earnings when they occur. However, if the derivative instrument qualifies as a hedge, the
accounting varies based on the type of risk being hedged. In 2014 and 2013 , the Corporation solely utilized interest rate swaps which did not
qualify for hedge accounting and therefore all changes in fair value and gains and losses on these instruments were reported in earnings as they
occurred. The effects of netting arrangements are disclosed within the Notes of the Consolidated Financial Statements.
Income Taxes. Deferred income tax assets and liabilities are computed annually for temporary differences in timing between the financial
statement and tax basis of assets and liabilities that result in taxable or deductible amounts in the future based on enacted tax law and rates
applicable to periods in which the differences are expected to affect taxable income. The ultimate realization of deferred tax assets is dependent
upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers
the scheduled reversals of deferred tax liabilities, appropriate tax planning strategies and projections for future taxable income over the period
which the deferred tax assets are deductible. When necessary, valuation allowances are established to reduce deferred tax assets to the realizable
amount. Management believes it is more likely than not that the Corporation will realize the benefits of these deductible differences, net of the
existing valuation allowances.
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Income tax expense or benefit represents the tax payable or tax refundable for a period, adjusted by the applicable change in deferred tax assets
and liabilities for that period. The Corporation and its subsidiaries file a consolidated federal income tax return and separate state income tax
returns. Tax sharing agreements allocate taxes to each entity for the settlement of intercompany taxes. The Corporation applies a more likely
than not standard to each of its tax positions when determining the amount of tax expense or benefit to record in its financial statements.
Unrecognized tax benefits are recorded in other liabilities. The Corporation recognizes accrued interest relating to unrecognized tax benefits in
income tax expense and penalties in other non-interest expense.
Other Comprehensive Income. Comprehensive income or loss, shown as a separate financial statement, includes net income or loss, changes in
unrealized holding gains and losses on available for sale securities, changes in deferred gains and losses on investment securities transferred
from available for sale to held to maturity, if any, changes in unrealized gains and losses associated with cash flow hedging instruments, if any,
and the amortization of deferred gains and losses associated with terminated cash flow hedges, if any. For the year ended December 31, 2014 ,
there were no items requiring reclassification out of accumulated other comprehensive income.
Earnings Per Share. Earnings per common share (“EPS”) is computed using the two-class method. Basic EPS are computed by dividing net
income allocated to common shares by the weighted average number of common shares outstanding for the period, excluding any participating
securities. Participating securities include unvested restricted shares. Unvested restricted shares are considered participating securities because
holders of these securities receive non-forfeitable dividends at the same rate as the holders of the Corporation’s common stock. Diluted EPS is
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 common shares determined for the basic EPS plus the dilutive effect of common stock equivalents using the
treasury stock method based on the average market price for the period. Some stock options are anti-dilutive and therefore are not included in the
calculation of diluted EPS.
Segments and Related Information. The Corporation is required to report each operating segment based on materiality thresholds of ten
percent or more of certain amounts, such as revenue. Additionally, the Corporation is required to report separate operating segments until the
revenue attributable to such segments is at least 75 percent of total consolidated revenue. The Corporation provides a broad range of financial
services to individuals and companies in the Midwest. These services include demand, time, and savings products, the sale of certain non-deposit
financial products and commercial and retail lending, leasing and trust services. While the Corporation’s chief decision-maker monitors the
revenue streams of the various products and services, operations are managed and financial performance is evaluated on a corporate-wide basis.
The Corporation’s business units have similar basic characteristics in the nature of the products, production processes and type or class of client
for products or services; therefore, these business units are considered one operating segment.
Stock Options. Prior to January 1, 2006, the Corporation accounted for stock-based compensation using the intrinsic value method. Under the
intrinsic value method, compensation expense for employee stock options was generally not recognized if the exercise price of the option
equaled or exceeded the fair market value of the stock on the date of grant.
On January 1, 2006, the Corporation adopted ASC Topic 718 using the prospective method as stock options were only granted by the
Corporation prior to meeting the definition of a public entity. Under the prospective method, ASC Topic 718 must only be applied to the extent
that those awards are subsequently modified, repurchased or canceled. No stock options have been granted since the Corporation met the
definition of a public entity and no stock options have been modified, repurchased or cancelled subsequent to the adoption of ASC Topic 718.
Therefore, no stock-based compensation was recognized in the consolidated statements of income for the years ended December 31, 2014 or
2013 , except with respect to restricted stock awards. Upon vesting of any options subject to ASC Topic 718, the benefits of tax deductions in
excess of recognized compensation expense will be reported as a financing cash flow, rather than as an operating cash flow.
Future Accounting Changes.
In July 2013, the FASB issued ASU No. 2013-11, “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a
Similar Tax Loss, or a Tax Credit Carryforward Exits.” This ASU provides that an unrecognized tax benefit, or a portion thereof, should be
presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit
carryforward, except to the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the
reporting date to settle any additional income taxes that would result from disallowance of a tax position, or the tax law does not require the
entity to use, and the entity does not intend to use the deferred tax asset for such purpose. In these cases, the unrecognized tax benefit should be
presented as a liability. This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013.
Retrospective application is permitted. The Corporation adopted the accounting standard in the fourth quarter of 2014 with no impact on its
financial position or results of operations.
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In January 2014, the FASB issued ASU No. 2014-04, “ Receivables—Troubled Debt Restructurings by Creditors (Subtopic 310-40):
Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure (a consensus of the FASB Emerging
Issues Task Force).” This ASU clarifies that an in substance repossession or foreclosure occurs, and a creditor is considered to have received
physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title
to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate
property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar agreement. In addition, the
amendments require interim and annual disclosure of both the amount of foreclosed residential real estate property held by the creditor and the
recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure in
accordance with local requirements of the applicable jurisdiction. This amendment is effective for fiscal years, and interim periods within those
years, beginning after December 15, 2014. An entity can elect to adopt the amendments using either a modified retrospective method or a
prospective transition method. 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 the Corporation’s consolidated financial position or results of operations.
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 666).” The ASU is a converged standard
between the FASB and the IASB that provides a single comprehensive revenue recognition model for all contracts with customers across
transactions and industries. The primary objective of the ASU is revenue recognition that represents the transfer of promised goods or services to
customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The
ASU is effective for interim and annual reporting periods beginning after December 15, 2016. 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 the Corporation’s consolidated financial position or results
of operations.
In June 2014, the FASB issued ASU No. 2014-12, “Accounting for Share-Based Payments When the Terms of an Award Provide That a
Performance Target Could Be Achieved after the Requisite Service Period.” This ASU requires a reporting entity to treat a performance target
that affects vesting and that could be achieved after the requisite service period as a performance condition. A reporting entity should apply
FASB ASC Topic 718, Compensation-Stock Compensation, to awards with performance conditions that affect vesting. For all entities, ASU
2014-12 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2015. Early adoption is
permitted. ASU 2014-12 may be adopted either prospectively for share-based payment awards granted or modified on or after the effective date,
or retrospectively, using a modified retrospective approach. The modified retrospective approach would apply to share-based payment awards
outstanding as of the beginning of the earliest annual period presented in the financial statements on adoption, and to all new or modified awards
thereafter. While the Corporation does not have any performance-based awards outstanding as of the reporting date, the Corporation’s equity
incentive plan does allow for such awards. The Corporation is, therefore, in the process of evaluating the impact of this standard but does not
expect this standard to have a material impact on the Corporation’s consolidated financial position or results of operations.
In August 2014, the FASB issued ASU 2014-14, “Receivables - Troubled Debt Restructuring by Creditors (Subtopic 310-40): Classification of
Certain Government-Guaranteed Mortgage Loans upon Foreclosure.” This ASU will require creditors to derecognize certain foreclosed
government-guaranteed mortgage loans and to recognize a separate other receivable that is measured at the amount the creditor expects to
recover from the guarantor, and to treat the guarantee and the receivable as a single unit of account. The ASU is effective for interim and annual
periods beginning after December 15, 2014. An entity can elect a prospective or a modified retrospective transition method, but must use the
same transition method that it elected under FASB ASU No. 2014-04, 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 the Corporation’s consolidated financial
position or results of operation.
In August 2014, the FASB issued ASU 2014-15, “Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern.” This
ASU describes how an entity should assess its ability to meet obligations and sets rules for how this information should be disclosed in the
financial statements. The standard provides accounting guidance that will be used along with existing auditing standards. The ASU is effective
for interim and annual periods beginning after December 15, 2016. Early application 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 the Corporation’s consolidated financial
position or results of operation.
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Note 2 – Business Combinations
Effective November 1, 2014, the Corporation completed its acquisition of the Aslin Group, including Alterra, pursuant to the terms of the
Merger Agreement. On May 22, 2014, the Corporation entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Aslin
Group and AGI Acquisition Corp., a Delaware corporation and a wholly-owned subsidiary of the Corporation (the “Merger Sub”). Under the
terms of the Merger Agreement, the Merger Sub merged with and into Aslin Group, with Aslin Group continuing as the surviving corporation.
Each outstanding share of common stock of Aslin Group (other than shares held in the treasury of Aslin Group, owned by the Corporation or any
subsidiary of the Corporation, or subject to validly exercised appraisal rights) ceased to be outstanding and was converted into the right to
receive a combination of shares of common stock of the Corporation and cash, as described in more detail below. Immediately following the
merger of the Merger Sub and Aslin Group, Aslin Group merged with and into the Corporation in a second merger, with the Corporation
continuing as the surviving corporation. As a result of the mergers, Alterra is a wholly-owned subsidiary of the Corporation. The separate
corporate existence of Aslin Group ceased as of the effective time of the second merger. The acquisition of Aslin Group is not considered a
significant business combination, as defined in accordance with Regulation S-X, and, accordingly, pro-forma financial information is not
required.
The cash-and-stock transaction was valued at $30.1 million . Under the terms of the Merger Agreement, each outstanding share of common
stock of Aslin Group was converted into the right to receive merger consideration valued at $14,435.59 per share, payable in $6,496.02 of cash
and $7,939.57 worth of the Corporation’s common stock. The number of the Corporation’s common shares issued was calculated based on the
Corporation’s 10-day volume-weighted average stock price (“VWAP”) as of the market close on the third business day prior to the effective date
of the transaction. Based upon the VWAP of $45.9825 , 360,081 shares were issued to the Aslin Group shareholders. The cash portion of the
consideration was paid to Aslin Group shareholders with a portion of the proceeds received from $15.0 million of subordinated notes issued by
the Corporation on August 26, 2014. See Note 10 – FHLB Advances, Other Borrowings and Junior Subordinated Notes.
As disclosed in the accompanying Consolidated Statements of Income, for the year ended December 31, 2014, the Corporation incurred
$990,000 in pre-tax, non-recurring transaction costs related to the merger with Aslin Group. These costs primarily consist of facilitative
professional service fees incurred to complete the merger transaction and have been expensed as incurred.
The following table summarizes the consideration paid for Aslin Group, the amounts of assets acquired and liabilities assumed, and the
adjustments to fair value that were recognized at the acquisition date:
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Consideration paid:
Cash
Common stock
Fair value of total consideration transferred
Recognized amounts of identifiable assets acquired and liabilities assumed:
Cash and cash equivalents
Securities available for sale
Loans
FHLB and FRB stock
Premises and equipment, net
Foreclosed properties
Bank-owned life insurance
Loan servicing asset
Core deposit intangible
Accrued interest receivable and other assets
Total assets acquired
Demand deposits
Time deposits
FHLB and other borrowings
Accrued interest payable and other liabilities
Total liabilities assumed
Total identifiable net assets
Goodwill
As Recorded by
Alterra Bank
As of November 1, 2014
Fair Value
Adjustments
(In Thousands)
Fair Value
$
$
30,945 $
3,379
199,507
988
2,160
1,391
3,285
933
—
3,579
246,167
71,886
138,933
9,000
2,373
222,192
23,975 $
$
$
— $
—
(4,038 )
—
140
214
—
—
347
—
(3,337 )
—
786
414
—
1,200
(4,537 )
$
13,548
16,557
30,105
30,945
3,379
195,469
988
2,300
1,605
3,285
933
347
3,579
242,830
71,886
139,719
9,414
2,373
223,392
19,438
10,667
Total identifiable net assets include $1.1 million of net assets acquired from the Aslin Group and the Merger Sub, consisting primarily of cash.
The Company accounted for the business combination under the acquisition method of accounting in accordance with Accounting Standards
Codification (“ASC”) 805, “Business Combinations” (“ASC 805”). The Company recognized the full fair value of the assets acquired and
liabilities assumed at the acquisition date, net of applicable income tax effects. The excess of cash consideration over the fair value of net assets
is recorded as goodwill. The market value adjustments are accreted or amortized using either an effective interest or straight-line method over
the expected term.
Acquired loans were recorded at fair value with no carryover of the related allowance for loan losses. Determining the fair value of loans
involved estimating the amount and timing of principal and interest cash flows expected to be collected on the loans and discounting those cash
flows at a market rate of interest. Loans acquired with evidence of credit quality deterioration totaled $2.9 million with a net combined yield and
credit mark of $762,000 which will be recognized in interest income over the remaining life of the loans contingent on the quarterly evaluation
of future expected cash flows. The Corporation acquired $192.6 million of gross loans, excluding purchased credit impaired loans, and
recognized a net combined yield and credit mark of $3.3 million which will be accreted to interest income over the average remaining term of 33
months using the effective interest method.
The Company recorded a core deposit intangible totaling $347,000 which was the portion of the acquisition purchase price which represented the
value assigned to the existing deposit base at acquisition. The core deposit intangible has a finite life and is amortized by the straight-line method
over the estimated useful life of the deposits of seven years.
In determining the fair value of the time deposits, a discounted cash flow analysis was used, which calculated the present value of the contractual
payments over the remaining life of the advances at a market rate of interest. The Corporation acquired
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$139.7 million of time deposits, including a premium of $786,000 which will be amortized as a reduction to interest expense over the weighted
average remaining term of 13 months using the straight-line method.
In determining the fair value of the FHLB advances, a discounted cash flow analysis was used, which calculated the present value of the
contractual payments over the remaining life of the advances at a market rate of interest. The Corporation acquired $9.4 million of FHLB
advances, including a premium of $414,000 which will be amortized as a reduction to interest expense over the weighted average remaining term
of 26 months using the straight-line method.
Goodwill of $10.7 million million arising from the acquisition will not be amortized and will be subject to an annual impairment evaluation
during the fourth quarter of each year hereafter.
Note 3 – Cash and Cash Equivalents
Cash and due from banks was approximately $14.9 million and $13.2 million at December 31, 2014 and 2013 , respectively. Required reserves
in the form of either vault cash or deposits held at the Federal Reserve Bank (“FRB”) were $1.2 million and $1.5 million at December 31, 2014
and 2013 . FRB balances were $70.5 million and $53.0 million at December 31, 2014 and 2013 , respectively, and are included in short-term
investments on the Consolidated Balance Sheets. Short-term investments, considered cash equivalents, were $88.4 million and $68.1 million at
December 31, 2014 and 2013 , respectively. Federal funds sold at December 31, 2014 and 2013 were $22,000 and $24,000 , respectively and are
included in short-term investments on the Consolidated Balance Sheets.
Note 4 – Securities
The amortized cost and estimated fair value of securities available-for-sale and the corresponding amounts of gross unrealized gains and losses
recognized in accumulated other comprehensive income were as follows:
Available-for-sale:
U.S. Government agency obligations - government-sponsored
enterprises
Municipal obligations
Asset-backed securities
Collateralized mortgage obligations - government issued
Collateralized mortgage obligations - government-sponsored
enterprises
Amortized cost
As of December 31, 2014
Gross
Gross
unrealized
unrealized
holding losses
holding gains
(In Thousands)
Estimated
fair value
9,046 $
573
1,514
67,740
64,763
143,636 $
— $
5
—
1,390
234
1,629 $
(81 ) $
—
(4 )
(256 )
(226 )
(567 ) $
8,965
578
1,510
68,874
64,771
144,698
$
$
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Available-for-sale:
U.S. Government agency obligations - government-sponsored
enterprises
Municipal obligations
Asset-backed securities
Collateralized mortgage obligations - government issued
Collateralized mortgage obligations - government-sponsored
enterprises
Amortized cost
As of December 31, 2013
Gross
Gross
unrealized
unrealized
holding losses
holding gains
(In Thousands)
Estimated
fair value
$
$
16,380 $
16,207
1,517
111,010
35,561
180,675 $
9 $
35
—
2,238
57
2,339 $
(145 ) $
(753 )
(23 )
(1,279 )
(696 )
(2,896 ) $
16,244
15,489
1,494
111,969
34,922
180,118
The amortized cost and estimated fair value of securities held-to-maturity and the corresponding amounts of gross unrecognized gains and losses
were as follows:
Held-to-maturity:
U.S. Government agency obligations - government-sponsored
enterprises
Municipal obligations
Asset-backed securities
Collateralized mortgage obligations - government issued
Collateralized mortgage obligations - government-sponsored
enterprises
Amortized cost
As of December 31, 2014
Gross
Gross
unrecognized
unrecognized
holding losses
holding gains
(In Thousands)
Estimated
fair value
$
$
1,490 $
16,088
—
14,505
9,480
41,563 $
— $
85
—
57
74
216 $
(17 ) $
(18 )
—
(31 )
(19 )
(85 ) $
1,473
16,155
—
14,531
9,535
41,694
During the quarter ended June 30, 2014, the Corporation transferred securities with an amortized cost of $44.6 million , previously designated as
available-for-sale, to held-to-maturity classification. The fair value of those securities as of the date of the transfer was $43.7 million , reflecting
a net unrealized loss of $874,000 . The fair value as of the transfer date became the new amortized cost over the life of the security. No gain or
loss was recognized at the time of the transfer. This transfer was completed after consideration of the Corporation’s ability and intent to hold
these securities to maturity.
U.S. Government agency obligations - government-sponsored enterprises represent securities issued by the Federal Home Loan Mortgage
Corporation (“FHLMC”) and Federal National Mortgage Association (“FNMA”). Collateralized mortgage obligations - government issued
represent securities guaranteed by the Government National Mortgage Association (“GNMA”). Collateralized mortgage obligations —
government-sponsored enterprises include securities guaranteed by FHLMC and the FNMA. Asset-backed securities represent securities issued
by the Student Loan Marketing Association (“SLMA”) and are 97% guaranteed by the U.S. government. Municipal obligations include
securities issued by various municipalities located primarily within the State of Wisconsin and are primarily general obligation bonds that are
tax-exempt in nature. There were no sales of securities available-for-sale during the years ended December 31, 2014 and 2013 .
At December 31, 2014 and December 31, 2013 , securities with a fair value of $32.7 million and $42.3 million , respectively, were pledged to
secure interest rate swap contracts, outstanding FHLB advances, if any, and additional FHLB availability.
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The amortized cost and estimated fair value of securities by contractual maturity at December 31, 2014 are shown below. Actual maturities may
differ from contractual maturities because issuers have the right to call or prepay obligations without call or prepayment penalties.
Due in one year or less
Due in one year through five years
Due in five through ten years
Due in over ten years
Available-for-Sale
Held-to-Maturity
Amortized
Cost
Estimated
Fair Value
Amortized
Cost
Estimated
Fair Value
(In Thousands)
$
— $
— $
8,869
71,255
63,512
143,636 $
8,820
71,845
64,033
144,698 $
$
— $
2,289
14,314
24,960
41,563 $
—
2,270
14,379
25,045
41,694
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 December 31, 2014 and
2013 . At December 31, 2014 and 2013 , the Corporation owned 59 and 131 available-for-sale securities that were in an unrealized loss position,
respectively. Such securities have not experienced credit rating downgrades; however, they have primarily declined in value due to the current
interest rate environment. At December 31, 2014 , the Corporation held 22 available-for-sale securities that had been in a continuous loss
position for twelve months or greater.
The Corporation also has not specifically identified available-for-sale securities in a loss position that it intends to sell in the near term and does
not believe that it will be required to sell any such securities. It is expected that the Corporation will recover the entire amortized cost basis of
each security based upon an evaluation of the present value of the expected future cash flows. Accordingly, no other than temporary impairment
was recorded in the Consolidated Statements of Income for the years ended December 31, 2014 , 2013 and 2012 .
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A summary of unrealized loss information for available-for-sale securities, categorized by security type follows:
Available-for-sale:
U.S. Government agency obligations -
government-sponsored enterprises
Municipal obligations
Asset-backed securities
Collateralized mortgage obligations -
government issued
Collateralized mortgage obligations -
government-sponsored enterprises
Available-for-sale:
U.S. Government agency obligations -
government-sponsored enterprises
Municipal obligations
Collateralized mortgage obligations -
government issued
Collateralized mortgage obligations -
government-sponsored enterprises
Less than 12 months
As of December 31, 2014
12 months or longer
Total
Fair value
Unrealized
losses
Fair value
Unrealized
losses
Fair value
Unrealized
losses
(In Thousands)
$
3,486 $
—
—
12 $
—
—
5,479 $
—
1,510
69 $
—
4
8,965 $
—
1,510
9,201
50
9,536
206
18,737
29,498
42,185 $
$
97
159 $
4,993
21,518 $
129
408 $
34,491
63,703 $
81
—
4
256
226
567
Less than 12 months
As of December 31, 2013
12 months or longer
Total
Fair value
Unrealized
losses
Fair value
Unrealized
losses
Fair value
Unrealized
losses
(In Thousands)
$
10,608 $
12,001
145 $
650
— $
981
— $
103
10,608 $
12,982
34,021
997
6,146
282
40,167
20,628
78,752 $
$
506
2,321 $
5,418
12,545 $
190
575 $
26,046
91,297 $
145
753
1,279
696
2,896
The tables below show the Corporation’s gross unrecognized losses and fair value of held-to-maturity investments, aggregated by investment
category and length of time that individual investments were in a continuous loss position at December 31, 2014 . At December 31, 2014 , the
Corporation held 57 held-to-maturity securities that were in an unrecognized 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 no held-to-maturity
securities that had been in a continuous loss position for twelve months or greater as of December 31, 2014 . It is expected that the Corporation
will recover the entire amortized cost basis of each held-to-maturity security based upon an evaluation of the present value of the expected future
cash flows. Accordingly, no other than temporary impairment was recorded in the Consolidated Statements of Income for the year ended
December 31, 2014 .
A summary of unrecognized loss information for securities held-to-maturity, categorized by security type follows:
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Held-to-maturity:
U.S. Government agency obligations -
government-sponsored enterprises
Municipal obligations
Collateralized mortgage obligations -
government issued
Collateralized mortgage obligations -
government-sponsored enterprises
Less than 12 months
As of December 31, 2014
12 months or longer
Total
Fair value
Unrecognized
losses
Fair value
Unrecognized
losses
Fair value
Unrecognized
losses
(In Thousands)
$
1,490 $
2,222
17 $
18
— $
—
— $
—
1,490 $
2,222
3,247
31
—
—
3,247
3,076
10,035 $
$
19
85 $
—
— $
—
— $
3,076
10,035 $
17
18
31
19
85
There were no securities designated as held-to-maturity as of December 31, 2013 .
