e10vk
UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT
TO
SECTION 13 OR 15(d) OF
THE
SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended
December 31, 2007
Commission file number 0-51028
FIRST
BUSINESS FINANCIAL SERVICES, INC.
|
|
|
WISCONSIN
|
|
39-1576570
|
|
(State or jurisdiction of
incorporation or organization)
|
|
(I.R.S. Employer Identification
No.)
|
|
401 Charmany Drive Madison, WI
|
|
53719
|
|
(Address of Principal Executive
Offices)
|
|
(Zip Code)
|
(608) 238-8008
Registrants telephone number,
including area code
Securities registered pursuant to Section 12(b) of the Act:
Common
Stock, $0.01 par value
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. o Yes þ No
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or 15(d) of the
Act. o Yes þ No
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. þ Yes o No
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 registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this From
10-K or any
amendment to this
Form 10-K. o
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 o
|
|
|
|
Accelerated
filer o
|
Non-accelerated
filer o
|
|
(Do not check if a smaller reporting company)
|
|
Smaller Reporting
Company þ
|
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the
Act). o Yes þ No
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
registrants most recently completed second fiscal quarter
was approximately $51.2 million.
As of March 5, 2008, 2,510,657 shares of common stock
were outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Part III Portions of the Proxy Statement for
the Annual Meeting of Stockholders to be held on May 5,
2008 are incorporated by reference into Part III hereof.
[This page
intentionally left blank]
PART I.
General
First Business Financial Services, Inc. (FBFS or the
Corporation) is a registered bank holding company incorporated
under the laws of the State of Wisconsin and is engaged in the
commercial banking business through its wholly-owned banking
subsidiaries First Business Bank and First Business Bank
Milwaukee (referred to as the Banks).
All of the operations of FBFS are conducted through the Banks
and certain subsidiaries of First Business Bank. The Corporation
operates 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 size businesses, business
owners, executives, professionals and high net worth
individuals. The Corporation does not utilize its locations to
attract retail customers. The Corporation generally targets
businesses with sales between $2 million and
$50 million. For a more detailed discussion of loans,
leases and the underwriting criteria of the Banks, see
Item 7, Managements Discussion and Analysis of
Financial Condition and Results of Operations. To supplement
its business banking deposit base, the Corporation utilizes
wholesale funding alternatives to fund a portion of the
Corporations assets.
First Business Bank (FBB) is a state bank that was 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 and medium-sized
businesses located in Madison and the surrounding area. FBB
offers a full line of commercial banking products and services
in the greater Madison, Wisconsin area, tailored to meet the
specific needs of businesses, business owners, executives,
professionals and high net worth individuals. FBBs product
lines include cash management services, commercial lending,
commercial real estate lending and equipment leasing. FBB also
offers trust and investment services through First Business
Trust & Investments (FBTI), a division of FBB. In
addition, FBB offers business owners, executives, professionals
and high net worth individuals consumer services including a
variety of deposit accounts, personal lines of credit and
personal loans. FBB has two loan production offices in the
Northeast Region of Wisconsin to serve Oshkosh, Wisconsin and
Appleton, Wisconsin and their surrounding areas. The Appleton,
Wisconsin location opened in December 2007.
FBB has two wholly owned subsidiaries that are complementary to
the Corporations business banking services. First Business
Capital Corp. (FBCC) is a wholly-owned subsidiary of FBB
operating as an asset-based commercial lending company
specializing in providing secured lines of credit as well as
term loans on equipment and real estate assets primarily to
manufacturers and wholesale distribution companies located
throughout the United States. First Business Equipment Finance,
LLC (FBEF), formerly known as First Business Leasing, LLC, is a
commercial equipment finance company specializing in financing
of general equipment to small and middle market companies
throughout the United States.
First Madison Investment Corp. (FMIC) and FMCC Nevada
Corp. (FMCCNC) are operating subsidiaries located in and formed
under the laws of the state of Nevada. FMIC was organized for
the purpose of managing a portion of the Banks investment
portfolio. FMIC invests in marketable securities and loans
purchased from FBB. FMCCNC, a wholly-owned subsidiary of FBCC,
invests in loans purchased from FBCC.
First Business Bank Milwaukee (FBB
Milwaukee) is a state bank that was chartered in 2000 in
Wisconsin. FBB Milwaukee also offers a wide range of
commercial banking products and services tailored to meet the
specific needs of businesses, business owners, executives,
professionals and high net worth individuals in the greater
Milwaukee, Wisconsin area through a single location in
Brookfield, Wisconsin. Like FBB, FBB
Milwaukees product lines include cash management services,
commercial lending and commercial real estate lending for
similar sized businesses as FBB. FBB Milwaukee also
offers trust and investment services through a trust service
office agreement with FBB. FBB Milwaukee also offers
business owners, executives, professionals and high net worth
individuals consumer services which include a variety of deposit
accounts, personal lines of credit, and personal loans.
In June 2000, FBFS purchased a 51% interest in The Business Banc
Group Ltd. (BBG), a corporation formed to act as a bank holding
company owning all the stock of a Wisconsin chartered bank to be
newly organized and headquartered in Brookfield, a suburb of
Milwaukee, Wisconsin. In June 2004
1
all shares of BBG stock were successfully exchanged for FBFS
stock pursuant to a conversion option. Subsequent to this
transaction, BBG was dissolved. This transaction resulted in
FBB Milwaukee becoming a wholly-owned subsidiary of
the Corporation.
In December 2001, FBFS formed FBFS Statutory Trust I
(Trust), a statutory trust organized under the laws of the State
of Connecticut and a wholly-owned financing subsidiary of FBFS.
In December 2001, the Trust issued $10.0 million in
aggregate liquidation amount of floating rate trust preferred
securities in a private placement offering. These securities
mature 30 years after issuance and are callable at face
value after five years. The Trust used the proceeds from the
offering to purchase $10.3 million of 3 month LIBOR
plus 3.60% Junior Subordinated Debentures (the Debentures) of
the Corporation. In December 2003, the Financial Accounting
Standards Board (FASB) issued FASB Interpretation No. 46,
Consolidation of Variable Interest Entities, an
Interpretation of Accounting Research Bulletin No. 51,
Revised (FIN 46R) to provide guidance on how to
identify a variable interest entity and determine when an entity
needs to be included in a companys consolidated financial
statements. As a result of the adoption of FIN 46R in 2004,
the Trust was no longer consolidated by FBFS. On
December 18, 2006 the Corporation exercised its right to
redeem the Debentures purchased by the Trust. The Trust
subsequently redeemed the preferred securities and the Trust was
closed. See Note 11 to the consolidated financial
statements.
Available
Information
The Corporation maintains a web site at
www.firstbusiness.com. This
Form 10-K
and all of the Corporations filings under the Exchange Act
are available through that web site, free of charge, including
copies of 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 the
Corporation files those materials with, or furnishes them to,
the Securities and Exchange Commission.
Employees
At December 31, 2007, FBFS had 142 employees which
include 121.5 full-time equivalent employees. No employee
is covered by a collective bargaining agreement, and we believe
our relationship with our employees to be excellent.
Supervision
and Regulation
Below is a brief description of certain laws and regulations
that relate to the Corporation and the Banks. This narrative
does not purport to be complete and is qualified in its entirety
by reference to applicable laws and regulations.
General.
The Banks are chartered in the State of Wisconsin and are
subject to regulation and supervision by the Division of
Wisconsin Banking Review Board (the Division), and more
specifically the Wisconsin Department of Financial Institutions
(WDFI), and are subject to periodic examinations. Review of
fiduciary operations is included in the periodic examinations.
The Banks deposits are insured by the Deposit Insurance
Fund (DIF). The DIF is administered by the Federal Deposit
Insurance Corporation (FDIC), and therefore the Banks are also
subject to regulation by the FDIC. Periodic examinations of both
Banks are also conducted by the FDIC. The Banks must file
periodic reports with the FDIC concerning their activities and
financial condition and must obtain regulatory approval prior to
entering into certain transactions such as mergers with or
acquisitions of other depository institutions and opening or
acquiring branch offices. This regulatory structure gives the
regulatory authorities extensive direction in connection with
their supervisory and enforcement activities and examination
policies, including policies regarding the classification of
assets and the establishment of adequate loan and lease loss
reserves.
Wisconsin banking laws restrict the payment of cash dividends by
state banks by providing that (i) dividends may be paid
only out of a banks undivided profits, and (ii) prior
consent of the Division is required for the payment of a
dividend which exceeds current year income if dividends declared
have exceeded net profits in either of the two immediately
preceding years. The various bank regulatory agencies have
authority to prohibit a bank regulated by them from engaging in
an unsafe or unsound practice; the payment of a dividend by a
bank could, depending upon the circumstances, be considered as
2
such. In the event that (i) the FDIC or the Division should
increase minimum required levels of capital; (ii) the total
assets of the Banks increase significantly; (iii) the
income of the Banks decrease significantly; or (iv) any
combination of the foregoing occurs, then the Boards of
Directors of the Banks may decide or be required by the FDIC or
the Division to retain a greater portion of the Banks
earnings, thereby reducing dividends.
The Banks are subject to certain restrictions imposed by the
Federal Reserve Act on any extensions of credit to their parent
holding company, FBFS. Also included in this Act are
restrictions on investments in stock or other securities of FBFS
and on taking of such stock or securities as collateral for
loans to any borrower. Under this Act and regulations of the
Federal Reserve Board, FBFS and its Banks are prohibited from
engaging in certain tie-in arrangements in connection with any
extension of credit or any property or service.
The
Corporation
FBFS is a financial holding company registered under the Bank
Holding Company Act of 1956, as amended (the BHCA), and is
subject to regulation, supervision, and examination by the Board
of Governors of the Federal Reserve System (the FRB). The
Corporation is required to file an annual report with the FRB
and such other reports as the FRB may require. Prior approval
must be obtained before the Corporation may merge with or
consolidate into another bank holding company, acquire
substantially all the assets of any bank or bank holding
company, or acquire ownership or control of any voting shares of
any bank or bank holding company if after such acquisition it
would own or control, directly or indirectly, more than 5% of
the voting shares of such bank or bank holding company.
In reviewing applications for such transactions, the FRB
considers managerial, financial, capital and other factors,
including financial performance of the bank or banks to be
acquired under the Community Reinvestment Act of 1977, as
amended (the CRA). Also, under the Riegle-Neal Interstate
Banking and Branching Efficiency Act of 1994, as amended, state
laws governing interstate banking acquisitions subject bank
holding companies to some limitations in acquiring banks outside
of their home state without regard to local law.
The Gramm-Leach Bliley Act of 1999 (the GLB) eliminates many of
the restrictions placed on the activities of bank holding
companies. Bank holding companies such as FBFS can expand into a
wide variety of financial services, including securities
activities, insurance, and merchant banking without the prior
approval of the FRB.
Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley
Act (SOX) was enacted by the United States Congress to improve
the accuracy and reliability of corporate disclosures made
pursuant to securities laws, and for other purposes. A primary
focus of SOX is to improve the quality and transparency in
financial reporting and independent auditor services for public
companies. As directed by SOX, the Securities and Exchange
Commission (SEC) adopts rules that require conformance with
specific sections of SOX. Section 302 of SOX and relating
SEC rules require the Corporations CEO and CFO to certify
that they (i) are responsible for establishing,
maintaining, and regularly evaluating the effectiveness of the
Corporations internal controls; (ii) have made
certain disclosures to the Corporations auditors and the
audit committee of the Corporations board of directors
about the Corporations internal controls; and
(iii) have included information in the Corporations
quarterly and annual reports about their evaluation and whether
there have been significant changes in the Corporations
internal controls over financial reporting that has materially
affected, or is reasonably likely to materially affect the
Corporation.
Section 404 of SOX requires public companies annual
reports to (i) include the companys own assessment of
internal control over financial reporting, and (ii) include
an auditors attestation regarding the companys
internal control over financial reporting. The primary purpose
of internal control over financial reporting is to foster the
preparation of reliable and accurate financial statements. Since
SOX was enacted, however, both requirements of SOX 404 have been
postponed for smaller public companies such as the Corporation.
The Corporation is subject to the first part of Section 404
of SOX beginning with this annual report. Refer to
Item 9A(T). Controls and Procedures for the
Corporations assessment. The requirement of an
auditors attestation per the second part of
Section 404 of SOX continues to be postponed per temporary
Item 308T of SEC
Regulation S-K.
Consequently, no auditor attestation accompanies
Managements Annual Report on Internal Control Over
Financial Reporting in this annual report.
3
The
Banks
As state-chartered DIF-insured banks, the Banks are subject to
extensive regulation by the WDFI and the FDIC. Lending
activities and other investments must comply with federal
statutory and regulatory requirements. This federal regulation
establishes a comprehensive framework of activities in which an
institution can engage and is intended primarily for the
protection of the DIF, the FDIC, and depositors.
Insurance of Deposits. The Banks
deposits are insured under the DIF of the FDIC. The basic
insurance coverage is up to $100,000. Depositors may qualify for
additional coverage if the deposit accounts are in different
ownership categories. In addition, federal law provides up to
$250,000 in coverage for self-directed retirement accounts. The
FDIC assigns institutions to a particular capital group based on
the levels of the Banks capital
well-capitalized, adequately
capitalized, or undercapitalized. These three
groups are then divided into three subgroups reflecting varying
levels of supervisory concern, ranging from those institutions
considered to be healthy to those that represent substantial
supervisory concern. The result is nine assessment risk
classifications, with well-capitalized, financially sound
institutions paying lower rates than those paid by
undercapitalized institutions that pose a risk to the insurance
fund.
The Banks assessment rate depends on the capital category
to which they are assigned. Assessment rates for deposit
insurance currently range from 0 to 27 basis points. The
Banks are well capitalized. The supervisory subgroup to which
the Banks are assigned by the FDIC is confidential and may not
be disclosed. The Banks rate of deposit insurance
assessments will depend upon the category or subcategory to
which the Banks are assigned. Any increase in insurance
assessments could have an adverse affect on the earnings of the
Banks.
Regulatory Capital Requirements. The FRB
monitors the capital adequacy of the Banks because on a
consolidated basis they have assets in excess of
$500.0 million. A combination of risk-based and leverage
ratios are determined by the FRB. Failure to meet these capital
guidelines could result in supervisory or enforcement actions by
the FRB. Under the risk-based capital guidelines, different
categories of assets, including certain off-balance sheet items,
such as loan commitments in excess of one year and letters of
credit, are assigned different risk weights, with perceived
credit risk of the asset in mind. These risk weighted assets are
calculated by assigning risk-weights to corresponding asset
balances to determine the risk-weight of the entire asset base.
Total capital, under this definition, is defined as the sum of
Tier 1 and Tier 2 capital
elements, with Tier 2 capital being limited to 100% of
Tier 1 capital. Tier 1 capital, with some
restrictions, includes common stockholders equity, any
perpetual preferred stock, qualifying trust preferred
securities, and minority interests in any unconsolidated
subsidiaries. Tier 2 capital, with certain restrictions,
includes any perpetual preferred stock not included in
Tier 1 capital, subordinated debt, any trust preferred
securities not qualifying as Tier 1 capital, specific
maturing capital instruments and the allowance for loan and
lease losses (limited to 1.25% of risk-weighted assets). The
regulatory guidelines require a minimum total capital to
risk-weighted assets of 8%, of which at least 4% must be in the
form of Tier 1 capital. The FRB also has a leverage ratio
requirement which is defined as Tier 1 capital divided by
average total consolidated assets. The minimum leverage ratio
required is 3%.
4
The Corporation and the Banks actual capital amounts and
ratios are presented in the table below and reflect the
Banks well-capitalized positions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum Required to
|
|
|
|
|
|
|
|
|
|
be Well Capitalized
|
|
|
|
|
|
|
Minimum Required
|
|
|
Under Prompt
|
|
|
|
|
|
|
for Capital Adequacy
|
|
|
Corrective Action
|
|
|
|
Actual
|
|
|
Purposes
|
|
|
Requirements
|
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
|
(In thousands)
|
|
|
As of December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital (to risk-weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
87,018
|
|
|
|
10.22
|
%
|
|
$
|
68,119
|
|
|
|
8.00
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
First Business Bank
|
|
|
79,072
|
|
|
|
10.45
|
|
|
|
60,528
|
|
|
|
8.00
|
|
|
$
|
75,660
|
|
|
|
10.00
|
%
|
First Business Bank Milwaukee
|
|
|
9,847
|
|
|
|
10.26
|
|
|
|
7,679
|
|
|
|
8.00
|
|
|
|
9,599
|
|
|
|
10.00
|
|
Tier 1 capital (to risk-weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
46,164
|
|
|
|
5.42
|
%
|
|
$
|
34,060
|
|
|
|
4.00
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
First Business Bank
|
|
|
71,097
|
|
|
|
9.40
|
|
|
|
30,264
|
|
|
|
4.00
|
|
|
$
|
45,396
|
|
|
|
6.00
|
%
|
First Business Bank Milwaukee
|
|
|
8,639
|
|
|
|
9.00
|
|
|
|
3,840
|
|
|
|
4.00
|
|
|
|
5,759
|
|
|
|
6.00
|
|
Tier 1 capital (to average assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
46,164
|
|
|
|
5.12
|
%
|
|
$
|
36,065
|
|
|
|
4.00
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
First Business Bank
|
|
|
71,097
|
|
|
|
9.04
|
|
|
|
31,459
|
|
|
|
4.00
|
|
|
$
|
39,324
|
|
|
|
5.00
|
%
|
First Business Bank Milwaukee
|
|
|
8,639
|
|
|
|
7.39
|
|
|
|
4,678
|
|
|
|
4.00
|
|
|
|
5,848
|
|
|
|
5.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum Required to
|
|
|
|
|
|
|
|
|
|
be Well Capitalized
|
|
|
|
|
|
|
Minimum Required
|
|
|
Under Prompt
|
|
|
|
|
|
|
for Capital
|
|
|
Corrective Action
|
|
|
|
Actual
|
|
|
Adequacy Purposes
|
|
|
Requirements
|
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
|
(In thousands)
|
|
|
As of December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital (to risk-weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
73,241
|
|
|
|
10.40
|
%
|
|
$
|
56,360
|
|
|
|
8.00
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
First Business Bank
|
|
|
64,443
|
|
|
|
10.49
|
|
|
|
49,144
|
|
|
|
8.00
|
|
|
$
|
61,430
|
|
|
|
10.00
|
%
|
First Business Bank Milwaukee
|
|
|
10,205
|
|
|
|
11.31
|
|
|
|
7,218
|
|
|
|
8.00
|
|
|
|
9,022
|
|
|
|
10.00
|
|
Tier 1 capital (to risk-weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
43,944
|
|
|
|
6.24
|
%
|
|
$
|
28,180
|
|
|
|
4.00
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
First Business Bank
|
|
|
57,838
|
|
|
|
9.42
|
|
|
|
24,572
|
|
|
|
4.00
|
|
|
$
|
36,858
|
|
|
|
6.00
|
%
|
First Business Bank Milwaukee
|
|
|
9,070
|
|
|
|
10.05
|
|
|
|
3,609
|
|
|
|
4.00
|
|
|
|
5,413
|
|
|
|
6.00
|
|
Tier 1 capital (to average assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
43,944
|
|
|
|
5.99
|
%
|
|
$
|
29,331
|
|
|
|
4.00
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
First Business Bank
|
|
|
57,838
|
|
|
|
9.22
|
|
|
|
25,086
|
|
|
|
4.00
|
|
|
$
|
31,358
|
|
|
|
5.00
|
%
|
First Business Bank Milwaukee
|
|
|
9,070
|
|
|
|
8.50
|
|
|
|
4,269
|
|
|
|
4.00
|
|
|
|
5,336
|
|
|
|
5.00
|
|
Prompt Corrective Action. The Banks are also
subject to capital adequacy requirements under the Federal
Deposit Insurance Corporation Improvement Act of 1991 (FDICIA),
whereby the Banks could be required to guarantee a capital
restoration plan, should they become
undercapitalized as defined by FDICIA. The maximum
liability under such a guarantee would be the lesser of 5% of
the Banks total assets at the time they became
undercapitalized or the amount necessary to bring the Banks into
compliance with the capital restoration plan. The Corporation is
also subject to the source of strength doctrine per
the FRB, which requires that holding companies serve as a source
of financial and managerial strength to their
subsidiary banks.
5
If banks fail to submit an acceptable restoration plan, they are
treated under the definition of significantly
undercapitalized and would thus be subject to a wider
range of regulatory requirements and restrictions. Such
restrictions would include activities involving asset growth,
acquisitions, branch establishment, establishment of new lines
of business and also prohibitions on capital distributions,
dividends and payment of management fees to control persons, if
such payments and distributions would cause undercapitalization.
The following table sets forth the FDICs definition of the
five capital categories, in the absence of a specific capital
directive.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital to Risk
|
|
|
Tier 1 Capital to
|
|
|
|
|
Category
|
|
Weighted Assets
|
|
|
Risk Weighted Assets
|
|
|
Tier 1 Leverage Ratio
|
|
|
Well capitalized
|
|
|
³
10
|
%
|
|
|
³
6
|
%
|
|
|
³
5
|
%
|
Adequately capitalized
|
|
|
³
8
|
%
|
|
|
³
4
|
%
|
|
|
³
4
|
%*
|
Undercapitalized
|
|
|
< 8
|
%
|
|
|
< 4
|
%
|
|
|
< 4
|
%*
|
Significantly undercapitalized
|
|
|
< 6
|
%
|
|
|
< 3
|
%
|
|
|
< 3
|
%
|
Critically undercapitalized
|
|
|
Ratio of tangible equity to total assets
£
2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
3% if the Banks receive the highest rating under the uniform
system. |
Limitations on Dividends and Other Capital
Distributions. Federal and state regulations
impose various restrictions or requirements on state-chartered
banks with respect to their ability to pay dividends or make
various other distributions of capital. Generally, such laws
restrict dividends to undivided profits or profits earned during
preceding periods. Also, FDIC insured institutions may not pay
dividends while undercapitalized or if such a payment would
cause undercapitalization. The FDIC also has authority to
prohibit the payment of dividends if such a payment constitutes
an unsafe or unsound practice in light of the financial
condition of a particular bank. At December 31, 2007,
subsidiary unencumbered retained earnings of approximately
$37.1 million could be transferred to the Corporation in
the form of cash dividends without prior regulatory approval,
subject to the capital needs of each subsidiary.
Liquidity. The Banks are required by federal
regulation to maintain sufficient liquidity to ensure safe and
sound operations. We believe that our Banks have an acceptable
liquidity percentage to match the balance of net withdrawable
deposits and short-term borrowings in light of present economic
conditions and deposit flows.
Federal Reserve System. The Banks are required
to maintain non-interest bearing reserves at specified levels
against their transaction accounts and non-personal time
deposits. As of December 31, 2007, the Banks were in
compliance with these requirements. Because required reserves
must be maintained in the form of cash or non-interest bearing
deposits at the FRB, the effect of this requirement is to reduce
the Banks interest-earning assets.
Federal Home Loan Bank System. The Banks are
members of the FHLB of Chicago (FHLB). The FHLB serves as a
central credit facility for its members. The FHLB is funded
primarily from proceeds from the sale of obligations of the FHLB
system. It makes 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.
As a member, each Bank is required to own shares of capital
stock in the FHLB in an amount equal to the greatest of $500, 1%
of its aggregate unpaid residential mortgage loans, home
purchase contracts or similar obligations at the beginning of
each year, or 20% of its outstanding advances. The FHLB also
imposes various limitations on advances relating to the amount
and type of collateral, the amount of advances and other items.
At December 31, 2007, the Banks owned a total of
$2.4 million in FHLB stock and were in compliance with
their respective requirements. The Banks received combined
dividends from the FHLB totaling $46,000 for the year ended
December 31, 2007 as compared to $82,000 for the year ended
December 31, 2006.
6
On October 10, 2007, FHLB announced via
Form 8-K
that it has entered into a consensual cease and desist order
with its regulator, the Federal Housing Finance Board. Under the
terms of the order, capital stock repurchases and redemptions,
including redemptions upon membership withdrawal or other
termination, are prohibited unless FHLB has received approval of
the Director of the Office of Supervision of the Finance Board.
As a result of this consensual cease and desist order, the Banks
do not expect dividend income from its holdings of FHLB stock to
be a significant source of income for the foreseeable future.
The Banks currently hold $2.4 million, at cost, of FHLB
stock, of which $641,000 is deemed voluntary stock. At this
time, we believe we will ultimately recover the value of this
stock. Refer to Item 7 Managements
Discussion and Analysis of Financial Condition and Results of
Operations Liquidity and Capital Resources for
further discussion relating to the impact of this order on our
ability to obtain resources from the FHLB to meet the liquidity
needs of the Banks.
Restrictions on Transactions with
Affiliates. The Banks loans to their own
and the Corporations executive officers, directors and
owners of greater than 10% of any of their respective stock
(so-called insiders) and any entities affiliated
with such insiders are subject to the conditions and limitations
under Section 23A of the Federal Reserve Act and the
Federal Reserve Banks Regulation O. Under these
regulations, the amount of loans to any insider is limited to
the same limit imposed in the loans-to-one borrower limits of
the respective Banks. All loans to insiders must not exceed the
Banks unimpaired capital and unimpaired surplus. Loans to
executive officers, other than loans for the education of the
officers children and certain loans secured by the
officers residence, may not exceed the greater of $25,000
or 2.5% of the Banks unimpaired capital and unimpaired
surplus, and may never exceed $100,000. Regulation O also
requires that loans to insiders must be approved in advance by a
majority of the Board of Directors, at the bank level. Such
loans, in general, must be made on substantially the same terms
as, and with credit underwriting procedures no less stringent
than those prevailing at the time for, comparable transactions
with other persons.
The Banks can make exceptions to the foregoing procedures if
they offer extensions of credit that are widely available to
employees of the Banks and that do not give any preference to
insiders over other employees of the Banks.
Community Reinvestment Act. The Community
Reinvestment Act (CRA) 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 the Banks record of meeting the credit needs of
their respective communities. Applications for additional
acquisitions would be affected by the evaluation of the
Banks effectiveness in meeting its CRA requirements.
Riegle Community Development and Regulatory Improvement Act
of 1994. Federal regulators have adopted
guidelines establishing general standards relating to internal
controls, information and internal audit systems, loan
documentation, credit underwriting, interest rate risk, asset
growth, asset quality, earnings and compensation, fees, and
benefits. These guidelines require, in general, that appropriate
systems and practices are in place to identify and manage the
risks and exposures specified by the guidelines. Such
prohibitions include excessive compensation when amounts paid
appear to be unreasonable or disproportionate to the services
performed by executive officers, employees, directors or
principal shareholders.
USA PATRIOT Act of 2001. The USA PATRIOT Act
requires banks to establish anti-money laundering programs; to
establish due diligence policies, procedures, and controls with
respect to private banking accounts and correspondent banking
accounts involving foreign individuals and specific foreign
banks; and to avoid establishing, maintaining, administering or
managing correspondent accounts in the United States for or on
behalf of foreign banks that maintain no presence in any
country. Additionally, the USA PATRIOT Act encourages
cooperation among financial institutions, regulatory
authorities, and law enforcement with respect to individuals or
organizations that could reasonably be suspected of engaging in
terrorist activities. Federal regulators have begun proposing
and implementing regulations in efforts to interpret the USA
PATRIOT Act. The Banks must comply with Section 326 of the
Act which provides for minimum procedures in the verification of
identification of new customers.