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:
Commercial real estate
Commercial real estate — owner occupied
Commercial real estate — non-owner occupied
Construction and land development
Multi-family
1-4 family
Total commercial real estate
Commercial and industrial
Direct financing leases, net
Consumer and other
Home equity and second mortgages
Other
Total consumer and other
Total gross loans and leases receivable
Less:
Allowance for loan and lease losses
Deferred loan fees
Loans and leases receivable, net
December 31,
2014
December 31,
2013
(In Thousands)
$
163,884 $
417,962
121,160
72,578
36,182
811,766
416,654
34,165
7,866
11,341
19,207
1,281,792
14,329
1,025
1,266,438 $
$
141,164
341,695
68,708
62,758
30,786
645,111
293,552
26,065
5,272
11,972
17,244
981,972
13,901
1,021
967,050
During the years ended December 31, 2014 and 2013 , $29.1 million and $46.2 million of loans were transferred to third parties, respectively.
Each of the transfers of these financial assets met the qualifications for sale accounting, including the requirements specific to loan
participations, and therefore $29.1 million and $46.2 million during the years ended December 31, 2014 and 2013 , respectively, have been
derecognized in the audited Consolidated Financial Statements. The Corporation has a continuing involvement in each of the loans by way of
relationship management and servicing the loans; however, there are no further obligations to the third-party participant required of the
Corporation in the event of a borrower’s default, other than standard representations and warranties related to sold amounts. The loans were
transferred at their fair value and no gain or loss was recognized upon the transfer, as the participation interest was transferred at or near the date
of loan origination and the payments received for servicing the portion of the loans participated represent adequate compensation. The
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total amount of loan participations purchased on the Corporation’s Consolidated Balance Sheets as of December 31, 2014 and December 31,
2013 was $482,000 and $498,000 , respectively.
The total amount of outstanding loans transferred to third parties as loan participations sold as of December 31, 2014 and December 31, 2013
was $116.6 million and $52.1 million , respectively, all of which were treated as a sale and derecognized under the applicable accounting
guidance in effect at the time of the transfers of the financial assets. The Corporation’s continuing involvement with these loans is by way of
partial ownership, relationship management and all servicing responsibilities. As of December 31, 2014 and December 31, 2013 , the total
amount of the Corporation’s partial ownership of loans on the Corporation’s Consolidated Balance Sheets was $96.4 million and $77.2 million ,
respectively. As of December 31, 2014 . $1.2 million loans in this participation sold portfolio were considered impaired as compared to none as
of December 31, 2013 . The Corporation does not share in the participant’s portion of the charge-offs.
In May 2013, the Corporation repurchased, from the original participating entity, a portion of one loan which was previously and appropriately
accounted for as a transfer (sale) under a participation agreement. The repurchase was not a condition of the original participation agreement and
was undertaken to provide the Corporation with complete discretion in the workout process of this loan. At December 31,
2014 and December 31, 2013, the carrying amount of the loan purchased with deteriorated credit quality was $1.3 million and $1.4 million ,
respectively. The loan is classified as a non-performing troubled debt restructuring because the Corporation cannot reasonably estimate the
timing of the cash flows expected to be collected and therefore the discount will not be accreted to earnings until the carrying amount is fully
paid. During the year ended December 31, 2014, there were no changes to the allowance for loan and lease losses relating to this loan, as it is a
collateral dependent loan and was deemed to have sufficient collateral value as of December 31, 2014 to support the carrying value.
On November 1, 2014, the Corporation completed its acquisition of Alterra in a stock and cash transaction valued at $30.1 million . Loans with a
fair value of $195.5 million were acquired by the Corporation, which included loans considered impaired prior to the acquisition date and
therefore accounted for under the applicable accounting guidance (ASC-310-30). As of November 1, 2014 and December 31, 2014, the gross
outstanding principal of the purchased credit impaired loans was $3.7 million and $3.6 million , respectively. As of November 1, 2014 and
December 31, 2014, the fair value of the purchased credit impaired loans was $2.9 million and $2.8 million , respectively.
ASC 310-30, Accounting for Certain Loans or Debt Securities Acquired in a Transfer, applies to purchased loans with evidence of deterioration
in credit quality since origination for which it is probable at acquisition that the Corporation will be unable to collect all contractually required
payments are considered to be credit impaired. Purchased credit-impaired loans are initially recorded at fair value, which is estimated by
discounting the cash flows expected to be collected at the acquisition date. Because the estimate of expected cash flows reflects an estimate of
future credit losses expected to be incurred over the life of the loans, an allowance for credit losses is not recorded at the acquisition date. The
excess of cash flows expected at acquisition over the estimated fair value, referred to as the accretable yield, is recognized in interest income
over the remaining life of the loan on a level-yield basis, contingent on the subsequent evaluation of future expected cash flows. The difference
between the contractually required payments at acquisition and the cash flows expected to be collected at acquisition is referred to as the
nonaccretable difference. A subsequent decrease in the estimate of cash flows expected to be received on purchased credit-impaired loans
generally results in the recognition of an allowance for credit losses. Subsequent increases in cash flows result in reversal of any nonaccretable
difference (or allowance for loan and lease losses to the extent any has been recorded) with a positive impact on interest income subsequently
recognized. The measurement of cash flows involves assumptions and judgments for interest rates, prepayments, default rates, loss severity, and
collateral values. All of these factors are inherently subjective and significant changes in the cash flow estimates over the life of the loan can
result.
The following table reflects the contractually required payments receivable, cash flows expected to be collected and fair value of the credit
impaired Alterra Bank loans at acquisition date:
Contractually required payments
Less: nonaccretable difference
Cash flows expected to be collected
Less: accretable yield
Fair value of credit impaired loans acquired
As of November 1, 2014
(In Thousands)
$
$
4,109
(528 )
3,581
(683 )
2,898
The following table presents a rollforward of the accretable yield for the year ended December 31, 2014 . There was no accretable yield in 2013 .
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Alterra Transaction:
Impact of acquisition on November 1, 2014
Accretion
Reclassification from nonaccretable difference
Outstanding accretable yield
December 31,
2014
(In Thousands)
$
$
683
(7 )
—
676
Certain of the Corporation’s executive officers, directors and their related interests are loan clients of the Banks. As of December 31, 2014 and
2013 , loans aggregating approximately $4.4 million and $3.0 million , respectively, were outstanding to such parties. New loans granted to such
parties during the years ended December 31, 2014 and 2013 were approximately $1.8 million and $1.6 million and repayments on such loans
were approximately $392,000 and $10.0 million , respectively. These loans were made in the ordinary course of business and on substantially
the same terms as those prevailing at the time for comparable loans not related to the lender. None of these loans were considered impaired.
The following information illustrates ending balances of the Corporation’s loan and lease portfolio, including impaired loans by class of
receivable, and considering certain credit quality indicators as of December 31, 2014 and 2013 :
Category
As of December 31, 2014
I
II
III
IV
Total
(Dollars in Thousands)
Commercial real estate:
Commercial real estate — owner occupied
Commercial real estate — non-owner occupied
Construction and land development
Multi-family
1-4 family
Total commercial real estate
$
$
$
$
131,094
378,671
100,934
70,897
25,997
707,593
15,592
20,823
8,193
751
5,278
50,637
16,621
17,498
6,876
913
3,336
45,244
$
577
970
5,157
17
1,571
8,292
163,884
417,962
121,160
72,578
36,182
811,766
Commercial and industrial
383,755
18,524
12,026
2,349
416,654
Direct financing leases, net
32,756
1,120
289
—
34,165
Consumer and other:
Home equity and second mortgages
Other
Total consumer and other
7,039
10,570
17,609
205
50
255
189
—
189
433
721
1,154
7,866
11,341
19,207
Total gross loans and leases receivable
$ 1,141,713
$
70,536
$
57,748
$
11,795
$ 1,281,792
Category as a % of total portfolio
89.07 %
5.50 %
4.51 %
0.92 %
100.00 %
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Table of Contents
Category
As of December 31, 2013
I
II
III
IV
Total
(Dollars in Thousands)
Commercial real estate:
Commercial real estate — owner occupied
Commercial real estate — non-owner occupied
Construction and land development
Multi-family
1-4 family
Total commercial real estate
$
$
$
$
118,764
290,865
53,493
57,049
19,197
539,368
11,259
29,444
1,972
5,678
7,611
55,964
10,802
21,103
7,754
—
3,312
42,971
$
339
283
5,489
31
666
6,808
141,164
341,695
68,708
62,758
30,786
645,111
Commercial and industrial
268,109
11,688
5,712
8,043
293,552
Direct financing leases, net
23,171
2,421
473
—
26,065
Consumer and other:
Home equity and second mortgages
Other
Total consumer and other
4,408
11,177
15,585
134
—
134
150
—
150
580
795
1,375
Total gross loans and leases receivable
Category as a % of total portfolio
$
846,233
$
70,207
$
49,306
$
16,226
$
86.18 %
7.15 %
5.02 %
1.65 %
5,272
11,972
17,244
981,972
100.00 %
Credit underwriting through a committee process is a key component of the Corporation’s operating philosophy. Business development officers
have relatively low individual lending authority limits, 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. In addition, the Corporation makes every effort to ensure that there is appropriate collateral at the time of
origination to protect the Corporation’s interest in the related loan or lease.
Each credit is evaluated for proper risk rating upon origination, at the time of each subsequent renewal, upon receipt and evaluation of updated
financial information from 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
borrower’s management team or the industry in which the borrower operates. Loans and leases in this category are not subject to additional
monitoring procedures above and beyond what is required at the origination or renewal of the loan or lease. The Corporation monitors Category
I loans and leases through payment performance, continued maintenance of 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 and collateral values. Management will place credits in this
category to allow for proactive monitoring and resolution with the borrower to possibly mitigate the area of concern and prevent further
deterioration or risk of loss to the Corporation. Category II loans are considered performing but are monitored frequently by the assigned
business development officer and by subcommittees of the Banks’ loan committees.
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Table of Contents
Category III — Loans and leases in this category are identified by the Corporation’s business development officers and senior management as
warranting special attention. However, the balance in this category is not intended to represent the amount of adversely classified assets held by
the Banks. Category III loans and leases generally exhibit undesirable characteristics such as evidence of adverse financial trends and conditions,
managerial problems, deteriorating economic conditions within the related industry, or evidence of adverse public filings and may exhibit
collateral shortfall positions. However, management continues to believe that it will collect all required principal and interest in accordance with
the original terms of the contracts relating to the loans and leases in this category. Therefore Category III loans are considered performing with
no specific reserves established for this category. Category III loans are monitored by management and loan committees of the Banks on a
monthly basis and the Banks’ Boards 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 include those which have been placed
on non-accrual as management has determined that it is unlikely that the Banks will receive the required principal and interest in accordance
with the contractual terms of the agreement and loans and leases considered performing troubled debt restructurings. 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 loan committees of the Banks on a monthly basis and the Banks’ Boards of Directors at each of their regularly
scheduled meetings.
Utilizing regulatory classification terminology, the Corporation identified $27.1 million and $22.8 million of loans and leases as Substandard as
of December 31, 2014 and 2013 , respectively. No loans were considered Special Mention, Doubtful or Loss as of either December 31, 2014 and
2013 . The population of Substandard loans are a subset of Category III and Category IV loans.
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Table of Contents
The delinquency aging of the loan and lease portfolio by class of receivable as of December 31, 2014 and 2013 were as follows:
As of December 31, 2014
Accruing loans and leases
Commercial real estate:
30-59
days past due
60-89
days past due
Greater
than 90
days past due Total past due
Current
Total loans
(Dollars in Thousands)
$
Owner occupied
Non-owner occupied
Construction and land development
Multi-family
1-4 family
Commercial & industrial
Direct financing leases, net
Consumer and other:
Home equity and second mortgages
Other
$
$
Total
Non-accruing loans and leases
Commercial real estate:
Owner occupied
Non-owner occupied
Construction and land development
Multi-family
1-4 family
Commercial & industrial
Direct financing leases, net
Consumer and other:
Home equity and second mortgages
Other
$
$
Total
Total loans and leases
Commercial real estate:
Owner occupied
Non-owner occupied
Construction and land development
Multi-family
1-4 family
Commercial & industrial
Direct financing leases, net
Consumer and other:
$
$
$
$
$
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
364
—
—
—
364
—
—
—
—
—
364
—
$
$
$
$
$
—
—
—
—
—
—
—
—
—
—
—
215
193
—
106
146
—
—
—
660
—
215
193
—
106
146
—
$
$
$
$
$
—
—
—
—
—
—
—
—
—
—
—
—
—
—
306
736
—
—
720
1,762
—
—
—
—
306
736
—
—
—
—
—
—
—
—
—
—
—
$
$
163,384
417,676
116,228
72,561
35,492
414,336
34,165
163,384
417,676
116,228
72,561
35,492
414,336
34,165
7,537
10,621
$ 1,272,000
7,537
10,621
$ 1,272,000
$
$
$
—
215
193
—
412
1,246
—
—
720
2,786
—
215
193
—
412
1,246
—
$
$
$
500
71
4,739
17
278
1,072
—
329
—
7,006
163,884
417,747
120,967
72,578
35,770
415,408
34,165
500
286
4,932
17
690
2,318
—
329
720
9,792
163,884
417,962
121,160
72,578
36,182
416,654
34,165
Home equity and second mortgages
Other
Total
Percent of portfolio
$
—
—
364
0.03 %
$
—
—
660
0.05 %
$
—
720
1,762
0.14 %
$
90
—
720
2,786
0.22 %
7,866
10,621
$ 1,279,006
7,866
11,341
$ 1,281,792
99.78 %
100.00 %
Table of Contents
As of December 31, 2013
Accruing loans and leases
Commercial real estate:
30-59
days past due
60-89
days past due
Greater
than 90
days past due Total past due
Current
Total loans
(Dollars in Thousands)
$
Owner occupied
Non-owner occupied
Construction and land development
Multi-family
1-4 family
Commercial & industrial
Direct financing leases, net
Consumer and other:
Home equity and second mortgages
Other
$
$
Total
Non-accruing loans and leases
Commercial real estate:
Owner occupied
Non-owner occupied
Construction and land development
Multi-family
1-4 family
Commercial & industrial
Direct financing leases, net
Consumer and other:
Home equity and second mortgages
Other
$
$
Total
Total loans and leases
Commercial real estate:
Owner occupied
Non-owner occupied
Construction and land development
Multi-family
1-4 family
Commercial & industrial
Direct financing leases, net
Consumer and other:
$
$
$
$
$
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
1,944
—
—
—
1,944
—
—
—
—
—
1,944
—
$
$
$
$
$
—
—
—
—
—
—
—
—
—
—
—
—
—
—
180
1,407
—
—
—
1,587
—
—
—
—
180
1,407
—
$
$
$
$
$
—
—
—
—
—
—
—
—
—
—
254
—
—
—
123
53
—
85
795
1,310
254
—
—
—
123
53
—
$
$
$
$
$
—
—
—
—
—
—
—
—
—
—
254
—
—
—
303
3,404
—
85
795
4,841
254
—
—
—
303
3,404
—
Home equity and second mortgages
Other
Total
Percent of portfolio
$
—
—
1,944
0.20 %
$
—
—
1,587
0.16 %
$
85
795
1,310
0.13 %
$
85
795
4,841
0.49 %
$
140,825
341,412
63,286
62,727
30,265
285,541
26,065
4,819
11,177
966,117
85
283
5,422
31
218
4,607
—
368
—
11,014
140,910
341,695
68,708
62,758
30,483
290,148
26,065
5,187
11,177
977,131
$
$
$
$
$
$
99.51 %
140,825
341,412
63,286
62,727
30,265
285,541
26,065
4,819
11,177
966,117
339
283
5,422
31
521
8,011
—
453
795
15,855
141,164
341,695
68,708
62,758
30,786
293,552
26,065
5,272
11,972
981,972
100.00 %
91
Table of Contents
The Corporation’s total impaired assets consisted of the following at December 31, 2014 and 2013 , respectively.
Non-accrual loans and leases
Commercial real estate:
Commercial real estate — owner occupied
Commercial real estate — non-owner occupied
Construction and land development
Multi-family
1-4 family
Total non-accrual commercial real estate
Commercial and industrial
Direct financing leases, net
Consumer and other:
Home equity and second mortgages
Other
Total non-accrual consumer and other loans
Total non-accrual loans and leases
Foreclosed properties, net
Total non-performing assets
Performing troubled debt restructurings
Total impaired assets
Total non-accrual loans and leases to gross loans and leases
Total non-performing assets to total gross loans and leases plus foreclosed properties, net
Total non-performing assets to total assets
Allowance for loan and lease losses to gross loans and leases
Allowance for loan and lease losses to non-accrual loans and leases
December 31,
2014
December 31,
2013
(Dollars in Thousands)
$
$
500 $
286
4,932
17
690
6,425
2,318
—
329
720
1,049
9,792
1,693
11,485
2,003
13,488 $
339
283
5,422
31
521
6,596
8,011
—
453
795
1,248
15,855
333
16,188
371
16,559
December 31,
2014
December 31,
2013
0.76 %
0.89
0.70
1.12
146.33
1.61 %
1.65
1.28
1.42
87.68
As of December 31, 2014 and December 31, 2013 , $7.4 million and $8.1 million of the non-accrual loans were considered troubled debt
restructurings, respectively. As of December 31, 2014 , there were no unfunded commitments associated with troubled debt restructured loans
and leases.
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Table of Contents
Troubled debt restructurings:
Commercial real estate
Commercial real estate —
owner occupied
Commercial real estate — non-
owner occupied
Construction and land
development
Multi-family
1-4 family
Commercial and industrial
Consumer and other:
Home equity and second
mortgage
Other
Total
Number
of
Loans
As of December 31, 2014
Pre-Modification
Recorded
Investment
Post-Modification
Recorded
Investment
Number
of
Loans
As of December 31, 2013
Pre-Modification
Recorded
Investment
Post-Modification
Recorded
Investment
(Dollars in Thousands)
2
5
4
1
16
4
6
2
40
$
624 $
1,095
6,260
184
2,119
361
772
2,080
13,495 $
$
577
970
5,157
17
1,368
155
431
721
9,396
1
3
3
1
10
5
6
1
30
$
110 $
385
6,060
184
911
1,935
752
2,076
12,413 $
$
84
283
5,489
31
666
565
580
795
8,493
All loans and leases modified as a troubled debt restructuring are evaluated 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 December 31, 2014 and 2013 , our troubled debt restructurings grouped by type of concession were as follows:
Commercial real estate
Extension of term
Interest rate concession
Combination of extension and interest rate
concession
Commercial and industrial
Extension of term
Combination of extension and interest rate
concession
Consumer and other
Extension of term
Combination of extension and interest rate
concession
Total
As of December 31, 2014
As of December 31, 2013
Number
of
Loans
Recorded
Investment
Number
of
Loans
Recorded
Investment
(Dollars in Thousands)
1 $
1
26
—
4
3
5
40 $
39
65
7,984
—
155
753
400
9,396
1 $
—
17
1
4
2
5
30 $
55
—
6,498
49
516
880
495
8,493
The following table provides the number of loans and leases modified in a troubled debt restructuring during the previous 12 months which
subsequently defaulted during the year ended December 31, 2014 , as well as the recorded investment in these restructured loans as of
December 31, 2014 .
93
Table of Contents
Commercial real estate:
Commercial real estate — owner occupied
Commercial real estate — non-owner occupied
Construction and land development
Multi-family
1-4 family
Commercial and industrial
Direct financing leases, net
Consumer and other:
Home equity and second mortgage
Other
Total
94
Year ended December 31, 2014
Number
of
Loans
Recorded Investment
(Dollars in Thousands)
—
2
—
—
—
1
—
—
—
3
$
$
—
215
—
—
—
117
—
—
—
332
Table of Contents
The following represents additional information regarding the Corporation’s impaired loans and leases by class:
Impaired Loans and Leases
As of and for the Year Ended December 31, 2014
Recorded
investment
Unpaid
principal
balance
Impairment
reserve
Average
recorded
investment (1)
(In Thousands)
Foregone
interest
income
Interest
income
recognized
Net
foregone
interest
income
$
$
$
$
$
With no impairment reserve
recorded:
Commercial real estate:
Owner occupied
Non-owner occupied
Construction and land development
Multi-family
1-4 family
Commercial and industrial
Direct financing leases, net
Consumer and other:
Home equity and second mortgages
Other
Total
With impairment reserve recorded:
Commercial real estate:
Owner occupied
Non-owner occupied
Construction and land development
Multi-family
1-4 family
Commercial and industrial
Direct financing leases, net
Consumer and other:
Home equity and second mortgages
Other
Total
Total:
Commercial real estate:
Owner occupied
Non-owner occupied
Construction and land development
Multi-family
1-4 family
Commercial and industrial
Direct financing leases, net
Consumer and other:
577 $
921
5,157
17
1,181
2,316
—
577 $
921
7,828
384
1,218
2,926
—
380
721
11,270 $
380
1,389
15,623 $
— $
49
—
—
390
33
—
53
—
525 $
577 $
970
5,157
17
1,571
2,349
—
— $
89
—
—
390
33
—
53
—
565 $
577 $
1,010
7,828
384
1,608
2,959
—
Home equity and second mortgages
Other
Grand total
433
721
11,795 $
433
1,389
16,188 $
$
(1) Average recorded investment is calculated primarily using daily average balances.
95
— $
—
—
—
—
—
—
—
—
— $
— $
49
—
—
155
33
—
53
—
290 $
— $
49
—
—
155
33
—
53
—
290 $
484 $
349
5,285
24
380
6,141
—
495
768
13,926 $
— $
52
—
—
405
34
—
57
—
548 $
484 $
401
5,285
24
785
6,175
—
552
768
14,474 $
30 $
22
155
53
15
463
—
18
87
843 $
— $
4
—
—
18
—
—
5
—
27 $
30 $
26
155
53
33
463
—
23
87
870 $
79 $
—
—
—
12
649
—
—
—
740 $
— $
—
—
—
—
—
—
—
—
— $
79 $
—
—
—
12
649
—
—
—
740 $
(49 )
22
155
53
3
(186 )
—
18
87
103
—
4
—
—
18
—
—
5
—
27
(49 )
26
155
53
21
(186 )
—
23
87
130
Table of Contents
$
$
$
$
$
With no impairment reserve
recorded:
Commercial real estate:
Owner occupied
Non-owner occupied
Construction and land development
Multi-family
1-4 family
Commercial and industrial
Direct financing leases, net
Consumer and other:
Home equity and second mortgages
Other
Total
With impairment reserve recorded:
Commercial real estate:
Owner occupied
Non-owner occupied
Construction and land development
Multi-family
1-4 family
Commercial and industrial
Direct financing leases, net
Consumer and other:
Home equity and second mortgages
Other
Total
Total:
Commercial real estate:
Owner occupied
Non-owner occupied
Construction and land development
Multi-family
1-4 family
Commercial and industrial
Direct financing leases, net
Consumer and other:
Impaired Loans and Leases
As of and for the Year Ended December 31, 2013
Recorded
investment
Unpaid
principal
balance
Impairment
reserve
Average
recorded
investment (1)
(In Thousands)
Foregone
interest
income
Interest
income
recognized
Net
foregone
Interest
Income
339 $
229
5,489
31
244
555
—
518
795
8,200 $
— $
54
—
—
422
7,488
—
62
—
8,026 $
339 $
283
5,489
31
666
8,043
—
339 $
229
8,160
398
244
766
—
518
1,461
12,115 $
— $
94
—
—
422
7,488
—
62
—
8,066 $
339 $
323
8,160
398
666
8,254
—
— $
—
—
—
—
—
—
—
—
— $
— $
54
—
—
155
131
—
62
—
402 $
— $
54
—
—
155
131
—
62
—
402 $
715 $
1,586
5,777
366
405
434
6
593
942
10,824 $
— $
88
—
—
437
670
—
65
—
1,260 $
715 $
1,674
5,777
366
842
1,104
6
658
942
12,084 $
57 $
198
203
93
31
97
—
37
100
816 $
— $
6
—
—
18
42
—
5
—
71 $
57 $
204
203
93
49
139
—
42
100
887 $
50 $
17
3
—
34
114
—
3
—
221 $
— $
—
—
—
—
—
—
—
—
— $
50 $
17
3
—
34
114
—
3
—
221 $
7
181
200
93
(3 )
(17 )
—
34
100
595
—
6
—
—
18
42
—
5
—
71
7
187
200
93
15
25
—
39
100
666
Home equity and second mortgages
Other
Grand total
580
795
16,226 $
580
1,461
20,181 $
$
(1) Average recorded investment is calculated primarily using daily average balances.