Commercial Real Estate Guidance. The
FDICs Concentrations in Commercial Real Estate Lending,
Sound Risk Management Practices (CRE Guidance) provides
supervisory criteria, including the following numerical
indicators, to assist bank examiners in identifying banks with
potentially significant
7
commercial real estate loan concentrations that may warrant
greater supervisory scrutiny: (1) commercial real estate
loans exceed 300% of capital and increased 50% or more in the
preceding three years, or (2) construction and land
development loans exceed 100% of capital. The CRE Guidance does
not limit banks levels of commercial real estate lending
activities but rather guides institutions in developing risk
management practices and levels of capital that are commensurate
with the level and nature of their commercial real estate
concentrations. Based on our current loan portfolio, the CRE
Guidance applies to the Banks. We believe that we have taken
appropriate precautions to address the risks associated with our
concentrations in commercial real estate lending. We do not
expect the Guidance to adversely affect our operations or our
ability to execute our growth strategy.
Fair and Accurate Transactions Act of 2003. In
November 2007, the OCC, FDIC, OTS, NCUA and FTC (the Agencies)
issued final rules and guidelines implementing section 114
of the Fair and Accurate Credit Transactions Act of 2003 (FACT
Act) and final rules implementing section 315 of the FACT
Act. The rules implementing Section 114 require each
financial institution or creditor to develop and implement a
written identity theft prevention program to detect, prevent and
mitigate identity theft in connection with opening of certain
accounts or certain existing accounts. Certain
events such as a change of address, returned mail, a
request for replacement debit or credit card or efforts to
reactivate dormant account may signal potential
fraud. Additionally, the Agencies issued joint rules under
Section 315 that provide guidance regarding reasonable
policies and process that a user of consumer reports must employ
when a consumer reporting agency sends us a notice of address
discrepancy. Sections 114 and 315 of the FACT Act are
effective January 1, 2008 with mandatory compliance
required by November 1, 2008. The Banks will be in full
compliance by this mandatory date.
Changing Regulatory Structure. Regulation of
the activities of national and state banks and their holding
companies imposes a heavy burden on the banking industry. The
FRB, FDIC, and WDFI all have extensive authority to police
unsafe or unsound practices and violations of applicable laws
and regulations by depository institutions and their holding
companies. These agencies can assess civil monetary penalties,
issue cease and desist or removal orders, seek injunctions, and
publicly disclose such actions. Moreover, the authority of these
agencies has expanded in recent years, and the agencies have not
yet fully tested the limits of their powers.
The laws and regulations affecting banks and financial or bank
holding companies have changed significantly in recent years,
and there is reason to expect changes will continue in the
future, although it is difficult to predict the outcome of these
changes. From time to time, various bills are introduced in the
United States Congress with respect to the regulation of
financial institutions. Certain of those proposals, if adopted,
could significantly change the regulation of banks and the
financial services industry.
Monetary Policy. The monetary policy of the
FRB has a significant effect on the operating results of
financial or bank holding companies and their subsidiaries.
Among the means available to the FRB 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.
Competition. The Banks encounter strong
competition in attracting commercial loan, equipment finance 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, tax exempt credit unions operate in most of 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. Our
profitability depends upon the Banks continued ability to
successfully maintain and increase market share.
8
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 45, has served as Chief Executive
Officer of First Business Financial Services, Inc. since
December, 2006, as President of the Corporation since February,
2005, and as a Director since July, 2002. He served as Chief
Operating Officer of the Corporation from February, 2005 to
September, 2006, and as Executive Vice President of the
Corporation from July, 2002 to February, 2005. He served as
Chief Executive Officer of First Business Bank from July, 1999
to September, 2006 and as President of First Business Bank from
July, 1999 to February, 2005. He currently serves as a Director
of First Business Bank-Milwaukee, First Business Equipment
Finance, LLC, First Business Capital Corp., First Madison
Investment Corp. and FMCC Nevada Corp.
James F. Ropella, age 48, has served as Senior Vice
President and Chief Financial Officer of the Corporation since
September, 2000. Mr. Ropella also serves as the Chief
Financial Officer of the subsidiaries of the Corporation. He
currently serves as a Director of First Madison Investment Corp.
and FMCC Nevada Corp.
Joan A. Burke, age 56, has served as President of First
Business Banks Trust Division since September, 2001.
Prior to that, from November, 1996 to May, 2001, Ms. Burke
was the President, Chief Executive Officer and Chairperson of
the Board of Johnson Trust Company and certain of its
affiliates.
Mark J. Meloy, age 46, has served as Chief Executive
Officer of First Business Bank since December 2007 and was
elected President and a Director of First Business Bank in
September, 2006. He served as Executive Vice President of First
Business Bank from September, 2004 to September, 2006. He served
as President and Chief Executive Officer of First Business
Bank-Milwaukee from January, 2003 to October, 2004, and as a
Director from November, 2002 to October, 2004. From November,
2002 to December 2002, he served as Executive Vice President and
Chief Operating Officer of First Business Bank-Milwaukee. From
April 2000, to November, 2002 he served as Senior Vice President
and Senior Lending Officer at First Business Bank. He currently
serves as a Director of First Business Equipment Finance, LLC
and First Business Capital Corp.
Michael J. Losenegger, age 50, has served as Chief
Operating Officer of the Corporation since September 2006. He
has also served as Chief Executive Officer of First Business
Bank from September 2006 December 2007. He was
elected President and a Director of First Business Bank in
February, 2005. He served as Chief Operating Officer of First
Business Bank from September, 2004 to February, 2005. He served
as Senior Vice President-Business Development from February,
2003 to September, 2004. Prior to that, from March, 1989 to
January, 2003, Mr. Losenegger served as Assistant Vice
President and Vice President and Senior Vice President of
Lending at M&I Bank in Madison, Wisconsin. He currently
serves as a Director of First Business Equipment Finance, LLC,
First Business Capital Corp., First Madison Investment Corp. and
FMCC Nevada Corp.
Charles H. Batson, age 54, joined the Corporation and was
elected President and Chief Executive Officer of First Business
Capital Corp. in January, 2006. Prior to joining the
Corporation, from February 1986 to December, 2005,
Mr. Batson served as Vice President and Business
Development Manager for Wells Fargo Business Credit, Inc. He
currently serves as a Director of First Business Capital Corp.
David J. Vetta, age 53, joined the Corporation and was
elected President and Chief Executive Officer of First Business
Bank-Milwaukee in January 2007. Prior to joining the Corporation
he was Managing Director at Fifth Third Bank and Managing
Director at JP Morgan Chase for nearly 30 years. He
currently serves as a Director of First Business
Bank Milwaukee.
You should carefully read and consider the following risks and
uncertainties because they could materially and adversely affect
our business, financial condition, results of operations and
prospects.
Competition. The Banks encounter strong
competition in attracting commercial loan, equipment finance 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.
9
The Banks market areas include branches of several
commercial banks that are substantially larger in terms of loans
and deposits. Furthermore, tax exempt credit unions operate in
most of 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. Our profitability depends upon the Banks
continued ability to successfully maintain and increase market
share.
We believe the principal factors that are used to attract core
deposit accounts and that distinguish one financial institution
from another include rates of return, types of accounts, service
fees, convenience of office locations and hours and quality of
service to the depositors. We believe the primary factors in
competing for commercial loans are interest rates, loan fee
charges, loan structure and timeliness and quality of service to
the borrower.
Government Regulation and Monetary Policy. Our
businesses are subject to extensive state and federal government
supervision, regulation, and control. Existing state and federal
banking laws subject us to substantial limitations with respect
to loans, purchases of securities, payment of dividends and many
other aspects of our businesses. See Item 1.
Business Supervision and Regulation. There can
be no assurance that future legislation or government policy
will not adversely affect the banking industry or our
operations. In addition, economic and monetary policy of the
Federal Reserve may increase our cost of doing business and
affect its ability to attract deposits and make loans.
Key Personnel. Our success has been and will
be greatly influenced by our continuing ability to retain the
services of our existing senior management and, as it expands,
to attract and retain additional qualified senior and middle
management. If we unexpectedly lose any of the key management
personnel, or we are unable to recruit and retain qualified
personnel in the future, that could have an adverse effect on
our business and financial results.
Technology. The banking industry is undergoing
rapid technological changes with frequent introductions of new
technology-driven products and services. In addition to better
serving clients, the effective use of technology increases
efficiency and enables financial institutions 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. There can be no
assurance that we will be able to implement new
technology-driven products and services to our clients.
Market Area. The origination of loans secured
by real estate and business assets of those businesses is the
Banks primary business and the principal source of
profits. Most of the Banks loans are to businesses located
in or adjacent to Dane, Waukesha and Outagamie Counties in
Wisconsin. Client demand for loans could be reduced by a weaker
economy, an increase in unemployment, a decrease in real estate
values, or an increase in interest rates in these areas. Any
general adverse change in the economic conditions, including
real estate values, prevailing in these areas could reduce the
Banks growth rate, impair their ability to collect loans
or attract deposits, and generally have an adverse impact on our
results of operations and financial condition. If this region
experienced adverse economic, political or business conditions,
the Banks would likely experience higher rates of loss and
delinquency on their loans than if their loans were
geographically more diverse.
Loan Portfolio Risk. The Banks originate
commercial mortgage, construction, multi-family, 1-4 family,
commercial, asset-based, consumer loans, and leases, all of
which are primarily within their respective market areas. Such
loans expose the Banks to greater credit risk than home
mortgages which form a greater part of the business of many
commercial banks, because the collateral securing these loans
may not be sold as easily as residential real estate. These
loans also have greater credit risk than residential real estate
for the following reasons:
|
|
|
|
|
Commercial mortgage loan repayment is dependent upon cash flow
generation sufficient to cover operating expenses and debt
service.
|
|
|
|
Commercial loan repayment is dependent upon the successful
operation of the borrowers business.
|
10
|
|
|
|
|
Consumer loans such as credit card loans and vehicle loans are
collateralized, if at all, with assets that may not provide an
adequate source of payment of the loan due to depreciation,
damage or loss.
|
Environmental Risk. The Banks encounter
certain environmental risks in their lending activities. Under
federal and state law, Banks may become liable for costs of
cleaning up hazardous materials found on secured properties.
Certain states may also impose liens with higher priorities than
first mortgages on properties to recover funds used in such
efforts. The Banks attempt to control their exposure to
environmental risks with respect to loans secured by larger
properties by monitoring available information on hazardous
waste disposal sites and occasionally requiring environmental
inspections of such properties prior to closing a loan, as
warranted. No assurance can be given, however, that the value of
properties securing loans in the Banks portfolio will not
be adversely affected by the presence of hazardous materials or
that future changes in federal or state laws will not increase
the Banks exposure to liability for environmental cleanup.
Loan and Lease Loss Allowance Risk. The Banks
are exposed to the risk that their loan and lease clients may
not repay their loans and leases according to their terms and
that the collateral securing the payment of these loans and
leases may be insufficient to assure repayment. The Banks may
experience significant loan and lease losses which could have a
material adverse impact on operating results. There is a risk
that various assumptions and judgments about the collectibility
of the loan and lease portfolios made by us could be formed from
inaccurately assessed conditions leading to and related to such
judgments and assumptions. Those assumptions and judgments are
based, in part, on assessment of the following conditions:
|
|
|
|
|
Current economic conditions and their estimated effects on
specific borrowers;
|
|
|
|
An evaluation of the existing relationships among loans and
leases, probable loan and lease losses and the present level of
the allowance for loan and lease losses;
|
|
|
|
Results of examinations of the Banks loan and lease
portfolios by regulatory agencies;
|
|
|
|
Managements internal review of the loan and lease
portfolios.
|
The Banks maintain an allowance for loan and lease losses to
cover probable losses inherent in the loan and lease portfolios.
Additional loan and lease losses will likely occur in the future
and may occur at a rate greater than that experienced to date.
An analysis of the loan and lease portfolios, historical loss
experience and an evaluation of general economic conditions are
all utilized in determining the size of the allowance.
Additional adjustments may be necessary to allow for unexpected
volatility or deterioration in the local or national economy. If
significant additions are made to the allowance for loan and
leases losses, this would materially decrease net income.
Additionally, regulators periodically review the allowance for
loan and lease losses or identify further loan or lease
charge-offs to be recognized based on judgments different from
ours. Any increase in the loan or lease allowance or loan or
lease charge-offs as required by regulatory agencies could have
a material adverse impact on net income.
Interest Rate Risk. We are subject to interest
rate risk. Changes in the interest rate environment may reduce
our profits. Net interest spreads are affected by the difference
between the maturities and repricing characteristics of
interest-earning assets and interest-bearing liabilities. They
are also affected by the proportion of interest-earning assets
that are funded by interest-bearing liabilities. Loan volume and
yield are affected by market interest rates on loans, and
increasing interest rates are generally associated with a lower
volume of loan originations. There is no assurance that we can
minimize our interest rate risk. In addition, an increase in the
general level of interest rates may adversely affect the ability
of certain borrowers to pay their obligations if the reason for
that increase in rates is not a result of a general expansion of
the economy. Accordingly, changes in levels of market interest
rates could materially and adversely affect our net interest
spread, asset quality, loan origination volume and overall
profitability.
Trust Operations Risk. We are subject to
trust operations risk related to performance of fiduciary
responsibilities. Clients may make claims and take legal action
pertaining to our performance of our fiduciary responsibilities.
Whether client claims and legal action related to our
performance of our fiduciary responsibilities are founded or
unfounded, if such claims and legal actions are not resolved in
a manner favorable to us, they may result in significant
financial liability
and/or
adversely affect the market perception of us and our products
and services, as well as impact client demand for those products
and services. Any financial liability or reputation damage could
have a material adverse affect on our
11
business, which, in turn, could have a material adverse effect
on our financial condition and results of operations.
Economic Conditions. Our success depends on
the economic conditions in the US and general economic
conditions in the specific local markets in which the Banks and
subsidiaries operate, principally in Dane County, Wisconsin area
and to a lesser extent, Waukesha County, Wisconsin. The Banks
invest in collateralized mortgage obligations as a part of their
asset portfolios due to the liquidity, favorable returns and
flexibility with these instruments. In recent months, structured
investments, such as collateralized mortgage obligations, have
been subject to significant market volatility due to the
uncertainty of their credit ratings, deterioration in credit
quality occurring within certain types of residential mortgages,
changes in prepayments of the underlying collateral and the lack
of transparency related to the credit quality of the underlying
collateral. In addition, the Banks use brokered certificates of
deposit as a component of their deposit accounts due to
favorable pricing and range of maturities available. A decline
in the US economy or an extended disruption in the credit
markets could have an adverse affect on the pricing, terms,
liquidity
and/or
availability of these instruments.
Adverse economic conditions in our market area, including
depressed real estate values, could reduce our growth rate,
affect borrowers ability to repay their loans, and cause
loans to become inadequately collateralized which could have an
adverse affect on our financial condition and results of
operations.
|
|
Item 1b.
|
Unresolved
Staff Comments
|
None
At December 31, 2007, the Banks conducted business from
their full service offices located in Madison, Wisconsin at 401
Charmany Drive and in Brookfield, Wisconsin located at
18500 W. Corporate Drive. The Banks lease their
full-service offices and these leases expire in 2016 and 2010,
respectively. FBB opened a loan production office at
3919 West Prospect Avenue, Appleton, Wisconsin in December
2007 and this lease expires in 2017. FBB conducts trust and
investment business from a limited purpose branch located at
3500 University Avenue, Madison, Wisconsin. Office space is also
leased in Burnsville, Minnesota, Independence, Ohio,
St. Louis, Missouri, Chicago, Illinois, and Oshkosh,
Wisconsin under short-term lease agreements which have terms of
less than one year. See Note 7 to the Consolidated
Financial Statements for more information regarding leasehold
improvements and equipment. See Note 14 to the
Consolidated Financial Statements for more information regarding
the operating lease agreements.
|
|
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 and trust agents, they could occasionally
be named as defendants in lawsuits involving claims to the
ownership of funds in particular accounts. This and other
litigation is incidental to our business.
|
|
Item 4.
|
Submission
of Matters to a Vote of Security Holders
|
No matters were submitted to a vote of security holders during
the fourth quarter of 2007.
12
PART II.
|
|
Item 5.
|
Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
|
The common stock of the Corporation is traded on the Nasdaq
National Market under the symbol FBIZ. At
February 29, 2008, there were approximately
501 shareholders of record of FBFS common stock.
The following table presents the range of high and low closing
sale prices of our common stock for each quarter within the two
most recent fiscal years, according to information available,
and cash dividends declared for the years ended
December 31, 2007 and 2006, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend
|
|
|
|
High
|
|
|
Low
|
|
|
Declared
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
1st Quarter
|
|
$
|
22.67
|
|
|
$
|
21.26
|
|
|
$
|
0.065
|
|
2nd Quarter
|
|
|
22.50
|
|
|
|
19.80
|
|
|
|
0.065
|
|
3rd Quarter
|
|
|
20.93
|
|
|
|
17.70
|
|
|
|
0.065
|
|
4th Quarter
|
|
|
19.05
|
|
|
|
17.50
|
|
|
|
0.065
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
1st Quarter
|
|
$
|
24.00
|
|
|
$
|
21.50
|
|
|
$
|
0.06
|
|
2nd Quarter
|
|
|
24.84
|
|
|
|
22.76
|
|
|
|
0.06
|
|
3rd Quarter
|
|
|
24.50
|
|
|
|
22.02
|
|
|
|
0.06
|
|
4th Quarter
|
|
|
23.00
|
|
|
|
21.51
|
|
|
|
0.06
|
|
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 and other factors considered relevant
by the Board. The Board anticipates it will continue to pay
quarterly dividends in amounts determined based on the above
factors.
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Compensation Plan Information
|
|
|
|
|
|
|
|
|
|
Number of Securities
|
|
|
|
|
|
|
|
|
|
Remaining Available for
|
|
|
|
|
|
|
|
|
|
Future Issuance Under
|
|
|
|
Number of Securities to
|
|
|
Weighted-average
|
|
|
Equity Compensation
|
|
|
|
be Issued upon Exercise
|
|
|
Exercise Price of
|
|
|
Plans (Excluding
|
|
|
|
of Outstanding Options,
|
|
|
Outstanding Options,
|
|
|
Securities Reflected in
|
|
Plan Category
|
|
Warrants, and Rights.
|
|
|
Warrants, and Rights
|
|
|
Column (a))
|
|
|
|
(a)
|
|
|
(b)
|
|
|
(c)
|
|
|
Equity compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
plans approved by
|
|
|
|
|
|
|
|
|
|
|
|
|
security holders
|
|
|
159,540
|
|
|
$
|
22.10
|
|
|
|
431,129
|
|
On November 20, 2007, the Corporation publicly announced a
stock repurchase program whereby the Corporation would
repurchase up to approximately $1,000,000 of the
Corporations outstanding stock.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuer Purchases of Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of
|
|
|
Maximum Number
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Purchased as
|
|
|
that May Yet be
|
|
|
|
|
|
|
|
|
|
|
|
|
Part of Publicly
|
|
|
Purchased Under
|
|
|
|
|
|
|
Total Number of
|
|
|
Average Price Paid
|
|
|
Announced Plans
|
|
|
the Plans or
|
|
|
|
|
Period
|
|
Shares Purchased
|
|
|
Per Share
|
|
|
or Programs
|
|
|
Programs
|
|
|
|
|
|
October 1 31, 2007
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
November 1 30, 2007
|
|
|
30,000
|
|
|
$
|
19.00
|
|
|
|
30,000
|
|
|
|
23,691
|
|
|
|
|
|
December 1 31, 2007
|
|
|
14,000
|
|
|
$
|
18.06
|
|
|
|
14,000
|
|
|
|
10,122
|
|
|
|
|
|
13
|
|
Item 6.
|
Selected
Consolidated Financial Data
|
Three
Year Comparison of Selected Consolidated Financial
Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and For the Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(Dollars in Thousands, Except Share Data)
|
|
|
FOR THE YEAR:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
59,488
|
|
|
$
|
47,660
|
|
|
$
|
36,509
|
|
Interest expense
|
|
|
36,280
|
|
|
|
28,689
|
|
|
|
18,733
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
23,208
|
|
|
|
18,971
|
|
|
|
17,776
|
|
Provision for loan and lease losses
|
|
|
2,904
|
|
|
|
1,519
|
|
|
|
400
|
|
Gain on sale of 50% owned joint venture
|
|
|
-
|
|
|
|
-
|
|
|
|
973
|
|
Non-interest income
|
|
|
4,416
|
|
|
|
3,674
|
|
|
|
3,266
|
|
Non-interest expense
|
|
|
19,657
|
|
|
|
15,698
|
|
|
|
14,403
|
|
Income tax expense
|
|
|
1,807
|
|
|
|
1,681
|
|
|
|
2,455
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
3,256
|
|
|
$
|
3,747
|
|
|
$
|
4,757
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yield on earning assets
|
|
|
7.36
|
%
|
|
|
7.21
|
%
|
|
|
6.22
|
|
Cost of funds
|
|
|
4.91
|
|
|
|
4.77
|
|
|
|
3.59
|
|
Interest rate spread
|
|
|
2.45
|
|
|
|
2.44
|
|
|
|
2.62
|
|
Net interest margin
|
|
|
2.87
|
|
|
|
2.87
|
|
|
|
3.03
|
|
Return on average assets
|
|
|
0.39
|
|
|
|
0.54
|
|
|
|
0.78
|
|
Return on average equity
|
|
|
6.86
|
|
|
|
8.65
|
|
|
|
11.79
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ENDING BALANCE SHEET:
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
918,438
|
|
|
$
|
788,323
|
|
|
$
|
669,249
|
|
Securities
|
|
|
97,378
|
|
|
|
100,008
|
|
|
|
92,055
|
|
Loans and leases, net
|
|
|
771,633
|
|
|
|
639,867
|
|
|
|
532,716
|
|
Deposits
|
|
|
776,060
|
|
|
|
640,266
|
|
|
|
567,464
|
|
Borrowed funds
|
|
|
81,986
|
|
|
|
92,970
|
|
|
|
39,758
|
|
Junior subordinated debentures
|
|
|
-
|
|
|
|
-
|
|
|
|
10,310
|
|
Stockholders equity
|
|
|
48,552
|
|
|
|
45,756
|
|
|
|
41,843
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FINANCIAL CONDITION ANALYSIS:
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses to year-end loans
|
|
|
1.26
|
%
|
|
|
1.28
|
%
|
|
|
1.25
|
%
|
Allowance to non-accrual loans
|
|
|
111.17
|
|
|
|
748.06
|
|
|
|
438.67
|
|
Net charge-offs to average loans
|
|
|
0.19
|
|
|
|
-
|
|
|
|
-
|
|
Non-accrual loans to gross loans
|
|
|
1.13
|
|
|
|
0.17
|
|
|
|
0.29
|
|
Average equity to average assets
|
|
|
5.64
|
|
|
|
6.26
|
|
|
|
6.61
|
|
STOCKHOLDERS DATA:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
1.33
|
|
|
$
|
1.53
|
|
|
$
|
1.96
|
|
Diluted earnings per share
|
|
|
1.32
|
|
|
|
1.52
|
|
|
|
1.93
|
|
Book value per share at end of period
|
|
|
19.35
|
|
|
|
18.36
|
|
|
|
17.18
|
|
Dividend declared per share
|
|
|
0.26
|
|
|
|
0.24
|
|
|
|
0.175
|
|
Dividend payout ratio
|
|
|
19.55
|
%
|
|
|
15.68
|
%
|
|
|
8.93
|
%
|
Shares outstanding
|
|
|
2,509,213
|
|
|
|
2,493,578
|
|
|
|
2,435,008
|
|
14
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
Forward-Looking
Statements
When used in this report, and in any oral statements made with
the approval of an authorized executive officer, 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 area of
FBB or FBB Milwaukee, changes in policies by
regulatory agencies, fluctuation in interest rates, demand for
loans in the market area of FBB or FBB Milwaukee,
borrowers defaulting in the repayment of loans and competition.
These risks could cause actual results to differ materially from
what FBFS has anticipated or projected. These risk factors and
uncertainties should be carefully considered by potential
investors. See Item 1A, Risk Factors for discussion
relating to risk factors impacting the Corporation. 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 the financial performance of FBFS 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, FBFS cautions that, while its 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 result in, or be achieved or accomplished.
FBFS does not intend to, and specifically disclaims 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 of FBFS 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.
Overview
The principal business of FBFS is conducted by FBB and
FBB Milwaukee and certain subsidiaries of FBB and
consists of a full range of commercial banking products and
services tailored to meet the financial service needs of small
and medium size businesses, business owners, executives,
professionals, and high net worth individuals. Products include
commercial lending, asset-based lending, equipment financing,
trust and investment services and a broad range of deposit
products. Our profitability depends on our ability to execute
our established growth strategy and on the outcome of efforts in
controlling the areas of net interest income, provision for loan
and lease losses, non-interest income, and non-interest expenses.
The operating philosophy of FBFS is focused on local decision
making and local client service from each of our primary banking
locations in Madison, Brookfield and Appleton, Wisconsin
combined with the efficiency of centralized administrative
functions such as support for information technology, finance
and accounting and human resources. We have a unique niche
business banking model and we consistently operate within this
niche. This allows us to provide a great deal of expertise in
providing financial solutions to our clients with an experienced
staff to serve our clients on an ongoing basis. In 2007, our
primary strategy was to focus on organic growth. We have made a
substantial investment in our business development team
throughout our entire company to allow us to execute this
organic growth strategy in both on balance sheet assets and
liabilities, including growth in our loan and lease portfolios
and in-market deposit portfolios as well as in our off-balance
sheet assets, which include our assets under management within
our trust division of FBB. The increase in the off-balance sheet
trust assets under management drives a significant portion of
our fee income and is a key component to achieving our Top Line
Revenue growth targets which is discussed in further detail
elsewhere in this document.
15
Net interest income is the difference between the income we
receive on our loans, leases and investment securities, and the
interest we pay on our deposits and borrowings. The provision
for loan and lease losses reflects the cost of credit risk in
the loan and lease portfolio. Non-interest income consists of
service charges on deposit accounts, securities gains, loan and
lease fees, trust and investment services fee income, and other
income. Non-interest expenses include salaries and employee
benefits, occupancy, equipment expenses, professional services,
marketing expenses, and other non-interest expenses.
Recent
Developments
Tax Audit. Like the majority of financial
institutions located in Wisconsin, FBB transferred investment
securities and loans to out-of-state investment subsidiaries.
FBBs Nevada investment subsidiaries now hold and manage
these assets. The investment subsidiaries have not filed returns
with, or paid income or franchise taxes to, the State of
Wisconsin. The Wisconsin Department of Revenue (the Department)
implemented a program to audit Wisconsin financial institutions
which formed investment subsidiaries located outside of
Wisconsin, and the Department has generally indicated that it
intends to assess income or franchise taxes on the income of the
out-of-state investment subsidiaries of Wisconsin financial
institutions. FBB received a Notice of Audit from the Department
that would cover years 1999 through 2005 and would relate
primarily to the issue of income of the Nevada subsidiaries.
During 2007, FBCC received a Notice of Audit from the Department
that would cover the years 2001 through 2005. During 2004, the
Department offered a blanket settlement agreement to most banks
in Wisconsin having Nevada investment subsidiaries. The
Department has not issued an assessment to FBB or FBCC, but the
Department has stated that it intends to do so if the matter is
not settled.
Prior to the formation of the investment subsidiaries FBB
obtained private letter rulings from the Department regarding
the non-taxability of income generated by the investment
subsidiaries in the State of Wisconsin. FBB believes it complied
with Wisconsin law and the private rulings received from the
Department. Should an assessment be forthcoming, FBB intends to
defend its position vigorously through the normal administrative
appeals process in place at the Department and through other
judicial channels should they become necessary. Although FBB
will vigorously oppose any such assessment, there can be no
assurance that the Department will not be successful in whole or
in part in its efforts to tax the income of FBBs Nevada
investment subsidiary. FBB and FBCC have accrued, as a component
of current state income tax expense, an estimated liability
including interest which is the most likely amount within a
range of probable settlement amounts. We do not expect the
resolution of this matter to materially affect its consolidated
results of operations and financial position beyond the amounts
accrued.
Critical
Accounting Policies and Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States
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. Please refer
to Note 1 to the Consolidated Financial Statements
for a discussion of the most significant accounting policies
followed by the Corporation. 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 its 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. 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 could 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 could 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 incurred credit losses, increased by the
16
provision for loan and lease losses and decreased by
charge-offs, net of recoveries. We estimate the allowance
balance required and the related provision for loan and lease
losses based on quarterly 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, the market value of
collateral, the strength and availabilities 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
uncollectibility of a loan or lease balance is confirmed. See
Note 6 to the Consolidated Financial Statements for
further discussion of the allowance for loan and lease losses.
We also continue to pursue all practical and legal methods of
collection, repossession and disposal, and adheres to high
underwriting standards in the origination process in order to
continue to maintain strong asset quality. Although we believe
that the allowance for loan and lease losses is adequate based
upon current 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. Should the
quality of loans or leases deteriorate, then the allowance for
loan and lease losses would generally be expected to increase
relative to total loans and leases. When 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 and
separate state tax returns. 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 analyses 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. Prior to January 1, 2007,
we accrued through our current income tax provision, the amounts
it deems probable of assessment related to federal and state
income tax expenses. Such accruals would be reduced when such
taxes are paid or reduced by way of a credit to the current
income tax provision when it is no longer probable that such
taxes will be paid. Beginning January 1, 2007, 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.
FBFS and its subsidiaries have State of Wisconsin net operating
loss (NOL) carryforwards as of December 31, 2007 of
approximately $43.0 million, which expire in years 2007
through 2022. See Note 15 to the Consolidated
Financial Statements for further discussion of income taxes. The
federal and state taxing authorities who make assessments based
on their determination of tax laws 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 taxing
authority examinations.
We have made our best estimate on valuation allowances needed
for deferred tax assets on certain net operating loss
carryforwards and other temporary differences and have made our
best estimate of the probable loss related to a state tax
exposure matter. These estimates are subject to changes. Changes
in these estimates could adversely affect future consolidated
results of operations.
As noted elsewhere herein, in June 2004, Business Banc Group LTD
(BBG) shareholders completed the exchange of their 49% minority
ownership in BBG to FBFS for shares of FBFS. This event resulted
in FBFS owning 100% of BBG shares. BBG was subsequently
dissolved and as a result, FBB Milwaukee became a
direct wholly-owned subsidiary of FBFS. Since 2004, FBFS has
filed a consolidated federal tax return with FBB
Milwaukee enabling the usage of FBB Milwaukees
NOL carryforwards to offset consolidated federal taxable income,
subject to certain IRS annual limitations. This event increases
17
further the probability that all of the benefits related to
these NOL carryforwards will be fully realized. We will continue
to evaluate the probability of the usage of the NOL
carryforwards and if in the future it is no longer deemed more
likely than not that the benefit of the NOL carryforwards will
be realized, then a valuation allowance will be established
through a charge to income tax expense. At December 31,
2007, $447,000 of the BBG Federal NOL remains.
Lease Residuals. We lease 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 property cost of
the related equipment), are recorded as lease receivables when
the lease is signed and the lease property is delivered to the
client. Residual value is the estimated fair market value of the
equipment on lease at lease termination. In estimating the
equipments fair value, we rely on historical experience by
equipment type and manufacturer published sources of used
equipment prices, internal evaluations and, where available,
valuations by independent appraisers, adjusted for known trends.
Our estimates are reviewed regularly to ensure reasonableness;
however, the amounts we will ultimately realize could differ
from the estimated amounts. Where declines in residual amounts
are estimated to be other-than-temporary, the residual amount is
reduced and a loss is recorded. See Note 6 to the
Consolidated Financial Statements for further discussion of
leases and lease residuals.
Goodwill and Other Intangible Assets. Goodwill
was recorded as a result of the acquisition of the 49% interest
in BBG on June 1, 2004, the purchase price of which
exceeded the fair value of the net assets acquired. Goodwill is
reviewed at least annually for impairment. Because of adverse
changes in the business climate, the Corporation performed an
additional goodwill impairment test as of December 31,
2007. This review requires judgment. If goodwill is determined
to be impaired, a reduction in value would be expensed in the
period in which it became impaired. No impairments has been
recognized for the years ended December 31, 2007 and 2006.
See Note 1 and Note 8 to the Consolidated
Financial Statements for further discussion of goodwill and
other intangibles.
Judgment is also used in the valuation of other intangible
assets consisting of a core deposit intangible and a client list
from a purchased brokerage/investment business. Core deposit
intangibles were recorded for core deposits acquired in the BBG
acquisition which was accounted for as a purchase business
combination. The core deposit intangible assets were recorded
under the presumption that they provide a more favorable source
of funding than wholesale borrowings. An intangible asset was
recorded for the present value of the difference between the
expected interest to be incurred on these deposits and interest
expense that would be expected if these deposits were replaced
by wholesale borrowings, over the expected lives of the core
deposits. The current estimate of the underlying lives of core
deposits is fifteen years and ten years for the client list. If
it is determined that the deposits or the client list have
shorter lives, the assets will be adjusted and an expense will
be recorded for the amount that is impaired.
Results
of Operations
Comparison
of the Years Ended December 31, 2007 and 2006
Overview. Net income for the year ended
December 31, 2007 was $3.3 million, a decline of
13.1%, or $491,000, from $3.7 million for the year ended
December 31, 2006. The principal factors that contributed
to this decline include an increase in the provision for loan
and lease losses and an increase in non-interest expenses.
Provision for loan and lease losses increased $1.4 million
which is associated with an increase in inherent risk directly
related to a growing loan portfolio coupled with an increase in
our non-performing loans and leases. Non-interest expenses
increased $4.0 million primarily in our compensation
expense category. Positive factors offsetting the decline in net
income include increase in net interest income of
$4.2 million caused by volume increases associated with our
organic growth and $742,000 increase in non-interest income
which is primarily driven by the increase in our trust and
investment services fee income. Basic earnings per share were
$1.33 and $1.53 for the years ended December 31, 2007 and
2006, respectively. Diluted earnings per share were $1.32 and
$1.52 for the years ended December 31, 2007 and 2006,
respectively. The decline in both basic and diluted earnings per
share was directly related to the 13.1% decline in net income
for the year ended December 31, 2007. Return on average
assets and average return on equity are 0.39% and 6.86%,
respectively for the year ended December 31, 2007 compared
to 0.54% and 8.65%, respectively, for the year ended
December 31, 2006.
18
Top Line Revenue. Top line revenue is
comprised of net interest income and non-interest income. This
measurement is also commonly referred to as operating revenue.
We use this measure to monitor our revenue growth and as one
half of the performance measurements used for our non-equity
incentive plan that covers substantially all employees within
our Corporation. The growth in top line revenue exceeded our
target of 12.5% growth over the prior year. The components of
top line revenue were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
|
(In Thousands)
|
|
|
Net interest income
|
|
$
|
23,208
|
|
|
$
|
18,971
|
|
|
|
22.3
|
%
|
Non-interest income
|
|
|
4,416
|
|
|
|
3,674
|
|
|
|
20.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total top line revenue
|
|
$
|
27,624
|
|
|
$
|
22,645
|
|
|
|
22.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted Net Income. Adjusted net income is
comprised of our net income as presented under generally
accepted accounting principles (GAAP) adjusted for the after tax
effects of the provision for loan and lease losses and actual
net charge-offs incurred during the year. We use this measure to
monitor the growth of net income after the effect of actual net
charge-offs and as the other half of the performance
measurements used for our non-equity incentive plan that covers
substantially all employees within our Corporation. Our target
growth of adjusted net income is 12.5% growth over the prior
year. A reconciliation of net income to adjusted net income is
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
Net income, presented under US GAAP
|
|
$
|
3,256
|
|
|
$
|
3,747
|
|
|
|
(13.1
|
)%
|
Add back:
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan and lease losses, after tax
|
|
|
1,765
|
|
|
|
923
|
|
|
|
91.2
|
%
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (charge-offs) recoveries, after tax
|
|
|
(818
|
)
|
|
|
2
|
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted net income
|
|
$
|
4,203
|
|
|
$
|
4,672
|
|
|
|
(10.0
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* Not meaningful
Net Interest Income. Net interest income
depends on the amounts of and yields on interest-earning assets
as compared to the amounts of and rates on interest-bearing
liabilities. Net interest income is sensitive to changes in
market rates of interest and the asset/liability management
procedures used by management in responding to such changes. The
dollar volume of loans, leases and investments compared to the
dollar volume of deposits and borrowings, combined with the
interest rate spread, produces the changes in net interest
income between periods. The table below provides information
with respect to (1) the effect on interest income
attributable to changes in rate (changes in rate multiplied by
prior volume), (2) the effect on interest income
attributable to changes in volume (changes in volume multiplied
by prior rate) and (3) the changes in rate/volume (changes
in rate multiplied by changes in volume) for the year ended
December 31, 2007 compared to the year ended
December 31, 2006.
19
Rate/Volume
Analysis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (Decrease) For the Year Ended December 31,
|
|
|
|
2007 Compared to 2006
|
|
|
|
|
|
|
|
|
|
Rate/
|
|
|
|
|
|
|
Rate
|
|
|
Volume
|
|
|
Volume
|
|
|
Net
|
|
|
|
(In Thousands)
|
|
|
Interest-Earning Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate and other mortgage loans
|
|
$
|
655
|
|
|
$
|
7,688
|
|
|
$
|
188
|
|
|
$
|
8,531
|
|
Commercial and industrial loans
|
|
|
(296
|
)
|
|
|
3,201
|
|
|
|
(63
|
)
|
|
|
2,842
|
|
Leases
|
|
|
(136
|
)
|
|
|
399
|
|
|
|
(41
|
)
|
|
|
222
|
|
Consumer loans
|
|
|
(9
|
)
|
|
|
19
|
|
|
|
(1
|
)
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans and leases receivable
|
|
|
214
|
|
|
|
11,307
|
|
|
|
83
|
|
|
|
11,604
|
|
Mortgage-related securities
|
|
|
261
|
|
|
|
(15
|
)
|
|
|
(1
|
)
|
|
|
245
|
|
Investment securities
|
|
|
11
|
|
|
|
(55
|
)
|
|
|
(6
|
)
|
|
|
(50
|
)
|
Other investments
|
|
|
(32
|
)
|
|
|
(8
|
)
|
|
|
3
|
|
|
|
(37
|
)
|
Fed funds sold and other
|
|
|
-
|
|
|
|
66
|
|
|
|
(12
|
)
|
|
|
54
|
|
Short-term investments
|
|
|
1
|
|
|
|
11
|
|
|
|
-
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net change in income on interest-earning assets
|
|
|
455
|
|
|
|
11,306
|
|
|
|
67
|
|
|
|
11,828
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-Bearing Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOW accounts
|
|
|
(17
|
)
|
|
|
687
|
|
|
|
(5
|
)
|
|
|
665
|
|
Money market
|
|
|
(123
|
)
|
|
|
801
|
|
|
|
(14
|
)
|
|
|
664
|
|
Certificates regular
|
|
|
1,133
|
|
|
|
4,036
|
|
|
|
330
|
|
|
|
5,499
|
|
Certificates large
|
|
|
166
|
|
|
|
358
|
|
|
|
30
|
|
|
|
554
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits
|
|
|
1,159
|
|
|
|
5,882
|
|
|
|
341
|
|
|
|
7,382
|
|
Junior subordinated debentures
|
|
|
(1,241
|
)
|
|
|
(1,241
|
)
|
|
|
1,241
|
|
|
|
(1,241
|
)
|
FHLB advances
|
|
|
9
|
|
|
|
324
|
|
|
|
3
|
|
|
|
336
|
|
Other borrowings
|
|
|
228
|
|
|
|
765
|
|
|
|
121
|
|
|
|
1,114
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net change in expense on interest-bearing liabilities
|
|
|
155
|
|
|
|
5,730
|
|
|
|
1,706
|
|
|
|
7,591
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in net interest income
|
|
$
|
300
|
|
|
$
|
5,576
|
|
|
$
|
(1,639
|
)
|
|
$
|
4,237
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income was $59.4 million for the year ended
December 31, 2007, an increase of $11.8 million, or
24.8%, from the year ended December 31, 2006. This increase
was primarily due to the volume increases in the commercial real
estate and other mortgage loan portfolio and the commercial and
industrial loan portfolio. The average balance of the commercial
real estate and other mortgage loan portfolio was
$481.0 million with an average yield of 7.34% compared to
an average balance of $373.7 million with an average yield
of 7.16% for the year ended December 31, 2006. Yields on
our commercial real estate and other mortgage loan portfolio
increased 18 basis points. The majority of the loans in
this portfolio are fixed rate in nature and are minimally
impacted by a volatile interest rate market. The average balance
of the commercial and industrial loan portfolio was
$200.4 million with an average yield of 8.98% for the year
ended December 31, 2007 compared to an average balance of
$165.5 million with an average yield of 9.16% for the year
ended December 31, 2006. The yields on our commercial and
industrial portfolio dropped 18 basis points. This basis
point decline is partially attributable to the volatility in the
Prime and London Interbank Offer Rates (LIBOR) that has occurred
during 2007 coupled with continued pressures to competitively
price our commercial loans. Yields on commercial loans also
reflect the recognition of asset-based loan fees collected
including prepayment fees.
20
Interest expense was $36.3 million for the year ended
December 31, 2007, an increase of $7.6 million, or
26.5%, from the year ended December 31, 2006. The increase
in interest expense was primarily caused by the increased
average deposit liability balances needed to fund asset growth
and the need to competitively price deposit products to attract
local deposits. Shortfalls in attracting local deposits are
supplemented with brokered deposits. Average deposit balances,
including brokered deposits, were approximately
$676.7 million with a weighted average cost of funds of
4.80% compared to an average balance of $548.0 million with
a weighted average cost of funds of 4.58% for the year ended
December 31, 2006. Average borrowings were
$62.4 million with a weighted average cost of funds of
6.13% for the year ended December 31, 2007 compared to an
average balance of $52.9 million with a weighted average
cost of funds of 6.82% for the year ended December 31,
2006. During the fourth quarter of 2006, we repaid
$10.3 million of junior subordinated debentures. The
decrease in the weighted average cost of funds is directly
related to this repayment and its replacement with subordinated
notes payable at a lower rate.
During the third quarter of 2007, we decided to change the
pricing index of our variable rate deposit liabilities,
including NOW and money market accounts from the 91 day
Treasury Bill (T-Bill) index to the Federal Funds rate. This was
done at a time when the T-Bill rates were experiencing
significant volatility and action was required to continue to
competitively price our products while protecting our in-market
deposits to maintain appropriate liquidity for the Banks. As a
result of this pricing methodology change, we did not experience
a significant decline in our weighted average cost of funds
associated with our NOW and money market accounts as the Federal
Funds average rate for the year 2007 and the average rate of the
T-Bill for the same time period of 2006 are closely correlated.
As discussed above, shortfalls in attracting local deposits are
supplemented with brokered deposits. With the volatility in the
interest rate markets over the last quarter of 2007, brokered
deposit rates did not fall as quickly as the related indices due
to significant demand for brokered deposits throughout the
financial services industry caused by liquidity issues among
larger financial institutions that were impacted by the
challenges of the sub-prime residential real estate market.
Interest rates on brokered deposits are fixed; however,
purchases of brokered certificates are structured to match the
repricing and maturity of the interest-earning portfolio.
Net interest margin was 2.87% for the year ended
December 31, 2007 compared to 2.87% for the year ended
December 31, 2006. Our net interest margin remained stable
due to the market-based pricing of assets and liabilities
because we managed the composition and duration of our
interest-bearing liabilities to limit the exposure to changing
rates and because the rate of increase in our net interest
income kept pace with the growth in our interest earning assets.
In addition, the change of the index of which we price our
variable rate deposit products allows us to significantly
mitigate basis risk or repricing mismatch inherent in our
portfolios without implementing complicated hedging strategies
to protect our net interest margin in volatile and changing rate
environments.
21
Net
Interest Income Information
Average Interest-Earning Assets, Average Interest-Bearing
Liabilities, Interest Rate Spread, and Net Interest
Margin. The following table shows our average
balances, interest, average rates, net interest margin, and the
spread between combined average rates earned on the our
interest-earning assets and cost of interest-bearing liabilities
for the periods indicated. The average balances are derived from
average daily balances.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
Average
|
|
|
|
|
|
Yield/
|
|
|
Average
|
|
|
|
|
|
Yield/
|
|
|
|
Balance
|
|
|
Interest
|
|
|
Cost
|
|
|
Balance
|
|
|
Interest
|
|
|
Cost
|
|
|
|
(Dollars in Thousands)
|
|
|
Interest-Earning Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate and
other mortgage
loans(1)
|
|
$
|
481,039
|
|
|
$
|
35,307
|
|
|
|
7.34
|
%
|
|
$
|
373,731
|
|
|
$
|
26,776
|
|
|
|
7.16
|
%
|
Commercial and industrial loans
|
|
|
200,414
|
|
|
|
18,000
|
|
|
|
8.98
|
|
|
|
165,473
|
|
|
|
15,158
|
|
|
|
9.16
|
|
Leases
|
|
|
24,346
|
|
|
|
1,552
|
|
|
|
6.37
|
|
|
|
18,730
|
|
|
|
1,330
|
|
|
|
7.10
|
|
Consumer loans
|
|
|
3,106
|
|
|
|
198
|
|
|
|
6.37
|
|
|
|
2,823
|
|
|
|
189
|
|
|
|
6.70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans and leases
receivable(1)
|
|
|
708,905
|
|
|
|
55,057
|
|
|
|
7.77
|
|
|
|
560,757
|
|
|
|
43,453
|
|
|
|
7.75
|
|
Mortgage-related
securities(2)
|
|
|
92,094
|
|
|
|
4,167
|
|
|
|
4.52
|
|
|
|
92,444
|
|
|
|
3,922
|
|
|
|
4.24
|
|
Investment
securities(2)
|
|
|
1,640
|
|
|
|
60
|
|
|
|
3.66
|
|
|
|
3,297
|
|
|
|
110
|
|
|
|
3.34
|
|
Federal Home Loan Bank stock
|
|
|
2,230
|
|
|
|
45
|
|
|
|
2.02
|
|
|
|
2,474
|
|
|
|
82
|
|
|
|
3.31
|
|
Fed funds sold and other
|
|
|
1,118
|
|
|
|
56
|
|
|
|
5.01
|
|
|
|
33
|
|
|
|
2
|
|
|
|
6.06
|
|
Short-term investments
|
|
|
2,212
|
|
|
|
103
|
|
|
|
4.66
|
|
|
|
1,980
|
|
|
|
91
|
|
|
|
4.60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets
|
|
|
808,199
|
|
|
|
59,488
|
|
|
|
7.36
|
|
|
|
660,985
|
|
|
|
47,660
|
|
|
|
7.21
|
|
Non-interest-earning assets
|
|
|
32,539
|
|
|
|
|
|
|
|
|
|
|
|
31,292
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
840,738
|
|
|
|
|
|
|
|
|
|
|
$
|
692,277
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-Bearing Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOW accounts
|
|
$
|
67,189
|
|
|
|
2,838
|
|
|
|
4.22
|
|
|
$
|
51,048
|
|
|
|
2,173
|
|
|
|
4.26
|
|
Money market
|
|
|
171,508
|
|
|
|
7,699
|
|
|
|
4.49
|
|
|
|
153,978
|
|
|
|
7,035
|
|
|
|
4.57
|
|
Certificates-regular
|
|
|
387,974
|
|
|
|
19,385
|
|
|
|
5.00
|
|
|
|
300,601
|
|
|
|
13,886
|
|
|
|
4.62
|
|
Certificates-large
|
|
|
50,025
|
|
|
|
2,536
|
|
|
|
5.07
|
|
|
|
42,377
|
|
|
|
1,982
|
|
|
|
4.68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits
|
|
|
676,696
|
|
|
|
32,458
|
|
|
|
4.80
|
|
|
|
548,004
|
|
|
|
25,076
|
|
|
|
4.58
|
|
Junior subordinated debentures
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
9,915
|
|
|
|
1,241
|
|
|
|
12.52
|
|
FHLB advances
|
|
|
25,776
|
|
|
|
1,256
|
|
|
|
4.87
|
|
|
|
19,059
|
|
|
|
920
|
|
|
|
4.83
|
|
Other borrowings
|
|
|
36,605
|
|
|
|
2,566
|
|
|
|
7.01
|
|
|
|
23,971
|
|
|
|
1,452
|
|
|
|
6.06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities
|
|
|
739,077
|
|
|
|
36,280
|
|
|
|
4.91
|
|
|
|
600,949
|
|
|
|
28,689
|
|
|
|
4.77
|
|
Non-interest-bearing liabilities
|
|
|
54,204
|
|
|
|
|
|
|
|
|
|
|
|
47,992
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
793,281
|
|
|
|
|
|
|
|
|
|
|
|
648,941
|
|
|
|
|
|
|
|
|
|
Stockholders equity
|
|
|
47,457
|
|
|
|
|
|
|
|
|
|
|
|
43,336
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
840,738
|
|
|
|
|
|
|
|
|
|
|
$
|
692,277
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income/interest rate spread
|
|
|
|
|
|
$
|
23,208
|
|
|
|
2.45
|
%
|
|
|
|
|
|
$
|
18,971
|
|
|
|
2.44
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest-earning assets
|
|
$
|
69,122
|
|
|
|
|
|
|
|
|
|
|
$
|
60,036
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin
|
|
|
|
|
|
|
|
|
|
|
2.87
|
%
|
|
|
|
|
|
|
|
|
|
|
2.87
|
%
|
Average interest-earning assets to average interest-bearing
liabilities
|
|
|
109.35
|
%
|
|
|
|
|
|
|
|
|
|
|
110.00
|
%
|
|
|
|
|
|
|
|
|
Return on average assets
|
|
|
0.39
|
|
|
|
|
|
|
|
|
|
|
|
0.54
|
|
|
|
|
|
|
|
|
|
Return on average equity
|
|
|
6.86
|
|
|
|
|
|
|
|
|
|
|
|
8.65
|
|
|
|
|
|
|
|
|
|
Average equity to average assets
|
|
|
5.64
|
|
|
|
|
|
|
|
|
|
|
|
6.26
|
|
|
|
|
|
|
|
|
|
Non-interest expense to average assets
|
|
|
2.34
|
|
|
|
|
|
|
|
|
|
|
|
2.27
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 of basis of assets held and available
for sale. |
22
Provision for Loan and Lease Losses. The
provision for loan and lease losses totaled $2.9 million
for the year ended December 31, 2007 compared to
$1.5 million for the year ended December 31, 2006. The
$1.4 million increase in the provision for loan and lease
losses is primarily due to the increased inherent risk
associated with a growing loan and lease portfolio coupled with
both an increased amount of impaired loans and other factors
prescribed by our allowance for loan and lease methodology. The
provision for loan and lease losses is dependent upon the credit
quality of loans and leases, the increased inherent risk
associated with a larger portfolio, the risk inherent in
specific loan types and our assessment of the collectibility of
loans and leases under current economic conditions. While we
have made no changes to our underwriting standards in 2007 and
2006, current economic conditions have caused us to add
additional steps to our approval process. To establish the
appropriate level of the allowance for loan and lease losses, we
regularly reviews our historical charge-off migration analysis
and an analysis of the current level and trend of several
factors that we believe may indicate losses in the loan and
lease portfolio. These factors include delinquencies, volume,
average size, average risk rating, technical defaults,
geographic concentrations, industry concentrations, loans and
leases on the management attention watch list, experience in the
credit granting functions and changes in underwriting standards,
and level of non-performing assets and related fair value of
underlying collateral. Refer to Allowance for Loan and Lease
Losses for further information.
Non-Interest Income. Non-interest income,
consisting primarily of fees earned for trust and investment
services, service charges and fees on deposits and loans and
income from bank-owned life insurance, increased $742,000, or
20.2%, to $4.4 million for the year ended December 31,
2007 from $3.7 million for the year ended December 31,
2006. Trust and investment services fee income increased
$558,000, or 41.2% to $1.9 million for the year ended
December 31, 2007 compared to $1.4 million for the
year ended December 31, 2006. Trust and investment services
fee income can be broken into two components: trust fee income
and investment service commission income. Trust fee income was
$1.5 million for the year ended December 31, 2007
compared to $1.1 million for the year ended
December 31, 2006. Trust fee income is driven by the volume
of assets under management and the market values associated with
those assets. At December 31, 2007, we had
$291.2 million of trust assets under management. This is an
$86.9 million increase over the assets under management of
$204.3 million at December 31, 2006. The increase in
trust assets under management is a direct result of successful
sales efforts. The second component of trust and investment
services fee income relates to investment service commissions.
Investment commissions are received on each transaction
processed for our brokerage clients along with continued
commissions received as long as our clients hold the investment
in the product that was purchased. At December 31, 2007,
the brokerage assets under administration increased
$33.4 million, or 29.2%, to $147.8 million compared to
$114.4 million at December 31, 2006. As a result of
increased client activity and due to timing of commissions paid,
investment service commissions increased approximately $158,000,
or 53.4%, for the year ended December 31, 2007 compared to
the year ended December 31, 2006.
Income associated with cash surrender value of life insurance
policies increased $83,000, or 13.5%, to $697,000 for the year
ended December 31, 2007 compared to $614,000 for the year
ended December 31, 2006. The increase in cash surrender
value is due to positive market performance of the policies. In
addition, non-interest income increased due to the change in
fair value of interest rate swaps and net cash settlement which
decreased 2006 period revenue by approximately $163,000. A
majority of our interest rate swaps were terminated during the
first quarter of 2006. We did not enter into any new interest
rate swaps in 2007.