96
Table of Contents
$
$
$
$
$
With no impairment reserve
recorded:
Commercial real estate:
Owner occupied
Non-owner occupied
Construction and land development
Multi-family
1-4 family
Commercial and industrial
Direct financing leases, net
Consumer and other:
Home equity and second mortgages
Other
Total
With impairment reserve recorded:
Commercial real estate:
Owner occupied
Non-owner occupied
Construction and land development
Multi-family
1-4 family
Commercial and industrial
Direct financing leases, net
Consumer and other:
Home equity and second mortgages
Other
Total
Total:
Commercial real estate:
Owner occupied
Non-owner occupied
Construction and land development
Multi-family
1-4 family
Commercial and industrial
Direct financing leases, net
Consumer and other:
Impaired Loans and Leases
As of and for the Year Ended December 31, 2012
Recorded
investment
Unpaid
principal
balance
Impairment
reserve
Average
recorded
investment (1)
(In Thousands)
Foregone
interest
income
Interest
income
recognized
Net
foregone
interest
income
741 $
648
4,946
47
544
2,394
—
741 $
648
8,537
414
677
2,404
—
656
1,030
11,006 $
657
1,620
15,698 $
28 $
28 $
2,582
465
—
614
447
—
2,582
465
—
614
3,137
—
— $
—
—
—
—
—
—
—
—
— $
16 $
829
174
—
224
187
—
85
—
4,221 $
85
—
6,911 $
87
—
1,517 $
769 $
769 $
3,230
5,411
47
1,158
2,841
—
3,230
9,002
414
1,291
5,541
—
16 $
829
174
—
224
187
—
1,482 $
1,239
5,834
313
2,213
1,987
4
142 $
222
246
69
151
163
—
913
1,150
15,135 $
55
113
1,161 $
30 $
162
528
—
637
1,350
—
103
—
2,810 $
1,512 $
1,401
6,362
313
2,850
3,337
4
2 $
33
15
—
36
178
—
7
—
271 $
144 $
255
261
69
187
341
—
2 $
207
24
60
—
25
1
1
1
321 $
— $
—
—
—
—
—
—
—
—
— $
2 $
207
24
60
—
25
1
1
1
321 $
140
15
222
9
151
138
(1 )
54
112
840
2
33
15
—
36
178
—
7
—
271
142
48
237
9
187
316
(1 )
61
112
1,111
Home equity and second mortgages
Other
Grand total
741
1,030
15,227 $
742
1,620
22,609 $
87
—
1,517 $
1,016
1,150
17,945 $
62
113
1,432 $
$
(1) Average recorded investment is calculated primarily using daily average balances.
The difference between the loans’ and leases’ recorded investment and the unpaid principal balance of $4.4 million and $4.0 million as of
December 31, 2014 and 2013 , respectively, represents partial charge-offs resulting from confirmed losses due to the value of the collateral
securing the loans and leases being less than the carrying values of the loans and leases. Impaired loans and leases also included $2.0 million and
$371,000 of loans that were performing troubled debt restructurings, and thus, while not on non-accrual, were reported as impaired, due to the
concession in terms. When a loan is placed on non-accrual, interest accruals are discontinued and previously accrued but uncollected interest is
deducted from interest income. If
97
Table of Contents
collectability of contractual principal and interest payments is in doubt, cash payments collected on non-accrual loans are first applied to
principal. Foregone interest represents the interest that was contractually due on the note but not received or recorded. To the extent the amount
of principal on a non-accrual note 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 breaks out the loan and lease portfolio by
segments and risk ratings. 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 Year Ended December 31, 2014
Commercial
and
industrial
Direct
financing
leases, net
Consumer
and other
Commercial
real estate
Total
(Dollars in Thousands)
Allowance for credit losses:
Beginning balance
Charge-offs
Recoveries
Provision
Ending balance
Ending balance: individually evaluated for impairment
Ending balance: collectively evaluated for impairment
Ending balance: loans acquired with deteriorated credit
quality
Loans and lease receivables:
Ending balance, gross
Ending balance: individually evaluated for impairment
Ending balance: collectively evaluated for impairment
Ending balance: loans acquired with deteriorated credit
quality
Allowance as % of gross loans
$
$
$
$
$
$
$
$
$
$
9,055
(631 )
44
151
8,619
204
8,414
$
$
$
$
4,235
(600 )
369
1,063
5,067
33
4,943
$
$
$
273
$
(2 )
12
(65 )
218
53
165
$
$
$
338
—
—
87
425
—
425
$
$
$
$
13,901
(1,233 )
425
1,236
14,329
290
13,947
1
$
91
$
—
$
—
$
92
811,766
4,877
803,475
$
$
$
416,654
1,669
414,304
$
$
$
19,207
1,154
18,053
$
$
$
34,165
—
34,165
$ 1,281,792
$
7,700
$ 1,269,997
$
3,414
1.06 %
$
681
1.22 %
$
—
1.14 %
$
—
1.24 %
4,095
1.12 %
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Table of Contents
Allowance for credit losses:
Beginning balance
Charge-offs
Recoveries
Provision
Ending balance
Ending balance: individually evaluated for impairment
Ending balance: collectively evaluated for impairment
Ending balance: loans acquired with deteriorated credit
quality
Loans and lease receivables:
Ending balance, gross
Ending balance: individually evaluated for impairment
Ending balance: collectively evaluated for impairment
Ending balance: loans acquired with deteriorated credit
quality
Allowance as % of gross loans
$
$
$
$
$
$
$
$
As of and for the Year Ended December 31, 2013
Commercial
and
industrial
Direct
financing
leases, net
Consumer
and other
Commercial
real estate
Total
$
10,693
$
(896 )
353
(1,095 )
9,055
209
8,846
$
$
$
(Dollars in Thousands)
4,129
$
(14 )
11
109
4,235
131
4,104
$
$
$
371
$
(4 )
5
(99 )
273
62
211
$
$
$
207
—
5
126
338
—
338
$
15,400
(914 )
374
(959 )
13,901
402
13,499
$
$
$
—
$
—
$
—
$
—
$
—
645,111
5,379
638,303
$
$
$
293,552
8,043
285,509
$
$
$
17,244
1,375
15,869
$
$
$
26,065
—
26,065
$
$
$
981,972
14,797
965,746
$
1,429
1.40 %
$
—
1.44 %
$
—
1.58 %
$
—
1.30 %
1,429
1.42 %
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Table of Contents
Commercial
real estate
As of and for the Year Ended December 31, 2012
Commercial
and
industrial
Direct
financing
leases, net
Consumer
and other
(Dollars in Thousands)
Allowance for credit losses:
Beginning balance
Charge-offs
Recoveries
Provision
Ending balance
Ending balance: individually evaluated for impairment
Ending balance: collectively evaluated for impairment
Ending balance: loans acquired with deteriorated credit
quality
Loans and lease receivables:
Ending balance, gross
Ending balance: individually evaluated for impairment
Ending balance: collectively evaluated for impairment
Ending balance: loans acquired with deteriorated credit
quality
Allowance as % of gross loans
$
$
$
$
$
$
$
$
$
Total
14,155
(3,479 )
481
4,243
15,400
1,517
13,883
$
9,554
(612 )
375
1,376
10,693
1,244
9,449
$
$
$
$
3,977
(2,739 )
66
2,825
4,129
186
3,943
$
$
$
$
384
(128 )
40
75
371
87
284
$
$
$
$
240
—
—
(33 )
207
—
207
$
$
$
—
$
—
$
—
$
—
$
—
624,011
10,614
613,397
$
$
$
256,458
2,842
253,616
$
$
$
16,313
1,771
14,542
$
$
$
15,926
—
15,926
$
$
$
912,708
15,227
897,481
$
—
1.71 %
$
—
1.61 %
$
—
2.27 %
$
—
1.30 %
—
1.69 %
The Corporation’s net investment in direct financing leases consists of the following:
Minimum lease payments receivable
Estimated unguaranteed residual values in leased property
Initial direct costs
Less unearned lease and residual income
Investment in commercial direct financing leases
As of December 31,
2014
2013
(In Thousands)
$
$
31,204 $
7,053
208
(4,300 )
34,165 $
24,658
4,546
226
(3,365 )
26,065
There were no impairments of residual value of leased property during the years ended December 31, 2014 , 2013 and 2012 .
The Corporation leases equipment under direct financing leases expiring in future years. Some of these leases provide for additional rents, based
on use in excess of a stipulated minimum number of hours, and generally allow the lessees to purchase the equipment for fair value at the end of
the lease term.
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Future aggregate maturities of minimum lease payments to be received are as follows:
(In Thousands)
Maturities during year ended December 31,
2015
2016
2017
2018
2019
Thereafter
$
$
8,432
7,322
6,080
5,115
2,678
1,577
31,204
Note 6 – Premises and Equipment
A summary of premises and equipment at December 31, 2014 and 2013 is as follows:
Land
Building and leasehold improvements
Furniture and equipment
Construction and purchases in progress
Less: accumulated depreciation
Total premises and equipment, net
As of December 31,
2013
2014
$
(In Thousands)
650 $
2,776
4,339
52
7,817
(3,874 )
3,943 $
$
—
1,547
3,257
—
4,804
(3,649 )
1,155
Depreciation expense was $385,000 , $313,000 and $292,000 for the years ended December 31, 2014 , 2013 and 2012 , respectively.
Note 7 – Goodwill and Other Intangible Assets
Goodwill is not amortized. Goodwill, as well as intangible assets, are subject to impairment tests on at least an annual basis. At December 31,
2014 , goodwill was $10.7 million as a result of the Alterra Transaction. The Corporation will perform a detailed valuation each November
utilizing discounted cash flow assumptions of Alterra with further evaluation of the consolidated entity market capitalization. A series of
assumptions, including the discount rate applied to the estimated future cash flows, are embedded within the evaluation. These assumptions and
estimates are subject to changes. There can be no assurances that discount rates will not increase, projected earnings and cash flows of Alterra
will not decline, and facts and circumstances influencing our consolidated market capitalization will not change. Accordingly, an impairment
charge to goodwill and intangible assets may be required in the foreseeable future if the book equity of Alterra exceeds its fair value. An
impairment charge to goodwill could have an adverse impact on future consolidated results of operations.
The Corporation has intangible assets that are amortized consisting of core deposit intangibles and loan servicing rights.
Loan servicing rights are recognized separately when they are acquired through sales of 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. Loan servicing assets are subsequently
measured using the amortization method, which requires servicing rights to be amortized into interest income in proportion to, and over the
period of, the estimated future net servicing income of the underlying loans.
As of December 31, 2014 , the estimated fair value of the Corporation’s loan servicing asset was $943,000 . This servicing asset represents the
servicing rights retained upon sale of the guaranteed portion of certain SBA 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.
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For the year ended December 31, 2014 , loan servicing asset amortization totaled $24,000 . The Corporation had no loan servicing assets
outstanding in 2013 and 2012 .
Changes in the gross carrying amount, accumulated amortization and net book value of core deposit intangibles were as follows:
Core deposit intangibles:
Gross carrying amount
Less: accumulated amortization
Net book value
Amortization during the period
Year Ended December 31,
2013
2012
2014
(In Thousands)
$
$
$
347 $
(12 )
335 $
(12 ) $
— $
—
— $
— $
—
—
—
—
Estimated amortization expense of core deposit intangibles for fiscal years 2015 through 2019 are as follows:
Estimate for the year ended December 31,
2015
2016
2017
2018
2019
Thereafter
Core deposit
intangibles
(In Thousands)
$
$
72
62
54
47
40
60
335
Note 8 – 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 variable interest holder in any of these limited partnerships. The Corporation’s share of the
partnerships’ income included in the Consolidated Statements of Income for the years ended December 31, 2014 and 2013 was income of
$774,000 and a loss of $437,000 , respectively. The Corporation had an equity investment in Aldine Capital Fund, LP, a mezzanine fund, of $1.1
million and $1.2 million recorded as of December 31, 2014 and 2013 , respectively. The Corporation had a remaining commitment to provide
funds of $960,000 at December 31, 2014 . The Corporation’s equity investment in Aldine Capital Fund II, LP, also a mezzanine fund, totaled
$2.1 million and $942,000 as of December 31, 2014 and 2013 , respectively. The Corporation had a remaining commitment to provide funds of
$2.8 million at December 31, 2014 . The Corporation also has one tax-preferred limited partnership equity investment, Chapel Valley Senior
Housing, LP. At December 31, 2014 and 2013 , there was a zero cost basis remaining in this tax-preferred limited partnership equity investment.
The Corporation invested in a community development entity (“CDE”) through Rimrock Road Investment Fund LLC (“Rimrock”), a wholly-
owned subsidiary of FBB, to develop and operate a real estate project located in a low-income community. At December 31, 2014, Rimrock had
one CDE investment, with a net carrying value of $7.5 million . Rimrock did not have any outstanding CDE investments in 2013. Due to the
Corporation’s inability to exercise any significant influence over the investment in the qualified CDE, it is accounted for using the cost method.
The investment provides federal new market tax credits over a seven-year credit allowance period. In each of the first three years, credits
totaling five percent of the original investment are allowed on the credit allowance dates and for the final four years, credits totaling six percent
of the original investment are allowed on the credit allowance dates. Rimrock must be invested in the qualified CDE on each of the credit
allowance dates during the seven-year period to utilize the tax credits. If the CDE ceases to qualify during the seven-year period, the credits may
be denied for any credit allowance date and a portion of the credits previously taken may be subject to recapture with interest. The investment in
the CDE cannot be redeemed before the end of the seven-year period.
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The remaining federal new market tax credit to be utilized over a maximum of seven years was $2.6 million as of December 31, 2014 . The
Corporation’s usage of the federal new market tax credit was approximately $375,000 during 2014 . No federal new market tax credits were used
in 2013 or 2012 .
The Corporation is the sole owner of $315,000 of common securities issued by FBFS Statutory Trust II, a Delaware business trust (“Trust II”).
The purpose of Trust II was to complete the sale of $10.0 million of 10.50% fixed rate trust preferred securities. Trust II, a wholly owned
subsidiary of the Corporation, was not consolidated into the financial statements of the Corporation. The investment in Trust II of $315,000 as of
December 31, 2014 and 2013 is included in accrued interest receivable and other assets.
A summary of accrued interest receivable and other assets is as follows:
Accrued interest receivable
Deferred tax assets, net
Investment in limited partnerships
Investment in community development entity
Investment in Trust II
Fair value of interest rate swaps
Prepaid expenses
Other
Total accrued interest receivable and other assets
Note 9 – Deposits
As of December 31,
2014
2013
(In Thousands)
$
$
3,932 $
3,603
3,193
7,500
315
575
2,217
4,882
26,217 $
3,231
3,722
2,141
—
315
946
1,224
2,737
14,316
The composition of deposits at December 31, 2014 and 2013 was as follows. Weighted average balances represent year-to-date averages.
December 31, 2014
Weighted
average
balance
Weighted
average rate
Balance
(Dollars in Thousands)
Balance
December 31, 2013
Weighted
average
balance
Weighted
average rate
Non-interest-bearing transaction
accounts
Interest-bearing transaction accounts
Money market accounts
Certificates of deposit
Wholesale deposits
Total deposits
$
204,328 $
104,199
575,766
126,635
427,340
154,687
83,508
493,322
60,284
416,202
$ 1,438,268 $ 1,208,003
103
—% $
151,275 $
77,004
456,065
51,979
393,532
138,920
62,578
450,558
60,276
393,726
$ 1,129,855 $ 1,106,058
0.22
0.52
0.89
1.49
0.78
—%
0.20
0.53
1.01
1.68
0.88
Table of Contents
A summary of annual maturities of certificates of deposit outstanding at December 31, 2014 follows:
(In Thousands)
Maturities during the year ended December 31,
2015
2016
2017
2018
2019
Thereafter
$
$
241,541
115,287
61,719
47,671
21,201
66,556
553,975
Deposits include approximately $116.3 million and $23.2 million of certificates of deposit, including wholesale deposits, which are denominated
in amounts of $100,000 or more at December 31, 2014 and 2013 , respectively.
Note 10 – FHLB Advances, Other Borrowings and Junior Subordinated Notes
The composition of borrowed funds at December 31, 2014 and 2013 was as follows. Weighted average balances represent year-to-date averages.
December 31, 2014
Weighted
average
balance
Balance
Weighted
average
Balance
rate
(Dollars in Thousands)
December 31, 2013
Weighted
average
balance
Weighted
average
rate
$
Federal funds purchased
FHLB advances and other borrowings
Line of credit
Subordinated notes payable
Junior subordinated notes
Short-term borrowings
Long-term borrowings
$
$
$
— $
10,058
1,010
22,926
10,315
44,309 $
2,010
42,299
44,309
237
5,093
13
13,362
10,315
29,020
0.82 % $
0.56
3.30
7.07
10.78
7.24
$
— $
—
10
11,926
10,315
22,251 $
260
6,471
10
11,926
10,315
28,982
0.74 %
0.19
3.41
6.92
10.78
6.78
$
$
10
22,241
22,251
The Corporation’s subsidiary banks, FBB and FBB-Milwaukee, are members of the FHLB of Chicago while Alterra is a member of the FHLB of
Topeka. Accordingly all three subsidiary banks of the Corporation are permitted to obtain advances.
At December 31, 2014 and 2013 , there were no securities sold under agreements to repurchase. There were no outstanding federal funds
purchased at any month-end during fiscal years December 31, 2014 and 2013 .
The Corporation has a $91.6 million FHLB line of credit available for advances and open line borrowings which is collateralized by mortgage-
related securities, unencumbered first mortgage loans and secured small business loans as noted below. At December 31, 2014 , $82.6 million of
this line remained unused. There were no advances outstanding on the Corporation’s open line at December 31, 2014 and 2013 . There were $9.4
million of Term FHLB advances outstanding at December 31, 2014 with stated fixed interest rates ranging from 0.71% to 4.96% . No Term
FHLB advances were outstanding at December 31, 2013 . The Term FHLB advances outstanding at December 31, 2014 are due at various dates
through December 2017.
The Corporation is required to maintain, as collateral, mortgage-related securities and unencumbered first mortgage loans and secured small
business loans in its portfolio aggregating at least the amount of outstanding advances from the FHLB. Loans totaling approximately $85.8
million and $37.1 million and collateralized mortgage obligations totaling approximately $30.7 million and $39.5 million were pledged as
collateral for FHLB advances and unused available credit at December 31, 2014 and 2013 , respectively.
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Table of Contents
The Corporation has a senior line of credit with a third-party financial institution of $10.5 million . As of December 31, 2014 , the line of credit
carried an interest rate of LIBOR + 2.75% with a floor of 3.25% and had certain performance debt covenants of which the Corporation was in
compliance. The Corporation paid an unused line fee on its senior line of credit. For the years ended December 31, 2014 , 2013 and 2012 , the
Corporation incurred $13,000 , $13,000 and $11,000 of additional interest expense due to this fee. On February 19, 2015 , the credit line was
renewed for one additional year with pricing terms of LIBOR + 2.75% with an interest rate floor of 3.125% and a maturity date of February 19,
2016 . As December 31, 2014 , the outstanding balance on the line of credit was $1.0 million .
The Corporation has subordinated notes payable. At December 31, 2014 and 2013 , the amount of subordinated notes payable outstanding was
$22.9 million . The subordinated notes payable qualify for Tier 2 capital. At December 31, 2014 , $1.7 million of the subordinated notes bore an
interest rate of LIBOR + 4.75% with an interest rate floor of 6.00% , $6.2 million bore a fixed interest rate of 7.50% and $15.0 million bore a
fixed interest rate of 6.50% . There are no debt covenants on the subordinated notes payable. $1.7 million of the subordinated notes outstanding
as of December 31, 2014 were held by a third-party financial institution and mature on May 15, 2021 . $6.2 million of the subordinated notes
consists of notes which the Corporation offered and sold to certain accredited investors in 2012. The notes mature on January 15, 2022 and bear
a fixed interest rate of 7.50% per year for their entire term. The Corporation may, at its option, redeem the notes, in whole or part, at any time
after the fifth anniversary of issuance. The Corporation used the net proceeds from the sale of the notes to repay a portion of its then-existing
$39.0 million of other subordinated notes. On January 17, 2014 the Corporation repaid $4.0 million of the third-party financial institution
subordinated notes.
The remaining $15.0 million of the subordinated notes were issued on August 26, 2014 in connection with the Alterra Transaction when the
Corporation entered into Subordinated Note Purchase Agreements with three accredited investors. The notes have a maturity date
of September 1, 2024 and will bear interest at a fixed rate of 6.50% per annum for the first five years of the instrument. From and including
September 1, 2019 to the maturity date, the interest rate shall reset quarterly to an interest rate per annum equal to the then-current three-month
LIBOR rate plus 470 basis points, payable quarterly in arrears. The Corporation may, at its option, beginning with the interest payment date of
September 1, 2019 and on any interest payment date thereafter, redeem the Notes, in whole or in part at a redemption price equal to 100% of the
principal amount of the Notes to be redeemed plus accrued and unpaid interest to the date of redemption. Any partial redemption will be made
pro rata among all of the holders. The notes are not subject to repayment at the option of the holders. The Corporation paid approximately $13.5
million of the net proceeds of the notes as the cash portion of the merger consideration in the acquisition of Aslin Group and Alterra. The
Corporation retained a portion of the net proceeds to increase its regulatory capital and for general corporate purposes.
In September 2008 , Trust II completed the sale of $10.0 million of 10.50% fixed rate trust preferred securities (“Preferred Securities”). Trust II
also issued common securities of $315,000 . Trust II used the proceeds from the offering to purchase $10.3 million of 10.50% Junior
Subordinated Notes (“Notes”) of the Corporation. The Preferred Securities are mandatorily redeemable upon the maturity of the Notes on
September 26, 2038 . The Preferred Securities qualify under the risk-based capital guidelines as Tier 1 capital for regulatory purposes. Per the
provisions of the Dodd-Frank Act, bank holding companies with total assets of less than $15 billion are not required to phase out trust preferred
securities as an element of Tier 1 capital as other, larger institutions must. The Corporation used the proceeds from the sale of the Notes for
general corporate purposes including providing additional capital to its subsidiaries. Debt issuance costs of approximately $428,000 were
capitalized in 2008 and are amortizing over the life of the Notes as an adjustment to interest expense. As of December 31, 2014 , $339,000 of
debt issuance costs remain reflected in other assets on the Consolidated Balance Sheets.