Non-Interest Expense. Non-interest expense
increased $4.0 million, or 25.2%, to $19.7 million for
the year ended December 31, 2007 from $15.7 million
for the year ended December 31, 2006. In general,
non-interest expenses are influenced by the growth of
operations, with additional employees necessary to staff such
growth. Compensation expense was the primary driver of the
increase in non-interest expenses during 2007. Compensation
expense increased $2.8 million, or 30.6%, to
$12.1 million for the year ended December 31, 2007
compared to $9.3 million for the year ended
December 31, 2006. The increase in compensation expense is
primarily due to an increased number of full-time equivalent
employees which increases overall salary expense and bonus
accruals, additional compensation expense associated with
share-based compensation awards and increased healthcare costs.
At December 31, 2007, we had 121.5 full-time
equivalent employees compared to 112.0 full-time equivalent
employees at December 31, 2006 with a primary emphasis in
hiring additional business development officers in all
23
areas of our Corporation as a means to execute our primary
growth strategy. We believe this investment in our people
provides a strong foundation to meet our growth initiatives in
the future. Share-based compensation expense increased
approximately $215,000 when comparing the years ended
December 31, 2007 and 2006. We began issuing restricted
share awards in 2006, and the increase in this expense
represents the recognition in 2007 of twelve months of expense
relating to 2006 awards that were granted periodically during
fiscal year 2006. We expect that we will continue to award
restricted shares. This expense will continue to increase
through 2010, at which time the expense will reflect four years
of awards of restricted shares, as our restricted shares
generally vest over a four year period, then will only fluctuate
due to other normal factors including number of shares granted
and market price at which those shares are granted.
Marketing expense increased $140,000, or 15.0%, to
$1.1 million for the year ended December 31, 2007 from
$936,000 for the year ended December 31, 2006. The increase
is due to the timing of planned advertising campaigns, including
those campaigns associated with market expansion. Professional
fees increased $112,000, or 8.6%, to $1.4 million for the
year ended December 31, 2007 compared to $1.3 million
for the year ended December 31, 2006. The increase is
attributable to increased audit fees, directors fees and
use of third party consultants. Other non-interest expense
increased $780,000, or 46.5%, to $2.5 million for the year
ended December 31, 2007 compared to $1.7 million for
the year ended December 31, 2006. The increase was caused
by several factors including increased FDIC insurance expense
due to increased premiums rates and larger average deposit
balances of the Banks of which the increased premium rates are
applied (approximately $238,000), the recognition of our portion
of the loss associated with Aldine Capital Fund Limited
Partnership (approximately $191,000), increased legal fees and
other expenses associated with defending our positions with
certain loans and owned real estate (approximately $72,000),
increased charitable donations (approximately $56,000), and
increased training expenses (approximately $28,000). Our
investment in Aldine Capital Fund Limited Partnership is
accounted for under the equity method and the losses represent
our pro-rata share of the operating costs given the relatively
new status of this private equity partnership. Aldine Capital
Fund Limited Partnership began operations in October 2006.
Income Taxes. Income tax expense was
$1.8 million for the year ended December 31, 2007,
with an effective tax rate of 35.7%, compared to
$1.7 million, with an effective tax rate of 31.0%, for the
year ended December 31, 2006. The primary reasons for the
increase in the effective tax rate are due to increased state
income tax expense including interest related to uncertain tax
positions, and a decline in low income housing income tax
credits.
Financial
Condition
December 31,
2007
General. Total assets increased
$130.1 million, or 16.5%, to $918.4 million at
December 31, 2007 from $788.3 million at
December 31, 2006. This asset growth is primarily in our
loan and lease portfolio. Loans and leases receivable, net of
allowance for loan and lease losses, increased
$131.8 million, or 20.6%. The asset growth was primarily
funded by net increases in deposits of $135.8 million. The
allowance for loan and lease losses was 1.26% and 1.28% of gross
loans as of December 31, 2007 and 2006, respectively.
Securities. Securities available-for-sale
decreased $2.6 million to $97.4 million at
December 31, 2007 from $100.0 million at
December 31, 2006, primarily due to principal pay-downs
received, net of new purchases. We used net principal pay-downs
that we received to fund loan and lease growth.
Our available for sale portfolio primarily consists of
collateralized mortgage obligations and is used to provide a
source of liquidity and provide collateral for borrowings, while
maximizing the earnings potential of the Banks assets. We
purchase investment securities intended to protect our net
interest margin while maintaining an acceptable risk profile.
Mortgage-related securities, including collateralized mortgage
obligations, are subject to risks based upon the future
performance of underlying collateral, mortgage loans, for these
securities. Among the risks are prepayment risk, extension risk,
and interest rate risk. Should general interest rates decline,
the mortgage-related securities portfolio would be subject to
prepayments caused by borrowers seeking lower financing rates. A
decline in interest rates could also cause a decline in interest
income on adjustable-rate mortgage-related securities.
Conversely, an increase in general interest rates could cause
the mortgage-related securities portfolio to be subject to a
longer
24
term to maturity caused by borrowers being less likely to prepay
their loans. Such a rate increase could also cause the fair
value of the mortgage related securities portfolio to decline.
While collateralized mortgage obligations present prepayment
risk and extension risk, the overall credit risk associated with
these investments as it relates to our investment portfolio is
minimal as we purchase investments which are insured or
guaranteed by the Federal Home Loan Mortgage Corporation
(FHLMC), Federal National Mortgage Association (FNMA), or
Government National Mortgage Association (GNMA). In addition, we
believe the collateralized mortgage obligations represent
attractive investments due to the wide variety of maturity and
repayment options available to allow us to better match our
short-term liabilities. Of the total available-for-sale mortgage
securities at December 31, 2007, $31.6 million,
$13.0 million, and $52.7 million were insured or guaranteed
by FHLMC, FNMA, and GNMA, respectively. None of the securities
within our portfolio are collateralized by sub-prime mortgages.
Investment objectives are formed to meet liquidity requirements
and generate a favorable return on investments without
compromising other business objectives and levels of interest
rate risk and credit risk. Consideration is also given to
investment portfolio concentrations. Federal and state chartered
banks are allowed to invest in various types of assets,
including U.S. Treasury obligations, securities of various
federal agencies, state and municipal obligations,
mortgage-related securities, certain time deposits of insured
financial institutions, repurchase agreements, loans of federal
funds, and, subject to certain limits, corporate debt and equity
securities, commercial paper and mutual funds. Our investment
policy provides that we will not engage in any practice that the
Federal Financial Institutions Examination Council considers an
unsuitable investment practice. These objectives are formalized
and documented in our investment policy which is approved by the
Banks Boards of Directors (Boards) on an annual basis.
Management, as authorized by the Boards, implements this policy.
The Boards review investment activity on a monthly basis.
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.
These derivative instruments are primarily interest rate swap
agreements which are used to protect against the risk of adverse
price or interest rate movements on the value of certain assets
and liabilities and on future cash flows. However, no new
derivative contracts were entered into during 2007.
Securities are classified as available-for-sale,
held-to-maturity and trading. Available-for-sale securities are
carried at fair value, with the unrealized gains and losses, net
of tax, reported as a separate component of stockholders
equity. We held no securities designated as held-to-maturity or
trading as of December 31, 2007.
At December 31, 2007, $62.5 million of our
mortgage-related securities were pledged to secure our various
obligations.
The table below sets forth information regarding the amortized
cost and fair values of our investments and mortgage-related
securities at the dates indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
Amortized
|
|
|
Fair
|
|
|
Amortized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Value
|
|
|
Cost
|
|
|
Value
|
|
|
|
(In Thousands)
|
|
|
Securities available-for-sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government corporations and agencies
|
|
$
|
1,500
|
|
|
$
|
1,497
|
|
|
$
|
1,497
|
|
|
$
|
1,467
|
|
Municipals
|
|
|
85
|
|
|
|
85
|
|
|
|
185
|
|
|
|
182
|
|
Collateralized mortgage obligations government
agencies
|
|
|
52,755
|
|
|
|
52,658
|
|
|
|
38,903
|
|
|
|
38,775
|
|
Collateralized mortgage obligations government
sponsored agencies
|
|
|
43,631
|
|
|
|
43,138
|
|
|
|
60,952
|
|
|
|
59,584
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
97,971
|
|
|
$
|
97,378
|
|
|
$
|
101,537
|
|
|
$
|
100,008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25
The following table sets forth the maturity and weighted average
yield characteristics of the fair value of the our debt
securities at December 31, 2007, classified by term
maturity.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than One Year
|
|
|
One to Five Years
|
|
|
Five to Ten Years
|
|
|
Over Ten Years
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Balance
|
|
|
Yield
|
|
|
Balance
|
|
|
Yield
|
|
|
Balance
|
|
|
Yield
|
|
|
Balance
|
|
|
Yield
|
|
|
Total
|
|
|
|
(In Thousands)
|
|
|
Available-for-sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government corporations and agencies
|
|
$
|
1,497
|
|
|
|
3.41
|
%
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
1,497
|
|
Municipals
|
|
|
85
|
|
|
|
5.63
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
85
|
|
Collateralized mortgage obligations government
agencies
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,388
|
|
|
|
5.14
|
%
|
|
|
51,271
|
|
|
|
5.15
|
|
|
|
52,658
|
|
Collateralized mortgage obligations government
sponsored agencies
|
|
|
30
|
|
|
|
6.01
|
%
|
|
|
423
|
|
|
|
3.84
|
%
|
|
|
17,830
|
|
|
|
3.84
|
%
|
|
|
24,856
|
|
|
|
4.16
|
%
|
|
|
43,138
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,611
|
|
|
|
3.57
|
%
|
|
$
|
423
|
|
|
|
3.84
|
%
|
|
$
|
19,217
|
|
|
|
3.94
|
%
|
|
$
|
76,127
|
|
|
|
4.82
|
%
|
|
$
|
97,378
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We currently do not hold any tax-exempt securities; therefore,
all yields presented are based on a tax equivalent basis.
Derivative Activities. We use derivative
instruments, principally interest rate swaps, to protect against
the risk of adverse price or interest rate movements on the
value of certain assets and liabilities and on future cash
flows. For further discussion on our interest rate risk
management activities and use of derivatives, see Note 1
to the Consolidated Financial Statements. We did not enter
into any new derivative contracts during 2007.
Loans and Leases Receivable. Total net loans
and leases increased $131.8 million to $771.6 million
at December 31, 2007 from $639.9 million at
December 31, 2006. The Banks principally originate
commercial and industrial loans and commercial real estate
loans. Commercial real estate loans represent approximately
43.01% of the loan portfolio while commercial and industrial
loans, including asset-based loans represent 27.35% of the loan
portfolio. The mix of the overall loan portfolio has remained
relatively consistent from the prior year continuing with a
concentration in commercial real estate. Commercial real estate
loans are secured by properties located primarily in Dane,
Waukesha and Outagamie counties and their surrounding
communities in Wisconsin. Growth in the loan and lease portfolio
is attributable to successful sales efforts by the expanded
business development team to extend credit to established and
new client relationships, including production from our loan
production offices located in the Northeast region of Wisconsin.
Our pipeline of potential new business remains strong and we
expect the loan and lease portfolio to continue to grow.
26
Loan Portfolio Composition. The following
table presents information concerning the composition of the
Banks consolidated loans and leases held for investment at
the dates indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
Percent
|
|
|
|
|
|
Percent
|
|
|
|
|
|
Percent
|
|
|
|
Amount
|
|
|
of Total
|
|
|
Amount
|
|
|
of Total
|
|
|
Amount
|
|
|
of Total
|
|
|
|
(In Thousands)
|
|
|
Mortgage loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
$
|
336,153
|
|
|
|
43.01
|
%
|
|
$
|
274,262
|
|
|
|
42.30
|
%
|
|
$
|
249,133
|
|
|
|
46.16
|
%
|
Construction and land development
|
|
|
90,545
|
|
|
|
11.58
|
|
|
|
78,257
|
|
|
|
12.07
|
|
|
|
50,619
|
|
|
|
9.38
|
|
Multi-family
|
|
|
41,821
|
|
|
|
5.35
|
|
|
|
34,635
|
|
|
|
5.34
|
|
|
|
22,115
|
|
|
|
4.10
|
|
1-4 family
|
|
|
48,437
|
|
|
|
6.20
|
|
|
|
35,721
|
|
|
|
5.51
|
|
|
|
26,513
|
|
|
|
4.91
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage loans
|
|
|
516,956
|
|
|
|
66.14
|
|
|
|
422,875
|
|
|
|
65.22
|
|
|
|
348,380
|
|
|
|
64.55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial loans and leases:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
|
147,856
|
|
|
|
18.92
|
|
|
|
125,256
|
|
|
|
19.32
|
|
|
|
102,482
|
|
|
|
18.98
|
|
Asset-based
|
|
|
65,930
|
|
|
|
8.43
|
|
|
|
51,445
|
|
|
|
7.93
|
|
|
|
49,206
|
|
|
|
9.12
|
|
Direct financing leases, net
|
|
|
29,383
|
|
|
|
3.76
|
|
|
|
23,203
|
|
|
|
3.58
|
|
|
|
17,852
|
|
|
|
3.31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial loans and leases
|
|
|
243,169
|
|
|
|
31.11
|
|
|
|
199,904
|
|
|
|
30.83
|
|
|
|
169,540
|
|
|
|
31.41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity and second mortgage
|
|
|
9,784
|
|
|
|
1.25
|
|
|
|
8,859
|
|
|
|
1.37
|
|
|
|
8,231
|
|
|
|
1.53
|
|
Credit card
|
|
|
854
|
|
|
|
0.11
|
|
|
|
785
|
|
|
|
0.12
|
|
|
|
560
|
|
|
|
0.10
|
|
Personal
|
|
|
1,147
|
|
|
|
0.15
|
|
|
|
1,248
|
|
|
|
0.19
|
|
|
|
860
|
|
|
|
0.16
|
|
Other
|
|
|
9,724
|
|
|
|
1.24
|
|
|
|
14,679
|
|
|
|
2.27
|
|
|
|
12,159
|
|
|
|
2.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer loans
|
|
|
21,509
|
|
|
|
2.75
|
|
|
|
25,571
|
|
|
|
3.95
|
|
|
|
21,810
|
|
|
|
4.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross loans and leases receivable
|
|
|
781,634
|
|
|
|
100.00
|
%
|
|
|
648,350
|
|
|
|
100.00
|
%
|
|
|
539,730
|
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contras to loans and leases:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan and lease losses
|
|
|
(9,854
|
)
|
|
|
|
|
|
|
(8,296
|
)
|
|
|
|
|
|
|
(6,773
|
)
|
|
|
|
|
Deferred loan fees
|
|
|
(147
|
)
|
|
|
|
|
|
|
(187
|
)
|
|
|
|
|
|
|
(241
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans and leases receivable, net
|
|
$
|
771,633
|
|
|
|
|
|
|
$
|
639,867
|
|
|
|
|
|
|
$
|
532,716
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table shows the scheduled contractual maturities
of the Banks consolidated gross loans and leases held for
investment, 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, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction,
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
Commercial
|
|
|
Multi-Family,
|
|
|
Lease
|
|
|
Consumer
|
|
|
|
|
|
|
Real Estate
|
|
|
and Industrial
|
|
|
1-4 Family
|
|
|
Receivables
|
|
|
and other
|
|
|
Total
|
|
|
|
(In Thousands)
|
|
|
Amounts due:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In one year or less
|
|
$
|
47,274
|
|
|
$
|
88,419
|
|
|
$
|
85,850
|
|
|
$
|
296
|
|
|
$
|
13,875
|
|
|
$
|
235,714
|
|
After one year through five years
|
|
|
229,642
|
|
|
|
120,355
|
|
|
|
84,834
|
|
|
|
21,924
|
|
|
|
7,557
|
|
|
|
464,312
|
|
After five years
|
|
|
59,237
|
|
|
|
5,012
|
|
|
|
10,119
|
|
|
|
7,163
|
|
|
|
77
|
|
|
|
81,608
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
336,153
|
|
|
$
|
213,786
|
|
|
$
|
180,803
|
|
|
$
|
29,383
|
|
|
$
|
21,509
|
|
|
$
|
781,634
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate terms on amounts due after one year:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
|
|
$
|
252,589
|
|
|
$
|
63,039
|
|
|
$
|
74,904
|
|
|
$
|
29,087
|
|
|
$
|
7,604
|
|
|
$
|
427,223
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustable
|
|
$
|
36,290
|
|
|
$
|
62,328
|
|
|
$
|
20,049
|
|
|
$
|
-
|
|
|
$
|
30
|
|
|
$
|
118,697
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Real Estate. The Banks originate
commercial real estate loans which have fixed or adjustable
rates and terms of generally up to five years and amortizations
of twenty-five years on existing commercial real estate and new
construction. Loans secured by commercial real estate consist of
commercial owner-occupied properties as well as investment
properties. At December 31, 2007, the Banks had
$336.2 million of loans secured by commercial real estate.
This represented 43.01% of the Banks
27
gross loans and leases. Approximately $155.2 million of the
commercial real estate loans are owner-occupied properties which
represents 30.02% of all loans secured by real estate.
Commercial Loans. At December 31, 2007,
commercial and industrial loans amounted to
$213.8 million,or 27.35%, of gross loans and leases. The
Banks commercial and industrial loan portfolio is
comprised of loans for a variety of purposes and generally is
secured by inventory, accounts receivable, equipment, machinery
and other corporate assets and are advanced within limits
prescribed by our loan policy. Substantially all of such loans
are secured and typically backed by personal guarantees of the
owners of the borrowing business.
Of the $213.6 million of commercial and industrial loans,
$65.9 million were originated by FBCC, our asset-based
lending subsidiary, as of December 31, 2007. These
asset-based loans are typically secured by accounts receivable,
inventories, or equipment. Because asset-based borrowers are
usually highly leveraged, such loans have higher interest rates
and fees accompanied by close monitoring of assets. Asset-based
loans secured by real estate amounted to $10.7 million as
of December 31, 2007 and are included in the commercial
real estate portfolio.
Construction, Multi-family Loans and 1-4
Family. The Banks originate loans to construct
commercial properties and complete land development projects. At
December 31, 2007, construction and land development loans
amounted to $90.5 million, or 11.58%, of the Banks
gross loans and leases. The Banks construction loans
generally have terms of six to twenty-four 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 inspections by title
companies warrant.
The Banks originated multi-family loans that amounted to
$41.8 million at December 31, 2007, or 5.35%, of gross
loans and leases. These loans are primarily secured by apartment
buildings and are primarily located in Dane and Waukesha
counties; however, loan participation opportunities may expand
the exposure to areas outside of the Banks primary market
area.
The Banks also originate 1 4 family first mortgage
loans which totaled $48.4 million at December 31,
2007, or 6.20%, of gross loans and leases. These loans are
primarily secured by single family homes that are held for
investment by our clients.
Leases. Leases originated through First
Business Equipment Finance, LLC (FBEF), formerly known as First
Business Leasing, LLC, amounted to $29.4 million as of
December 31, 2007 and represented 3.76% of gross loans and
leases. Leases 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 property 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 an approximate 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 equipments fair value, FBEF
relies on historical experience by equipment type and
manufacturer, published sources of used equipment pricing,
internal evaluations and, where available, valuations by
independent appraisers, adjusted for known trends. FBEF reviews
its estimates regularly to ensure reasonableness; however, the
amounts the FBEF will ultimately realize could differ from the
estimated amounts. The majority of the equipment was leased to
businesses in the manufacturing (26.3%), printing (19.4%), and
commercial vehicle leasing (31.5%) industries as of
December 31, 2007.
Consumer and other mortgage loans. The Banks
originate a small amount of consumer loans. Such loans amounted
to $21.5 million, or 2.75% of the Banks gross loans,
at December 31, 2007 and consist of home equity, second
mortgage, credit card and other personal loans for professional
and
28
executive clients of the Banks. Generally, the maximum loan to
value on home equity loans is 80% with proof of property value
required at origination and annual personal financial statements
required after the initial loan application. The typical loan to
value on new automobiles and trucks is 80%.
Net Fee Income from Lending Activities. The
Banks defer loan and lease origination and commitment fees and
certain direct loan and lease origination costs and amortize as
an adjustment to the related loan and lease yields. The Banks
also receive other fees and charges relating to existing loans,
which include prepayment penalties, loan monitoring fees, late
charges and fees collected in connection with loan modifications.
Loan and Lease Delinquencies. The Banks place
loans and leases on non-accrual status when, in the judgment of
management, the probability of collection of interest is deemed
to be insufficient to warrant further accrual. Previously
accrued but unpaid interest is deducted from interest income at
that time. As a matter of policy, the Banks do not accrue
interest on loans or leases past due beyond 90 days. Loans
on non-accrual status are considered impaired.
The following table sets forth information relating to
delinquent loans and leases at the dates indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
Loans and
|
|
|
|
|
|
Loans and
|
|
|
|
|
|
Loans and
|
|
Days Past Due
|
|
Balance
|
|
|
Leases
|
|
|
Balance
|
|
|
Leases
|
|
|
Balance
|
|
|
Leases
|
|
|
|
(In Thousands)
|
|
|
30 to 59 days
|
|
$
|
621
|
|
|
|
0.08
|
%
|
|
$
|
5,860
|
|
|
|
0.90
|
%
|
|
$
|
389
|
|
|
|
0.07
|
%
|
60 to 89 days
|
|
|
85
|
|
|
|
0.01
|
|
|
|
-
|
|
|
|
0.00
|
|
|
|
99
|
|
|
|
0.02
|
|
90 days and
over(3)
|
|
|
2,487
|
|
|
|
0.32
|
|
|
|
455
|
|
|
|
0.07
|
|
|
|
721
|
|
|
|
0.13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,193
|
|
|
|
0.41
|
%
|
|
$
|
6,315
|
|
|
|
0.97
|
%
|
|
$
|
1,209
|
|
|
|
0.22
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3) |
|
Includes loans and leases contractually 90 days past due
and which have been placed on non-accrual status. |
The increase in loans and leases
30-59 days
past due in 2006 was attributable to several unrelated loans and
leases that as a result of receiving the required payments in
January 2007, were brought current.
Non-performing Assets and Impaired Loans and
Leases. Non-performing assets consists of
non-accrual loans and leases of $8.9 million and $660,000
of foreclosed properties as of December 31, 2007, or 1.04%
of total assets, as compared to $1.1 million, or 0.14% of
total assets, as of December 31, 2006. This represents an
increase of $8.4 million of non-performing assets. The
increase is primarily due to the addition of several large
commercial real estate and land development loans. Recent
economic events, including the slowdown of the housing market
and declining real estate market values, have caused several
large commercial real estate and land development loans to
default. As a result of these defaults and related foreclosure
actions, our non-performing assets have significantly increased
at December 31, 2007.
As discussed previously, we recorded a provision for loan and
lease losses of $2.9 million for the year ended
December 31, 2007 compared to $1.5 million for the
year ended December 31, 2006. The primary drivers of the
increased provision relate to increased inherent risk associated
with a growing portfolio coupled with an increased amount of
impaired loans. While we have made no significant changes to our
underwriting standards, current economic conditions have caused
us to add additional steps to our approval process. Through
proactive monitoring of the loan and lease portfolio, we
identified weakening of key performance indicators based upon
our clients financial statements and declining market
values of real estate used as collateral. These factors
contributed to an increase in the number and amount of loans on
management attention watch lists and consequently an increase in
the number and amount of loans on non-accrual status.
Non-accrual loans and leases are considered an indicator of
potential future losses. In the existing inventory of loans
identified as non-accrual and impaired,
29
approximately 20.1% are associated with loans for construction
and/or land
development and 56.3% with multi-family properties.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In Thousands)
|
|
|
Non-accrual loans
|
|
$
|
8,805
|
|
|
$
|
1,109
|
|
|
$
|
1,454
|
|
Non-accrual leases
|
|
|
59
|
|
|
|
-
|
|
|
|
90
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-accrual loans and leases
|
|
|
8,864
|
|
|
|
1,109
|
|
|
|
1,544
|
|
Foreclosed properties and repossessed assets, net
|
|
|
660
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-performing assets
|
|
$
|
9,524
|
|
|
$
|
1,109
|
|
|
$
|
1,544
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performing troubled debt restructurings
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-accrual loans and leases to total loans and leases
|
|
|
1.13
|
%
|
|
|
0.17
|
%
|
|
|
0.29
|
%
|
Total non-performing assets to total assets
|
|
|
1.04
|
|
|
|
0.14
|
|
|
|
0.23
|
|
Allowance for loan and lease losses to total loans and leases
|
|
|
1.26
|
|
|
|
1.28
|
|
|
|
1.25
|
|
Allowance for loan and lease losses to non-accrual loans and
leases
|
|
|
111.17
|
|
|
|
748.06
|
|
|
|
438.67
|
|
We consider a loan or lease impaired if, based upon current
information and events, it is probable that we will be unable to
collect the scheduled payments of principal and interest when
due according to the contractual terms of the loan or lease
agreement. Certain homogeneous loans, including residential
mortgage and consumer loans, are collectively evaluated for
impairment and, therefore, do not have individual credit risk
ratings and are excluded from impaired loans. Impaired loans
include all nonaccrual loans and leases as well as certain
accruing loans and leases judged to have higher risk of
noncompliance with the present contractual repayment schedule
for both interest and principal. Once we determine a loan or
lease impaired, the impaired loan is measured to establish the
amount of the impairment. While impaired loans and leases
exhibit weaknesses that inhibit repayment in compliance with the
original note terms, the measurement of impairment may not
always result in a specific reserve included in the allowance
for loan and lease losses for every impaired loan. We calculate
the amount of the allowance for loan and lease losses for
impaired loans utilizing various methods appropriate to the loan
or lease being evaluated, including the present value of
expected future cash flows discounted at the loans or
leases effective interest rate or evaluation of the fair
value, less costs to sell, of collateral for collateral
dependent loans.
Foreclosed properties are recorded at the lower of cost or fair
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 losses
prior to transfer to foreclosed property. The fair value is
primarily based on appraisals, discounted cash flow analysis
(the majority of which is based on current occupancy and lease
rates) and verifiable offers to purchase. After foreclosure,
valuation allowances or future write-downs to fair value less
costs to sell are charged directly to expense. Non-performing
assets include one foreclosed property at December 31,
2007. Subsequent to December 31, 2007, the Bank sold this
property at an amount approximate to its carrying value.