The Corporation has the right to redeem the Notes at each interest payment date on or after September 26, 2013 . The Corporation also has the
right to redeem the Notes, in whole but not in part, after the occurrence of certain special events. Special events are limited to: (1) a change in
capital treatment resulting in the inability of the Corporation to include the Notes in Tier 1 capital, (2) a change in laws or regulations that could
require Trust II to register as an investment company under the Investment Company Act of 1940, as amended; and (3) a change in laws or
regulations that would require Trust II to pay income tax with respect to interest received on the Notes or, prohibit the Corporation from
deducting the interest payable by the Corporation on the Notes or result in greater than a de minimis amount of taxes for Trust II.
Trust II, a wholly owned subsidiary of the Corporation, was not consolidated into the financial statements of the Corporation. Therefore, the
Corporation presents in its Consolidated Financial Statements junior subordinated notes as a liability and its investment in Trust II as a
component of other assets.
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Table of Contents
Note 11 – Stockholders’ Equity and Regulatory Capital
On June 5, 2008, in connection with the implementation of the Shareholder Rights Plan dated the same date, the Board of Directors declared a
dividend of one common share purchase right for each outstanding share of common stock, $0.01 par value per share (common shares), of the
Corporation. The dividend was paid on July 15, 2008. Each right entitles the registered holder to purchase from the Corporation one-half of one
common share, at a price of $85.00 per full common share (equivalent to $42.50 for each one-half of a common share), subject to adjustment.
The rights will be exercisable only if a person or group acquires 15% or more of the Corporation’s common stock or announces a tender offer for
such stock. Under conditions described in the Shareholder Rights Plan, holders of rights may acquire additional shares of the Corporation’s
common stock. The value of shares acquired under the plan would have a market value of two times the then-current per share purchase price.
The rights will expire on June 5, 2018 if not renewed.
The Corporation and the Banks 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 Banks’ assets, liabilities and certain off-balance-
sheet items as calculated under regulatory practices. The Corporation’s and the Banks’ capital amounts and classifications are also subject to
qualitative judgments by the regulators about components, risk weightings and other factors. The Corporation continuously 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 Banks. The Corporation’s and the
Banks’ Boards of Directors and management teams adhere to the appropriate regulatory guidelines on decisions which affect their capital
position, 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 Federal
Reserve. Federal Reserve guidance urges companies 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.
The Banks are 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 Banks 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 Banks 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 Banks to maintain minimum amounts
and ratios of Total and Tier 1 capital to risk-weighted assets and of Tier 1 capital to average assets. Tier 1 capital generally consists of
stockholders’ equity plus certain qualifying debentures and other specified items less intangible assets such as goodwill. Risk-based capital
requirements presently address credit risk related to both recorded and off-balance-sheet commitments and obligations. Management believes, as
of December 31, 2014 , that the Corporation and the Banks met all applicable capital adequacy requirements.
As of December 31, 2014 , the most recent notification from the FDIC, the WDFI and the OSBC categorized the Banks as well capitalized under
the regulatory framework for prompt corrective action in effect at that time.
The Company anticipates that its capital ratios will remain in excess of the enhanced regulatory benchmark levels required by Basel III which
went into effect on January 1, 2015.
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The following table summarizes the Corporation’s and Banks’ capital ratios and the ratios required by their federal regulators at December 31,
2014 and 2013 , respectively:
As of December 31, 2014
Total capital
(to risk-weighted assets)
Consolidated
First Business Bank
First Business Bank – Milwaukee
Alterra Bank
Tier 1 capital
(to risk-weighted assets)
Consolidated
First Business Bank
First Business Bank – Milwaukee
Alterra Bank
Tier 1 capital
(to average assets)
Consolidated
First Business Bank
First Business Bank – Milwaukee
Alterra Bank
As of December 31, 2013
Total capital
(to risk-weighted assets)
Consolidated
First Business Bank
First Business Bank – Milwaukee
Tier 1 capital
(to risk-weighted assets)
Consolidated
First Business Bank
First Business Bank – Milwaukee
Tier 1 capital
(to average assets)
Consolidated
First Business Bank
First Business Bank – Milwaukee
Actual
Minimum Required for Capital
Adequacy Purposes
Minimum Required to Be Well
Capitalized Under Prompt
Corrective Action
Requirements
Amount
Ratio
Amount
Ratio
Amount
Ratio
(Dollars In Thousands)
173,263
131,411
19,128
22,657
136,008
118,907
17,641
22,320
136,008
118,907
17,641
22,320
12.13 % $
12.19
12.47
10.90
114,253
86,272
12,274
16,628
$
8.00 %
8.00
8.00
8.00
N/A
107,841
15,343
20,785
N/A
10.00 %
10.00
10.00
$
$
9.52
11.03
11.50
10.74
8.71
10.13
7.90
9.01
57,127
43,136
6,137
8,314
62,490
46,960
8,935
9,910
$
$
4.00
4.00
4.00
4.00
4.00
4.00
4.00
4.00
N/A
64,704
9,206
12,471
N/A
58,700
11,169
12,388
N/A
6.00
6.00
6.00
N/A
5.00
5.00
5.00
Actual
Minimum Required for Capital
Adequacy Purposes
Minimum Required to Be Well
Capitalized Under Prompt
Corrective Action
Requirements
Amount
Ratio
Amount
Ratio
Amount
Ratio
(Dollars In Thousands)
145,352
123,331
17,944
13.16 % $
12.57
14.66
88,373
78,516
9,790
8.00 %
8.00
8.00
$
N/A
98,145
12,238
N/A
10.00 %
10.00
119,617
111,062
16,414
119,617
111,062
16,414
$
$
10.83
11.32
13.41
9.35
10.35
7.64
44,186
39,258
4,895
51,153
42,913
8,595
4.00
4.00
4.00
4.00
4.00
4.00
$
$
N/A
58,887
7,343
N/A
53,641
10,744
N/A
6.00
6.00
N/A
5.00
5.00
107
$
$
$
$
$
$
Table of Contents
The following table reconciles stockholders’ equity to federal regulatory capital at December 31, 2014 and 2013 , respectively.
Stockholders’ equity of the Corporation
Unrealized and accumulated (gains) losses on specific items
Disallowed servicing assets and purchased credit card relationships
Disallowed goodwill and other intangibles
Trust preferred securities
Tier 1 capital
Allowable general valuation allowances and subordinated debt
Risk-based capital
Note 12 – Earnings per Common Share
As of December 31,
2014
2013
(In Thousands)
$
$
137,748 $
(652 )
(94 )
(10,994 )
10,000
136,008
37,255
173,263 $
109,275
342
—
—
10,000
119,617
25,735
145,352
Earnings per common share are computed using the two-class method. Basic earnings per common share are computed by dividing net income
allocated to common shares by the weighted average number of shares outstanding during the applicable period, excluding outstanding
participating securities. Participating securities include unvested restricted shares. Unvested restricted shares are considered participating
securities because holders of these securities receive non-forfeitable dividends at the same rate as holders of the Corporation’s common stock.
Diluted earnings per share are computed by dividing net income allocated to common shares adjusted for reallocation of undistributed earnings
of unvested restricted shares by the weighted average number of shares determined for the basic earnings per common share computation plus
the dilutive effect of common stock equivalents using the treasury stock method.
Effective November 1, 2014, the Corporation successfully completed the acquisition of Aslin Group and Alterra. Under the terms of the
definitive agreement, the Corporation issued 360,081 shares to Aslin Group shareholders as the stock portion of the consideration paid. This
stock issuance impacted the Corporation’s earnings per share by increasing the number of shares outstanding.
For the years ended December 31, 2014 and 2013 , average anti-dilutive employee share-based awards totaled 4 and 77 , respectively.
2014
For the Year Ended December 31,
2013
(Dollars in Thousands, Except Share Data)
2012
Basic earnings per common share
Net income
Less: earnings allocated to participating securities
Basic earnings allocated to common shareholders
Weighted-average common shares outstanding, excluding participating
securities
Basic earnings per common share
Diluted earnings per common share
Earnings allocated to common shareholders
Reallocation of undistributed earnings
Diluted earnings allocated to common shareholders
$
$
$
$
$
14,139 $
294
13,845 $
13,746 $
331
13,415 $
8,926
329
8,597
3,929,969
3,832,296
2,608,961
3.52 $
3.50 $
3.30
13,845 $
13,415 $
1
2
13,846 $
13,417 $
8,597
—
8,597
Weighted-average common shares outstanding, excluding participating
securities
Dilutive effect of share-based awards
3,929,969
18,403
3,832,296
15,314
2,608,961
1,911
Weighted-average diluted common shares outstanding, excluding participating
securities
3,948,372
3,847,610
2,610,872
Diluted earnings per common share
$
3.51 $
3.49 $
3.29
Note 13 – 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 and dividend
equivalent units, and any other type of award permitted by the Plan. As of December 31, 2014 , 174,769 shares were available for future grants
under the Plan. Shares covered by awards that expire, terminate or lapse will again be available for the grant of awards under the Plan. The
Corporation may issue new shares and shares from treasury for shares delivered under the Plan.
Stock Options
The Corporation may grant Stock Options to senior executives and other employees under the Plan. Stock Options generally have an exercise
price that is equal to the fair value of the common shares on the date the option is awarded. Stock Options granted under the plans are subject to
graded vesting, generally ranging from 4 years to 8 years , and have a contractual term of 10 years . For any new awards issued, compensation
expense is recognized over the requisite service period for the entire award on a straight-line basis. No Stock Options were granted since the
Corporation became a reporting company under the Securities Exchange Act of 1934 and no Stock Options have been modified, repurchased or
canceled since such time. For that reason, no stock-based compensation related to Stock Options was recognized in the Consolidated Financial
Statements for the years ended December 31, 2014 , 2013 and 2012 . As of December 31, 2014 , all Stock Options granted and not previously
forfeited had vested. The benefits of tax deductions as a result of disqualifying dispositions upon exercise of stock options are recognized as a
financing cash flow activity.
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Table of Contents
The following table represents a summary of Stock Options activity for the periods indicated.
For the Years Ended December 31,
2013
2014
2012
Options
Weighted
average price Options
Weighted
average
price
Options
Weighted
average
price
Outstanding at beginning of year
Granted
Exercised
Expired
Forfeited
Outstanding at end of year
Options exercisable at end of year
51,000 $
—
(39,000 )
—
—
12,000
12,000
—
24.00
—
—
25.00
24.24 124,034 $ 22.43 125,034 $ 22.43
—
22.00
—
—
22.43
—
(1,000 )
—
—
24.24 124,034
24.24 124,034
—
(69,684 )
(3,350 )
—
51,000
51,000
—
21.13
22.00
—
25.00
22.43
The following table represents outstanding Stock Options and exercisable Stock Options at the respective ranges of exercise prices at
December 31, 2014 .
Range of exercise prices
$25.00 - $25.99
Restricted Stock
Options Outstanding
Exercisable
Weighted
average
remaining
contractual
life (years)
0.13
Weighted
average
exercise
price
Shares
Weighted
average
exercise
price
$
25.00
12,000 $
25.00
Shares
12,000
Under the Plan, the Corporation may grant restricted shares to plan participants, subject to forfeiture upon the occurrence of certain events until
the dates specified in the participant’s award agreement. While the restricted shares are subject to forfeiture, the participant may exercise full
voting rights and will receive all dividends and other distributions paid with respect to the restricted shares. The restricted shares granted under
the Plan are subject to graded vesting. Compensation expense is recognized over the requisite service period of generally four years for the entire
award on a straight-line basis. Upon vesting of restricted share awards, the benefit of tax deductions in excess of recognized compensation
expense is recognized as a financing cash flow activity.
Restricted share activity for the years ended December 31, 2014 , 2013 and 2012 was as follows:
Nonvested balance at beginning of year
Granted
Vested
Forfeited
Nonvested balance as of end of year
2014
For the Year Ended December 31,
2013
2012
Weighted
average
grant-date
fair value
Number of
restricted
shares
84,709 $ 23.10
44.98
32,261
19.71
(39,471 )
—
—
77,499
33.94
Weighted
average
grant-date
fair value
Number of
restricted
shares
94,506 $ 18.19
33.00
25,030
16.88
(34,827 )
—
—
84,709
23.10
Weighted
Number of
average
restricted
grant-date
shares
fair value
95,868 $ 15.15
23.03
37,123
15.06
(35,905 )
(2,580 )
18.32
94,506
18.19
As of December 31, 2014 , $2.3 million of deferred compensation expense was included in additional paid-in capital in the Consolidated Balance
Sheets related to unvested restricted shares which the Corporation expects to recognize over approximately 2.8 years. As of December 31, 2014 ,
all restricted shares that vested were delivered.
For the years ended December 31, 2014 , 2013 and 2012 , share-based compensation expense related to restricted stock included in the
Consolidated Statements of Income was as follows:
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Table of Contents
2014
For the Year Ended December 31,
2013
(In Thousands)
2012
Share-based compensation expense
$
887 $
660 $
548
Note 14 – Employee Benefit Plans
The Corporation maintains a contributory 401(k) defined contribution plan covering substantially all employees. The Corporation matches 100%
of amounts contributed by each participating employee up to 3.0% of the employee’s compensation. The Corporation may also make
discretionary contributions up to an additional 6.0% of salary. Contributions are expensed in the period incurred and recorded in compensation
expense in the Consolidated Statements of Income. The Corporation made a matching contribution of 3.0% to all eligible employees which
totaled $398,000 , $348,000 and $321,000 for the years ended December 31, 2014 , 2013 and 2012 , respectively. Discretionary contributions of
4.7% , or $632,000 , 4.6% , or $533,000 , and 5.0% , or $528,000 , were made in 2014 , 2013 and 2012 , respectively.
As of December 31, 2014 , 2013 and 2012 , the Corporation had a deferred compensation plan under which it provided contributions to
supplement the retirement income of one executive. Under the terms of the plan, benefits to be received are generally payable within six months
of the date of the termination of employment with the Corporation. The expense associated with the deferred compensation plan in 2014 , 2013
and 2012 was $101,000 , $81,000 and $58,000 , respectively. The present value of future payments under the remaining plan of $747,000 and
$647,000 at December 31, 2014 and 2013 , respectively, is included in other liabilities.
The Corporation owned life insurance policies on the life of the executive covered by the deferred compensation plan, which had cash surrender
values and death benefits of approximately $2.1 million and $5.7 million , respectively, at December 31, 2014 and cash surrender values and
death benefits of approximately $2.0 million and $5.7 million , respectively, at December 31, 2013 . The remaining balance of the cash surrender
value of bank-owned life insurance of $25.2 million and $21.1 million as of December 31, 2014 and 2013 , respectively, is related to policies on
a number of then-qualified individuals affiliated with the Banks.
Note 15 – Leases
The Corporation and FBB occupy space in Madison, WI under an operating lease agreement that expires on July 7, 2028 . FBB has four loan
production offices in Appleton, WI, Oshkosh, WI, Green Bay, WI and Kenosha, WI that occupy office space under separate operating lease
agreements that expire on August 30, 2015 , November 30, 2017 , January 31, 2018 , and March 31, 2017 , respectively. FBB – Milwaukee
occupies office space under an operating lease agreement that expires on November 30, 2020 . Alterra occupies office space in Leawood, KS
under an operating lease agreement that expires on May 31, 2023 . Alterra also owns a branch location in Overland Park, KS. The Corporation’s
total rent expense was $1.3 million , $1.2 million and $1.2 million for years ended December 31, 2014 , 2013 and 2012 , respectively. Rent
expense is recognized on a straight-line basis. The Corporation also leases other office equipment. Rental expense for these operating leases was
$37,000 , $29,000 and $27,000 for the years ended December 31, 2014 , 2013 and 2012 , respectively.
Future minimum lease payments for noncancelable operating leases for each of the five succeeding years and thereafter are as follows:
(In Thousands)
2015
2016
2017
2018
2019
Thereafter
$
$
1,198
1,118
1,076
1,022
1,034
6,547
11,995
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Note 16 - Other Operating Expenses
A summary of other operating expenses for the years ended December 31, 2014 , 2013 and 2012 is as follows:
Endowment to First Business Charitable Foundation
General and administrative expenses
Travel and other employee expenses
Computer software expenses
Partnership (income) loss
Foreclosed properties expenses
Other expenses
Total other operating expenses
2014
Year Ended December 31,
2013
(In Thousands)
2012
$
$
— $
1,024
1,069
886
(774 )
5
202
2,412 $
1,300 $
938
877
677
437
185
240
4,654 $
—
912
903
446
(678 )
589
562
2,734
Note 17 – Income Taxes
Income tax expense applicable to income for the years ended December 31, 2014 , 2013 and 2012 consists of the following:
Current:
Federal
State
Current tax expense
Deferred:
Federal
State
Deferred tax expense (benefit)
Total income tax expense
Year Ended December 31,
2013
2012
2014
(In Thousands)
$
4,235 $
1,459
5,694
1,299
90
1,389
3,605 $
1,356
4,961
2,257
171
2,428
5,473
1,183
6,656
(1,756 )
(150 )
(1,906 )
$
7,083 $
7,389 $
4,750
Deferred income tax assets and liabilities reflect the net tax effects of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and their tax basis. Net deferred tax assets are included in other assets in the consolidated balance
sheets.
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Table of Contents
The significant components of the Corporation’s deferred tax assets and liabilities are as follows:
Deferred tax assets:
Allowance for loan and lease losses
Excess book basis over tax basis for net assets acquired
Deferred compensation
State net operating loss carryforwards
Write-down of foreclosed properties
Non-accrual loan interest
Capital loss carryforwards
Unrealized loss on securities
Other
Total deferred tax assets before valuation allowance
Valuation allowance
Total deferred tax assets
Deferred tax liabilities:
Leasing and fixed asset activities
Loan servicing asset
Unrealized gain on securities
Other
Total deferred tax liabilities
Net deferred tax asset
$
At December 31,
2014
2013
(In Thousands)
5,501 $
2,082
1,332
694
1
751
32
—
305
10,698
(68 )
10,630
6,393
364
137
133
7,027
5,372
—
1,144
730
—
733
35
215
486
8,715
(67 )
8,648
4,803
—
—
123
4,926
$
3,603 $
3,722
The tax effects of unrealized gains and losses on derivative instruments and unrealized gains and losses on securities are components of other
comprehensive income. A reconciliation of the change in net deferred tax assets to deferred tax expense follows:
Change in net deferred tax assets
Deferred taxes allocated to other comprehensive income
Acquired deferred tax assets
Deferred income tax (expense) benefit
2014
At December 31,
2013
(In Thousands)
2012
$
$
(119 ) $
352
(1,622 )
(1,389 ) $
(861 ) $
(1,567 )
—
(2,428 ) $
2,101
(195 )
—
1,906
Realization of the deferred tax asset over time is dependent upon the Corporation generating sufficient taxable earnings in future periods. In
making its determination that the realization of the deferred tax was more likely than not, the Corporation gave consideration to a number of
factors including its recent earnings history, its expected earnings in the future, appropriate tax planning strategies and expiration dates
associated with operating loss carry forwards.
The Corporation had state net operating loss carryforwards of approximately $13.4 million and $14.1 million at December 31, 2014 and 2013 ,
respectively, which can be used to offset future state taxable income. The carryforwards expire between 2023 and 2032 . A valuation allowance
has been established for the future benefits attributable to certain of the non-Wisconsin state net operating losses. The valuation allowance
associated with these deferred tax assets was $68,000 and $67,000 as of December 31, 2014 and 2013 , respectively. The Corporation believes it
will be able to fully utilize its Wisconsin state net operating losses under this law and therefore no valuation allowance has been established on
its Wisconsin state net operating losses.
The provision for income taxes differs from that computed at the federal statutory corporate tax rate as follows:
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Table of Contents
Income before income tax expense
Tax expense at statutory federal rate of 34.42% and 34% applied to income before income
tax expense, respectively
State income tax, net of federal effect
Tax-exempt security and loan income, net of TEFRA adjustments
Change in valuation allowance
Bank-owned life insurance
Non-deductible transaction costs
Federal new market tax credit
Other
Total income tax expense
Effective tax rate
$
$
$
Year Ended December 31,
2013
2012
2014
21,222
(Dollars In Thousands)
$
$
21,135
13,676
$
$
7,305
1,000
(736 )
(1 )
(296 )
124
(375 )
62
7,083
33.38 %
7,275
906
(682 )
59
(291 )
—
—
122
7,389
34.96 %
$
$
4,650
647
(431 )
(3 )
(239 )
—
—
126
4,750
34.73 %
As of both December 31, 2014 and 2013 , the summary of all of the Corporation’s uncertain tax positions totaled $22,000 and $16,000 ,
respectively. There were no material additions to or reductions from these uncertain tax positions for the year ended December 31, 2014 . In
addition, there were no settlements of uncertain tax positions. As of December 31, 2014 , tax years remaining open for the State of Wisconsin tax
were 2010 through 2013 . Federal tax years that remained open were 2011 through 2013 . As of December 31, 2014 , there were no
unrecognized tax benefits that are expected to significantly increase or decrease within the next twelve months.
Note 18 – 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 December 31, 2014 , the aggregate amortizing notional value of interest rate swaps with various commercial borrowers was 27.5 million .
The Corporation receives fixed rates and pays floating rates based upon LIBOR on the swaps with commercial borrowers. These interest rate
swaps mature in March, 2016 through February, 2023 . 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 Consolidated Balance Sheets as a derivative
asset of $575,000 , included in accrued interest receivable and other assets. 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 December 31, 2014 , no interest rate swaps were in default and therefore all values for the commercial borrower swaps are recorded on a gross
basis within the Corporation’s Consolidated Balance Sheets.
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Table of Contents
At December 31, 2014 , the aggregate amortizing notional value of interest rate swaps with dealer counterparties was also 27.5 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 March, 2016 through February, 2023 . Dealer counterparty swaps are subject to master netting agreements among the contracts within
each of our Banks and are reported on the Consolidated Balance Sheets as a net derivative liability of $575,000 . The value of these swaps was
included in accrued interest payable and other liabilities as of December 31, 2014 . The gross amount of dealer counterparty swaps, without
regard to the enforceable master netting agreement, was a gross derivative liability of $575,000 . No right of offset exists with the dealer
counterparty swaps.
The table below provides information about the location and fair value of the Corporation’s derivative instruments as of December 31, 2014 and
2013 .
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
December 31, 2014
December 31, 2013
Other assets
Other assets
$
$
575 Other liabilities
946 Other liabilities
$
$
575
946
No derivative instruments held by the Corporation for the year ended December 31, 2014 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 years ended December 31, 2014 , 2013 and 2012 had an insignificant impact to the audited
Consolidated Statements of Income.
Note 19 – Commitments and Contingencies
The Banks are party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of clients.
These financial instruments include commitments to extend credit and standby letters of credit and involve, to varying degrees, elements of
credit and interest rate risk in excess of the amounts recognized in the Consolidated Financial Statements. The contract amounts reflect the extent
of involvement the Banks have in these particular classes of financial instruments.
In the event of non-performance, the Banks’ exposure to credit loss for commitments to extend credit and standby letters of credit is represented
by the contractual amount of these instruments. The Banks use the same credit policies in making commitments and conditional obligations as
they do for instruments reflected in the Consolidated Financial Statements. An accrual for credit losses on financial instruments with off-
balance-sheet risk would be recorded separate from any valuation account related to any such recognized financial instrument. As of
December 31, 2014 and 2013 , there were no accrued credit losses for financial instruments with off-balance-sheet risk.