30
Additional information about impaired loans at or for the years
ended December 31, 2007 and 2006 is as follows:
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In Thousands)
|
|
|
Impaired loans and leases with no impairment reserves
|
|
$
|
6,500
|
|
|
$
|
683
|
|
Impaired loans and leases with impairment reserves required
|
|
|
2,617
|
|
|
|
1,404
|
|
|
|
|
|
|
|
|
|
|
Total impaired loans and leases
|
|
|
9,117
|
|
|
|
2,087
|
|
Less:
|
|
|
|
|
|
|
|
|
Impairment reserve (included in allowance for loan and lease
losses)
|
|
|
834
|
|
|
|
863
|
|
|
|
|
|
|
|
|
|
|
Net impaired loans and leases
|
|
$
|
8,283
|
|
|
$
|
1,224
|
|
|
|
|
|
|
|
|
|
|
Average impaired loans and leases
|
|
$
|
3,439
|
|
|
$
|
1,444
|
|
|
|
|
|
|
|
|
|
|
Interest income attributable to impaired loans and leases
|
|
$
|
365
|
|
|
$
|
210
|
|
Interest income recognized on impaired loans and leases
|
|
|
41
|
|
|
|
217
|
|
|
|
|
|
|
|
|
|
|
Net foregone interest income on impaired loans and leases
|
|
$
|
324
|
|
|
$
|
(7
|
)
|
|
|
|
|
|
|
|
|
|
Allowance for Loan and Lease Losses. In order
to establish the level of loan and lease losses, we regularly
review and update the calculations within our existing allowance
methodology by incorporating historical charge-off migration
analysis and an analysis of the current level and trend of
several factors that we believe may indicate losses in the loan
and lease portfolio. These factors include delinquencies, volume
and average size loan relationships, average risk rating,
technical defaults, geographic concentrations, loans and leases
on management attention watch lists, experience in the credit
granting functions, changes in underwriting standards and level
of non-performing assets and related fair value of underlying
collateral. The historical charge-off migration analysis
utilizes the most recent five years of net charge-offs and
traces the migration of the risk rating from origination through
charge-off. The historical percentage of the amounts charged-off
for each risk rating, for each subsidiary is averaged for the
five 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 a result of this review process, we have concluded that an
appropriate allowance for loan and lease loss reserve for the
existing loan and lease portfolio was $9.9 million, or
1.26% of gross loans and leases at December 31, 2007.
Taking into consideration net charge-offs of $1.3 million,
the required provision for loan and lease losses was
$2.9 million for the year ended December 31, 2007. At
December 31, 2006, the allowance for loan and lease losses
was $8.3 million, or 1.28% of gross loans and leases,
reflecting net recoveries of $4,000 and a provision for loan and
lease losses of $1.5 million for the year ended
December 31, 2006.
During the fourth quarter of 2007, we recorded charge-offs of
$1.4 million. Loan and lease losses are charged against the
allowance when we believe we have confirmation that the loan or
lease balance is uncollectible. Through the completion of our
evaluation of the allowance for loan and lease losses, we
determined that we would not receive our entire contractual
principal on several loans and as a result recorded the
appropriate charge against the allowance for loan and lease loss
reserve. Our charge-offs related to a few different types of
loans. Commercial and industrial charge-offs primarily related
to one specific loan to a roofing contractor where it was
determined that the future viability of the company was doubtful
and the collateral is not adequate to cover the outstanding
amount of the loan. Commercial real estate and other mortgage
loan charge-offs were recognized because the associated real
estate projects have relied on sales of property to repay the
loans. Due to recent economic conditions, sales of property have
not been sufficient to service the debt, forcing the borrowers
into default status. Foreclosure actions have been initiated.
New appraisals
and/or
market evaluations were completed confirming declines in real
estate values. Remaining proceeds from sales of properties at
new market values are inadequate to repay the entire debt. As a
result, we have written down the value of these loans to their
estimated fair value, less costs to sell through a charge to the
allowance for loan and lease losses.
31
A summary of the activity in the allowance for loan and lease
losses follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In Thousands)
|
|
|
Allowance at beginning of period
|
|
$
|
8,296
|
|
|
$
|
6,773
|
|
|
$
|
6,375
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge-offs:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate and other mortgage
|
|
|
(571
|
)
|
|
|
-
|
|
|
|
-
|
|
Commercial and industrial
|
|
|
(778
|
)
|
|
|
-
|
|
|
|
-
|
|
Lease
|
|
|
(25
|
)
|
|
|
-
|
|
|
|
-
|
|
Consumer
|
|
|
-
|
|
|
|
-
|
|
|
|
(10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total charge-offs
|
|
|
(1,374
|
)
|
|
|
-
|
|
|
|
(10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recoveries:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate and other mortgage
|
|
|
5
|
|
|
|
4
|
|
|
|
4
|
|
Commercial and industrial
|
|
|
23
|
|
|
|
-
|
|
|
|
4
|
|
Lease
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Consumer
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recoveries
|
|
|
28
|
|
|
|
4
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (charge-offs) recoveries
|
|
|
(1,346
|
)
|
|
|
4
|
|
|
|
(2
|
)
|
Provision for loan and lease loss
|
|
|
2,904
|
|
|
|
1,519
|
|
|
|
400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance at end of period
|
|
$
|
9,854
|
|
|
$
|
8,296
|
|
|
$
|
6,773
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance to gross loans and leases
|
|
|
1.26
|
%
|
|
|
1.28
|
%
|
|
|
1.25
|
%
|
Loan charge-offs were $1.4 million and $0 for the year
ended December 31, 2007 and 2006, respectively. Recoveries
for the years ended December 31, 2007 and 2006 were $28,000
and $4,000, respectively.
To determine the level and composition of the allowance for loan
and lease losses, we break out the portfolio by categories and
risk ratings. We evaluate impaired loans and leases and
potential impaired loans and leases for 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 of the
previously identified factors to each category of loans that
have not been specifically evaluated for the purpose of
establishing the general reserve.
We review our methodology and periodically adjust allocation
percentages 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.
32
The table below shows our allocation of the allowance for loan
and lease losses by loan and lease loss reserve category at the
dates indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
Allowance
|
|
|
Percent of
|
|
|
Allowance
|
|
|
Percent of
|
|
|
Allowance
|
|
|
Percent of
|
|
|
|
for Loan
|
|
|
Loans in
|
|
|
for Loan
|
|
|
Loans in
|
|
|
for Loan
|
|
|
Loans in
|
|
|
|
and Lease
|
|
|
Each Category
|
|
|
and Lease
|
|
|
Each Category
|
|
|
and Lease
|
|
|
Each Category
|
|
|
|
Loss
|
|
|
to Total Loans
|
|
|
Loss
|
|
|
to Total Loans
|
|
|
Loss
|
|
|
to Total Loans
|
|
|
|
(In Thousands)
|
|
|
Commercial real estate
|
|
$
|
3,858
|
|
|
|
43.01
|
%
|
|
$
|
2,998
|
|
|
|
42.30
|
%
|
|
$
|
2,777
|
|
|
|
46.16
|
|
Construction and land development
|
|
|
1,328
|
|
|
|
11.58
|
|
|
|
826
|
|
|
|
12.07
|
|
|
|
553
|
|
|
|
9.38
|
|
Multi-family
|
|
|
423
|
|
|
|
5.35
|
|
|
|
340
|
|
|
|
5.34
|
|
|
|
231
|
|
|
|
4.10
|
|
1-4 family
|
|
|
557
|
|
|
|
6.20
|
|
|
|
369
|
|
|
|
5.51
|
|
|
|
291
|
|
|
|
4.91
|
|
Commercial and industrial loans
|
|
|
3,042
|
|
|
|
27.35
|
|
|
|
3,115
|
|
|
|
27.25
|
|
|
|
2,414
|
|
|
|
28.10
|
|
Direct financing leases, net
|
|
|
355
|
|
|
|
3.76
|
|
|
|
380
|
|
|
|
3.58
|
|
|
|
268
|
|
|
|
3.31
|
|
Consumer and other
|
|
|
291
|
|
|
|
2.75
|
|
|
|
268
|
|
|
|
3.95
|
|
|
|
237
|
|
|
|
4.04
|
|
Unallocated
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
9,854
|
|
|
|
100.00
|
%
|
|
$
|
8,296
|
|
|
|
100.00
|
%
|
|
$
|
6,773
|
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Although we believe the allowance for loan and lease losses is
adequate based on the current level of loan delinquencies,
non-performing assets, trends in charge-offs, economic
conditions and other factors as of December 31, 2007, 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 continues to
pursue practical and legal methods of collection, repossession
and disposal of any such troubled assets. As of
December 31, 2007, there were no significant industry
concentrations in the loan portfolio.
Deposits. As of December 31, 2007,
deposits increased $135.8 million to $776.1 million
from $640.3 million at December 31, 2006. Deposits are
a major source of the Banks funds for lending and other
investment activities. A variety of accounts are designed to
attract both short- and long-term deposits. These accounts
include time deposits, money market and demand deposits. The
Banks in-market deposits are obtained primarily from Dane
and Waukesha Counties. At December 31, 2007,
$429.2 million of the Banks time deposits were
comprised of brokered deposits compared to $325.9 million
at December 31, 2006. The increase in deposits is directly
related to the increase in brokered deposits obtained to fund
asset growth. Brokered deposits are generally a lower cost
source of funds when compared to the interest rates on deposits
with similar terms that would need to be offered in the local
markets to generate a sufficient level of funds. The Banks
liquidity policy limits the amount of brokered deposits to 75%
of total deposits. At December 31, 2007, the Banks were in
compliance with the policy limits.
Deposit terms offered by the Banks vary according to minimum
balance required, the time period the funds must remain on
deposit, Federal funds rates and the interest rates charged on
other sources of funds, among other factors. In determining the
characteristics of deposit accounts, consideration is given to
profitability of the Banks, matching terms of the deposits with
loan and lease products, the attractiveness to clients and the
rates offered by the Banks competitors.
33
The following table sets forth the amount and maturities of the
Banks certificates of deposit, including brokered deposits
at December 31, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Over Six
|
|
|
|
|
|
|
|
|
|
|
|
|
Over Three
|
|
|
Months
|
|
|
|
|
|
|
|
|
|
|
|
|
Months
|
|
|
Through
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Through
|
|
|
Twelve
|
|
|
Over Twelve
|
|
|
|
|
Interest Rate
|
|
and Less
|
|
|
Six Months
|
|
|
Months
|
|
|
Months
|
|
|
Total
|
|
|
|
(In Thousands)
|
|
|
0.00% to 1.99%
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
2.00% to 2.99%
|
|
|
20
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
20
|
|
3.00% to 3.99%
|
|
|
347
|
|
|
|
238
|
|
|
|
289
|
|
|
|
111
|
|
|
|
985
|
|
4.00% to 4.99%
|
|
|
55,329
|
|
|
|
59,973
|
|
|
|
68,587
|
|
|
|
118,425
|
|
|
|
302,314
|
|
5.00% and greater
|
|
|
38,095
|
|
|
|
21,237
|
|
|
|
23,241
|
|
|
|
115,424
|
|
|
|
197,997
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
93,791
|
|
|
$
|
81,448
|
|
|
$
|
92,117
|
|
|
$
|
233,960
|
|
|
$
|
501,316
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2007, time deposits included
$72.5 million of certificates of deposit in denominations
greater than or equal to $100,000. Of these certificates,
$34.3 million are scheduled to mature in three months or
less, $14.2 million in greater than three through six
months, $4.1 million in greater than six through twelve
months and $3.3 million in greater than twelve months.
Borrowings. We had borrowings of
$82.0 million as of December 31, 2007, a decrease of
$11.0 million, or 11.4%, from $93.0 million at
December 31, 2006. The decrease is primarily driven by a
decrease in federal funds purchased and securities sold under
agreements to repurchase of $19.5 million. At the end of
December 31, 2006, we experienced a significant amount of
loan closings that were temporarily funded by short-term
borrowings, or federal funds purchased, until permanent funding
could be arranged. Permanent funding in this situation relates
to an orderly attainment of brokered deposits. The decrease in
federal funds purchased is offset by an increase in subordinated
notes payable. During 2007, we obtained an additional
$10 million of long-term funding through subordinated notes
payable that was used to provide adequate capital to support our
continued growth.
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
Balance
|
|
|
Balance
|
|
|
Rate
|
|
|
Balance
|
|
|
Balance
|
|
|
Rate
|
|
|
|
(In Thousands)
|
|
|
Fed funds purchased and securities sold under agreements to
repurchase
|
|
$
|
14,250
|
|
|
$
|
10,394
|
|
|
|
5.35
|
%
|
|
$
|
33,751
|
|
|
$
|
13,875
|
|
|
|
5.12
|
%
|
FHLB advances
|
|
|
34,526
|
|
|
|
25,776
|
|
|
|
4.87
|
|
|
|
36,584
|
|
|
|
19,059
|
|
|
|
4.83
|
|
Junior subordinated debentures
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
9,915
|
|
|
|
12.52
|
|
Line of credit
|
|
|
2,210
|
|
|
|
2,556
|
|
|
|
7.20
|
|
|
|
1,635
|
|
|
|
3,167
|
|
|
|
6.82
|
|
Subordinated notes payable
|
|
|
31,000
|
|
|
|
23,630
|
|
|
|
7.73
|
|
|
|
21,000
|
|
|
|
6,929
|
|
|
|
7.58
|
|
Other
|
|
|
-
|
|
|
|
25
|
|
|
|
7.00
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
81,986
|
|
|
$
|
62,381
|
|
|
|
6.13
|
|
|
$
|
92,970
|
|
|
$
|
52,945
|
|
|
|
6.82
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term borrowings
|
|
$
|
32,470
|
|
|
|
|
|
|
|
|
|
|
$
|
52,443
|
|
|
|
|
|
|
|
|
|
Long-term borrowings
|
|
|
49,516
|
|
|
|
|
|
|
|
|
|
|
|
40,527
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
81,986
|
|
|
|
|
|
|
|
|
|
|
$
|
92,970
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Banks obtain advances from the FHLB. Such advances are made
pursuant to several different credit programs, each of which has
its own interest rate and maturity. The FHLB may prescribe
acceptable uses for these advances as well as limitations on the
size of the advances and repayment
34
provisions. The Banks pledge a portion of their 1-4 family
loans, commercial loans, and mortgage-related securities as
collateral.
The Banks may also enter into repurchase agreements with
selected clients. Repurchase agreements are accounted for as
borrowings by the Banks and are secured by mortgage-related
securities. At December 31, 2007, there were no outstanding
repurchase agreements with clients.
The Corporation has a short-term line of credit to fund
short-term cash flow needs. The interest rate is based on the
London Interbank Offer Rate (LIBOR) plus a spread of 1.70% with
an embedded floor of 3.75% and is payable monthly. The final
maturity of the credit line is February 28, 2008. In March
2008, this line of credit was renewed for an additional year.
The renewed line of credit provides for borrowings upto
$10.5 million with an interest rate of LIBOR plus a spread
of 1.70% on the first $7.5 million and LIBOR plus a spread
of 1.75% on the remaining $3 million. The Corporation also
has a subordinated note payable with an interest rate based on
LIBOR plus 2.35% subject to a floor of 4.25% which matures
on September 29, 2013. See Note 11 to the
Consolidated Financial Statements for more information on
borrowings.
The following table sets forth maximum amounts outstanding at
each month-end for specific types of borrowings for the periods
indicated.
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In Thousands)
|
|
|
Maximum month-end balance:
|
|
|
|
|
|
|
|
|
FHLB advances
|
|
$
|
34,529
|
|
|
$
|
36,584
|
|
Fed funds purchased and securities sold under agreements to
repurchase
|
|
|
30,970
|
|
|
|
33,751
|
|
Stockholders Equity. As of
December 31, 2007, stockholders equity was
$48.6 million or 5.3% of total assets. Stockholders
equity increased $2.8 million during the year ended
December 31, 2007 primarily as a result of comprehensive
income of $3.9 million, which includes net income of
$3.3 million plus a decrease in accumulated other
comprehensive loss of $606,000. Stock options exercised
increased equity by $37,000. Restricted stock issued with
respect to share-based compensation programs increased equity by
$397,000. These increases were partially offset by treasury
stock purchases of $843,000 and cash dividends declared of
$657,000. In November 2007, the Corporation announced a stock
repurchase plan to repurchase up to $1,000,000 of the
Corporations outstanding stock. Through December 31,
2007, the Corporation has purchased 44,000 shares of its
own stock as part of the program and is the primary reason for
the increase in the level of activity relating to treasury
stock. As of December 31, 2006, stockholders equity
totaled $45.8 million or 5.8% of total assets.
Non-bank
Subsidiaries
First Madison Investment Corporation. FMIC is
an 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 the Banks investment portfolio. FMIC
invests in marketable securities and also invests in commercial
real estate, multi-family, commercial and some 1-4 family loans
in the form of loan participations with FBB retaining servicing
and charging a servicing fee of .25%. As an operating
subsidiary, FMICs results of operations are consolidated
with FBBs for financial and regulatory purposes.
FBBs investment in FMIC amounted to $185.1 million at
December 31, 2007. FMIC had net income of $6.7 million
for the year ended December 31, 2007. This compares to a
total investment of $177.9 million at December 31,
2006 and net income of $6.0 million for the year ended
December 31, 2006.
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 lending company
designed to meet the needs of growing, highly leveraged
manufacturers and wholesale distribution businesses and
specializes in providing secured lines of credit as well as term
loans on equipment and real estate assets. FBBs investment
in FBCC at December 31, 2007 was $11.0 million and net
income for the year ended December 31, 2007 was
$1.3 million. This compares to a total investment of
$9.7 million and net income of $1.3 million,
respectively, at and for the year ended December 31, 2006.
35
FMCC Nevada Corp. FMCCNC is a wholly-owned
subsidiary of FBCC incorporated in the state of Nevada in 2000.
FMCCNC invests in asset-based loans in the form of loan
participations with FBCC retaining servicing. FBCCs total
investment in FMCCNC at December 31, 2007 was
$21.6 million. FMCCNC had net income of $1.3 million
for the year ended December 31 2007. This compares to a total
investment of $20.3 million and net income of
$1.4 million, respectively, at and for the year ended
December 31, 2006.
First Business Equipment Finance, LLC. FBEF,
formerly known as First Business Leasing, LLC, headquartered in
Madison, Wisconsin, was formed in 1998 for the purpose of
purchasing leases from
m2
Lease Funds, LLC (m2) and to originate leases. Until its sale on
January 4, 2005, FBB had a 50% equity interest in m2, which
is a commercial finance joint venture specializing in the lease
of general equipment to small and medium-sized companies
nationwide. Typically FBEF originates leases and extends credit
in the form of loans to finance general equipment for small and
medium-sized companies. FBBs total investment in FBEF at
December 31, 2007 was $4.8 million and net income was
$171,000 for the year ended December 31, 2007. This
compares to a total investment of $3.4 million and net
income of $203,000, respectively, at and for the year ended
December 31, 2006.
Liquidity
and Capital Resources
During the years ended December 31, 2007 and 2006, the
Banks did not make dividend payments to the Corporation. The
Banks are subject to certain regulatory limitations regarding
their ability to pay dividends to the Corporation. We believe
that the Corporation will not be adversely affected by these
dividend limitations and that any future projected dividends
from the Banks will be sufficient to meet the Corporations
liquidity needs. The Corporations principal liquidity
requirements at December 31, 2007 are the repayment of a
short-term borrowing of $2.2 million and interest payments
due on subordinated debentures. The Corporation expects to meet
its liquidity needs through existing cash flow sources, its bank
line of credit and or dividends received from the Banks. The
Corporation and its subsidiaries continue to have a strong
capital base and the Corporations regulatory capital
ratios continue to be above the defined minimum regulatory
ratios. See Note 12 in Notes to Consolidated
Financial Statements for the Corporations comparative
capital ratios and the capital ratios of its Banks.
As previously discussed, the Federal Home Loan Bank of Chicago
(FHLB) has entered into a consensual cease and desist order with
its regulator. Under the terms of the order, capital stock
repurchases and redemptions are prohibited unless the Bank has
received approval of the Director of the Office of Supervision
of the Finance Board. The order also provides that dividend
declarations are subject to prior written approval of the
Director. The Banks currently hold, at cost, $2.4 million
of FHLB stock, all of which we believe we will ultimately be
able to recover. Based upon correspondence we received from the
FHLB, we do not expect that this cease and desist order will
impact the short- and long-term funding options provided by the
FHLB.
We manage our liquidity to ensure that funds are available to
each of our Banks to satisfy the cash flow requirements of
depositors and borrowers and to ensure the Corporations
own cash requirements are met. The Banks maintain liquidity by
obtaining funds from several sources.
The Banks primary sources of funds are principal and
interest repayments on loans receivable and mortgage-related
securities, deposits and other borrowings such as federal funds
and Federal Home Loan Bank advances. The scheduled repayments of
loans and the repayments of mortgage-related securities are a
predictable source of funds. Deposit flows and loan repayments,
however, are greatly influenced by general interest rates,
economic conditions and competition.
The Banks used brokered deposits, which allows the Banks to
gather funds across a larger geographic base at attractive price
levels. Access to such deposits allows the flexibility to not
pursue single service deposit relationships in markets that have
experienced some unprofitable pricing levels. Brokered deposits
account for $429.2 million and $325.9 million of
deposits as of December 31, 2007 and 2006, respectively.
Brokered deposits are utilized to support asset growth and are
generally a lower cost source of funds when compared to the
interest rates that would need to be offered in the local
markets to generate a sufficient level of funds. In addition,
the administrative costs associated with brokered deposits are
considerably less than the administrative costs that would be
incurred to administer a similar level of local deposits.
Although local market deposits are expected to increase as new
client relationships are established and as existing clients
increase the balances in their deposit accounts, the Banks will
likely
36
continue to use brokered deposits. In order to provide for
ongoing liquidity and funding, all of the brokered deposits are
certificates of deposit that do not allow for withdrawal, at the
option of the depositor, before the stated maturity. In the
event that there is a disruption in the availability of brokered
deposits at maturity, the Banks have managed the maturity
structure so that at least 90 days of maturities would be
funded through other means, including but not limited to
advances from the Federal Home Loan Bank, replacement with
higher cost local market deposits or cash flow from borrower
repayments and security maturities.
The Banks are required by federal regulators to maintain levels
of liquid investments in qualified U.S. Government and
agency securities and other investments which are sufficient to
ensure the safety and soundness of operations. The regulatory
requirements for liquidity are discussed in Item 1,
Business under Supervision and Regulation.
Off-balance
Sheet Arrangements
As of December 31, 2007, the Banks had outstanding
commitments to originate $172.7 million of loans and
commitments to extend funds to or on behalf of clients pursuant
to standby letters of credit of $12.2 million. Commitments
to extend funds typically have a term of less than one year;
however the Banks have $127.5 million of commitments which
extend beyond one year at December 31, 2007. See
Note 16 to the Consolidated Financial Statements. No
losses are expected 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 associated with these unfunded
commitments. It is believed that additional commitments will not
be granted or additional collateral will be provided to support
the additional funds advanced. The Banks also utilize interest
rate swaps for the purposes of interest rate risk management.
Such instruments are discussed in Note 18 to the
Consolidated Financial Statements. Additionally the Corporation
has committed to provide an additional $2.5 million to
Aldine Capital Fund, LP. 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
and other commitments at December 31, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment Due by Period
|
|
|
|
|
|
|
Less Than 1
|
|
|
|
|
|
|
|
|
More Than
|
|
|
|
Total
|
|
|
Year
|
|
|
1-3 Years
|
|
|
4-5 Years
|
|
|
5 Years
|
|
|
|
(In Thousands)
|
|
|
Operating lease obligations
|
|
$
|
5,861
|
|
|
$
|
830
|
|
|
$
|
1,576
|
|
|
$
|
1,236
|
|
|
$
|
2,219
|
|
Fed funds purchased and securities sold under repurchase
agreements
|
|
|
14,250
|
|
|
|
14,250
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Time deposits
|
|
|
501,316
|
|
|
|
267,356
|
|
|
|
231,606
|
|
|
|
2,354
|
|
|
|
-
|
|
Line of credit
|
|
|
2,210
|
|
|
|
2,210
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Subordinated debt
|
|
|
31,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
31,000
|
|
FHLB advances
|
|
|
34,526
|
|
|
|
16,010
|
|
|
|
18,034
|
|
|
|
-
|
|
|
|
482
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Uncertain tax
positions(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual obligations
|
|
$
|
589,163
|
|
|
$
|
300,656
|
|
|
$
|
251,216
|
|
|
$
|
3,590
|
|
|
$
|
33,701
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The contractual obligations table excludes the
Corporations uncertain tax payments of $1.8 million
because the we cannot make a reliable estimate of the timing of
cash payments. |
Recently
Issued Accounting Pronouncements
See
Note 1-
Summary of Significant Accounting Policies and Nature of
Operations, Recent Accounting Changes in the accompanying
financial statements included elsewhere in this report for
details of recently issued accounting pronouncements and their
expected impact on our financial statements.
37
|
|
Item 7a.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
Interest rate risk, or market risk, 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 our 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. 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 changing
rates on our net interest income for the next twelve months, as
of December 31, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in interest rates in basis points
|
|
|
|
−200
|
|
|
−100
|
|
|
0
|
|
|
+100
|
|
|
+200
|
|
|
Impact on net interest income
|
|
|
6.60
|
%
|
|
|
3.19
|
%
|
|
|
-
|
|
|
|
(3.21
|
%)
|
|
|
(6.45
|
%)
|
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. 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, 2007, interest-bearing liabilities repriced
faster than interest-earning assets in the short term. In
addition to the gap position, other determinants of net interest
income are the shape of the yield curve, general rate levels,
reinvestment spreads, balance sheet growth and mix, and interest
rate spreads.
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. Broker
certificates of deposit are a significant source of funds. We
use a variety of maturities to augment our management of
interest rate exposure.
38
The following table illustrates our static gap position.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Maturity or Repricing at December 31, 2007
|
|
|
|
Within
|
|
|
3-12
|
|
|
1-5
|
|
|
After
|
|
|
|
|
|
|
3 Months
|
|
|
Months
|
|
|
Years
|
|
|
5 Years
|
|
|
Total
|
|
|
|
(In Thousands)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities
|
|
$
|
10,237
|
|
|
$
|
24,281
|
|
|
$
|
56,569
|
|
|
$
|
6,291
|
|
|
$
|
97,378
|
|
Commercial loans
|
|
|
74,168
|
|
|
|
17,538
|
|
|
|
64,083
|
|
|
|
1,774
|
|
|
|
157,563
|
|
Real estate loans
|
|
|
166,287
|
|
|
|
35,041
|
|
|
|
262,694
|
|
|
|
62,734
|
|
|
|
526,756
|
|
Asset-based loans
|
|
|
65,930
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
65,930
|
|
Lease receivables
|
|
|
1,268
|
|
|
|
3,955
|
|
|
|
24,160
|
|
|
|
-
|
|
|
|
29,383
|
|
Consumer loans
|
|
|
1,161
|
|
|
|
735
|
|
|
|
105
|
|
|
|
-
|
|
|
|
2,001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total earning assets
|
|
$
|
319,051
|
|
|
$
|
81,550
|
|
|
$
|
407,612
|
|
|
$
|
70,799
|
|
|
$
|
879,011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing checking
|
|
$
|
65,034
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
65,034
|
|
Money market accounts
|
|
|
162,585
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
162,585
|
|
Time deposits under $100,000
|
|
|
59,499
|
|
|
|
139,631
|
|
|
|
229,668
|
|
|
|
-
|
|
|
|
428,797
|
|
Time deposits $100,000 and over
|
|
|
31,845
|
|
|
|
36,382
|
|
|
|
4,293
|
|
|
|
-
|
|
|
|
72,519
|
|
Securities sold under agreements to repurchase
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
FHLB advances
|
|
|
6,000
|
|
|
|
10,000
|
|
|
|
18,000
|
|
|
|
526
|
|
|
|
34,526
|
|
Short-term borrowings
|
|
|
16,460
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
16,460
|
|
Long-term debt
|
|
|
31,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
31,000
|
|
Interest rate swaps
|
|
|
(404
|
)
|
|
|
128
|
|
|
|
276
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities
|
|
$
|
372,031
|
|
|
$
|
186,141
|
|
|
$
|
252,236
|
|
|
$
|
526
|
|
|
$
|
810,922
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate gap
|
|
$
|
(52,968
|
)
|
|
$
|
(104,591
|
)
|
|
$
|
155,375
|
|
|
$
|
70,273
|
|
|
$
|
68,089
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative interest rate gap
|
|
$
|
(52,968
|
)
|
|
$
|
(157,559
|
)
|
|
$
|
(2,184
|
)
|
|
$
|
68,089
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative interest rate gap to total earning assets
|
|
|
(6.03
|
)%
|
|
|
(17.92
|
)%
|
|
|
(0.24
|
)%
|
|
|
7.75
|
%
|
|
|
|
|
39
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS OF FIRST BUSINESS FINANCIAL
SERVICES
The
following financial statements are included in this Annual
Report on
Form 10-K:
40
First
Business Financial Services, Inc.
Consolidated
Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In Thousands, Except Share Data)
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
17,421
|
|
|
$
|
19,215
|
|
Short-term investments
|
|
|
203
|
|
|
|
246
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
17,624
|
|
|
|
19,461
|
|
Securities available-for-sale, at fair value
|
|
|
97,378
|
|
|
|
100,008
|
|
Loans and leases receivable, net of allowance for loan and lease
losses of $9,854 and $8,296, respectively
|
|
|
771,633
|
|
|
|
639,867
|
|
Leasehold improvements and equipment, net
|
|
|
1,546
|
|
|
|
1,051
|
|
Cash surrender value of bank-owned life insurance
|
|
|
14,757
|
|
|
|
13,469
|
|
Investment in Federal Home Loan Bank stock, at cost
|
|
|
2,367
|
|
|
|
2,024
|
|
Goodwill and other intangibles
|
|
|
2,787
|
|
|
|
2,817
|
|
Accrued interest receivable and other assets
|
|
|
10,346
|
|
|
|
9,626
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
918,438
|
|
|
$
|
788,323
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders Equity
|
|
|
|
|
|
|
|
|
Deposits
|
|
$
|
776,060
|
|
|
$
|
640,266
|
|
Securities sold under agreement to repurchase
|
|
|
-
|
|
|
|
451
|
|
Federal Home Loan Bank and other borrowings
|
|
|
81,986
|
|
|
|
92,519
|
|
Accrued interest payable and other liabilities
|
|
|
11,840
|
|
|
|
9,331
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
869,886
|
|
|
|
742,567
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Preferred stock, $10 par value, 10,000 Series A shares
and 10,000 Series B shares authorized, none issued or
outstanding
|
|
|
-
|
|
|
|
-
|
|
Common stock, $0.01 par value, 8,000,000 shares
authorized, 2,576,849 and 2,516,193 shares issued,
2,509,213 and 2,493,578 outstanding in 2007 and 2006,
respectively
|
|
|
26
|
|
|
|
25
|
|
Additional paid-in capital
|
|
|
23,462
|
|
|
|
23,029
|
|
Retained earnings
|
|
|
26,836
|
|
|
|
24,237
|
|
Accumulated other comprehensive loss
|
|
|
(399
|
)
|
|
|
(1,005
|
)
|
Treasury stock (67,636 and 22,615 shares in 2007 and 2006,
respectively), at cost
|
|
|
(1,373
|
)
|
|
|
(530
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
48,552
|
|
|
|
45,756
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
918,438
|
|
|
$
|
788,323
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial Statements.
41
First
Business Financial Services, Inc.
Consolidated
Statements of Income
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In Thousands, Except Share Data)
|
|
|
Interest income:
|
|
|
|
|
|
|
|
|
Loans and leases
|
|
$
|
55,057
|
|
|
$
|
43,452
|
|
Securities income, taxable
|
|
|
4,227
|
|
|
|
4,033
|
|
Short-term investments
|
|
|
204
|
|
|
|
175
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
|
59,488
|
|
|
|
47,660
|
|
|
|
|
|
|
|
|
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
32,458
|
|
|
|
25,076
|
|
Notes payable and other borrowings
|
|
|
3,822
|
|
|
|
2,372
|
|
Junior subordinated debentures
|
|
|
-
|
|
|
|
1,241
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
|
36,280
|
|
|
|
28,689
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
23,208
|
|
|
|
18,971
|
|
Provision for loan and lease losses
|
|
|
2,904
|
|
|
|
1,519
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision for loan and lease losses
|
|
|
20,304
|
|
|
|
17,452
|
|
Non-interest income:
|
|
|
|
|
|
|
|
|
Trust and investment services fee income
|
|
|
1,914
|
|
|
|
1,356
|
|
Service charges on deposits
|
|
|
715
|
|
|
|
756
|
|
Increase in cash surrender value of bank-owned life insurance
|
|
|
697
|
|
|
|
614
|
|
Loan fees
|
|
|
630
|
|
|
|
630
|
|
Credit, merchant and debit card fees
|
|
|
210
|
|
|
|
176
|
|
Change in fair value of interest rate swaps
|
|
|
-
|
|
|
|
(283
|
)
|
Net cash settlement of interest rate swaps
|
|
|
-
|
|
|
|
120
|
|
Other
|
|
|
250
|
|
|
|
305
|
|
|
|
|
|
|
|
|
|
|
Total non-interest income
|
|
|
4,416
|
|
|
|
3,674
|
|
|
|
|
|
|
|
|
|
|
Non-interest expense:
|
|
|
|
|
|
|
|
|
Compensation
|
|
|
12,121
|
|
|
|
9,280
|
|
Occupancy
|
|
|
1,040
|
|
|
|
993
|
|
Equipment
|
|
|
497
|
|
|
|
518
|
|
Data processing
|
|
|
1,054
|
|
|
|
994
|
|
Marketing
|
|
|
1,076
|
|
|
|
936
|
|
Professional fees
|
|
|
1,411
|
|
|
|
1,299
|
|
Other
|
|
|
2,458
|
|
|
|
1,678
|
|
|
|
|
|
|
|
|
|
|
Total non-interest expense
|
|
|
19,657
|
|
|
|
15,698
|
|
|
|
|
|
|
|
|
|
|
Income before income tax expense
|
|
|
5,063
|
|
|
|
5,428
|
|
Income tax expense
|
|
|
1,807
|
|
|
|
1,681
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
3,256
|
|
|
$
|
3,747
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.33
|
|
|
$
|
1.53
|
|
Diluted
|
|
$
|
1.32
|
|
|
$
|
1.52
|
|
Dividends declared per share
|
|
$
|
0.26
|
|
|
$
|
0.24
|
|
See accompanying Notes to Consolidated Financial Statements.
42
First
Business Financial Services, Inc.
Consolidated
Statements of Changes in Stockholders Equity and
Comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
Common
|
|
|
Paid-in
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
Treasury
|
|
|
|
|
|
|
Stock
|
|
|
Capital
|
|
|
Earnings
|
|
|
Loss
|
|
|
Stock
|
|
|
Total
|
|
|
|
(In Thousands, Except Share Data)
|
|
|
Balance at December 31, 2005
|
|
$
|
24
|
|
|
$
|
22,712
|
|
|
$
|
21,085
|
|
|
$
|
(1,469
|
)
|
|
$
|
(509
|
)
|
|
$
|
41,843
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
-
|
|
|
|
-
|
|
|
|
3,747
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,747
|
|
Unrealized securities gains arising during the period
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
549
|
|
|
|
-
|
|
|
|
549
|
|
Reclassification adjustment for realized loss on securities
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7
|
|
|
|
-
|
|
|
|
7
|
|
Unrealized derivative gains arising during the period
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5
|
|
|
|
-
|
|
|
|
5
|
|
Reclassification adjustment for realized losses on derivatives
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
99
|
|
|
|
-
|
|
|
|
99
|
|
Income tax effect
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(196
|
)
|
|
|
-
|
|
|
|
(196
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,211
|
|
Share-based compensation restricted shares
|
|
|
1
|
|
|
|
181
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
182
|
|
Cash dividends ($0.24 per share)
|
|
|
-
|
|
|
|
-
|
|
|
|
(595
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(595
|
)
|
Treasury stock purchased (869 shares)
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(21
|
)
|
|
|
(21
|
)
|
Stock options exercised (14,314 shares)
|
|
|
-
|
|
|
|
136
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
136
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006
|
|
$
|
25
|
|
|
$
|
23,029
|
|
|
$
|
24,237
|
|
|
$
|
(1,005
|
)
|
|
$
|
(530
|
)
|
|
$
|
45,756
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
-
|
|
|
|
-
|
|
|
|
3,256
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,256
|
|
Unrealized securities gains arising during the period
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
936
|
|
|
|
-
|
|
|
|
936
|
|
Unrealized derivative losses arising during the period
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(9
|
)
|
|
|
-
|
|
|
|
(9
|
)
|
Reclassification adjustment for realized losses on derivatives
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4
|
|
|
|
-
|
|
|
|
4
|
|
Income tax effect
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(325
|
)
|
|
|
-
|
|
|
|
(325
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,862
|
|
Share-based compensation restricted shares
|
|
|
1
|
|
|
|
396
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
397
|
|
Cash dividends ($0.26 per share)
|
|
|
-
|
|
|
|
-
|
|
|
|
(657
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(657
|
)
|
Treasury stock purchased (45,021 shares)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(843
|
)
|
|
|
(843
|
)
|
Stock options exercised (3,128 shares)
|
|
|
-
|
|
|
|
37
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
$
|
26
|
|
|
$
|
23,462
|
|
|
$
|
26,836
|
|
|
$
|
(399
|
)
|
|
$
|
(1,373
|
)
|
|
$
|
48,552
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial Statements.
43
First
Business Financial Services, Inc.
Consolidated
Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In Thousands)
|
|
|
Operating activities
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
3,256
|
|
|
$
|
3,747
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
Deferred income taxes, net
|
|
|
(392
|
)
|
|
|
(836
|
)
|
Provision for loan and lease losses
|
|
|
2,904
|
|
|
|
1,519
|
|
Depreciation, amortization and accretion, net
|
|
|
475
|
|
|
|
602
|
|
Share-based compensation
|
|
|
397
|
|
|
|
182
|
|
Change in fair value of interest rate swaps
|
|
|
-
|
|
|
|
283
|
|
Increase in cash surrender value of bank-owned life insurance
|
|
|
(697
|
)
|
|
|
(614
|
)
|
Origination of loans held for sale
|
|
|
(1,340
|
)
|
|
|
(1,082
|
)
|
Sale of loans held for sale
|
|
|
1,346
|
|
|
|
1,089
|
|
Gain on sale of loans held for sale
|
|
|
(6
|
)
|
|
|
(7
|
)
|
Loss on sale of available-for-sale securities
|
|
|
-
|
|
|
|
7
|
|
Gain on sale of 50% owned joint venture
|
|
|
-
|
|
|
|
-
|
|
Increase in accrued interest receivable and other assets
|
|
|
(694
|
)
|
|
|
(950
|
)
|
Increase in accrued interest payable and other liabilities
|
|
|
2,492
|
|
|
|
602
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
7,741
|
|
|
|
4,542
|
|
|
|
|
|
|
|
|
|
|
Investing activities
|
|
|
|
|
|
|
|
|
Proceeds from maturities of available-for-sale securities
|
|
|
22,045
|
|
|
|
22,480
|
|
Proceeds from sale of available-for-sale securities
|
|
|
-
|
|
|
|
749
|
|
Proceeds from sale of 50% owned joint adventure
|
|
|
-
|
|
|
|
-
|
|
Purchases of available-for-sale securities
|
|
|
(18,523
|
)
|
|
|
(30,780
|
)
|
Proceeds from sale of FHLB stock
|
|
|
-
|
|
|
|
1,125
|
|
Purchases of FHLB stock
|
|
|
(343
|
)
|
|
|
(251
|
)
|
Net increase in loans and leases
|
|
|
(134,670
|
)
|
|
|
(108,671
|
)
|
Purchases of leasehold improvements and equipment, net
|
|
|
(856
|
)
|
|
|
(283
|
)
|
Purchase of bank-owned life insurance
|
|
|
(591
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(132,938
|
)
|
|
|
(115,631
|
)
|
|
|
|
|
|
|
|
|
|
Financing activities
|
|
|
|
|
|
|
|
|
Net increase in deposits
|
|
|
135,794
|
|
|
|
72,802
|
|
Net decrease in FHLB line of credit
|
|
|
(17,048
|
)
|
|
|
17,048
|
|
Repayment of FHLB advances
|
|
|
(10
|
)
|
|
|
(9
|
)
|
Proceeds from FHLB advances
|
|
|
15,000
|
|
|
|
7,000
|
|
Net decrease in short-term borrowed funds
|
|
|
(18,926
|
)
|
|
|
13,173
|
|
Repayment of subordinated notes payable
|
|
|
-
|
|
|
|
(5,000
|
)
|
Proceeds from subordinated notes payable
|
|
|
10,000
|
|
|
|
21,000
|
|
Repayment of junior subordinated debentures
|
|
|
-
|
|
|
|
(10,310
|
)
|
Termination of interest rate swaps
|
|
|
-
|
|
|
|
(1,384
|
)
|
Exercise of stock options
|
|
|
37
|
|
|
|
136
|
|
Cash dividends paid
|
|
|
(644
|
)
|
|
|
(592
|
)
|
Purchase of treasury stock
|
|
|
(843
|
)
|
|
|
(21
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
123,360
|
|
|
|
113,843
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents
|
|
|
(1,837
|
)
|
|
|
2,754
|
|
Cash and cash equivalents at the beginning of the period
|
|
|
19,461
|
|
|
|
16,707
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at the end of the period
|
|
$
|
17,624
|
|
|
$
|
19,461
|
|
|
|
|
|
|
|
|
|
|
Supplementary cash flow information
|
|
|
|
|
|
|
|
|
Interest paid on deposits and borrowings
|
|
$
|
34,363
|
|
|
$
|
27,639
|
|
Income taxes paid
|
|
|
2,495
|
|
|
|
2,385
|
|
Transfer to other real estate owned
|
|
|
660
|
|
|
|
-
|
|
See accompanying Notes to Consolidated Financial Statements.
44
First
Business Financial Services, Inc.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
|
|
Note 1
|
Summary
of Significant Accounting Policies and Nature of
Operations
|
Nature of Operations. The accounting and
reporting practices of First Business Financial Services (FBFS
or the Corporation), its wholly-owned subsidiaries, First
Business Bank (FBB) and First Business Bank
Milwaukee (FBB Milwaukee) have been prepared in
accordance with U.S. generally accepted accounting
principles. First Business Bank and First Business
Bank Milwaukee are sometimes referred to together as
the Banks. FBB operates as a commercial banking
institution in the Dane County and surrounding areas market with
loan production offices in Oshkosh, Wisconsin and Appleton,
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 Waukesha County and surrounding areas
market. The Banks provide a full range of financial services to
businesses, business owners, executives, professionals and high
net worth individuals. The Banks are subject to competition from
other financial institutions and service providers and are also
subject to state and federal regulations. FBB has the following
subsidiaries: First Business Capital Corp. (FBCC), First Madison
Investment Corp. (FMIC), and First Business Equipment Finance,
LLC. FBCC has a wholly-owned subsidiary, FMCC Nevada Corp.
(FMCCNC). FMIC and FMCCNC are located in and were formed under
the laws of the state of Nevada. Significant intercompany
accounts and transactions have been eliminated.
Basis of Financial Statement Presentation. The
consolidated financial statements include the accounts of FBFS,
and its wholly-owned subsidiaries. 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 allowance for loan and lease losses,
the value of foreclosed property, lease residuals, the value of
property under operating leases, and the valuation of
securities, intangibles, and taxes.
Cash and Cash Equivalents. The Corporation
considers federal funds sold and interest-bearing deposits, and
short-term investments that have original maturities of three
months or less to be cash equivalents.
Securities Available-for-Sale. 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 had no held-to-maturity
or trading securities at December 31, 2007 and 2006.
Discounts and premiums on investment and mortgage-backed
securities are accreted and amortized into interest income using
the effective yield method over the period to maturity.
When it is determined securities are other than temporarily
impaired, an impairment loss is recorded in earnings and a new
cost basis is established for the impaired security. At
December 31, 2007 and 2006, no securities were deemed to be
other than temporarily impaired.
Federal Home Loan Bank Stock. The Corporation
owns shares in the Federal Home Loan Bank (FHLB) as required for
membership in the FHLB-Chicago. The minimum required investment
was $1.7 million as of December 31, 2007. FHLB stock
is carried at cost which approximates its fair value
45
because the shares can be resold to other member banks at their
carrying amount of $100 per share par amount. The Corporation
periodically evaluates its holding in FHLB 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
stock during the years ended December 31, 2007 and 2006.
Loans and Leases. Loans and leases that
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 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 market 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 included in other
non-interest income.
Loans Held for Sale. Loans held for sale
consist of the current origination of certain 1-4 family
mortgage loans and are carried at lower of cost or market value.
Fees received from the borrower and direct costs to originate
the loan are deferred and recorded as an adjustment of the sales
price. The Corporation had no loans held for sale at
December 31, 2007 and 2006.
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 customer. 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
equipments 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 industry and economic
trends. The Corporations 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 Corporations 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.
Interest on Loans. Interest on loans 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 is placed in a non-accrual
status when it becomes 90 days past due or more or the
likelihood of collecting interest is doubtful unless the loan is
well collateralized and in the process of collection. A loan may
be placed on non-accrual status prior to being 90 days past
due if the collectibility of interest is doubtful. A loan 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 is
placed on non-accrual, interest accrual is discontinued and
previously accrued but uncollected interest is deducted from
interest income and the payments on non-accrual loans are
applied to interest on a cash basis. If collectibility of the
principal is in doubt, payments received are first applied to
reduce loan principal. As soon as it is determined that the
principal of a non-accrual loan is uncollectible, the portion of
the carrying balance that exceeds the value of the underlying
collateral is charged off. Loans 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 collectibility of total contractual principal and
interest is no longer doubtful.
Loan and Lease Origination Fees. 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 that result
from a refinance or restructure, other than a troubled debt
restructure, where terms are at least as favorable to the
Corporation as the terms for comparable loans to other
46
borrowers with similar collection risks and result in an
essentially new loan, are accounted for as a new loan. Any
unamortized net fees, costs, or penalties are recognized when
the new loan is originated. Unamortized net loan fees or costs
for loans that result from a refinance or restructure with only
minor modifications to the original loan contract are carried
forward as a part of the net investment in the new loan. For
troubled debt restructurings all fees received in connection
with a modification of terms are applied as a reduction of the
loan; and related costs including direct loan origination costs
are charged to expense as incurred.
Foreclosed Properties and Repossessed
Assets. Real estate acquired by foreclosure or by
deed in lieu of foreclosure and other repossessed assets is
carried at the lower of cost or fair value with estimated
selling expenses deducted. Costs relating to the development and
improvement of the property are capitalized while holding period
costs are charged to other non-interest expense. Valuations are
periodically performed by management and independent third
parties and an allowance for loss is established by a charge to
expense if the carrying value of a property exceeds its fair
value less estimated costs to sell. Foreclosed properties and
repossessed assets are included in other assets in the
consolidated balance sheets.
Allowance for Loan and Lease Losses. The
allowance for loan and lease losses is maintained at a level
that management deems adequate 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 borrowers ability
to repay, and current geographic or industry-specific current
economic events. Some impaired and other loans have risk
characteristics that are unique to an individual borrower and
the inherent loss must be estimated on a
loan-by-loan
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 are
aggregated with historical statistics applied to determine
inherent risk of loss.
The determination of the estimate of loss is reliant upon
historical experience, information about the ability of the
individual debtor to pay, and 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, estimation of losses on types of loans based on
historical losses, and consideration of current economic trends,
both local and national. Based on managements periodic
review using all previously mentioned pertinent factors, a
provision for loan and lease losses is charged to expense. 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.
The fair value of impaired loans and leases is determined based
on the present value of expected future cash flows discounted at
the loans 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 the fair value of
the underlying collateral less costs to sell, if the loan is
collateral dependent. A loan or lease is collateral dependent if
repayment is expected to be provided solely by the underlying
collateral. A loans 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 leases future
cash flows will result in a reassessment of the valuation
allowance to determine if an adjustment is necessary.
Measurements based on observable market value or fair value of
the collateral may change over time and require a reassessment
of the valuation allowance if there is a
47
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 leases
estimated future cash flows. 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 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.
No income has been recognized for impaired loans or leases,
where the measurement of impairment is based on the present
value of future cash flows discounted at the loans
effective interest rate, since such loans or leases have not
experienced any increases in present values.
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
and liabilities and on future cash flows. 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. 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
Corporations primary market risk is interest rate risk.
Management uses derivative instruments to protect against the
risk of interest rate movements on the value of certain assets
and liabilities and on future cash flows. These instruments
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.
Credit risk occurs when a counter party to a derivative contract
with an unrealized gain fails to perform according to the terms
of the agreement. Credit risk is managed by limiting the
counterparties to highly rated dealers, 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 balance sheet. The accounting for the gain or loss due to
changes in the fair value of the 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.
For fair value hedges, gains or losses on derivative hedging
instruments are recorded in earnings. In addition, gains or
losses on the hedged item are recognized in earnings in the same
period and the same income statement line as the change in fair
value of the derivative. Consequently, if gains or losses on the
derivative hedging instrument and the related hedged item do not
completely offset, the difference (i.e. the ineffective portion
of the hedge) is recognized currently in earnings.
For cash flow hedges, the reporting of gains or losses on
derivative hedging instruments depends on whether the gains or
losses are effective at offsetting the cash flows of the hedged
item. The effective portion of the gain or loss is accumulated
in other comprehensive income and recognized in earnings during
the period that the hedged forecasted transaction affects
earnings.
Goodwill and Other Intangible Assets. The
excess of the cost of the acquisition of The Business Banc Group
Ltd. (BBG) over the fair value of the net assets acquired
consists primarily of goodwill and core deposit intangibles.
Core deposit intangibles have estimated finite lives and are
amortized on an accelerated basis to expense over a period of
15 years. The Corporation reviews long-
48
lived assets and certain identifiable intangibles 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. The
Corporation completes its annual goodwill impairment test as of
June 1 each year, or whenever events or significant changes in
circumstances indicate that the carrying value may not be
recoverable. Because of adverse changes in the business climate,
the Corporation performed an additional goodwill impairment test
as of December 31, 2007. No impairment has been recognized
for the years ended December 31, 2007 and 2006.
Note 8 includes a summary of the Corporations
goodwill and core deposit intangibles.
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.
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. 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 investee 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.
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 is $43.1 million. 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 December 31,
2007, there were no loans against the cash surrender value of
the BOLI policies.
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.
Income tax expense 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. Prior to January 1,
2007, FBFS accrued through current income tax provision amounts
it deems probable of assessment related to federal and state
income tax expenses. Such accruals would be reduced when such
taxes were paid or reduced by way of a credit to the current
income tax provision when it was no longer probable
49
that such taxes would be paid. Tax sharing agreements allocate
taxes to each entity for the settlement of intercompany taxes.
Effective January 1, 2007, the Corporation applies a more
likely than not approach to each of its tax positions when
determining the amount of tax 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.
Earnings Per Share. Basic earnings per share
(EPS) are computed by dividing net income by the weighted
average number of common shares outstanding for the period. The
basic EPS computation excludes the dilutive effect of all common
stock equivalents. Common stock equivalents are all potential
common shares which could be issued if securities or other
contracts to issue common stock were exercised or converted into
common stock. Diluted EPS is computed by dividing adjusted net
income by the weighted average number of common shares
outstanding plus all common stock equivalents. These common
stock equivalents are computed based on the treasury stock
method using the average market price for the period. Some stock
options are anti-dilutive and are therefore not included in the
calculation of diluted earnings per share.
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
south central and southeastern Wisconsin. 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
Corporations 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. Since the Corporations business
units have similar basic characteristics in the nature of the
products, production processes, and type or class of customer
for products or services, these business units are considered
one operating segment.
Defined Contribution Plan. The Corporation has
a contributory 401(k) defined contribution plan covering
substantially all employees. A matching contribution of up to 3%
of salary is provided. The Corporation may also make
discretionary contributions up to an additional 6% of salary.
Contributions are expensed in the period incurred and recorded
in compensation expense in the consolidated statements of income.
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 Statement of
Financial Accounting Standards (SFAS) No. 123R,
Share-Based Payment (SFAS No. 123R
or the Statement) using the prospective method as
stock options were only granted by the Corporation prior to
meeting the definition of a nonpublic entity. Under the
prospective method, SFAS 123R must only be applied to the
extent that those awards are subsequently modified, repurchased
or cancelled. 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 this Statement. Therefore, no stock-based
compensation was recognized in the consolidated statement of
income for the years ending December 31, 2007 or 2006,
except with respect to restricted stock awards. Upon vesting of
any options subject to SFAS 123R, 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.
Reclassifications. Certain accounts have been
reclassified to conform to the current year presentations.
Weighted average common and diluted shares outstanding and the
dilutive effect of stock options have been modified from prior
year presentation to account for a correction of an error in
applying the treasury stock method. Basic and diluted earnings
per share for the year ended December 31, 2006 as
previously presented were $1.51 and $1.50, respectively compared
to basic and diluted earnings
50
per share of $1.53 and $1.52 as restated, respectively.
Management has quantitatively and qualitatively deemed the
impact of the disclosure error to be immaterial.
Recent
Accounting Changes.
Accounting for Uncertainty in Income Taxes. In
July 2006, the FASB issued FASB Interpretation No. 48
(FIN 48), Accounting for Uncertainty in Income Taxes
which is an interpretation of SFAS No. 109,
Accounting for Income Taxes. FIN 48 clarifies the
accounting for uncertainty in income taxes recognized in the
Corporations financial statements. The interpretation
applies to situations where there is uncertainty about the
timing of the deduction, the amount of the deduction, or the
validity of the deduction. FIN 48 is effective for fiscal
years beginning after December 15, 2006. The Corporation
adopted this standard on January 1, 2007. The adoption of
this standard did not have a material effect on the
Corporations consolidated financial statements.
Fair Value Measurements. In September 2006,
the FASB issued SFAS No. 157, Fair Value
Measurements
(SFAS No. 157). SFAS No. 157
defines fair value, establishes a framework for measuring fair
value under GAAP and requires enhanced disclosures about fair
value measurements. It does not require any new fair value
measurements. SFAS No. 157 is effective for financial
statements issued for fiscal years beginning after
November 15, 2007 and interim periods within those fiscal
years. It is expected that the adoption of
SFAS No. 157 will not have a material effect on the
consolidated financial statements of the Corporation.