Financial instruments whose contract amounts represent potential credit risk at December 31, 2014 and 2013 , respectively, are as follows:
Commitments to extend credit, primarily commercial loans
Standby letters of credit
At December 31,
2014
2013
$
(In Thousands)
406,183 $
17,555
282,581
19,602
Commitments to extend credit are agreements to lend to a client as long as there is no violation of any condition in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may have a fixed interest rate or a rate which varies with the prime rate or
other market indices and may require payment of a fee. Since some commitments expire without being drawn upon, the total commitment
amounts do not necessarily represent future cash requirements of the Banks. The Banks evaluate the creditworthiness of each client on a case-by-
case basis and generally extend credit only on a secured basis. Collateral obtained varies but consists primarily of commercial real estate,
accounts receivable, inventory, equipment,
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and securities. There is generally no market for commercial loan commitments, the fair value of which would approximate the present value of
any fees expected to be received as a result of the commitment. These are not considered to be material to the financial statements.
Standby letters of credit are conditional commitments issued by the Banks to guarantee the performance of a client to a third party. Generally,
standby letters of credit expire within one year and are collateralized by accounts receivable, equipment, inventory, and commercial properties.
The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to clients. The fair value of
standby letters of credit is recorded as a liability when the standby letter of credit is issued. The fair value has been estimated to approximate the
fees received by the Banks for issuance. The fees are recorded into income and the fair value of the guarantee is decreased ratably over the term
of the standby letter of credit.
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 20 – Fair Value
The Corporation determines the fair market 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 inputs that are supported by little or no market activity and that 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.
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Assets and liabilities measured at fair value on a recurring basis, segregated by fair value hierarchy level, are summarized below:
December 31, 2014
Assets:
Securities available-for-sale:
Municipal obligations
Asset backed securities
U.S. Government agency obligations - government-sponsored enterprises
Collateralized mortgage obligations - government issued
Collateralized mortgage obligations - government-sponsored enterprises
Interest rate swaps
Liabilities:
Interest rate swaps
$
$
December 31, 2013
Assets:
Securities available-for-sale:
Municipal obligations
Asset backed securities
U.S. Government agency obligations - government-sponsored enterprises
Collateralized mortgage obligations - government issued
Collateralized mortgage obligations - government-sponsored enterprises
Interest rate swaps
Liabilities:
Interest rate swaps
$
$
Fair Value Measurements Using
Level 2
Level 3
Level 1
(In Thousands)
— $
—
—
—
—
—
578 $
1,510
8,965
68,874
64,771
575
— $
—
—
—
—
—
— $
575 $
— $
Fair Value Measurements Using
Level 2
Level 3
Level 1
Total
578
1,510
8,965
68,874
64,771
575
—
575
Total
(In Thousands)
— $
—
—
—
—
—
15,489 $
1,494
16,244
111,969
34,922
946
— $
—
—
—
—
—
15,489
1,494
16,244
111,969
34,922
946
— $
946 $
— $
946
For assets and liabilities measured at fair value on a recurring basis, there were no transfers between the levels during the years ended
December 31, 2014 or 2013 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:
As of and for the Year Ended December 31, 2014
Fair Value Measurements Using
Balance at
December 31,
2014
Level 1
Level 2
(In Thousands)
Level 3
Total
Gains
(Losses)
Impaired loans
Foreclosed properties
$
8,565 $
1,693
— $
—
7,025 $
1,693
1,540 $
—
—
(4 )
116
Table of Contents
As of and for the Year Ended December 31, 2013
Fair Value Measurements Using
Balance at
December 31,
2013
Level 1
Level 2
(In Thousands)
Level 3
Total
Gains
(Losses)
Impaired loans
Foreclosed properties
$
13,719 $
333
— $
—
13,666 $
333
53 $
—
—
(59 )
Impaired loans that are collateral dependent were written down to their fair value less costs to sell of $8.6 million and $13.7 million at
December 31, 2014 and December 31, 2013 , respectively, through the establishment of specific reserves or by recording charge-offs when the
carrying value exceeded the fair value. 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. In cases where such inputs were unobservable, specifically discounts 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 values range from 10% - 100% . The weighted average of those
unobservable inputs as of the measurement date of December 31, 2014 was 34% . The majority of the impaired loans in the Level 3 category are
considered collateral dependent loans.
Non-financial assets subject to measurement at fair value on a non-recurring basis included foreclosed properties. Foreclosed properties, upon
initial recognition, are re-measured 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 an 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. As of December 31,
2014 , there were no foreclosed properties supported by a Level 3 valuation. Subsequent impairments of foreclosed properties are recorded as a
loss on foreclosed properties. Based upon an evaluation of value of certain of the Corporation’s foreclosed properties, impairment losses of
$4,000 on foreclosed properties were recognized for the year ended December 31, 2014 . The activity of the Corporation’s foreclosed properties
is summarized as follows:
Foreclosed properties at the beginning of the period
Foreclosed properties acquired in acquisition, at fair value
Loans transferred to foreclosed properties, at lower of cost or fair value
Payments to priority lien holders of foreclosed properties
Proceeds from sale of foreclosed properties
Net gain on sale of foreclosed properties
Impairment valuation
Foreclosed properties at the end of the period
117
As of and for the Year Ended December 31,
2014
2013
(In Thousands)
$
$
333 $
1,605
—
—
(255 )
14
(4 )
1,693 $
1,574
—
1,381
—
(2,739 )
176
(59 )
333
Table of Contents
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:
$
$
Financial assets:
Cash and cash equivalents
Securities available-for-sale
Loans and lease receivables, net
Federal Home Loan Bank stock
Cash surrender value of life insurance
Accrued interest receivable
Interest rate swaps
Financial liabilities:
Deposits
Federal Home Loan Bank and other borrowings
Junior subordinated notes
Interest rate swaps
Accrued interest payable
Off balance sheet items:
Standby letters of credit
Commitments to extend credit
*Not meaningful
Carrying
Amount
December 31, 2014
Fair Value
Total
Level 1
(In Thousands)
Level 2
Level 3
103,237 $
144,698
1,266,438
2,340
27,314
3,932
575
1,438,268 $
33,994
10,315
575
1,574
103,227 $
144,698
1,286,502
2,340
27,314
3,932
575
1,440,248 $
34,590
7,101
575
1,574
192
—
192
*
85,937 $
—
—
—
27,314
3,932
—
884,292 $
—
—
—
1,574
—
*
6,890 $
144,698
7,025
—
—
—
575
555,956 $
34,590
—
575
—
—
*
10,400
—
1,279,477
2,340
—
—
—
—
—
7,101
—
—
192
*
118
Table of Contents
$
$
Financial assets:
Cash and cash equivalents
Securities available-for-sale
Loans and lease receivables, net
Federal Home Loan Bank stock
Cash surrender value of life insurance
Accrued interest receivable
Interest rate swaps
Financial liabilities:
Deposits
Federal Home Loan Bank and other borrowings
Junior subordinated notes
Interest rate swaps
Accrued interest payable
Off balance sheet items:
Standby letters of credit
Commitments to extend credit
*Not meaningful
Carrying
Amount
December 31, 2013
Fair Value
Total
Level 1
(In Thousands)
Level 2
Level 3
81,286 $
180,118
967,050
1,255
23,142
3,231
946
81,295 $
180,118
963,937
1,255
23,142
3,231
946
1,129,855 $
11,936
10,315
946
1,052
1,131,002 $
11,979
7,084
946
1,052
219
—
219
*
66,266 $
—
—
—
23,142
3,231
—
684,344 $
—
—
—
1,052
—
*
4,029 $
180,118
13,666
—
—
—
946
446,658 $
11,979
—
946
—
—
*
11,000
—
950,271
1,255
—
—
—
—
—
7,084
—
—
219
*
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 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 amounts reported for cash and due from banks, interest bearing deposits held by the Corporation,
accrued interest receivable and accrued interest payable approximate fair value because of their immediate availability and because they do not
present unanticipated credit concerns. The carrying value of commercial paper, included in the cash and cash equivalents category, approximates
fair value due to the short-term maturity structure of the instrument. As of December 31, 2014 and 2013 , the Corporation held $10.4 million and
$11.0 million , respectively, of commercial paper. The fair value of commercial paper is considered a Level 3 input due to the lack of available
independent pricing sources. The carrying value of brokered certificates of deposit purchased is equivalent to purchase price of the instrument as
the Corporation has not elected a fair value option 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 December 31, 2014 and 2013 , the Corporation held $6.9 million and $4.0 million , respectively, of brokered certificates of
deposits.
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. On a sample basis, the fair value measurements are
subject to independent verification by another pricing source on a quarterly basis to review for reasonableness. In addition, the Corporation
reviews the third-party valuation methodology on a periodic basis. Any significant differences in valuation 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
119
Table of Contents
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 and Leases: 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 Banks’ 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 at their carrying amount of $100 per share.
Cash Surrender Value of Life Insurance: The carrying amount of cash surrender value of life insurance approximates its fair value as the
carrying value represents the current settlement amount.
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 Banks for debt with similar terms and remaining maturities are used
to estimate fair value of existing debt.
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.
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 has considered the impact of netting and any applicable
credit enhancements, such as collateral postings, thresholds, mutual puts and guarantees.
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 were not considered in the estimates.
120
Table of Contents
Note 21 – Condensed Parent Only Financial Information
The following represents the condensed financial information of FBFS - Only:
Condensed Balance Sheets
As of December 31,
2014
2013
(In Thousands)
$
$
$
$
1,179 $
170,923
1,388
2,695
176,185 $
34,251 $
4,186
38,437
137,748
176,185 $
4,855
127,450
789
1,921
135,015
22,251
3,489
25,740
109,275
135,015
Condensed Statements of Income
For the Year Ended December 31,
2013
2012
2014
Assets
Cash and cash equivalents
Investments in subsidiaries, at equity
Leasehold improvements and equipment, net
Other assets
Total assets
Liabilities and Stockholders’ Equity
Borrowed funds
Other liabilities
Total liabilities
Stockholders’ equity
Total liabilities and stockholders’ equity
Interest income
Interest expense
Net interest expense
Non-interest income
Consulting and rental income from consolidated subsidiaries
Other
Total non-interest income
Non-interest expense
Loss before income tax benefit and equity in undistributed net income of consolidated
subsidiaries
Income tax benefit
Loss before equity in undistributed net income of consolidated subsidiaries
Equity in undistributed net income of consolidated subsidiaries
Net income
$
121
(In Thousands)
$
— $
— $
2,071
(2,071 )
10,776
34
10,810
13,444
(4,705 )
(1,659 )
(3,046 )
17,185
14,139 $
1,952
(1,952 )
9,738
34
9,772
10,558
(2,738 )
(1,050 )
(1,688 )
15,434
13,746 $
—
3,825
(3,825 )
8,904
34
8,938
9,615
(4,502 )
(1,722 )
(2,780 )
11,706
8,926
Table of Contents
Condensed Statements of Cash Flows
Operating activities
Net income
Adjustments to reconcile net income to net cash used in operating activities:
Equity in undistributed earnings of consolidated subsidiaries
Share-based compensation
Excess tax benefit from share-based compensation
Increase (decrease) in other liabilities
Other, net
Net cash used in operating activities
Investing activities
Dividends received from subsidiaries
Capital contributions to subsidiaries
Net cash (used in) provided by investing activities
Financing activities
Net decrease in short-term borrowed funds
Proceeds from issuance of long-term debt, net of issuance costs
Repayment of long-term debt
Proceeds from issuance of common stock
Proceeds from exercise of stock options
Purchase of treasury stock
Excess tax benefit from share-based compensation
Dividends paid
Net cash provided by (used in) financing activities
(Decrease) increase in cash and cash equivalents
Cash and cash equivalents at the beginning of the period
Cash and cash equivalents at the end of the period
$
122
For the Year Ended December 31,
2013
2012
2014
(In Thousands)
$
14,139 $
13,746 $
8,926
(17,185 )
416
(305 )
1,002
(842 )
(2,775 )
8,000
(32,980 )
(24,980 )
1,000
14,469
(4,000 )
16,560
936
(1,795 )
305
(3,396 )
24,079
(3,676 )
4,855
1,179 $
(15,434 )
311
(145 )
867
(34 )
(689 )
8,000
(850 )
7,150
—
—
—
—
1,474
(1,782 )
145
(2,475 )
(2,638 )
3,823
1,032
4,855 $
(11,706 )
254
(47 )
(1,131 )
(297 )
(4,001 )
6,000
—
6,000
(800 )
6,215
(33,289 )
27,074
22
(216 )
47
(738 )
(1,685 )
314
718
1,032
Table of Contents
Note 22 – Condensed Quarterly Earnings (unaudited)
2014
2013
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
(Dollars in Thousands, Except per share data)
Interest income
Interest expense
Net interest income
Provision for loan losses
Non-interest income
Non-interest expense
Income before income tax expense
Income taxes
Net income
Per common share data:
Basic earnings per common share
Diluted earnings per common share
Dividends declared per share
$ 13,402 $ 13,565 $ 13,871 $ 16,863 $ 13,319 $ 13,142 $ 13,586 $ 13,763
(2,779 )
10,984
1,202
2,191
(8,556 )
5,821
(2,061 )
$ 3,337 $ 3,505 $ 3,553 $ 3,744 $ 3,244 $ 3,133 $ 3,609 $ 3,760
(3,268 )
13,595
(1,236 )
2,965
(10,127 )
5,197
(1,453 )
(2,936 )
10,935
89
2,459
(8,047 )
5,436
(1,883 )
(2,601 )
10,801
(180 )
2,321
(7,852 )
5,090
(1,753 )
(2,887 )
10,699
(109 )
2,124
(7,147 )
5,567
(1,958 )
(3,090 )
10,229
(80 )
1,953
(7,178 )
4,924
(1,680 )
(2,766 )
10,799
91
2,358
(7,749 )
5,499
(1,994 )
(2,949 )
10,193
(54 )
2,174
(7,490 )
4,823
(1,690 )
$
0.85 $
0.84
0.21
0.89 $
0.88
0.21
0.90 $
0.89
0.21
0.89 $
0.89
0.21
0.83 $
0.83
0.14
0.80 $
0.80
0.14
0.92 $
0.91
0.14
0.95
0.95
0.14
123
Table of Contents
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
First Business Financial Services, Inc.:
We have audited the accompanying consolidated balance sheets of First Business Financial Services, Inc. and subsidiaries (the Company) as of
December 31, 2014 and 2013, and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and
cash flows for each of the years in the three-year period ended December 31, 2014. These consolidated financial statements are the responsibility
of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of First
Business Financial Services, Inc. and subsidiaries as of December 31, 2014 and 2013, and the results of their operations and their cash flows for
each of the years in the three-year period ended December 31, 2014, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), First Business
Financial Services, Inc.’s internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control -
Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report
dated March 6, 2015 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Chicago, Illinois
March 6, 2015
/s/ KPMG LLP
124
Table of Contents
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Disclosure Controls and Procedures
The Corporation’s management, with the participation of the Corporation’s Chief Executive Officer and Chief Financial Officer, has
evaluated the Corporation’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act
of 1934, as amended). Based upon that evaluation, the Corporation’s Chief Executive Officer and Chief Financial Officer have concluded that
the Corporation’s disclosure controls and procedures were effective as of December 31, 2014 .
Changes in Internal Control over Financial Reporting
There was no change in the Corporation’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-
15(f) under the Securities and Exchange Act of 1934, as amended) that occurred during the quarter ended December 31, 2014 that has materially
affected, or is reasonably likely to materially affect, the Corporation’s internal control over financial reporting.
Management’s Annual Report on Internal Control over Financial Reporting
The Corporation’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as
such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended. The Corporation’s internal
control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of the Corporation’s financial statements for external purposes in accordance with generally accepted accounting principles.
Management, under the supervision of the Chief Executive Officer and the Chief Financial Officer, assessed the effectiveness of the
Corporation’s internal control over financial reporting based on criteria for effective internal control over financial reporting established in
Internal Control – Integrated Framework (1992) , issued by the Committee of Sponsoring Organization of the Treadway Commission (COSO).
The scope of the assessment excluded Alterra, which was acquired on November 1, 2014. Consolidated revenues for the Corporation for the
year-ended December 31, 2014 were $56.2 million , of which Alterra represented $2.5 million , or 4.5% . The consolidated total assets of the
Corporation as of December 31, 2014 were $1.629 billion , of which Alterra represented $258.8 million , or 15.9% . Based on this assessment,
management has determined that the Corporation’s internal control over financial reporting was effective as of December 31, 2014 .
KPMG LLP, the independent registered public accounting firm that audited the Consolidated Financial Statements of the Corporation
included in this Annual Report on Form 10-K, has issued an attestation report on the effectiveness of the Corporation’s internal control over
financial reporting as of December 31, 2014 . The report, which expresses an unqualified opinion on the effectiveness of the Corporation’s
internal control over financial reporting as of December 31, 2014 , is included under the heading “Report of Independent Registered Public
Accounting Firm.”
125
Table of Contents
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
First Business Financial Services, Inc.:
We have audited First Business Financial Services, Inc.’s (the Company) internal control over financial reporting as of December 31, 2014,
based on criteria established in Internal Control - Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual
Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial
reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk
that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk.
Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A
company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and
directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
In our opinion, First Business Financial Services, Inc. maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2014, based on criteria established in Internal Control - Integrated Framework (1992) issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).
The Company acquired Alterra Bank, on November 1, 2014, and management excluded Alterra Bank’s internal control over financial reporting
from its assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2014. Consolidated
revenues for the Company for the year ended December 31, 2014, were $56.2 million, of which Alterra represented $2.5 million, or 4.5%. The
consolidated total assets of the Company as of December 31, 2014 were $1.629 billion, of which Alterra represented $258.8 million, or 15.9%.
Our audit of internal control over financial reporting of the Company also excluded an evaluation of the internal control over financial reporting
of Alterra Bank.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated
balance sheets of First Business Financial Services, Inc. and subsidiaries as of December 31, 2014 and 2013, and the related consolidated
statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for each of the years in the three-year period
ended December 31, 2014, and our report dated March 6, 2015 expressed an unqualified opinion on those consolidated financial statements.
Chicago, Illinois
March 6, 2015
/s/ KPMG LLP
126
Table of Contents
Item 9B. Other Information
None.
PART III.
Item 10. Directors, Executive Officers and Corporate Governance
(a) Directors of the Registrant . The information included in the definitive Proxy Statement for the Annual Meeting of the Shareholders
to be held on May 18, 2015 under the captions “Item 1 - Election of Directors,” “Corporate Governance Principles and Practices”
and “Section 16(a) Beneficial Ownership Reporting Compliance” is incorporated herein by reference.
(b) Executive Officers of the Registrant . The information presented in Item 1 of this document is incorporated herein by reference.
(c) Code of Ethics . The Corporation has adopted a code of ethics applicable to all employees, including the principal executive officer,
principal financial officer and principal accounting officer of the Corporation. The FBFS Code of Ethics is posted on the
Corporation’s website at www.firstbusiness.com. The Corporation intends to satisfy the disclosure requirements under Item 5.05(c)
of Form 8-K regarding any amendment to or waiver of the code with respect to its Chief Executive Officer and Chief Financial
Officer, principal accounting officer, and persons performing similar functions, by posting such information to the Corporation’s
website.
Item 11. Executive Compensation
Information with respect to compensation for our directors and officers included in the definitive Proxy Statement for the Annual
Meeting of the Shareholders to be held on May 18, 2015 under the captions “Executive Compensation,” “Summary Compensation Table,”
“Long Term Incentive Plans,” “Outstanding Equity Awards at December 31, 2014 ,” “Disclosure Regarding Termination and Change in Control
Provisions” and “Director Compensation” is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Information with respect to security ownership of certain beneficial owners and management included in the definitive Proxy Statement
for the Annual Meeting of the Shareholders to be held on May 18, 2015 under the caption “Principal Shareholders” is incorporated herein by
reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Information with respect to certain relationships and related transactions included in the definitive Proxy Statement for the Annual
Meeting of the Shareholders to be held on May 18, 2015 under the captions “Related Party Transactions” and “Corporate Governance Principles
and Practices” is incorporated herein by reference.
Item 14. Principal Accountant Fees and Services
Information with respect to principal accounting fees and services included in the definitive Proxy Statement for the Annual Meeting of
the Shareholders to be held on May 18, 2015 under the caption “Miscellaneous” is incorporated herein by reference.
127
Table of Contents
PART IV.
Item 15. Exhibits and Financial Statement Schedules
The Consolidated Financial Statements listed on the Index included under “ Item 8. Financial Statements and Supplementary Data ”
are filed as a part of this Form 10-K. All financial statement schedules have been included in the Consolidated Financial Statements or are either
not applicable or not significant.
Exhibits . See Exhibit Index.
128
Table of Contents
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
FIRST BUSINESS FINANCIAL SERVICES, INC.
/s/ Corey A. Chambas
Corey A. Chambas
Chief Executive Officer
March 6, 2015
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature
/s/ Corey A. Chambas
Corey A. Chambas
/s/ James F. Ropella
James F. Ropella
/s/ Jerome J. Smith
Jerome J. Smith
/s/ Mark D. Bugher
Mark D. Bugher
/s/ Jan A. Eddy
Jan A. Eddy
/s/ John J. Harris
John J. Harris
/s/ Gerald L. Kilcoyne
Gerald L. Kilcoyne
/s/ John M. Silseth
John M. Silseth
/s/ Barbara H. Stephens
Barbara H. Stephens
/s/ Dean W. Voeks
Dean W. Voeks
Title
Date
Chief Executive Officer
March 6, 2015
Chief Financial Officer
March 6, 2015
Chairman of the Board of Directors
March 6, 2015
Director
March 6, 2015
Director
March 6, 2015
Director
March 6, 2015
Director
March 6, 2015
Director
March 6, 2015
Director
March 6, 2015
Director
March 6, 2015
129
Table of Contents
Exhibit Index
Exhibit No.
Exhibit Name
2.1
2.2
3.1
3.2
4.1
4.2
4.3
4.4
4.5
10.1
10.2
10.3
10.4
10.5
10.6
Agreement and Plan of Merger by and among Aslin Group, Inc., AGI Acquisition Corp. and First Business Financial
Services, Inc., dated as of May 22, 2014 (incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K
filed on May 23, 2014.
Voting Agreement by and among First Business Financial Services, Inc. and the persons and entities listed on
Schedule I attached thereto dated as of May 22, 2014 (incorporated by reference to Exhibit 2.2 to the Current Report
on Form 8-K filed on May 23, 2014.
Amended and Restated Articles of Incorporation of First Business Financial Services, Inc., as amended (incorporated
by reference to Exhibit 3.1 to the Annual Report on Form 10-K filed on March 13, 2009)
Amended and Restated Bylaws of First Business Financial Services, Inc., as amended (incorporated by reference to
Exhibit 3.1 to the Current Report on Form 8-K filed on January 31, 2012)
Pursuant to Item 601(b)(4)(iii) of Regulation S-K, the Registrant agrees to furnish to the Securities and Exchange
Commission, upon request, any instrument defining the rights of holders of long-term debt not being registered that is
not filed as an exhibit to this Annual Report on Form 10-K. No such instrument authorizes securities in excess of 10%
of the total assets of the Registrant.
Rights Agreement, dated as of June 5, 2008, between the Registrant and Computershare Investor Services, Inc.