Fair Value Option for Financial Assets and Financial
Liabilities. In February 2007, the FASB issued
SFAS No. 159, The Fair Value Option for Financial
Assets and Liabilities Including an Amendment of
SFAS No. 115 (SFAS No. 159). This
standard permits an entity to choose to measure many financial
instruments and certain other items at fair value. This option
is available to all entities, including not-for-profit
organizations. Most of the provisions in SFAS No. 159
are elective; however, the amendment to SFAS No. 115,
Accounting for Certain Investments in Debt and Equity
Securities, applies to all entities with available-for-sale
and trading securities. Some requirements apply differently to
entities that do not report net income.
The fair value option established by SFAS No. 159
permits all entities to choose to measure eligible items at fair
value at specified election dates. A business entity will report
unrealized gains and losses on items for which the fair value
option has been elected in earnings (or another performance
indicator if the business entity does not report earnings) at
each subsequent reporting date. A not-for-profit organization
will report unrealized gains and losses in its statement of
activities or similar statement. The fair value option:
(a) may be applied instrument by instrument, with a few
exceptions, such as investments otherwise accounted for by the
equity method; (b) is irrevocable (unless a new election
date occurs); and (c) is applied only to entire instruments
and not to portions of instruments.
SFAS No. 159 is effective as of the beginning of an
entitys first fiscal year that begins after
November 15, 2007. The adoption of this standard did not
have a material impact on the consolidated financial statements
of the Corporation.
Business Combinations. In December 2007, the
FASB issued SFAS No. 141(R), Business Combinations,
which replaces SFAS No. 141.
SFAS No. 141(R) establishes principles and
requirements for how an acquirer recognizes and measures in its
financial statements the identifiable assets acquired, the
liabilities assumed, any noncontrolling interest in the acquiree
and the goodwill acquired. The Statement also establishes
disclosure requirements which will enable users to evaluate the
nature and financial effects of the business combination.
SFAS No. 141(R) is effective for the fiscal years
beginning after December 15, 2008. The Corporation has not
yet evaluated the potential impact of this standard.
Noncontrolling Interests in Consolidated Financial
Statements. In December 2007, the FASB issued
SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements an amendment of
Accounting Research Bulletin No. 51, which
establishes accounting and reporting standards for ownership
interests in subsidiaries held by parties other than the parent,
the amount of consolidated net income attributable to the parent
and to the noncontrolling interest, changes in a parents
ownership interest and the valuation of retained noncontrolling
equity investments when a subsidiary is deconsolidated. The
Statement also establishes reporting requirements that provide
sufficient disclosures that clearly identify and distinguish
between the interest of the parent and the interests of the
51
noncontrolling owners. SFAS No. 160 is effective for
fiscal years beginning after December 15, 2008. The Company
has not evaluated the potential impact of this standard.
Note 2
Equity Incentive Plans
The Corporation adopted an equity incentive plan in 1993 as
amended in 1995, an equity incentive plan in 2001 and the 2006
Equity Incentive Plan (the Plans). The Plans are administered by
the Compensation Committee of the Board of Directors of FBFS and
provide for the grant of equity ownership opportunities through
incentive stock options, nonqualified stock options (stock
options) and restricted stock (unvested shares). A maximum of
431,129 common shares are currently authorized for awards under
the Plans. 152,094 shares are available for future grants
under the Plans as of December 31, 2007. Shares covered by
awards that expire, terminate or lapse will again be available
for the grant of awards under the Plans. The Corporation may
issue new shares and shares from treasury for shares delivered
under the Plans.
Stock
Options
Stock options are granted to senior executives and other
employees under the Plans. Options generally have an exercise
price that is equal to the fair value of the common shares on
the date the option is granted. Options granted under the Plans
are subject to graded vesting, generally ranging from four to
eight 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. There were no stock options granted during
year ended December 31, 2007 or 2006. 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. Therefore, no stock-based compensation
was recognized in the consolidated financial statements for the
years ended December 31, 2007 and 2006. The Corporation
expects that a majority of the outstanding stock options will
fully vest.
The following table represents a summary of stock options
activity for all periods.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
Options
|
|
|
Price
|
|
|
Options
|
|
|
Price
|
|
|
Outstanding at beginning of year
|
|
|
166,168
|
|
|
$
|
21.97
|
|
|
|
201,532
|
|
|
$
|
21.05
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
(3,128
|
)
|
|
|
11.91
|
|
|
|
(14,314
|
)
|
|
|
9.50
|
|
Forfeited
|
|
|
(3,500
|
)
|
|
|
24.71
|
|
|
|
(21,050
|
)
|
|
|
21.71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of year
|
|
|
159,540
|
|
|
|
22.10
|
|
|
|
166,168
|
|
|
|
21.97
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at end of year
|
|
|
140,637
|
|
|
|
|
|
|
|
106,445
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table represents outstanding stock options and
exercisable stock options at the respective ranges of exercise
prices at December 31, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Exercisable
|
|
|
|
|
|
|
Average
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Remaining
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Contractual
|
|
|
Exercise
|
|
|
|
|
|
Exercise
|
|
Range of Exercise
Prices
|
|
Shares
|
|
|
Life (Years)
|
|
|
Price
|
|
|
Shares
|
|
|
Price
|
|
|
$15.00 $17.50
|
|
|
9,984
|
|
|
|
6.04
|
|
|
|
15.33
|
|
|
|
9,984
|
|
|
|
15.33
|
|
$17.51 $20.00
|
|
|
18,356
|
|
|
|
3.54
|
|
|
|
19.08
|
|
|
|
17,953
|
|
|
|
19.08
|
|
$20.01 $22.50
|
|
|
69,450
|
|
|
|
5.16
|
|
|
|
22.00
|
|
|
|
69,450
|
|
|
|
22.00
|
|
$22.51 $25.00
|
|
|
61,750
|
|
|
|
6.77
|
|
|
|
24.21
|
|
|
|
43,250
|
|
|
|
24.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
159,540
|
|
|
|
5.65
|
|
|
|
22.10
|
|
|
|
140,637
|
|
|
|
21.82
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52
Restricted
Shares
Under the 2001 and 2006 Equity Incentive Plans, participants may
be granted restricted shares, each of which represents an
unfunded, unsecured right, which is nontransferable except in
the event of death of the participant, to receive a common share
on the date specified in the participants 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 this plan
are subject to graded vesting. For awards with graded vesting,
compensation expense is recognized over the requisite service
period of four years for the entire award on a straight-line
basis. Upon vesting of restricted share awards, the benefits of
tax deductions in excess of recognized compensation expense is
recognized as a financing cash flow activity. For the year ended
December 31, 2007, restricted share awards vested on a date
at which the market price was lower than the market value on the
date of grant; therefore there is no excess tax benefit
reflected in the consolidated statements of cash flows. There
were no vesting events during the year ended December 31,
2006. Restricted share activity for the years ended
December 31, 2007 and 2006 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
Number of
|
|
|
Average
|
|
|
Number of
|
|
|
Average
|
|
|
|
Restricted
|
|
|
Grant-Date
|
|
|
Restricted
|
|
|
Grant-Date
|
|
|
|
Shares
|
|
|
Fair Value
|
|
|
Shares
|
|
|
Fair Value
|
|
|
Nonvested balance at beginning of year
|
|
|
45,125
|
|
|
$
|
23.08
|
|
|
|
-
|
|
|
$
|
-
|
|
Granted
|
|
|
61,885
|
|
|
|
20.12
|
|
|
|
48,475
|
|
|
|
23.07
|
|
Vested
|
|
|
(11,274
|
)
|
|
|
23.08
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
(4,357
|
)
|
|
|
21.37
|
|
|
|
(3,350
|
)
|
|
|
23.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested balance as of end of year
|
|
|
91,379
|
|
|
|
21.16
|
|
|
|
45,125
|
|
|
|
23.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2007, there was approximately
$1.6 million of deferred compensation expense related to
unvested restricted share awards which is expected to be
recognized over four years. For the years ended
December 31, 2007 and 2006, share-based compensation
expense included in net income totaled approximately $397,000
and $182,000, respectively. As of December 31, 2007 there
were no restricted shares vested and not delivered.
|
|
Note 3
|
Earnings
per Share
|
The computation of earnings per share for fiscal years 2007 and
2006 is as follows:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Income available to common stockholders
|
|
$
|
3,256,341
|
|
|
$
|
3,747,352
|
|
|
|
|
|
|
|
|
|
|
Basic average shares
|
|
|
2,453,157
|
|
|
|
2,444,408
|
|
Dilutive effect of share-based awards
|
|
|
6,079
|
|
|
|
16,409
|
|
|
|
|
|
|
|
|
|
|
Dilutive average shares
|
|
|
2,459,236
|
|
|
|
2,460,817
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.33
|
|
|
$
|
1.53
|
|
Diluted
|
|
$
|
1.32
|
|
|
$
|
1.52
|
|
There were 131,200 and 65,263 option shares which were not
considered dilutive for purposes of calculating earnings per
share for the years ending December 31, 2007 and 2006,
respectively.
Note 4
Cash and Due From Banks.
Reserves in the form of deposits with the Federal Reserve Bank
and vault cash totaling approximately $464,000 and $548,000 were
maintained to satisfy federal regulatory requirements as of
December 31, 2007 and 2006, respectively. These amounts are
included in cash and due from banks in the consolidated balance
sheets.
53
The amortized cost and estimated fair values of securities
available-for-sale are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2007
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
|
|
|
|
Amortized
|
|
|
Holding
|
|
|
Holding
|
|
|
Estimated
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
|
(In Thousands)
|
|
|
U.S. Government corporations and agencies
|
|
$
|
1,500
|
|
|
$
|
-
|
|
|
$
|
(3
|
)
|
|
$
|
1,497
|
|
Municipals
|
|
|
85
|
|
|
|
-
|
|
|
|
-
|
|
|
|
85
|
|
Collateralized mortgage obligations government
agencies
|
|
|
52,755
|
|
|
|
282
|
|
|
|
(379
|
)
|
|
|
52,658
|
|
Collateralized mortgage obligations government
sponsored agencies
|
|
|
43,631
|
|
|
|
2
|
|
|
|
(495
|
)
|
|
|
43,138
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
97,971
|
|
|
$
|
284
|
|
|
$
|
(877
|
)
|
|
$
|
97,378
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2006
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
|
|
|
|
Amortized
|
|
|
Holding
|
|
|
Holding
|
|
|
Estimated
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
|
(In thousands)
|
|
|
U.S. Government corporations and agencies
|
|
$
|
1,497
|
|
|
$
|
-
|
|
|
$
|
(30
|
)
|
|
$
|
1,467
|
|
Municipals
|
|
|
185
|
|
|
|
-
|
|
|
|
(3
|
)
|
|
|
182
|
|
Collateralized mortgage obligations government
agencies
|
|
|
38,903
|
|
|
|
85
|
|
|
|
(213
|
)
|
|
|
38,775
|
|
Collateralized mortgage obligations government
sponsored agencies
|
|
|
60,952
|
|
|
|
-
|
|
|
|
(1,368
|
)
|
|
|
59,584
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
101,537
|
|
|
$
|
85
|
|
|
$
|
(1,614
|
)
|
|
$
|
100,008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized mortgage obligations government
agencies include securities issued by GNMA. Collateralized
mortgage obligations government sponsored agencies
include securities issued by FHLMC and FNMA. In 2006, the
Corporation sold one available-for-sale security and realized a
loss of approximately $7,000. There were no other sales of
available-for-sale securities for any of the periods shown.
Securities with carrying values aggregating approximately
$62.5 million and $35.4 million were pledged to secure
public deposits, securities sold under agreement to repurchase,
and FHLB advances at December 31, 2007 and 2006,
respectively.
Unrealized holding losses, net of tax effect, included in
accumulated other comprehensive loss at December 31, 2007
and 2006 were $393,000 and $1.0 million, respectively.
The amortized cost and estimated fair value of securities
available-for-sale by contractual maturity at December 31,
2007 are shown below. Actual maturities may differ from
contractual maturities because issuers have the right to call or
prepay obligations with or without call or prepayment penalties.
54
|
|
|
|
|
|
|
|
|
|
|
Amortized
|
|
|
Estimated
|
|
|
|
Cost
|
|
|
Fair Value
|
|
|
|
(In Thousands)
|
|
|
Due in one year or less
|
|
$
|
1,615
|
|
|
$
|
1,611
|
|
Due in one year through five years
|
|
|
429
|
|
|
|
423
|
|
Due in five through ten years
|
|
|
19,412
|
|
|
|
19,217
|
|
Due in over ten years
|
|
|
76,515
|
|
|
|
76,127
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
97,971
|
|
|
$
|
97,378
|
|
|
|
|
|
|
|
|
|
|
The tables below shows the Corporations gross unrealized
losses and fair value of investments, aggregated by investment
category and length of time that individual investments have
been in a continuous unrealized loss position at
December 31, 2007 and 2006. At December 31, 2007 and
December 31, 2006, the Corporation had 87 and 105
securities that were in an unrealized loss position,
respectively. Such securities have declined in value due to
current interest rate environments and not credit quality and do
not presently represent realized losses. The Corporation has the
ability and intent to and anticipates that these securities,
which have been in a continuous loss position but are not
other-than-temporarily impaired, will be kept in the
Corporations portfolio until maturity or until the
unrealized loss is recovered. If held until maturity, it is
anticipated that the investments will regain their value. If the
Corporation determines that any of the above investments are
deemed to be other-than-temporarily impaired, the impairment
loss will be recognized in the consolidated statements of income.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2007
|
|
|
|
Less than 12 Months
|
|
|
12 Months or Longer
|
|
|
Total
|
|
|
|
Fair Value
|
|
|
Unrealized Losses
|
|
|
Fair Value
|
|
|
Unrealized Losses
|
|
|
Fair Value
|
|
|
Unrealized Losses
|
|
|
|
(In Thousands)
|
|
|
U.S. Government corporations and agencies
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,497
|
|
|
$
|
3
|
|
|
$
|
1,497
|
|
|
$
|
3
|
|
Collateralized mortgage obligations government
agencies
|
|
|
13,054
|
|
|
|
374
|
|
|
|
579
|
|
|
|
5
|
|
|
|
13,633
|
|
|
|
379
|
|
Collateralized mortgage obligations government
sponsored agencies
|
|
|
6,463
|
|
|
|
66
|
|
|
|
35,317
|
|
|
|
429
|
|
|
|
41,780
|
|
|
|
495
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
19,517
|
|
|
$
|
440
|
|
|
$
|
37,393
|
|
|
$
|
437
|
|
|
$
|
56,910
|
|
|
$
|
877
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2006
|
|
|
|
Less than 12 Months
|
|
|
12 Months or Longer
|
|
|
Total
|
|
|
|
Fair Value
|
|
|
Unrealized Losses
|
|
|
Fair Value
|
|
|
Unrealized Losses
|
|
|
Fair Value
|
|
|
Unrealized Losses
|
|
|
|
(In Thousands)
|
|
|
U.S. Government corporations and agencies
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,467
|
|
|
$
|
30
|
|
|
$
|
1,467
|
|
|
$
|
30
|
|
Municipals
|
|
|
-
|
|
|
|
-
|
|
|
|
182
|
|
|
|
3
|
|
|
|
182
|
|
|
|
3
|
|
Collateralized mortgage obligations government
agencies
|
|
|
14,044
|
|
|
|
97
|
|
|
|
9,843
|
|
|
|
116
|
|
|
|
23,887
|
|
|
|
213
|
|
Collateralized mortgage obligations government
sponsored agencies
|
|
|
407
|
|
|
|
10
|
|
|
|
59,178
|
|
|
|
1,358
|
|
|
|
59,585
|
|
|
|
1,368
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
14,451
|
|
|
$
|
107
|
|
|
$
|
70,670
|
|
|
$
|
1,507
|
|
|
$
|
85,121
|
|
|
$
|
1,614
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 6
|
Loan and
Lease Receivables and Allowance for Loan and Lease
Losses
|
Loan and lease receivables consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In Thousands)
|
|
|
First mortgage loans:
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
$
|
336,153
|
|
|
$
|
274,262
|
|
Construction
|
|
|
90,545
|
|
|
|
78,257
|
|
Multi-family
|
|
|
41,821
|
|
|
|
34,635
|
|
1-4 family
|
|
|
48,437
|
|
|
|
35,721
|
|
|
|
|
|
|
|
|
|
|
|
|
|
516,956
|
|
|
|
422,875
|
|
Commercial and industrial loans
|
|
|
213,786
|
|
|
|
176,701
|
|
Direct financing leases, net
|
|
|
29,383
|
|
|
|
23,203
|
|
Home equity loans and second mortgage loans
|
|
|
9,784
|
|
|
|
8,859
|
|
Credit card and other
|
|
|
11,725
|
|
|
|
16,712
|
|
|
|
|
|
|
|
|
|
|
|
|
|
781,634
|
|
|
|
648,350
|
|
Less:
|
|
|
|
|
|
|
|
|
Allowance for loan and lease losses
|
|
|
9,854
|
|
|
|
8,296
|
|
Deferred loan fees
|
|
|
147
|
|
|
|
187
|
|
|
|
|
|
|
|
|
|
|
Loans and lease receivables, net
|
|
$
|
771,633
|
|
|
$
|
639,867
|
|
|
|
|
|
|
|
|
|
|
Certain of the Corporations executive officers, directors,
and their related interests are loan clients of the Banks. As of
December 31, 2007 and 2006, loans aggregating approximately
$23.3 million and $18.6 million, respectively, were
outstanding to such parties. New loans granted during 2007 and
2006 were approximately $9.3 million and $9.7 million
and loan repayments were approximately $4.6 million and
$8.2 million, respectively. These loans were made in the
ordinary course of business and on substantially the same terms
as those prevailing for comparable transactions with other
clients. None of these loans were considered impaired.
56
A summary of the activity in the allowance for loan and lease
losses follows:
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In Thousands)
|
|
|
Allowance at beginning of period
|
|
$
|
8,296
|
|
|
$
|
6,773
|
|
Charge-offs:
|
|
|
|
|
|
|
|
|
Commercial real estate and other mortgage
|
|
|
(571
|
)
|
|
|
-
|
|
Commercial and industrial
|
|
|
(778
|
)
|
|
|
-
|
|
Lease
|
|
|
(25
|
)
|
|
|
-
|
|
Consumer
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total charge-offs
|
|
|
(1,374
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Recoveries:
|
|
|
|
|
|
|
|
|
Commercial real estate and other mortgage
|
|
|
5
|
|
|
|
4
|
|
Commercial and industrial
|
|
|
23
|
|
|
|
-
|
|
Lease
|
|
|
-
|
|
|
|
-
|
|
Consumer
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total recoveries
|
|
|
28
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
Net (charge-offs) recoveries
|
|
|
(1,346
|
)
|
|
|
4
|
|
Provision for loan and lease loss
|
|
|
2,904
|
|
|
|
1,519
|
|
|
|
|
|
|
|
|
|
|
Allowance at end of period
|
|
$
|
9,854
|
|
|
$
|
8,296
|
|
|
|
|
|
|
|
|
|
|
Allowance to gross loans and leases
|
|
|
1.26
|
%
|
|
|
1.28
|
%
|
The Corporations non-accrual loans and leases consist of
the following at December 31, 2007 and 2006, respectively.
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In Thousands)
|
|
|
Non-accrual loans
|
|
$
|
8,864
|
|
|
$
|
1,109
|
|
Non-accrual leases
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total non-accrual loans and leases
|
|
|
8,864
|
|
|
|
1,109
|
|
Foreclosed properties and reposed assets, net
|
|
|
660
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total non-performing assets
|
|
$
|
9,524
|
|
|
$
|
1,109
|
|
|
|
|
|
|
|
|
|
|
Performing troubled debt restructurings
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Total non-accrual loans and leases to total loans and leases
|
|
|
1.13
|
%
|
|
|
0.17
|
%
|
Total non-performing assets to total assets
|
|
|
1.04
|
|
|
|
0.14
|
|
Allowance for loan and lease losses to total loans and leases
|
|
|
1.26
|
|
|
|
1.28
|
|
Allowance for loan and lease losses to non-accrual loans and
leases
|
|
|
111.17
|
|
|
|
748.06
|
|
At December 31, 2007 and 2006, there were no loans greater
than ninety days past due and still accruing interest.
57
The following represents information regarding the
Corporations impaired loans and leases:
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In Thousands)
|
|
|
Impaired loans and leases with no impairment reserves required
|
|
$
|
6,500
|
|
|
$
|
683
|
|
Impaired loans and leases with impairment reserves required
|
|
|
2,617
|
|
|
|
1,404
|
|
|
|
|
|
|
|
|
|
|
Total impaired loans and leases
|
|
|
9,117
|
|
|
|
2,087
|
|
Less:
|
|
|
|
|
|
|
|
|
Impairment reserve (included in allowance for loan and lease
loss)
|
|
|
834
|
|
|
|
863
|
|
|
|
|
|
|
|
|
|
|
Net impaired loans and leases
|
|
$
|
8,283
|
|
|
$
|
1,224
|
|
|
|
|
|
|
|
|
|
|
Average impaired loans and leases
|
|
$
|
3,439
|
|
|
$
|
1,444
|
|
|
|
|
|
|
|
|
|
|
Foregone interest income attributable to impaired loans and
leases
|
|
$
|
365
|
|
|
$
|
210
|
|
Interest income recognized on impaired loans and leases
|
|
|
41
|
|
|
|
217
|
|
|
|
|
|
|
|
|
|
|
Net foregone interest income on impaired loans and leases
|
|
$
|
324
|
|
|
$
|
(7
|
)
|
|
|
|
|
|
|
|
|
|
The Corporations net investment in direct financing leases
consists of the following:
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In Thousands)
|
|
|
Minimum lease payments receivable
|
|
$
|
27,572
|
|
|
$
|
21,184
|
|
Estimated unguaranteed residual values in leased property
|
|
|
6,642
|
|
|
|
5,544
|
|
Initial direct costs
|
|
|
236
|
|
|
|
273
|
|
Less unearned lease and residual income
|
|
|
(5,067
|
)
|
|
|
(3,798
|
)
|
|
|
|
|
|
|
|
|
|
Investment in commercial direct financing leases
|
|
$
|
29,383
|
|
|
$
|
23,203
|
|
|
|
|
|
|
|
|
|
|
There were no impairments of residual value of leased property
during 2007 and 2006.
The Corporation leases equipment under direct financing leases
expiring in various 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. Future aggregate maturities of minimum lease payments to
be received are as follows (In Thousands):
Maturities
during year ended December 31,
|
|
|
|
|
2008
|
|
$
|
7,312
|
|
2009
|
|
|
6,594
|
|
2010
|
|
|
5,819
|
|
2011
|
|
|
4,376
|
|
2012
|
|
|
2,047
|
|
Thereafter
|
|
|
1,424
|
|
|
|
|
|
|
|
|
$
|
27,572
|
|
|
|
|
|
|
58
|
|
Note 7
|
Leasehold
Improvements and Equipment
|
A summary of leasehold improvements and equipment at
December 31, 2007 and 2006 is as follows:
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In Thousands)
|
|
|
Leasehold improvements
|
|
$
|
1,241
|
|
|
$
|
892
|
|
Furniture and equipment
|
|
|
2,447
|
|
|
|
2,124
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,688
|
|
|
|
3,016
|
|
Less: accumulated depreciation
|
|
|
(2,142
|
)
|
|
|
(1,965
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,546
|
|
|
$
|
1,051
|
|
|
|
|
|
|
|
|
|
|
Note 8
Goodwill and Intangible Assets.
Goodwill is not amortized. Goodwill as well as other intangible
assets is subject to impairment tests on at least an annual
basis. Because of adverse changes in the business climate, the
Corporation performed an additional goodwill impairment test as
of December 31, 2007. No impairment loss was recorded in
2007 and 2006. At December 31, 2007, goodwill was
$2.7 million. There was no change in the carrying amount of
goodwill during the year ended December 31, 2007 and 2006.
The Corporation has intangible assets that are amortized
consisting of core deposit intangibles and other intangibles,
consisting of a purchased customer list from a purchased
brokerage/investment business. Changes in the gross carrying
amount, accumulated amortization and net book value of core
deposits and other intangibles were as follows:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In Thousands)
|
|
|
Core deposit intangibles:
|
|
|
|
|
|
|
|
|
Gross carrying amount
|
|
$
|
145
|
|
|
$
|
145
|
|
Accumulated amortization
|
|
|
(95
|
)
|
|
|
(77
|
)
|
|
|
|
|
|
|
|
|
|
Net book value
|
|
$
|
50
|
|
|
$
|
68
|
|
|
|
|
|
|
|
|
|
|
Amortization during the period
|
|
$
|
(18
|
)
|
|
$
|
(23
|
)
|
|
|
|
|
|
|
|
|
|
Other intangibles:
|
|
|
|
|
|
|
|
|
Gross carrying amount
|
|
$
|
120
|
|
|
$
|
120
|
|
Accumulated amortization
|
|
|
(72
|
)
|
|
|
(60
|
)
|
|
|
|
|
|
|
|
|
|
Net book value
|
|
$
|
48
|
|
|
$
|
60
|
|
|
|
|
|
|
|
|
|
|
Amortization during the period
|
|
$
|
(12
|
)
|
|
$
|
(12
|
)
|
|
|
|
|
|
|
|
|
|
Estimated amortization expense of core deposit and other
intangibles for fiscal years 2008 through 2012 are as follows:
Estimate
for the year ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core Deposit
|
|
|
Other
|
|
|
|
|
|
|
Intangibles
|
|
|
Intangibles
|
|
|
Total
|
|
|
|
(In Thousands)
|
|
|
2008
|
|
$
|
13
|
|
|
$
|
12
|
|
|
$
|
25
|
|
2009
|
|
|
10
|
|
|
|
12
|
|
|
|
22
|
|
2010
|
|
|
7
|
|
|
|
12
|
|
|
|
19
|
|
2011
|
|
|
5
|
|
|
|
12
|
|
|
|
17
|
|
2012
|
|
|
3
|
|
|
|
-
|
|
|
|
3
|
|
Thereafter
|
|
|
12
|
|
|
|
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
50
|
|
|
$
|
48
|
|
|
$
|
98
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
59
Included in other assets is an equity investment of $100,000 and
$80,000 in CapVest Fund, LP as of December 31, 2007 and
2006, respectively. As of December 31, 2007 the Corporation
had fulfilled its capital commitment with respect to CapVest
Fund, LP. During 2006 the Corporation made an initial investment
in Aldine Capital Fund, LP, a mezzanine fund. The investment as
of December 31, 2007 is $319,000 and the Corporation has an
additional commitment to provide funds of $2.5 million. The
Corporation has two tax-preferred limited partnership equity
investments, Porchlight Inc., a community housing limited
partnership and Chapel Valley Senior Housing, LP, in the amounts
of $25,000 and $0, respectively, as of December 31, 2007.
As of December 31, 2006, investments in these two entities
were $100,000 and $59,000, respectively. 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.