(incorporated by reference to Exhibit 4.1 to the Registration Statement on Form 8-A filed on June 6, 2008)
Form of Common Stock Certificate (incorporated by reference to Exhibit 4.3 to Amendment No. 1 to the Registration
Statement on Form S-1 filed on November 26, 2012)
Form of Fixed Rate Subordinated Note due September 1, 2014 (incorporated by reference to Exhibit 4.1 to the
Current Report on Form 8-K filed on August 26, 2014)
Form of Subordinated Note Purchase Agreement (incorporated by reference to Exhibit 99.1 to the Current Report on
Form 8-K filed on August 26, 2014)
2001 Equity Incentive Plan (incorporated by reference to Exhibit 10.1 to the Amended Registration Statement on
Form 10 filed on April 28, 2005)
Form of Incentive Stock Option Agreement (incorporated by reference to Exhibit 10.2 to the Amended Registration
Statement on Form 10 filed on April 28, 2005)
2006 Equity Incentive Plan (incorporated by reference to Appendix B to the Corporation’s Proxy Statement for the
2006 Annual Meeting of Shareholders filed on March 31, 2006)
Form of Restricted Stock Agreement (incorporated by reference to Exhibit 4.4 to the Registration Statement on Form
S-8 filed on September 28, 2006)
2012 Equity Incentive Plan (incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q filed on
July 27, 2012)
Form of Restricted Stock Agreement (incorporated by reference to Exhibit 4.5 to the Registration Statement on Form
S-8 filed on August 13, 2012)
130
Table of Contents
10.7
Form of Executive Change-in-Control and Severance Agreement (incorporated by reference to Exhibit 10.1 to the
Current Report on Form 8-K filed on February 10, 2006)
10.8
Amended and Restated Agreement effective December 22, 2014 between the Registrant and Corey A. Chambas +
10.9
10.10
10.11
21
Annual Incentive Bonus Program, as amended, dated March 6, 2015 (incorporated by reference to Exhibit 10.1 to the
Current Report on Form 8-K filed on March 6, 2015)
Offer Letter between the Company and David R. Papritz accepted September 5, 2014 (incorporated by reference to
Exhibit 99.1 to the Current Report on Form 8-K filed on September 9, 2014)
Employment Agreement, dated as of April 22, 2014, by and among First Business Financial Services, Inc. and Pamela
Berneking +
Subsidiaries of the Registrant (incorporated by reference to Exhibit 21 to the Amended Registration Statement on
Form 10 filed on April 28, 2005)
23
Consent of KPMG LLP +
31.1
Certification of the Chief Executive Officer +
31.2
Certification of the Senior Vice President and Chief Financial Officer +
32
99
101
Certification of the Chief Executive Officer and Senior Vice President and Chief Financial Officer pursuant to 18
U.S.C. Section 1350 +
Proxy Statement for the Annual Meeting of the Shareholders (to be filed with the Securities and Exchange
Commission under Regulation 14A within 120 days after December 31, 2014; except to the extent specifically
incorporated by reference, the Proxy Statement for the Annual Meeting of the Shareholders shall not be deemed to be
filed with the Securities and Exchange Commission as part of this Annual Report on Form 10-K)
The following financial information from First Business Financial Services, Inc.’s Annual Report on Form 10-K for
the years ended December 31, 2014, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated
Balance Sheets as of December 31, 2014 and December 31, 2013, (ii) Consolidated Statements of Income for the
years ended December 31, 2014, 2013 and 2012, (iii) Consolidated Statements of Comprehensive Income for the
years ended December 31, 2014, 2013 and 2012, (iv) Consolidated Statements of Changes in Stockholders’ Equity for
the years ended December 31, 2014, 2013 and 2012, (v) Consolidated Statements of Cash Flows for the years ended
December 31, 2014, 2013 and 2012, and (vi) the Notes to Consolidated Financial Statements +
+
Submitted electronically with this Annual Report.
131
Exhibit 10.8
AGREEMENT
BY AND BETWEEN
FIRST BUSINESS BANK AND
COREY CHAMBAS
(AMENDED AND RESTATED DECEMBER 22, 2014)
Table of Contents
Page
ARTICLE 1. DEFINITIONS 2
1.1 Definitions 2
ARTICLE 2. RETIREMENT BENEFIT 4
2.1 Normal Retirement Benefit 4
2.2 Early Retirement Benefit 4
2.3 Withholding of Taxes 5
2.4 Notice of Retirement 5
2.5 Consulting 5
ARTICLE 3. DEATH BENEFIT 6
3.1 Death Benefit 6
3.2 Alternative Death Benefit 6
3.4 Life Insurance 7
3.5 Withholding of Taxes 7
ARTICLE 4. DISABILITY 7
4.1 Treatment of Disability 7
4.2 Retirement Benefit 7
4.3 Inflation Protection 7
4.4 Death Benefits 7
ARTICLE 5. TERMINATION OF EMPLOYMENT BY THE COMPANY 8
5.1 Termination for Cause 8
5.2 Termination for Other Than Cause 8
ARTICLE 6. CHANGE IN CONTROL BENEFIT 8
6.1 Change in Control Benefit 8
6.2 Withholding of Taxes 10
ARTICLE 7. COVENANTS NOT TO COMPETE 10
7.1 Covenant Not to Compete 10
7.2 Solicitation 10
7.3 Covenant Not to Compete During Consulting Period 10
7.4 Trade Secrets Laws Not Limited 10
ARTICLE 8. TERM OF AGREEMENT 10
8.1 Term of Agreement 10
8.2 Survival of Obligation 10
ARTICLE 9. SUCCESSORS 11
9.1 Successors 11
9.2 Binding Effect 11
i
ARTICLE 10. MISCELLANEOUS 11
10.1 Employment Status 11
10.2 Beneficiaries 11
10.3 Entire Agreement 11
10.4 Gender and Number 11
10.5 Severability 11
10.6 Modification 11
10.7 Applicable Law 12
10.8 Full Time Employment 12
10.9 One Benefit Payable 12
10.10 Attorneys’ Fees 12
10.11 Code Section 409A 12
ii
AGREEMENT
THIS AMENDED AND RESTATED AGREEMENT is made and entered into as of this 22 nd day of December 2014, by
and between First Business Bank, a Wisconsin corporation (the “Company”), and Corey Chambas, President and Chief Executive
Officer of the Company (the “Executive”). The parties agree that the agreement between them made and entered into as of
January 1, 2005 (the “Prior Agreement”) is superseded by this Agreement and is no longer in effect.
WHEREAS , it is desirable to amend and restate the Prior Agreement as set forth herein; and
WITNESSETH :
WHEREAS , the Company shall provide the Executive and/or his beneficiaries with the death and retirement benefits set
forth in this Agreement, subject to the terms and conditions of this Agreement, and said benefits shall be in addition to the
Executive’s regular compensation, bonus and employee benefits; and
WHEREAS , the Board of Directors of the Company has approved the Company entering into this Agreement with the
Executive; and
WHEREAS , the Executive has discharged the duties as a senior executive in a very capable and skillful manner, resulting
in substantial benefits to the Company; and
WHEREAS , the Company desires the Executive to remain in its service and to continue to use his knowledge and
experience on behalf of the Company, and is willing to continue to offer the Executive an incentive to do so in the form of death
and retirement benefits; and
WHEREAS , the Executive is willing to continue his efforts on behalf of the Company in exchange for such an incentive;
and
WHEREAS , should the possibility of a Change in Control arise, the Board believes it imperative that the Company and
the Board should be able to rely upon the Executive to continue in his position, and that the Company should be able to receive and
rely upon his advice, if it requests it, as to the best interests of the Company and its shareholders without concern that he might be
distracted by the personal uncertainties and risks created by the possibility of a Change in Control; and
WHEREAS , should the possibility of a Change in Control arise, in addition to the Executive’s regular duties, he may be
called upon to assist in the assessment of such possible Change in Control, advise management and the Board as to whether such
Change in Control would be in the best interests of the Company and its shareholders, and to take such other actions as the Board
might determine to be appropriate.
NOW, THEREFORE , to assure the Company that it will have the continued dedication of the Executive and the
availability of his advice and counsel notwithstanding the possibility, threat, or occurrence of a Change in Control, and to induce
the Executive to remain in the employ of the Company, and for other good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, the Company and the Executive agree as follows.
1.1 Definitions . Whenever used in this Agreement, the following terms shall have the meanings set forth below, and,
when the meaning is intended, the initial letter of the word is capitalized:
ARTICLE 1. DEFINITIONS
(a) “Agreement” means this document.
(b) “ Beneficiary ” means the persons or entities designated by the Executive pursuant to Section 10.2 herein.
(c) “Board” means the Board of Directors of the Company or any committee formed by or appointed by the
Board to administer this Agreement.
(d) “Cause” shall be determined by the Board, in the exercise of good faith and reasonable judgment, and shall
mean any of the following:
(1) The willful, intentional, and continued failure by the Executive to substantially perform the
Executive’s duties to the best of the Executive’s ability after a written demand for performance is delivered by the Board to
the Executive that identifies the failure to perform such duties if such failure is not remedied within ninety (90) calendar
days after receipt of the written demand by the Executive.
(2) The occurrence of the Executive’s conviction for committing an act of fraud, embezzlement, theft, or
other act constituting a felony substantially related to the circumstances of the Executive’s duties; or material breach by the
Executive of the banking laws of Wisconsin or the United States or any regulation issued by a state or federal regulatory
authority having jurisdiction over the banking affairs of the Company, or any of its subsidiary, parent, or affiliated
organizations; or an act which disqualifies the Executive from serving as an officer or director of a bank under Wisconsin
or Federal banking laws.
(e) “Change in Control”
(1) A “Change in Control” shall be deemed to have occurred as of the first day that any one or more of
the following conditions shall have been satisfied including, but not limited to, signing of documents by all parties and
approval by all regulatory agencies, if required:
(i) Any person (as defined in Section 3(a)(9) of the Securities Exchange Act of 1934 (the
“Exchange Act”) and used in Sections 13(d) and 14(d) thereof), including a group (as defined in Section 13(d)),
becomes the Beneficial Owner (as such term is defined pursuant to rules promulgated under the Exchange Act),
directly or indirectly, of securities of the Company representing at least fifty percent (50%) of the combined voting
power of the Company’s then outstanding securities;
(ii) During any twelve (12) consecutive months, individuals who, at the beginning of the twelve-
(12-) month period constitute the Board, cease for any reason to constitute a majority of the Board; provided,
however, a “Change in Control” shall not occur pursuant to this provision, if a new director is approved by a vote
of at least a majority of the directors serving on the Board and these directors either were directors at the beginning
of the twelve- (12-) month period or whose election or nomination for election was so approved; or
(iii) The shareholders of the Company approve: (A) a plan of complete liquidation of the
Company; or (B) an agreement for the sale or disposition of all or substantially all the Company’s assets; or (C) a
merger, consolidation, or reorganization of the Company with or involving any other corporation, other than a
merger, consolidation,
2
or reorganization that would result in the voting securities of the Company outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or by being converted into voting securities of the
surviving entity), at least fifty percent (50%) of the combined voting power of the voting securities of the Company
(or such surviving entity) outstanding immediately after or within one (1) year following such merger,
consolidation, or reorganization.
(2) However, notwithstanding the foregoing, in no event shall a Change in Control be deemed to have
occurred, with respect to the Executive, if the Executive is part of a purchasing group which consummates the Change-in-
Control transaction. The Executive shall be deemed “part of a purchasing group” for purposes of the preceding sentence if
the Executive is an equity participant in the purchasing company or group (except for passive ownership of less than three
(3%) percent of the stock of the purchasing company or ownership of equity participation in the purchasing company or
group which is otherwise not significant, as determined prior to the Change in Control by a majority of the nonemployee
continuing members of the Board).
(3) For purposes of the definition of “Change in Control” under this Section 1.1(e), “Company” means
First Business Financial Services, Inc. or First Business Bank.
(f) “Code” means the Internal Revenue Code of 1986, as amended from time to time.
(g) “Company” means First Business Bank, a Wisconsin corporation (including any and all of its subsidiaries),
or any successor thereto as provided in ARTICLE 9 herein, except as otherwise provided in Section 1.1(e)(3). For purposes
of the Executive’s separation from service (as defined in Code Section 409A and any regulations thereunder) with the
Company, “Company” includes First Business Financial Services, Inc. and any other entity related to the Company (within
the meaning of Code Section 414(b), (c) or (m)).
(h) “Death Benefit” means the benefit payable to the Beneficiary pursuant to Section 3.1.
(i) “Early Retirement Benefit” means the retirement benefit payable to the Executive pursuant to Section 2.2.
(j) “Effective Date ” means December 22, 2014.
(k) “Executive” means Corey Chambas, who is presently the President and Chief Executive Officer of the
Company.
(l) “Normal Retirement Age” means the first day of the month following the month in which the Executive
reaches age sixty-five (65).
(m) “Normal Retirement Benefit” means the retirement benefit payable to the Executive pursuant to Section 2.1.
(n) “Parachute Payment” means a “ parachute payment” as defined in Section 280G of the Internal Revenue
Code of 1986, as amended, and any regulations thereunder.
(o) “Retirement Date” means the effective date of the retirement of the Executive pursuant to ARTICLE 2.
3
(p) “Salary” means, with respect to any calendar year in which the Executive’s separation from service with the
Company occurs, the aggregate of the Executive’s base salary for the year and the highest of the following: (i) the amount
of his target bonus for the year, (ii) the average of the amounts of his actual bonuses, if any, for the two (2) immediately
preceding years, or (iii) the average of the amounts of his actual bonuses, if any, for the three (3) immediately preceding
years). The Salary shall be calculated based on the date of actual separation from service, even if the Executive is deemed
to remain employed after such separation under ARTICLE 4.
(q) “Specified Employee” means a key employee (as defined in Code Section 416(i) without regard to paragraph
(5) thereof) as determined by the Company based upon the twelve (12)-month period ending on each December 31st (such
12-month period is referred to below as the “identification period”). If the Executive is determined to be a key employee,
the Executive shall be treated as a Specified Employee for purposes of this Agreement during the 12-month period that
begins on the April 1 following the close of the identification period. For purposes of determining whether the Executive is
a key employee, “compensation” means the Executive’s W-2 compensation as reported by the Company for a particular
calendar year.
(r) “Total Disability” means that the Executive:
(1) is unable to engage in any substantial gainful activity by reason of any medically determinable
physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of
not less than twelve (12) months, or
(2) is, by reason of any medically determinable physical or mental impairment which can be expected to
result in death or can be expected to last for a continuous period of not less than twelve (12) months, receiving income
replacement benefits for a period of not less than three (3) months under an accident and health plan covering employees of
the Company.
ARTICLE 2. RETIREMENT BENEFIT
2.1 Normal Retirement Benefit . Upon the Executive’s separation from service with the Company at or after Normal
Retirement Age (“Normal Retirement”), the Company shall become obligated to pay to the Executive a retirement benefit equal to
sixty percent (60%) of the Executive’s Salary, payable yearly for ten (10) years, beginning on the fifteenth (15th ) day following the
Retirement Date and on the next nine (9) anniversaries of the first payment. In the event of the Executive’s death before the total
amount due under this Section has been paid, the Company shall pay to the Beneficiary, or, if none, the Executive’s estate, the
remaining annual payments on the schedule established at the Executive’s Normal Retirement.
2.2 Early Retirement Benefit .
(a) The Executive may retire at any time after the Executive has been employed by the Company for twenty-
three (23) consecutive years (“Early Retirement”). The Executive’s date of initial employment with the Company is
December 1, 1993, and, therefore, if there is no interruption in consecutive years of employment, the Executive may retire
at any time after December 1, 2016. Upon the Executive’s separation from service with the Company due to Early
Retirement, the Company shall become obligated to pay to the Executive a retirement benefit equal to sixty percent (60%)
of the Executive’s Salary, multiplied by a vesting percentage described below, payable for ten (10) years, beginning on the
fifteenth (15 th ) day following the Retirement Date and on the next nine (9) anniversaries of the first payment. In the event
of the Executive’s death before the total amount due under this Section has been paid, the Company shall pay to the
Beneficiary, or, if none,
4
the Executive’s estate, the remaining annual payments on the schedule established at the Executive’s Early Retirement.
(b) When the Executive has completed twenty-three (23) years of consecutive employment with the Company,
the vesting percentage shall be twenty-three thirty-fourths (23/34), or sixty-seven and 65/100 percent (.6765). The
numerator twenty–three (23) used to determine the vesting percentage shall increase by one (1) for each subsequent year of
consecutive service with the Company above twenty-three (23) through thirty-four (34). Therefore, for example, if the
Executive’s separation from service occurs after twenty-seven (27) years of consecutive service the vesting percentage
shall be twenty-seven thirty-fourths (27/34), or seventy-nine and 41/100 percent (.7941). For another example, if the
Executive’s separation from service occurs after thirty-four (34) years of service, the vesting percentage shall be thirty-four
thirty-fourths (34/34) or one hundred percent (100%), and the Executive shall be entitled to the Normal Retirement Benefit,
rather than an Early Retirement Benefit.
2.3 Withholding of Taxes . The Company shall withhold from any amounts payable under this ARTICLE all federal,
state, city, local, or other taxes as may be required.
2.4 Notice of Retirement . The Executive shall give the Company at least one (1) year’s notice of his intent to retire, in
writing. Notwithstanding any provision in this Agreement to the contrary, neither the Executive nor, in the event of his death, the
Beneficiary or, if none, the Executive’s estate shall be entitled to any benefit under this ARTICLE 2 until the Company has been
given the notice required by this Section 2.4, and the Executive has worked, or offered to work, for the notice period of one (1)
year; provided, however, no notice of intent to retire is required if the Executive chooses to retire and/or becomes eligible for an
Early or Normal Retirement Benefit as a result of the occurrence of an event described in Section 3.2, 4.2 or 5.2.
2.5 Consulting . In the event of the Executive’s separation from service with the Company for any reason other than
death, Total Disability or Cause, effective as of his separation from service, the Company shall engage the Executive, and the
Executive shall serve the Company, as a consultant on the terms and subject to the conditions set forth in this Section 2.5. During
the Term (as defined below), the Consultant shall devote his best efforts, attention, skills and energies, as necessary, to provide the
Company with the Consulting Services (as defined below).
(a) Term . The period during which the Executive will provide the Consulting Services to the Company shall
commence on the date of his separation from service and shall continue through the later of (1) date of the last payment of
his Early or Normal Retirement Benefit, as applicable, or (2) the second (2nd) anniversary of his separation from service
(the “Term”).
(b) Services . The Executive shall provide the following services (the “Consulting Services”) as reasonably
requested from time to time by the Chair of the Board or the President of the Company upon not less than seven (7) days
written notice:
(1) responding to questions concerning the Company, including, but not limited to, its business,
financial condition, customers and prospects; and
(2) such other services as may be mutually agreed upon by the Executive and the Chair of the Board or
the President of the Company from time to time. The Executive shall not be required to devote (i) more than ten (10) hours
during any calendar quarter or (ii) any minimum number of hours to perform Consulting Services. For up to sixteen (16)
weeks each year, the
5
Executive, in his discretion, may be unavailable to provide Consulting Services. The Executive may perform Consulting
Services by telephone or any other means of electronic communication. During the Term, the Executive may pursue other
civic, private and business interests, provided that his pursuit of such interests does not violate any of his covenants in this
Agreement.
(c) Compensation . For and in consideration of his being available to provide Consulting Services hereunder, the
Company shall pay the Executive cash in the amount of five thousand and no/100 dollars ($5,000.00) on the date of each
payment of his Normal or Early Retirement Benefit, as applicable, or, if he is not eligible for his Normal or Early
Retirement Benefit, on each anniversary of his separation from service through the end of the Term. The Executive shall be
entitled to receive such payments whether or not he is requested to provide Consulting Services.
(d) Relationship . In providing any Consulting Services, the Executive shall be acting as an independent
contractor and not as an employee, agent or representative of the Company. During the Term, the Executive shall disclose
that he is an independent contractor of the Company and shall not represent to any third party that he is an employee, agent
or representative of the Company. As an independent contractor, the Executive shall have no authority, express or implied,
to commit or obligate the Company in any manner whatsoever, and nothing contained herein shall be construed or
interpreted to create an employment, agency, partnership or joint venture relationship between the Executive and the
Company.
(e) Benefit Plans . Except as otherwise provided in this Agreement, during the Term the Executive shall not be
covered under, eligible to participate in, or otherwise entitled to receive any benefits under, any pension, welfare or fringe
benefit plan, if any, offered or provided by the Company to any employee or former employee of the Company.
(f) Taxes . The Executive shall be liable for the payment of all taxes on any compensation paid to the Executive
under this Section 2.5, and the Company shall not withhold or pay any federal, state or local income, social security,
unemployment or workers compensation taxes on such compensation.
ARTICLE 3. DEATH BENEFIT
3.1 Death Benefit . In the event of the Executive’s death while in the employ of the Company, the Company shall pay to
the Beneficiary, or, if none, the Executive’s estate, the sum of one million five hundred thousand and 00/100 dollars
($1,500,000.00). Such sum shall be paid over a period of ten (10) years beginning with the fifteenth (15 th ) day of the first calendar
month following the date of the Executive’s death and on the next following nine (9) anniversaries of the first payment.
3.2 Alternative Death Benefit . If the Early or Normal Retirement Benefit which the Executive would have been
entitled to (if he had retired) on the day immediately preceding the date of the Executive’s death exceeds the Death Benefit payable
under Section 3.1, the Beneficiary shall be entitled to an amount equal to such Early or Normal Retirement Benefit paid as a
replacement for the Death Benefit. Such sum shall be paid over a period of ten (10) years beginning with the fifteenth (15 th ) day of
the first calendar month following the date of the Executive’s death and on the next following nine (9) anniversaries of the first
payment.
3.3 Life Insurance . If the Company purchases any life insurance policy on the Executive’s life and the Company is the
beneficiary of such life insurance policy, the Death Benefit payable under Section
6
3.1 will not be payable if the circumstances of the Executive’s death because of suicide within the applicable contestable period are
such that the Company is not entitled to the policy benefit.
3.4 Withholding of Taxes . The Company shall withhold from any amounts payable under this ARTICLE all federal,
state, city, local, or other taxes as may be required.
ARTICLE 4. DISABILITY
4.1 Treatment of Disability . In the event of the Executive’s separation from service with the Company prior to his
Normal Retirement Age due to Total Disability, the Executive shall be considered, notwithstanding such separation from service, to
continue to be employed by the Company for purposes of his eligibility for benefits under this ARTICLE 4.
4.2 Retirement Benefit .
(a) If the Executive’s separation from service due to Total Disability occurs prior to age fifty-five (55), then, as
of his separation from service, the Executive shall receive the Early Retirement Benefit under Section 2.2 as though he had
been employed by the Company for consecutive years through age fifty-five (55).
(b) If the Executive’s separation from service due to Total Disability occurs after he reaches age fifty-five (55)
but prior to his Normal Retirement Age, then, as of his separation from service, the Executive shall receive the Early
Retirement Benefit described in Section 2.2.
(c) If the Executive’s separation from service due to Total Disability occurs after he reaches Normal Retirement
Age, the Executive shall receive the Normal Retirement Benefit described in Section 2.1.
4.3 Inflation Protection . If the Executive receives an Early or Normal Retirement Benefit pursuant to Section 4.2, the
amount of the Executive’s Salary (for purposes of calculating the Early or Normal Retirement Benefit) shall be increased annually
by an amount equal to the average annual performance increase approved for Company personnel Company-wide between the date
of the Executive’s separation from service due to Total Disability and the date of the first payment. For example, if the Executive’s
employment terminates due to Total Disability on December 31, 2005, and if the Executive’s Salary for 2005 is two hundred
thousand and no/100 dollars ($200,000) and if the Executive receives the first payment on December 15, 2010, and the average
Company-wide annual performance increases were four percent (4%) in 2006, zero percent (0%) in 2007, three percent (3%) in
2008, three percent (3%) in 2009, and two percent (2%) in 2010, the amount of the Executive’s Salary shall be deemed to be two
hundred twenty-five thousand eighty and 54/100 dollars ($225,080.54).
4.4 Death Benefits . In the event of the Executive’s death while Totally Disabled prior to commencement of payment of
Early or Normal Retirement Benefits under ARTICLE 2 or Section 4.2, the Beneficiary, or, if none, the Executive’s estate, shall
receive the Death Benefit described in ARTICLE 3.
ARTICLE 5. TERMINATION OF EMPLOYMENT BY THE COMPANY
5.1 Termination for Cause . In the event of the Executive’s separation from service with the Company due to the
termination by the Company of his employment for Cause, all obligations to pay benefits under this Agreement shall immediately
become null and void.
7
5.2 Termination for Other Than Cause . In the event of the Executive’s separation from service with the Company
due to the termination by the Company of his employment for any reason other than Cause prior to a Change in Control or more
than two (2) years after a Change in Control, the Company shall pay the Executive as wages the greater of an amount equal to two
(2) times the Executive’s Salary or the amount to which the Executive would be entitled under ARTICLE 2 of this Agreement had
the Executive given notice of retirement one (1) year before the date on which the Company terminated the Executive’s
employment.
(g) Severance Benefits . If the greater amount is two (2) times the Executive’s Salary, then upon the Executive’s
separation from service with the Company, the Company shall become obligated to pay to the Executive such amount in
equal yearly installments for ten (10) years, beginning on the fifteenth (15th ) day following the date of the Executive’s
separation from service and on the next nine (9) anniversaries of the first payment. In the event of the Executive’s death
before the total amount due under this Section has been paid, the Company shall pay to the Beneficiary, or, if none, the
Executive’s estate, the remaining annual payments on the schedule established on the date of the Executive’s separation
from service.
(h) Retirement Benefit . If the greater amount is defined in ARTICLE 2 of this Agreement, then payment shall
be made according to the terms stated in ARTICLE 2 and the Executive shall serve as the consultant to the Company in
accordance with Section 2.5. In the event of the Executive’s death before the total amount due under this Section 5.2(b) has
been paid, the Company shall pay to the Beneficiary, or, if none, the Executive’s estate, the remaining annual payments on
the schedule established at the Executive’s employment termination date.
ARTICLE 6. CHANGE IN CONTROL BENEFIT
6.1 Change in Control Benefit .
(i) Involuntary Termination of Employment . In the event of a Change in Control followed by the Executive’s
separation from service with the Company due to an involuntary termination of his employment without Cause within two
(2) years of the Change in Control, the Executive shall be entitled to a cash payment of an amount equal to the fair value of
the Executive’s unvested stock options issued by the Company or by First Business Financial Services, Inc. calculated as of
the date of the Executive’s termination from employment, plus such additional amount as will, when added to any
Parachute Payment to the Executive contingent upon the Change in Control, equal two and 99/100 (2.99) times the
Executive’s Salary. Payment shall be made on the fifteenth (15 th ) day immediately following the date of the Executive’s
separation from service.
(j) Involuntary Reassignment or Salary Reduction . In the event of a Change in Control followed by:
(1) an involuntary assignment of the Executive to a position of lesser responsibility than that which he
held at the time of the Change in Control or
(2) an involuntary reduction of more than ten percent (10%) in the amount of the Executive’s Salary as
in effect immediately prior to the Change in Control,
within two (2) years of the Change in Control, the Executive shall be entitled, if he incurs a separation from service with
the Company due to his voluntary termination of employment within three (3) months after the involuntary assignment or
salary reduction and two (2) years after the Change in
8
Control, to a cash payment of an amount equal to the fair value of the Executive’s unvested stock options issued by the
Company or by First Business Financial Services, Inc. calculated as of the date of the Executive’s separation from service,
plus such additional amount as will, when added to any Parachute Payment to the Executive contingent upon the Change in
Control, equal two and 99/100 (2.99) times the Executive’s Salary. Payment shall be made in a lump sum on the fifteenth
(15th) day immediately following the date of the Executive’s separation from service.
(k) Involuntary Relocation . In the event of a Change in Control followed by an involuntary assignment of the
Executive to a position not located within Milwaukee, Ozaukee, Waukesha, or Dane counties within two (2) years of the
Change in Control, the Executive shall be entitled, if he incurs a separation from service with the Company due to his
voluntary termination of employment within three (3) months after the involuntary assignment and two (2) years after the
Change in Control, to a cash payment of an amount equal to the fair value of the Executive’s unvested stock options issued
by the Company or by First Business Financial Services, Inc. calculated as of the date of the Executive’s separation from
service, plus such additional amount as will, when added to any Parachute Payment to the Executive contingent upon the
Change in Control, equal two and 99/100 (2.99) times the Executive’s Salary. Payment shall be made in a lump sum on the
fifteenth (15th) day immediately following the date of the Executive’s separation from service.
(l) Voluntary Termination . In the event of a Change in Control followed by the Executive’s separation from
service with the Company due to his voluntary termination of employment within three (3) months of the Change in
Control, the Executive shall be entitled to a payment of an amount equal to two (2) times his Salary. Payment shall be made
in a lump sum on the fifteenth (15th) day immediately following the date of the Executive’s separation from service.
(m) Death . In the event of the Executive’s death before the total amount due under this Section 6.1 has been
paid, the Company shall pay to the Beneficiary, or, if none, the Executive’s estate, the remaining payments in accordance
with the applicable schedule established under this Section 6.1.
(n) Maximum Benefit . Notwithstanding any provision in this Agreement to the contrary, the benefit under this
ARTICLE 6 will not exceed two and 99/100 (2.99) times the Executive’s “base amount” (as defined in Code Section 280G
and the underlying regulations), no matter what the value of the Executive’s unvested stock options issued by the Company
or by First Business Financial Services, Inc.
(o) Retirement Benefit . Notwithstanding any provision in this ARTICLE 6 to the contrary, if within the two (2)
years after a Change in Control the Executive is otherwise eligible for a payment under this ARTICLE 6. or an Early or
Normal Retirement Benefit under ARTICLE 2, then he may elect to retire and to receive the Early or Normal Retirement
Benefit, as applicable, in lieu of any benefit payable upon his separation from service with the Company due to a voluntary
or involuntary termination of employment pursuant to this ARTICLE 6. Payment shall be made in a lump sum on the
fifteenth (15th) day immediately following the date of the Executive’s separation from service.
6.2 Withholding of Taxes . The Company shall withhold from any amounts payable under this ARTICLE all federal,
state, city, local, or other taxes as may be required.
ARTICLE 7. COVENANTS NOT TO COMPETE
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7.1 Covenant Not to Compete . During the Executive’s employment and for two (2) years after the Executive’s
separation from service with the Company, the Executive shall not compete with the Company by providing, on behalf of himself,
another bank or any financial services entity, any services of the Company that the Executive performed, supervised or managed as
an officer or executive of the Company during the twelve (12) month period immediately prior to his separation from service within
any county in which the Company maintained a bank or other financial services office as of the date of his separation from service.
This covenant shall be independent of the covenants in Sections 7.2 and 7.3.
7.2 Solicitation . During the Executive’s employment and for two (2) years after the Executive’s separation from service
with the Company, the Executive shall not solicit any employee or former employee of First Business Financial Services, Inc. or
any of its subsidiaries to compete with the Company by providing, on behalf of the employee, another bank or any financial
services entity, any services similar to those services that the employee performed, supervised or managed as an employee of the
Company during the twelve (12) month period immediately prior to the employee’s separation from service with the Company
within any county in which First Business Financial Services, Inc. or any of its subsidiaries, whichever employed the employee,
maintained a bank or financial services office as of the date of the employee’s separation from service. Nothing in this paragraph is
meant to prohibit an employee or former employee of First Business Financial Services, Inc. or any of its subsidiaries who is not a
party to this Agreement from becoming employed by another organization or person. This covenant shall be independent of the
covenants in Sections 7.1 and 7.3.
7.3 Covenant Not to Compete During Consulting Period . During the Term when the Executive is performing
Consulting Services, as provided in Section 2.5, the Executive shall not compete with the Company by providing, on behalf of
himself or another person or organization, services similar to those services of the Company which he has provided or is providing
to the Company within any county in which the Company is providing or attempting to provide services about which the Executive
has provided or is providing consulting services. This covenant not to compete is independent of the covenants in Sections 7.1 and
7.2.
7.4 Trade Secrets Laws Not Limited . Nothing in this Agreement shall limit the time period or the Executive’s duties,
responsibilities or obligations under Wisconsin’s, or other applicable state’s, trade secrets laws, including but not limited to
Sections 134.90 et seq. of the Wisconsin Statutes.
ARTICLE 8. TERM OF AGREEMENT
8.1 Term of Agreement . This Agreement will continue from the Effective Date until the earliest of the Executive’s
death, his separation from service for reasons other than Normal or Early Retirement or mutual agreement of the parties.
8.2 Survival of Obligation .
(a) Executive. Any applicable obligations of the Executive under ARTICLE 7 shall survive the expiration of this
Agreement.
(b) Company . The expiration of this Agreement shall in no way relieve the Company of its obligations under
this Agreement, until all obligations of the Company hereunder have been fulfilled, and until all benefits required
hereunder have been paid to the Executive.
ARTICLE 9. SUCCESSORS
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9.1 Successors . The Company will require any successor (whether direct or indirect, by purchase, merger,
consolidation, or otherwise) of all or substantially all of the business and/or assets of the Company to expressly assume and agree to
perform the Company’s obligations under this Agreement in the same manner and to the same extent that the Company would be
required to perform them if no such succession had taken place. Failure of the Company to obtain such assumption and agreement
prior to the effective date of any such succession shall be a breach of this Agreement and shall entitle the Executive to
compensation from the Company in the same amount and on the same terms as he would be entitled to as if ARTICLE 6 applied
here.
9.2 Binding Effect . This Agreement shall inure to the benefit of and be enforceable by the Executive’s personal or legal
representatives, executors, administrators, successors, heirs, distributees, devises, and legatees. If the Executive should die while
any amount would still be payable to him hereunder had he continued to live, all such amounts, unless otherwise provided herein,
shall be paid in accordance with the terms of this Agreement, to the Executive’s Beneficiary. If the Executive has not named a
Beneficiary, then such amounts shall be paid to the Executive’s devisee, legatee, or other designee, or if there is no such designee,
to the Executive’s estate.
ARTICLE 10. MISCELLANEOUS
10.1 Employment Status . The Executive and the Company acknowledge that, except as provided in this or any other
agreement between the Executive and the Company, the employment of the Executive by the Company is “at will”, and, may be
terminated by either the Executive or the Company at any time, subject to applicable law.
10.2 Beneficiaries . The Executive may designate one or more persons or entities as the primary and/or contingent
Beneficiaries of any Death Benefits or Retirement Benefits owing to the Executive under this Agreement. Such designation must be
signed by the Executive, and in a form acceptable to the Board. The Executive may make or change such designation at any time.
10.3 Entire Agreement . This Agreement contains the entire understanding of the Company and the Executive with
respect to the subject matter hereof.
10.4 Gender and Number . Except where otherwise indicated by the context, any masculine term used herein also shall
include the feminine; the plural shall include the singular, and the singular shall include the plural.
10.5 Severability . In the event any provision of this Agreement shall be held illegal or invalid for any reason, the
illegality or invalidity shall not affect the remaining parts of the Agreement, and the Agreement shall be construed and enforced as
if the illegal or invalid provision had not been included. Further, the captions of this Agreement are not part of the provisions hereof
and shall have no force and effect.
10.6 Modification . No provision of this Agreement may be modified, waived, or discharged unless such modification,
waiver, or discharge is agreed to in writing and signed by the Executive and by an authorized member of the Board, or by the
respective parties’ legal representatives and successors.
10.7 Applicable Law . To the extent not preempted by the laws of the United States, the laws of the State of Wisconsin
shall be the controlling law in all matters relating to this Agreement.
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10.8 Full Time Employment . This Company’s obligations under this Agreement are premised upon and conditioned
upon the Executive being employed full time in a senior executive management position, that is to say a work week of at least forty
(40) hours.
10.9 One Benefit Payable . Notwithstanding any provision of this Agreement to the contrary, only one (1) benefit will
be payable under this Agreement to the Executive or, in the event of his death, the Beneficiary (or, if none, the Executive’s estate).
There may be a benefit on separation for service without cause under Section 5.2; there may be a benefit on a Change in Control
under ARTICLE 6; there may be a Normal Retirement Benefit or an Early Retirement Benefit under ARTICLE 2; or there may be a
Death Benefit under Section 3.1; but there will never be more than one (1) benefit payable under this Agreement. If, as of the date
of the Executive’s separation from service with the Company, the Executive is eligible to receive more than one (1) benefit under
this Agreement, the Executive shall be provided the benefit with the greatest net present value (calculated using the annual long-
term applicable federal rate then in effect) as of such separation from service, payable in accordance with the applicable payment
provisions of this Agreement and Code Section 409A.
10.10 Attorneys’ Fees . If after a Change in Control, and as a result of a position taken by the Company or its
successors after a Change in Control, the Executive takes nonfrivolous legal actions against the Company or its successors to
defend his rights under this Agreement, the Company or its successors will reimburse the Executive for reasonable attorneys’ fees
actually incurred in such legal actions.
10.11 Code Section 409A .
(a) To the extent any provision of this Agreement or action by the Company would subject the Executive to
liability for interest or additional taxes under Code Section 409A, such provision shall be deemed null and void, to the
extent permitted by law and deemed advisable by the Company and beneficial to the Executive. It is intended that this
Agreement will comply with Code Section 409A, and this Agreement shall be administered accordingly and interpreted
and construed on a basis consistent with such intent. Notwithstanding any provision of this Agreement to the contrary, no
termination or similar payments or benefits shall be payable hereunder on account of an employment termination unless
such termination constitutes a “separation from service” within the meaning of Code Section 409A. For purposes of Code
Section 409A, all installment payments of deferred compensation made hereunder, or pursuant to another plan or
arrangement, shall be deemed to be separate payments. To the extent any reimbursements or in-kind benefit payments
under this Agreement are subject to Code Section 409A, such reimbursements and in-kind benefit payments shall be made
in accordance with Treasury Regulation Section 1.409A-3(i)(1)(iv).
(b) Notwithstanding any provision of this Agreement to the contrary, in the event that any amount or benefit
under this Agreement constitutes deferred compensation under Code Section 409A and the settlement or distribution of
such amount or benefit is to be triggered by a Change in Control, then such settlement or distribution shall be subject to the
event constituting the Change in Control also constituting a “change in control event” under Code Section 409A.
(c) Notwithstanding any provision of this Agreement to the contrary, if the Executive is determined to be a
Specified Employee as of the date of his separation from service, then, to the extent required pursuant to Code Section
409A, payments due under this Agreement that are deemed to be deferred compensation shall be subject to a six (6)-month
delay following the date of separation from service; and all delayed payments shall be accumulated and paid in a lump-sum
payment as of the first day of the seventh (7th) month following the date of separation from service (or, if earlier, as of the
Executive’s death). Any portion of the benefits hereunder that were not otherwise due to
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be paid during the six (6)-month period following the date of the Executive’s separation from service shall be paid to the
Executive in accordance with the payment schedule established herein.
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IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first above written.
FIRST BUSINESS BANK
BY:
/s/ Gerald L. Kilcoyne
Gerald L. Kilcoyne
Chair of the Board
/s/ Corey A. Chambas
Corey A. Chambas
Chief Executive Officer of First Business Financial Services, Inc.
ATTESTED BY:
/s/ Jerome J. Smith
Jerome J. Smith
Chair of First Business Financial Services, Inc.
S-1
EMPLOYMENT AGREEMENT
Exhibit 10.11
THIS EMPLOYMENT AGREEMENT (this “Agreement” ) is made and entered into effective as of the 22nd day of
April, 2014 by and among First Business Financial Services, Inc. (“FBIZ”) , a Wisconsin corporation and bank holding
company, and Pamela Berneking (“ Executive ”).
Recitals
WHEREAS, FBIZ is negotiating to directly or indirectly acquire the stock of Alterra Bank (the “ Bank ”);
WHEREAS, Executive serves as President & Chief Executive Officer of the Bank, and her continued employment in that
role is central to whether FBIZ will acquire the Bank; and
WHEREAS, the purpose of this Agreement is to set forth the proposed terms of Executive’s employment should FBIZ
successfully acquire the stock of Alterra Bank, but this Agreement will not take effect until such time as FBIZ acquires the stock of
Alterra Bank (the “ Effective Time ”).
NOW, THEREFORE, in consideration of the promises and the mutual agreements and covenants contained herein, and for
other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, FBIZ and Executive hereby
agree as follows:
1.
Employment .
(a)
The Bank will continue to employ Executive, and Executive hereby agrees to continue employment, on
the terms and subject to the conditions contained herein.
(b)
Chief Executive Officer of the Bank.
During the Employment Term (as defined in Section 2), Executive shall serve as the President and
(c)
During the Employment Term, and excluding any periods of vacation and sick leave to which
Executive is entitled, Executive agrees to devote all of her business time, efforts and skills to the business and affairs of the Bank.
2.
Employment Term . The term of the employment of Executive under this Agreement (the “ Employment
Term ”) shall commence at the Effective Time and shall continue, unless sooner terminated under Section 9 hereof, until the first to
occur of (a) a Change in Control as defined in the Executive Change-in-Control Severance Agreement between Executive and FBIZ
(the “ CIC Agreement ” ) entered into contemporaneously herewith or (b) the third anniversary of the Effective Time.
1
3.
Annual Base Salary .
(a) During the Employment Term, Executive shall be paid a salary at the rate of at least $200,000 per annum
(the “ Annual Base Salary ”), payable in equal installments in accordance with the Bank’s customary payroll practices in effect
from time to time.
(b) Executive’s Annual Base Salary shall be reviewed at least annually, starting in January of 2015, and may be
increased at any time and from time to time as the President and Chief Executive Officer of FBIZ, in his sole discretion, shall deem
appropriate. Any such Base Salary increase would be further subject to approvals by the FBIZ Board of Directors and its
Compensation Committee. The term Annual Base Salary as utilized in this Agreement shall refer to Annual Base Salary as so
increased. Any increase in Annual Base Salary shall not serve to limit or reduce any other obligation to Executive under this
Agreement. Annual Base Salary shall not be reduced at any time during the Employment Term except if other senior officers of
FBIZ and its bank Affiliates (as defined below) experience a comparable percentage decrease. All amounts in this Agreement are
stated prior to deductions for income and employment tax withholding.
4.
Annual Incentive Bonus Program . For calendar year 2014, Executive shall continue to participate in the
Bank’s annual incentive plan as in effect on the date of this Agreement. Starting in calendar year 2015, Executive will participate in
the annual incentive bonus program approved by the Compensation Committee of the Board of Directors of FBIZ with performance
metrics tailored to the Bank. Executive’s threshold bonus will be 10% of Annual Base Salary, target bonus will be 30% of Annual
Base Salary and maximum bonus will be 60% of Annual Base Salary. For the 2015 calendar year, Executive is guaranteed a
minimum bonus equal in amount to the threshold bonus, but if her performance exceeds that level, she will receive the larger
amount earned.
5.
Benefits . Subject to (a) the application of any applicable anti-discrimination rules and (b) any more favorable
provisions contained in the definitive agreement whereby FBIZ, directly or indirectly, acquires the stock of the Bank, Executive
shall be entitled to participate during the Employment Term in all employee benefit plans, programs, practices or arrangements of
the Bank in which other senior executives of the Bank are eligible to participate from time to time.
6.
Expenses . The Bank shall pay or reimburse Executive for all reasonable out-of- pocket expenses incurred by
Executive in the course of performing Executive’s duties for the Bank in accordance with the Bank’s reimbursement policies for
senior executives as in effect from time to time. Executive shall keep accurate records and receipts of such expenditures and shall
submit such accounts and proof thereof as may from time to time be required in accordance with such expense account or
reimbursement policies that the Bank may establish for its senior executives generally. The Bank’s obligation to pay or reimburse
Executive for certain expenses will comply with the requirements set forth in Section 1.409A-3(i)(1)(iv) of the regulations
promulgated under Section 409A of the Internal Revenue Code of 1986, as amended (the “ 409A Regulations ”), including the
requirement that the amount of expenses eligible for reimbursement during any calendar year may not affect the expenses eligible
for reimbursement in any other taxable year. Further, reimbursement of eligible expenses shall be made on or before the last day of
the calendar year
2
following the calendar year in which the expense was incurred, as required by Section 1.409A-3(i)(1)(iv) of the 409A Regulations.
7.
Long-Term Incentive Plans. Executive shall be entitled to participate during the Employment Term in all long-
term incentive plans, including the FBIZ 2012 Equity Incentive Plan (the “ Equity Plan ”), in which other senior executives of
FBIZ and its bank Affiliates are eligible to participate from time to time on terms and conditions at least as favorable as provided to
other senior executives of bank Affiliates, taking into account any differences in Annual Base Salary between Executive and other
senior executives and the relative size and other financial metrics of the Bank when compared with other bank Affiliates, to the
extent these variables affect the compensation awarded thereunder.
8.
Retention Amount . Executive shall be awarded a number of shares of restricted stock of FBIZ under the Equity
Plan determined as follows: (a) $200,000 divided by (b) the average closing price of FBIZ stock for the ten trading days beginning
five trading days before the Effective Time (the “First Trading Day”) and ending on the tenth trading day after the First Trading
Day (the “ Restricted Shares ”). The Restricted Shares will cliff vest on the third anniversary of the Effective Time if Executive is
still in the employ of the Bank on that date. Accelerated vesting will occur on the date of a Change in Control of FBIZ as defined in
the Equity Plan (a “ Change in Control ”). The form of the grant agreement for the Restricted Shares will be that customarily used
under the Equity Plan to award shares of restricted stock, adjusted to comply with the provisions of this paragraph to the extent
such form is not consistent with this Section 8, and, in FBIZ’s sole discretion, including restrictive covenant provisions consistent
with those contained in Sections 11 through 13 hereof.
9.
Termination of Employment . During the Employment Term, Executive’s employment hereunder may be
terminated under any of the following circumstances:
(a) Death or Disability . Executive’s employment hereunder shall terminate automatically upon Executive’s
death during the Employment Term. If the Bank determines in good faith that a Disability (as defined below) of Executive has
occurred during the Employment Term, the Bank may give to Executive written notice in accordance with Section 9(d) of this
Agreement of its intention to terminate Executive’s employment hereunder. In such event, Executive’s employment with the Bank
shall terminate effective on the thirtieth (30th) day after receipt of such notice by Executive (the “ Disability Effective Date ”);
provided, that within thirty (30) days after such receipt, Executive shall not have returned to full-time performance of Executive’s
duties. For purposes of this Agreement, “ Disability ” has the same meaning as in the Bank’s long-term disability plan, or if there is
no such plan, “ Disability ” means a mental or physical condition which, in the opinion of the Bank, renders Executive unable or
incompetent to carry out the material job responsibilities which such Executive held or the material duties to which Executive was
assigned at the time the disability was incurred, which has existed for at least three (3) months and, which condition, in the opinion
of a physician selected by the Bank, is expected to be permanent or to have a duration of more than six (6) months.
(b) Termination by Bank . The Bank may terminate Executive’s employment for Cause (as defined below) or
without Cause in accordance with the provisions of this Section 9. For purposes of
3
this Agreement, “ Cause ” means the occurrence of any one or more of the following: (i) Executive’s willful failure to substantially
perform her duties with the Bank (other than any such failure resulting from Executive’s Disability), after FBIZ or the Bank
delivers a written demand for substantial performance to Executive (which specifically identifies the manner in which FBIZ or the
Bank believes that Executive has not substantially performed her duties) and Executive fails to remedy the situation within fifteen
(15) business days of such written notice from FBIZ or the Bank; (ii) gross negligence in the performance of Executive’s duties to
the Bank, which could or does result in material financial harm to the Bank or FBIZ; (iii) Executive’s conviction of, or pleas of
guilty or nolo contendere , to any felony or any other crime, the circumstances of which relate to Executive’s duties to the Bank;
(iv) Executive’s willful engagement in conduct that is demonstrably and materially injurious to the Bank or FBIZ, monetarily or
otherwise; (v) willful violation provision of the Code of Business Conduct & Ethics of FBIZ, as amended from time to time; or
(vi) willful violation of any of the covenants contained in Sections 11 through 13 hereof. For purposes of this definition, no act, or
failure to act, on Executive’s part will be deemed “willful” unless done, or omitted to be done, by Executive in bad faith.
(c) Termination by Executive . Executive may terminate her employment with the Bank with or without Good
Reason. For purposes of this Agreement, “Good Reason” means any of the following: (i) a material reduction in Executive's base
salary or incentive compensation opportunity; (ii) Executive no longer serving as the President and Chief Executive Officer of the
Bank, unless such change in position is not a demotion; (iii) Executive being required by FBIZ or the Bank to be based at any office
or location that is more than fifty (50) miles from the location where Executive is employed immediately preceding the proposed
change in office or location; or (iv) a material breach by FBIZ of this Agreement. Notwithstanding the foregoing, in order for
Executive to terminate for Good Reason, the Executive must give FBIZ a Notice of Termination, as defined in subparagraph (d),
below, within 90 days of the initial existence of the condition(s) specified by Executive that constitute Good Reason and FBIZ shall
have 30 days from the date of such Notice of Termination in which to cure the condition giving rise to Good Reason, if curable. If,
during such 30-day period, FBIZ cures the condition giving rise to Good Reason, no benefits shall be triggered under Section 10(b)
of this Agreement with respect to such occurrence. If, during such 30-day period, FBIZ fails or refuses to cure the condition giving
rise to Good Reason, Executive shall be entitled to benefits under Section 10(b) of this Agreement if she terminates her
employment for Good Reason within 90 days of Executive’s original written notice of Good Reason.
(d) Notice of Termination . Any purported termination of Executive’s employment by either party shall be
communicated by Notice of Termination to the other party, except in the case of Executive’s death in which event no such notice is
required. For purposes of this Agreement, a “ Notice of Termination ” shall mean a written notice which (i) indicates the specific
termination provision in this Agreement relied upon; (ii) if applicable, sets forth in reasonable detail the facts and circumstances
claimed to provide a basis for termination of Executive’s employment under the provision so indicated; and (iii) specifies the
Termination Date. As used herein, “ Termination Date ” shall mean the date specified in the Notice of Termination; provided ,
however , that in the case of Disability, the Termination Date shall be at least thirty (30) days subsequent to the date of the Notice
of Termination and Executive shall not have returned to the full-time performance of her duties during such period of at least thirty
(30) days and in the
4
case of a voluntary termination without Good Reason by Executive, the Termination Date shall be at least thirty(30) days after the
date of the Notice of Termination.
10.
Obligations Upon Termination During the Employment Term .
(a) Termination by the Bank for Cause, Death or Disability; Termination by Executive Other Than for
Good Reason . If Executive’s employment with the Bank is terminated by the Bank for Cause, death or Disability or by Executive
other than for Good Reason during the Employment Term, the Bank will pay and/or provide Executive with the following: (i)
Executive’s Annual Base Salary earned but unpaid through the date employment terminates, payable in a lump sum within thirty
(30) days after the date of termination (or earlier to the extent required by law), (ii) except in the case of a termination of
Executive’s employment for Cause, payment of any annual incentive bonus for the fiscal year prior to the year in which the date of
termination of employment occurs, to the extent unpaid, and (iii) all vested benefits to which Executive is entitled under any benefit
plans of FBIZ or the Bank in accordance with the terms of such plans through the date of termination of employment (collectively,
the “ Accrued Obligations ”). All other unvested rights and benefits hereunder, including the Restricted Shares, shall be forfeited.
(b) Termination by the Bank Without Cause; Termination by Executive for Good Reason. If Executive’s
employment with the Bank is terminated by the Bank without Cause, or if Executive terminates her employment with the Bank for
Good Reason, during the Employment Term, the Bank will pay and/or provide Executive with the following: (i) the Accrued
Obligations and (ii) 18 months of Annual Base Salary, paid in arrears in six payments of three months of Annual Base Salary each,
with the first payment made on the first regularly-scheduled payroll date that is immediately subsequent to the 90 th day after
Executive’s termination of employment, and the remaining five payments made on the first regularly-scheduled payroll date at
roughly 90-day intervals thereafter (the “Severance Payments” ).
(c) Release of Claims . Notwithstanding the foregoing, the Bank will not pay to Executive, and Executive will
not have any right to receive, any payments described in Section 10(b) (other than the Accrued Obligations) unless, on or before
the forty-fifth (45th) day following the Termination Date, (i) Executive has executed and delivered to the Bank a release of all
employment-related claims against the Bank, its Affiliates, parent companies, successor companies, and their past and current
members, managers, directors, officers, employees and agents, in the form presented to Executive by the Bank, and (ii) the
statutory rescission period for such release has expired.
(d) Withholding and Other Issues . Payments to be made to Executive under this Section 10 will be treated as
ordinary income and will be reduced by any applicable income or employment taxes which are required to be withheld under
applicable law, and all amounts are stated before any such deduction. Furthermore, none of the payments under this Section 10
shall be included as compensation for purposes of any pension, deferred compensation or welfare benefit plan or program of the
Bank.
5
11.
Confidentiality.
(a) Confidentiality Obligations . During the Employment Term and at all times thereafter, Executive will not
directly or indirectly use or disclose any Confidential Information (as defined below) or any Trade Secret Information (as defined
below) except in the interest and for the benefit of the Bank, unless such information ceases to be deemed Confidential Information
or a Trade Secret by means of one of the exceptions set forth below. The terms “Trade Secret Information”, “Trade Secret” and
“Confidential Information” shall not include, and the obligations set forth in this Agreement shall not apply to, any information
which: (i) can be demonstrated by Executive to have been known by Executive prior to Executive’s employment by the Bank; (ii) is
or becomes generally available to the public through no act or omission of Executive; (iii) is obtained by Executive in good faith
from a third party who discloses such information to Executive on a non-confidential basis without violating any obligation of
confidentiality or secrecy relating to the information disclosed; or (iv) is independently developed by Executive outside the scope of
Executive’s employment without use of Confidential Information or Trade Secrets. Furthermore, nothing in this Agreement shall
prevent Executive, after her termination of employment, from using general skills and knowledge gained while employed by the
Bank.
(b) Definitions .
i.
Trade Secret Information . The terms “ Trade Secret ” and “ Trade Secret Information ”
shall have those meaning(s) set forth under applicable law.
ii.
Confidential Information . The term “ Confidential Information ” shall mean all non-Trade
Secret business information of FBIZ and its Affiliates which has been developed or obtained at their expense, has
significant economic value to FBIZ and its Affiliates and which is not known to the public or the competitors of FBIZ or its
Affiliates, including, but not limited to, new products, customer lists, pricing policies, employment records and policies,
operational methods, marketing plans and strategies, product development techniques and plans, business acquisition plans
and any confidential information received from a third party with whom FBIZ or an Affiliate has a binding agreement
restricting disclosure of such confidential information.
iii.
“Affiliate” means any entity that, directly or through one or more intermediaries, is controlled
by, controls, or is under common control with FBIZ within the meaning of Section 414(b) or (c) of the Internal Revenue
Code of 1986, as amended (the ‘Code” ); provided , however , that in applying such provisions, the phrase “at least 50
percent” shall be used in place of “at least 80 percent’ each place it appears therein.
(c) Return of Records . Upon termination of Executive’s employment for any reason, or upon request by FBIZ
or the Bank, Executive shall return to FBIZ or the Bank, within thirty (30) days of the termination of her employment or such
request, all documents, records, materials and devices belonging and/or relating to FBIZ or its Affiliates (except personnel, wage
and benefit materials relating solely to Executive), and all copies of all such materials. Upon termination of employment, for
whatever reason, or
6
upon request by FBIZ or the Bank, Executive further agrees to destroy such records maintained by Executive on Executive’s own
computer equipment or other devices.
12.
Nonsolicitation of Clients. In consideration of this Agreement, Executive agrees that while Executive is
employed by FBIZ or any of its Affiliates, and for a period of eighteen (18) months immediately following the termination of her
employment for any reason, Executive will not (except on behalf of FBIZ or its Affiliates), either individually or on behalf of or
through any third party, directly or indirectly, solicit financial services business from, or conduct financial services business with,
any client of FBIZ or any of its Affiliates which was a client of FBIZ or any of its Affiliates with which Executive had any contact
during the period of one year prior to the date Executive ceased to be an employee of FBIZ or any of its Affiliates or about whom
Executive has Confidential Information (each, a “Client” ). “Client” does not include any person or business who or which
terminates its business dealings with FBIZ or any of its Affiliates without any encouragement by, and through no act or omission
of, Executive. This covenant applies to Clients whether they are persons or entities.
13.
Nonsolicitation of Employees. In consideration of this Agreement, Executive agrees that while Executive is
employed by FBIZ or any of its Affiliates, and for a period of eighteen (18) months immediately following the termination of her
employment for any reason, Executive will not (except on behalf of FBIZ or its Affiliates), either individually or on behalf of or
through any third party, directly or indirectly, solicit, entice, persuade or encourage, or attempt to solicit, entice, persuade or
encourage, any employee or consultant of FBIZ or any of its Affiliates to terminate his or her employment with such entity. In
addition, Executive agrees not to disclose the identity of any other employee of FBIZ or its Affiliates to any bank, savings and loan,
credit union, financial services company or other related business (a “Competing Business”) for the purpose of recruiting or hiring
away such employee. Executive agrees not to hire any prospective employee for a Competing Business if Executive knows that
such prospect currently works for FBIZ or any of its Affiliates.
14.
Reasonable Restrictions; Specific Performance, etc. Executive has reviewed the provisions of this
Agreement with legal counsel, or has been given adequate opportunity to seek such counsel, and Executive acknowledges and
expressly agrees that the covenants contained in Sections 11 through 13 hereof are reasonable with respect to their duration and
scope. Executive further acknowledges (a) that the restrictions contained in Sections 11 through 13 hereof are reasonable and
necessary for the protection of the legitimate business interests of FBIZ and its Affiliates, (b) that the restrictions create no undue
hardships, and (c) that any violation of these restrictions would cause substantial injury to FBIZ and/or its Affiliates. In the event of
any violation or threatened violation of these restrictions, FBIZ and/or the Bank, in addition to and not in limitation of, any other
rights, remedies or damages available to FBIZ and/or the Bank under this Agreement or otherwise at law or in equity, shall be
entitled to preliminary and permanent injunctive relief to prevent or restrain any such violation by Executive and any and all
persons directly or indirectly acting for or with her, as the case may be. Executive will reimburse and indemnify FBIZ or any of its
Affiliates for the actual costs incurred by FBIZ or its Affiliates in enforcing the covenants contained in Sections 11 through 13
hereof, including, but not limited to, attorney's fees reasonably incurred in enforcement activity. While Executive is employed by
FBIZ or any of its Affiliates and for a period of eighteen (18) months immediately following the date Executive ceases to be an
employee of FBIZ or any of its Affiliates,
7
Executive will inform each new employer, prior to accepting employment, of the existence of this Agreement, including the
prohibitions contained in Sections 11 through 13, and provide that employer with a copy of it. Executive authorizes FBIZ to
forward a copy of the prohibitions against competition as contained in Section 11 through 13 to any actual or prospective new
employer. The invalidity or unenforceability of any such sections shall not render the other such sections or subsections invalid or
unenforceable. Executive agrees that FBIZ or the Bank may offset against any amount owed to FBIZ or the Bank pursuant to this
Section 14 any amount owed by the Bank to Executive pursuant to Section 10(b) hereof.
15.
Exclusive Remedy . The payments, severance benefits and severance protections provided to Executive
pursuant to this Agreement are to be paid and provided in lieu of any severance payments, severance benefits and severance
protections provided in any other plan or policy of FBIZ or the Bank. Notwithstanding the foregoing, in the event of a Change in
Control, if Executive and FBIZ have entered into a CIC Agreement, Executive shall receive the greater of (a) the severance
provided in the COC Agreement or (b) the Severance Payments.
16.
Successors .
(a) This Agreement is personal to Executive and without the prior written consent of FBIZ shall not be
assignable by Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of
and be enforceable by Executive’s legal representatives.
(b) This Agreement shall be assignable by FBIZ without the written consent of Executive and shall inure to the
benefit of and be binding upon FBIZ, the Bank and their respective successors and assigns.
17.
Miscellaneous .
(a) This Agreement shall be governed by and construed in accordance with the laws of the State of Kansas,
without reference to principles of conflict of laws. The captions of this Agreement are not part of the provisions hereof and shall
have no force or effect. This Agreement may not be amended or modified otherwise than by a written agreement executed by the
parties hereto or their respective successors and legal representatives.
(b) All notices and other communications hereunder shall be in writing and shall be given by hand delivery to
the other party, delivered by overnight courier, or by certified mail, return receipt requested, postage prepaid, addressed as follows:
If to Executive, to:
Pamela Berneking
12422 NE 117th Street
Kearney, Missouri 64060
8
With a copy to:
Kimberly A. Jones
Seyferth Blumenthal & Harris LLC
4801 Main Street, Suite 310
Kansas City, Missouri 64112
If to FBIZ:
First Business Financial Services, Inc.
401 Charmany Drive
Madison, WI 53719
Attn: General Counsel
Peter Wilder
Godfrey & Kahn, S.C.
780 N. Water Street
Milwaukee, WI 53202
With a copy to:
or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and
communications shall be effective when actually received by the addressee.
(c) The provisions of this Agreement are severable, and if any part of any provision is held to be illegal, void,
voidable, invalid, nonbinding or unenforceable, for any reason, a court of competent jurisdiction may change such provision to the
extent reasonably necessary to make the provision, as so changed, legal or enforceable. All disputes under this Agreement shall be
heard in courts of competent jurisdiction in the state of Kansas. EXECUTIVE WAIVES ANY RIGHTS SHE MAY HAVE TO A
TRIAL BY JURY OF ANY SUCH DISPUTE.
(d) The failure of FBIZ, the Bank or Executive to insist upon strict compliance with any provision hereof shall
not be deemed to be a waiver of such provision or any other provision thereof.
(e) This Agreement contains the entire understanding of the parties with respect to the subject matter hereof. It is
expressly agreed that this Agreement supersedes and replaces any other agreements, understandings and arrangements, oral or
written, between the parties hereto regarding the subject matter of this Agreement except for the CIC Agreement entered into
contemporaneously herewith. Notwithstanding the foregoing, (i) this Agreement and the CIC Agreement shall be void and of no
force or effect if the Effective Time does not occur, (ii) Executive agrees that if she enters into a change of control or similar
agreement with the Bank or an affiliate thereof at such time as it is, directly or indirectly, controlled by the Aslin Group, Inc., that
such agreement shall be null and void, and of no further effect if the Effective Time occurs, and that Executive waives any right she
may have to any compensation or other benefits thereunder and (iii) if Executive is entitled to severance payments in connection
with a covered termination of employment under both Section 10(b) of this Agreement and Section 2.3 of the CIC Agreement, that
she will only be entitled to receive severance under the one agreement that provides her with the greater payment, and she hereby
waives severance under the other agreement. Furthermore, if a Change in Control as defined in the CIC Agreement
occurs while Executive is employed by the Bank, Articles 3, 4 and 5 of the CIC Agreement shall
9
govern Executive’s responsibilities regarding confidentiality and non-solicitation of clients and employees, and Sections 11 through
13 hereof shall be of no further effect.
(f) If Executive dies prior to receiving all of the amounts payable to Executive in accordance with the terms and
conditions of this Agreement, such amounts shall be paid to the beneficiary (“Beneficiary”) designated by Executive in writing to
FBIZ or the Bank, or if no such Beneficiary is designated, to Executive’s legal representative in her or her capacity as such.
Executive, without the consent of any prior Beneficiary, may change her designation of Beneficiary or Beneficiaries at any time or
from time to time by submitting to FBIZ or the Bank a new designation in writing.
18.
Compliance with Section 409A .
(a) The Severance Payments to Executive pursuant to Section 10(b) of this Agreement are intended to be exempt from
Section 409A of the Code ( “Section 409A” ) to the maximum extent possible, under either the separation pay exemption pursuant
to Treasury Regulation §1.409A-1(b)(9)(iii) or as short-term deferrals pursuant to Treasury Regulation §1.409A-1(b)(4), and for
such purposes, each payment to Executive under this Agreement shall be considered a separate payment.
(b) If on the date the Executive’s employment terminates, the Executive is a "specified employee" as defined in Section
409A, then to the extent that any amount to which the Executive is entitled in connection with the termination of Executive's
employment is subject to Section 409A, payments of such amounts to which the Executive would otherwise be entitled during the
six (6) month period following the Executive's Date of Termination will be accumulated and paid in a lump sum on the first day of
the seventh month after the month in which the Date of Termination occurs. This paragraph shall apply only to the extent required
to avoid the Executive's incurrence of any additional tax or interest under Section 409A.
(c) Notwithstanding any other provisions of this Agreement to the contrary and to the extent applicable, it is intended
that this Agreement be exempt from or otherwise comply with the requirements of Section 409A, and this Agreement shall be
interpreted, construed and administered in accordance with this intent, so as to avoid the imposition of taxes and penalties on
Executive pursuant to Section 409A. However, neither FBIZ nor the Bank shall have any liability to Executive, Executive's
beneficiaries or otherwise if this Agreement or any amounts paid or payable hereunder are subject to the additional tax and
penalties under Section 409A. For purposes of any provision of this Agreement providing for the payment of any amounts or
benefits subject to Section 409A, references to a “termination,” “termination of employment” or like terms shall mean “separation
from service” within the meaning of Section 1.409A-1(h) of the Treasury Regulations promulgated under Section 409A.
19.
Regulatory Prohibition on Payment . Notwithstanding anything to the contrary contained in this Agreement,
neither FBIZ nor the Bank shall be obligated to make any payment to Executive under this Agreement if the payment would violate
any rule, regulation or order of any regulatory agency having jurisdiction over FBIZ or the Bank; provided , however , that FBIZ
and the Bank
10
covenant to Executive that they will use commercially reasonable efforts to obtain any regulatory agency approvals that may be
required in order to make payments to Executive as provided herein.
20.
Excise Tax Limitation .
(a) Anything in this Agreement to the contrary notwithstanding, in the event that the receipt of all payments,
distributions or benefits (including without limitation accelerated vesting of equity-based awards) in the nature of compensation to
or for Executive’s benefit, whether paid or payable pursuant to this Agreement or otherwise (a “Payment”), would subject
Executive to the excise tax under Section 4999 of the Code by virtue of Section 280G of the Code, the Payments shall be reduced to
the Reduced Amount. The “Reduced Amount” shall mean the greatest amount of Payments that can be paid that would not result in
the imposition of the excise tax under Section 4999 of the Code.
(b) For purposes of reducing the Payments to the Reduced Amount, Payments shall be reduced, in the following order:
(A) any Payments otherwise payable to the Executive that are exempt from Section 409A of the Code (“Section 409A”); and (B)
any Payments otherwise payable to the Executive that are not exempt from Section 409A, on a pro rata basis or such other manner
that complies with Section 409A.
(c) Executive agrees that she will waive her right to any Payments which would subject her to the excise tax under
Section 4999 of the Code by virtue of Section 280G of the Code (“Excess Payments”) so that a shareholder vote can be taken in
compliance with Q&A-7 of Treasury Regulation 1.280G-1 as regards the Excess Payments.
IN WITNESS WHEREOF , the parties hereto have executed this Agreement as of the date first set forth above
FIRST BUSINESS FINANCIAL SERVICES, INC.
EXECUTIVE
BY:
/s/ Corey A. Chambas
Corey A. Chambas
President and CEO
11
/s/ Pamela Berneking
Pamela Berneking
Consent of Independent Registered Public Accounting Firm
Exhibit 23
The Board of Directors
First Business Financial Services, Inc.:
We consent to the incorporation by reference in the registration statements (No. 333-129059, No. 333-183274, No. 333-137635 and No. 333-
201056) on Form S-8 and S-3 of First Business Financial Services, Inc. and subsidiaries of our reports dated March 6, 2015 , with respect to the
consolidated balance sheets of First Business Financial Services, Inc. and subsidiaries as of December 31, 2014 and 2013 , and the related
consolidated statements of income, comprehensive income, changes in stockholders' equity, and cash flows, for each of the years in the three-
year period ended December 31, 2014 , and the effectiveness of internal control over financial reporting as of December 31, 2014 , which reports
appear in the December 31, 2014 Annual Report on Form 10-K of First Business Financial Services, Inc.
Chicago, Illinois
March 6, 2015
/s/ KPMG LLP
I, Corey A. Chambas, certify that:
1. I have reviewed this Annual Report on Form 10-K of First Business Financial Services, Inc.;
Certifications
Exhibit 31.1
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the
period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act
Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on
such evaluation; and
d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent
functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial
information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
/s/ Corey A. Chambas
Corey A. Chambas
Chief Executive Officer
March 6, 2015
I, James F. Ropella, certify that:
1. I have reviewed this Annual Report on Form 10-K of First Business Financial Services, Inc.;
Certifications
Exhibit 31.2
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the
period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act
Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on
such evaluation; and
d. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent
functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial
information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant's internal control over financial reporting.
/s/ James F. Ropella
James F. Ropella
Chief Financial Officer
March 6, 2015
Certification of the Chief Executive Officer and the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350
Solely for the purposes of complying with 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, we,
the undersigned Chief Executive Officer and Chief Financial Officer, of First Business Financial Services, Inc., a Wisconsin Corporation (the
“Corporation”), hereby certify, based on our knowledge that the Annual Report on Form 10-K of the Corporation for the three months ended
December 31, 2014 (the “Report”) fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of
1934, as amended, and that information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of the Corporation.
Exhibit 32
/s/ Corey A. Chambas
Corey A. Chambas
Chief Executive Officer
March 6, 2015
/s/ James F. Ropella
James F. Ropella
Chief Financial Officer
March 6, 2015