In addition to these other investments, accrued interest
receivable and other assets includes accrued interest receivable
of $3.6 million, net deferred tax assets of
$2.8 million and other assets of $3.0 million as of
December 31, 2007. As of December 31, 2006, these
amounts were accrued interest receivable of $3.4 million,
net deferred tax assets of $2.7 million and other assets of
$2.9 million.
Deposits are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
December 31, 2006
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
Balance
|
|
|
Average Rate
|
|
|
Balance
|
|
|
Average Rate
|
|
|
|
(In Thousands)
|
|
|
Transaction accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits
|
|
$
|
47,124
|
|
|
|
0.00
|
%
|
|
$
|
45,171
|
|
|
|
0.00
|
%
|
Negotiable order of withdrawal (NOW) accounts
|
|
|
65,035
|
|
|
|
4.22
|
|
|
|
58,927
|
|
|
|
4.26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
112,159
|
|
|
|
|
|
|
|
104,098
|
|
|
|
|
|
Money market accounts
|
|
|
162,585
|
|
|
|
4.49
|
|
|
|
171,996
|
|
|
|
4.57
|
|
Certificates of deposit
|
|
|
501,316
|
|
|
|
5.00
|
|
|
|
364,172
|
|
|
|
4.63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
776,060
|
|
|
|
|
|
|
$
|
640,266
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A summary of annual maturities of certificates of deposit
outstanding at December 31, 2007 follows (in thousands):
Maturities
during year ended December 31,
|
|
|
|
|
2008
|
|
$
|
267,356
|
|
2009
|
|
|
90,155
|
|
2010
|
|
|
117,934
|
|
2011
|
|
|
23,517
|
|
2012
|
|
|
2,354
|
|
Thereafter
|
|
|
-
|
|
|
|
|
|
|
|
|
$
|
501,316
|
|
|
|
|
|
|
Deposits include approximately $72.5 million and
$36.0 million of certificates of deposit, including
brokered deposits, which are denominated in amounts of $100,000
or more at December 31, 2007 and 2006, respectively.
Included in certificates of deposit were brokered deposits of
$429.2 million and $325.9 million at December 31,
2007 and 2006, respectively.
60
The composition of borrowed funds is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
December 31, 2006
|
|
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
Balance
|
|
|
Balance
|
|
|
Rate
|
|
|
Balance
|
|
|
Balance
|
|
|
Rate
|
|
|
|
(In Thousands)
|
|
|
Fed funds purchased and securities sold under agreements to
repurchase
|
|
$
|
14,250
|
|
|
$
|
10,394
|
|
|
|
5.35
|
%
|
|
$
|
33,751
|
|
|
$
|
13,875
|
|
|
|
5.12
|
%
|
FHLB advances
|
|
|
34,526
|
|
|
|
25,776
|
|
|
|
4.87
|
|
|
|
36,584
|
|
|
|
19,059
|
|
|
|
4.83
|
|
Junior subordinated debentures
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
9,915
|
|
|
|
12.52
|
|
Line of credit
|
|
|
2,210
|
|
|
|
2,556
|
|
|
|
7.20
|
|
|
|
1,635
|
|
|
|
3,167
|
|
|
|
6.82
|
|
Subordinated notes payable
|
|
|
31,000
|
|
|
|
23,630
|
|
|
|
7.73
|
|
|
|
21,000
|
|
|
|
6,929
|
|
|
|
7.58
|
|
Other
|
|
|
-
|
|
|
|
25
|
|
|
|
7.00
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
81,986
|
|
|
$
|
62,381
|
|
|
|
6.13
|
|
|
$
|
92,970
|
|
|
$
|
52,945
|
|
|
|
6.82
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term borrowings
|
|
$
|
32,470
|
|
|
|
|
|
|
|
|
|
|
$
|
52,443
|
|
|
|
|
|
|
|
|
|
Long-term borrowings
|
|
|
49,516
|
|
|
|
|
|
|
|
|
|
|
|
40,527
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
81,986
|
|
|
|
|
|
|
|
|
|
|
$
|
92,970
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The maximum outstanding of federal funds purchased and
securities repurchase agreements was $31.0 million and
$33.8 million for the years ended December 31, 2007
and 2006, respectively.
The Corporation has a $74.0 million FHLB line of credit
available for advances which is collateralized by
mortgage-related securities, unencumbered first mortgage loans
and secured small business loans as noted below. At
December 31, 2007 and 2006, open line advances totaled $0
and $17 million, respectively. Open line advances have an
interest rate based on the overnight investment rate at the FHLB
plus 45 basis points. The rate at December 31, 2007
and 2006 was 5.02% and 5.50%, respectively. Long-term FHLB
advances totaled $34.6 million and $19.6 million at
December 31, 2007 and 2006, respectively. These advances
bear fixed interest rates which range from 4.50% to 6.06% at
both December 31, 2007 and 2006, and are subject to a
prepayment fee if they are repaid prior to maturity. None of the
Corporations FHLB advances are putable.
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 $14.0 million and
$26.4 million and mortgage-related securities totaling
approximately $58.1 million and $34.5 million were
pledged as collateral for FHLB advances at December 31,
2007 and 2006, respectively. Scheduled repayments of long-term
FHLB advances outstanding as of December 31, 2007 are as
follows (in thousands):
Maturities
during year ended December 31,
|
|
|
|
|
2008
|
|
$
|
16,010
|
|
2009
|
|
|
11
|
|
2010
|
|
|
16,011
|
|
2011
|
|
|
2,012
|
|
2012
|
|
|
13
|
|
Thereafter
|
|
|
469
|
|
|
|
|
|
|
|
|
$
|
34,526
|
|
|
|
|
|
|
As of December 31, 2007, the Corporation has an unsecured
bank line of credit of $7.5 million with an interest rate
based on one-month LIBOR (London Inter Bank Offer Rate) plus
1.70% subject to a
61
floor of 3.75% per year. The Corporation is in compliance with
all covenants as of December 31, 2007. The line of credit
matures on February 28, 2008 and had a rate of 6.925% and
7.05% at December 31, 2007 and 2006, respectively. The
balance outstanding was $2.2 million and $1.6 million
at December 31, 2007 and 2006, respectively. In March 2008,
this line of credit was renewed for an additional year. The
renewed line of credit provides for borrowings up to
$10.5 million with an interest rate of LIBOR plus 1.70% on
the first $7.5 million and LIBOR plus 1.75% on the
remaining $3 million.
The Corporation also has $31.0 million of subordinated
notes payable to a bank with an interest rate based on one-month
LIBOR plus 2.35%, subject to a floor of 4.25%. The notes mature
on September 29, 2013 and had a 7.575% interest rate at
December 31, 2007. At December 31, 2006, the
Corporation had a $21.0 million subordinated note payable
to a bank with an interest rate based on one-month LIBOR plus
2.35%, subject to a floor of 4.25% and had an interest of 7.70%
interest rate.
In December 2001, FBFS Statutory Trust I (the Trust), a
Connecticut business trust wholly owned by the Corporation,
completed the sale of $10.0 million of three-month LIBOR
plus 3.60% preferred securities (the Preferred
Securities), with a maximum rate of 12.5%. The rate at
December 31, 2005 was 8.10%. The Trust also issued common
securities of $300,000. The Trust used the proceeds from the
offering to purchase $10.3 million of 3 month LIBOR
plus 3.60% Junior Subordinated Debentures (the Debentures) of
the Corporation. Debentures were the sole assets of the Trust.
The Corporation fully and unconditionally guaranteed the
obligations of the Trust on a subordinated basis. The
Corporation capitalized the debt issuance costs in 2001 of
approximately $312,000, which are included in other assets, and
are amortizing over the life of the Debentures.
On December 18, 2006, the Corporation exercised its right
to redeem the debentures at par. The redemption was made
utilizing the proceeds from the increase in the subordinated
note payable. The remaining debt issuance cost of $260,000 was
amortized to interest expense in 2006.
The Preferred Securities had qualified under the risk-based
capital guidelines as Tier 1 capital for regulatory
purposes. The Corporation had used the proceeds from the sale of
the Debentures for general corporate purposes.
|
|
Note 12
|
Stockholders
Equity
|
The Corporation and Banks are subject to various regulatory
capital requirements administered by the Federal and State of
Wisconsin 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 accounting practices. The
Corporation and the Banks capital amounts and
classification are also subject to qualitative judgments by the
regulators about components, risk weightings and other factors.
Qualitative measures established by regulation to ensure capital
adequacy require the Corporation and the Bank to maintain
minimum amounts and ratios of total and Tier 1 capital to
risk-weighted assets and of Tier 1 capital to average
assets. Management believes, as of December 31, 2007, that
the Corporation and the Banks meet all applicable capital
adequacy requirements.
As of December 31, 2007 and 2006, the most recent
notification from the Federal Deposit Insurance Corporation and
the state of Wisconsin Department of Financial Institutions
(DFI) categorized the Banks as well capitalized under the
regulatory framework for prompt corrective action. The
qualification results in lower assessment of FDIC premiums,
among other benefits.
In addition, the Banks met the minimum net worth requirement of
6.0% as required by the State of Wisconsin at December 31,
2007 and 2006.
62
The following table summarizes the Corporation and Banks
capital ratios and the ratios required by its federal regulators
at December 31, 2007 and 2006, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum
|
|
|
|
|
|
|
|
|
|
|
|
|
Required to be
|
|
|
|
|
|
|
|
|
|
Minimum
|
|
|
Well Capitalized
|
|
|
|
|
|
|
|
|
|
Required for
|
|
|
Under Prompt
|
|
|
|
|
|
|
|
|
|
Capital
|
|
|
Corrective
|
|
|
|
|
|
|
|
|
|
Adequacy
|
|
|
Action
|
|
|
|
Actual
|
|
|
Purposes
|
|
|
Requirements
|
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
|
(In Thousands)
|
|
|
As of December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital (to risk-weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
87,018
|
|
|
|
10.22
|
%
|
|
$
|
68,119
|
|
|
|
8.00
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
First Business Bank
|
|
|
79,072
|
|
|
|
10.45
|
|
|
|
60,528
|
|
|
|
8.00
|
|
|
$
|
75,660
|
|
|
|
10.00
|
%
|
First Business Bank Milwaukee
|
|
|
9,847
|
|
|
|
10.26
|
|
|
|
7,679
|
|
|
|
8.00
|
|
|
|
9,599
|
|
|
|
10.00
|
|
Tier 1 capital (to risk-weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
46,164
|
|
|
|
5.42
|
%
|
|
$
|
34,060
|
|
|
|
4.00
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
First Business Bank
|
|
|
71,097
|
|
|
|
9.40
|
|
|
|
30,264
|
|
|
|
4.00
|
|
|
$
|
45,396
|
|
|
|
6.00
|
%
|
First Business Bank Milwaukee
|
|
|
8,639
|
|
|
|
9.00
|
|
|
|
3,840
|
|
|
|
4.00
|
|
|
|
5,759
|
|
|
|
6.00
|
|
Tier 1 capital (to average assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
46,164
|
|
|
|
5.12
|
%
|
|
$
|
36,065
|
|
|
|
4.00
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
First Business Bank
|
|
|
71,097
|
|
|
|
9.04
|
|
|
|
31,459
|
|
|
|
4.00
|
|
|
$
|
39,324
|
|
|
|
5.00
|
%
|
First Business Bank Milwaukee
|
|
|
8,639
|
|
|
|
7.39
|
|
|
|
4,678
|
|
|
|
4.00
|
|
|
|
5,848
|
|
|
|
5.00
|
|
As of December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital (to risk-weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
73,241
|
|
|
|
10.40
|
%
|
|
$
|
56,360
|
|
|
|
8.00
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
First Business Bank
|
|
|
64,443
|
|
|
|
10.49
|
|
|
|
49,144
|
|
|
|
8.00
|
|
|
$
|
61,430
|
|
|
|
10.00
|
%
|
First Business Bank Milwaukee
|
|
|
10,205
|
|
|
|
11.31
|
|
|
|
7,218
|
|
|
|
8.00
|
|
|
|
9,022
|
|
|
|
10.00
|
|
Tier 1 capital (to risk-weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
43,944
|
|
|
|
6.24
|
%
|
|
$
|
28,180
|
|
|
|
4.00
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
First Business Bank
|
|
|
57,838
|
|
|
|
9.42
|
|
|
|
24,572
|
|
|
|
4.00
|
|
|
$
|
36,858
|
|
|
|
6.00
|
%
|
First Business Bank Milwaukee
|
|
|
9,070
|
|
|
|
10.05
|
|
|
|
3,609
|
|
|
|
4.00
|
|
|
|
5,413
|
|
|
|
6.00
|
|
Tier 1 capital (to average assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
43,944
|
|
|
|
5.99
|
%
|
|
$
|
29,331
|
|
|
|
4.00
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
First Business Bank
|
|
|
57,838
|
|
|
|
9.22
|
|
|
|
25,086
|
|
|
|
4.00
|
|
|
$
|
31,358
|
|
|
|
5.00
|
%
|
First Business Bank Milwaukee
|
|
|
9,070
|
|
|
|
8.50
|
|
|
|
4,269
|
|
|
|
4.00
|
|
|
|
5,336
|
|
|
|
5.00
|
|
The following table reconciles stockholders equity to
federal regulatory capital at December 31, 2007 and 2006,
respectively.
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In Thousands)
|
|
|
Stockholders equity of the Corporation
|
|
$
|
48,552
|
|
|
$
|
45,756
|
|
Unrealized and accumulated gains and losses on specific items
and disallowed goodwill and intangible assets
|
|
|
(2,388
|
)
|
|
|
(1,812
|
)
|
|
|
|
|
|
|
|
|
|
Tier 1 capital
|
|
|
46,164
|
|
|
|
43,944
|
|
Plus: Allowable general valuation allowances and subordinated
debt
|
|
|
40,854
|
|
|
|
29,296
|
|
|
|
|
|
|
|
|
|
|
Risk-based capital
|
|
$
|
87,018
|
|
|
$
|
73,241
|
|
|
|
|
|
|
|
|
|
|
63
The Banks may not declare or pay cash dividends if such
declaration and payment would violate Federal
and/or state
regulatory requirements. Unlike the Banks, the Corporation is
not subject to these regulatory restrictions on the payment of
dividends to its stockholders, the source of which, however, may
depend upon dividends from the Banks. At December 31, 2007,
subsidiary net assets of approximately $37.1 million could
be transferred to the Corporation in the form of cash dividends
without prior regulatory approval, subject to the capital needs
of each subsidiary.
|
|
Note 13
|
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% of the employees
compensation. The Corporation made a matching contribution of 3%
to all eligible employees in 2007 and 2006. The Corporation may
also contribute additional amounts at its discretion.
Discretionary contributions of 2.8% and 1.2% were made in 2007
and 2006. Plan expense totaled approximately $221,000 and
$68,000 in 2007 and 2006, respectively.
The Corporation has a deferred compensation plan covering two
officers under which it provides contributions to supplement
their retirement. Under the terms of the agreements, 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 this plan in 2007 and 2006 was $124,000
and $36,000, respectively. The present value of future payments
under the plan of $1,636,000 and $1,916,000 at December 31,
2007 and 2006 is included in other liabilities. One of the
agreements provides for contributions to supplement health
insurance costs. The reduction of expense associated with this
portion of the plan due to the reduction of the liability in
2007 and 2006 was $4,000 and $14,000, respectively. The present
value of future payments related to post retirement health
insurance costs of $57,000 and $61,000 at December 31, 2007
and 2006 is included in other liabilities.
The Corporation owns life insurance policies on the lives of
these two officers, which have cash surrender values of
approximately $1.5 million and $1.4 million as of
December 31, 2007 and 2006, respectively and death benefits
of $5.8 million and $5.7 million, respectively. The
remaining balance of the cash surrender value of bank-owned life
insurance of $13.3 million and $12.1 million as of
December 31, 2007 and 2006, respectively, is related to
policies on a number of other officers of the Banks.
The Corporation and FBB occupy space under an operating lease
agreement that expires on March 8, 2016. First Business
Bank has a loan production office that occupies office space
under an operating lease agreement that expires on
December 31, 2017. FBB Milwaukee occupies
office space under an operating lease agreement that expires on
November 30, 2010. The Corporations total rent
expense was approximately $965,000 and $926,000 and for the
years ended December 31, 2007 and 2006, respectively.
Included in total rent expense was contingent rent of
approximately $293,000 and $294,000 for the years ended 2007 and
2006, respectively. The lease agreements include both fixed rent
increases as well as contingent rent increases. The fixed rent
increases are accrued on a straight-line basis. The contingent
rent increases are expensed as incurred. The Corporation also
leases vehicles and other office equipment. Rental expense for
these operating leases was $71,000 and $84,000 for the years
ended December 31, 2007 and 2006, respectively.
Future minimum lease payments for noncancelable operating leases
for each of the five succeeding years and thereafter are as
follows (in thousands):
|
|
|
|
|
2008
|
|
$
|
830
|
|
2009
|
|
|
849
|
|
2010
|
|
|
727
|
|
2011
|
|
|
620
|
|
2012
|
|
|
616
|
|
Thereafter
|
|
|
2,219
|
|
|
|
|
|
|
|
|
$
|
5,861
|
|
|
|
|
|
|
64
Income tax expense applicable to income for the years ended
December 31, 2007 and 2006 consists of the following:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Current:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
1,527
|
|
|
$
|
2,180
|
|
State
|
|
|
672
|
|
|
|
337
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,199
|
|
|
|
2,517
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(275
|
)
|
|
|
(564
|
)
|
State
|
|
|
(117
|
)
|
|
|
(272
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(392
|
)
|
|
|
(836
|
)
|
|
|
|
|
|
|
|
|
|
Total income tax expense
|
|
$
|
1,807
|
|
|
$
|
1,681
|
|
|
|
|
|
|
|
|
|
|
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.
The significant components of the Corporations deferred
tax assets and liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Allowance for loan and lease losses
|
|
$
|
3,784
|
|
|
$
|
3,179
|
|
Deferred compensation
|
|
|
641
|
|
|
|
751
|
|
Unrealized loss on securities
|
|
|
200
|
|
|
|
527
|
|
Unrealized loss on interest rate swaps
|
|
|
4
|
|
|
|
2
|
|
Federal and state net operating loss carryforwards
|
|
|
2,387
|
|
|
|
2,058
|
|
Other
|
|
|
1,076
|
|
|
|
794
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,092
|
|
|
|
7,311
|
|
Valuation allowance
|
|
|
(1,074
|
)
|
|
|
(857
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
7,018
|
|
|
|
6,454
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Leasing and fixed asset activities
|
|
|
4,032
|
|
|
|
3,581
|
|
Other
|
|
|
234
|
|
|
|
188
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
4,266
|
|
|
|
3,769
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset
|
|
$
|
2,752
|
|
|
$
|
2,685
|
|
|
|
|
|
|
|
|
|
|
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:
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In Thousands)
|
|
|
Change in net deferred tax assets
|
|
$
|
(67
|
)
|
|
$
|
(640
|
)
|
Deferred taxes allocated to OCI
|
|
|
(325
|
)
|
|
|
(196
|
)
|
|
|
|
|
|
|
|
|
|
Deferred income tax benefit
|
|
$
|
(392
|
)
|
|
$
|
(836
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets are included in other assets in the
consolidated balance sheets.
65
First Business Financial Services, Inc. and its wholly owned
subsidiaries have state net operating loss carryforwards of
approximately $43.0 million and $36.2 million at
December 31, 2007 and 2006, respectively, which can be used
to offset their future state taxable income. The carry forwards
expire between 2007 and 2022. A valuation allowance has been
established for the future benefits attributable to certain of
the state net operating losses.
Included in deferred tax assets is a benefit for separate return
Federal and state net operating loss carryforwards for the BBG
and its subsidiary prior to the acquisition of BBG on
June 1, 2004. As a result of the 2004 transaction, FBFS
obtained 100% ownership of BBG and its subsidiary enabling a
consolidated Federal tax return to be filed in 2004. The loss
carry forward of approximately $447,000 is subject to certain
limitations and will expire in 2024.
Realization of the deferred tax asset over time is dependent
upon the Corporation generating sufficient taxable earnings in
future periods. In determining that realizing 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 valuation allowance is established against certain state
deferred tax assets for those entities which have state net
operating loss carry forwards in which management believes that
it is more likely than not that the state deferred tax assets
will not be realized.
The provision for income taxes differs from that computed at the
federal statutory corporate tax rate as follows:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In Thousands)
|
|
|
Income before income tax expense
|
|
$
|
5,063
|
|
|
$
|
5,428
|
|
|
|
|
|
|
|
|
|
|
Tax expense at statutory federal rate of 34% applied to income
before income tax expense
|
|
$
|
1,721
|
|
|
|
1,846
|
|
State income tax, net of federal effect
|
|
|
287
|
|
|
|
43
|
|
Low income housing tax credits
|
|
|
(48
|
)
|
|
|
(68
|
)
|
Bank-owned life insurance
|
|
|
(237
|
)
|
|
|
(209
|
)
|
Other
|
|
|
84
|
|
|
|
69
|
|
|
|
|
|
|
|
|
|
|
Total income tax expense
|
|
$
|
1,807
|
|
|
$
|
1,681
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
|
35.69
|
%
|
|
|
30.97
|
%
|
Like the majority of financial institutions located in
Wisconsin, First Business Bank transferred investment securities
and loans to
out-of-state
investment subsidiaries. The Banks Nevada investment
subsidiaries now hold and manage these assets. The investment
subsidiaries have not filed returns with, or paid income or
franchise taxes to, the State of Wisconsin. The Wisconsin
Department of Revenue (the Department) recently
implemented a program to audit Wisconsin financial institutions
which formed investment subsidiaries located outside of
Wisconsin, and the Department has generally indicated that it
intends to assess income or franchise taxes on the income of the
out-of-state
investment subsidiaries of Wisconsin financial institutions. FBB
has received a Notice of Audit from the Department that would
cover years 1999 through 2005 and would relate primarily to the
issue of income of the Nevada subsidiaries. In 2007, First
Business Capital Corp (FBCC) received a Notice of Audit from the
Department that would cover the years 2001 through 2005. During
2004, the Department offered a blanket settlement agreement to
most banks in Wisconsin having Nevada investment subsidiaries.
The Department has not issued an assessment to the Bank, but the
Department has stated that it intends to do so if the matter is
not settled.
Prior to the formation of the investment subsidiaries the Bank
sought and obtained private letter rulings from the Department
regarding the non-taxability of the investment subsidiaries in
the State of Wisconsin. The Bank believes that it complied with
Wisconsin law and the private rulings received from the
Department. Should an assessment be forthcoming, the Bank
intends to defend its position vigorously through the normal
administrative appeals process in place at the Department and
through other judicial channels should they become necessary.
Although the Bank will vigorously oppose any such assessment
66
there can be no assurance that the Department will not be
successful in whole or in part in its efforts to tax the income
of the Banks Nevada investment subsidiary. In 2007 and
2006, the Bank accrued, as a component of current state tax
expense, an estimated liability including interest which is the
most likely amount within a range of probable settlement
amounts. FBFS does not expect the resolution of this matter to
materially affect its consolidated results of operations and
financial position beyond the amounts accrued.
A summary of all of the Corporations uncertain tax
positions are as follows (In Thousands):
|
|
|
|
|
Unrecognized tax benefits at beginning of year
|
|
$
|
1,397
|
|
Additions based on tax positions related to current year
|
|
|
-
|
|
Additions for tax positions of prior years
|
|
|
649
|
|
Reductions for tax positions of prior years
|
|
|
(234
|
)
|
Settlements
|
|
|
-
|
|
|
|
|
|
|
Unrecognized tax benefits at end of year
|
|
$
|
1,812
|
|
|
|
|
|
|
The total amount of unrecognized tax benefits that, if
recognized, would affect effective tax rate is
$1.2 million. As of December 31, 2007, the Corporation
had accrued $213,000 of interest. During the period ending
December 31, 2007, interest associated with uncertain tax
positions was $111,000 and is included in income tax expense. As
of December 31, 2007, State of Wisconsin tax years that
remain open are 1997 and 1999 through 2006. Federal tax years
that remain open are 2004 through 2006. As of December 31,
2007, there were no unrecognized tax benefits that are expected
to significantly increase or decrease within the next twelve
months.
|
|
Note 16
|
Commitments,
Contingencies, and Financial Instruments with Off-Balance Sheet
Risk
|
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, 2007 and 2006, 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, 2007 and 2006, respectively,
are as follows:
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In Thousands)
|
|
|
Commitments to extend credit, primarily commercial loans
|
|
$
|
172,660
|
|
|
$
|
211,611
|
|
Standby letters of credit and other credit substitutes
|
|
|
12,174
|
|
|
|
12,211
|
|
Commitments to extend credit are agreements to lend to a
customer 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 customer on a
case-by-case
basis and generally extend credit only on a secured basis.
Collateral obtained varies but consists primarily of accounts
receivable, inventory, equipment, securities, life insurance or
income-producing commercial properties. There is generally no
market for commercial loan commitments, the fair value of which
would approximate the
67
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 customer to a third
party. Standby letters of credit, collateralized by accounts
receivable, inventory, and income-producing commercial
properties, expire primarily within one year. 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.
Management has estimated that there is no probable loss expected
from the funding of loan commitments or stand-by letters of
credit at December 31, 2007 and 2006.
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 Corporations financial position, results of
operations, and cash flows.
|
|
Note 17
|
Fair
Value of Financial Instruments
|
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.
The carrying amounts reported for cash and cash equivalents,
interest bearing deposits, federal funds sold, federal funds
purchased, securities sold under agreements to repurchase,
accrued interest receivable and accrued interest payable
approximate fair value because of their short-term nature and
because they do not present unanticipated credit concerns.
Securities: The fair value of securities is
estimated based on quoted market prices or bid quotations
received from securities dealers.
Loans and Leases: Fair values are estimated
for portfolios of loans with similar financial characteristics.
The fair value of performing loans is calculated by discounting
scheduled cash flows through the estimated maturity using
estimated market discount rates that reflect the credit and
interest rate risk inherent in the loan. 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.
Federal Home Loan Bank stock: The carrying
amount of FHLB stock equals its fair value because the shares
may be redeemed by the FHLB at their carrying amount of $100 per
share par amount.
Cash surrender value of life insurance: The
carrying amount of the cash surrender value of life insurance
approximates its fair value.
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 offered for deposits of similar remaining maturities.
The fair value estimates do not include the benefit that results
from the low cost funding provided by deposit liabilities
compared to borrowing funds in the market.
68
Securities sold under agreement to
repurchase: Securities sold under agreement to
repurchase reprice frequently, and as such, fair value
approximates the carrying value.
Borrowed funds: 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 Corporations
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 counter party.
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 fair value of
interest rate swaps is based on the amount the Banks would pay
or receive to terminate the contract.
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 Corporations entire
holding of a particular financial instrument. Because no market
exists for a significant portion of the Corporations
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 have not been considered in the
estimates.
Fair value estimates, methods, and assumptions used by the
Corporation to estimate fair value for its financial instruments
are set forth below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
December 31, 2006
|
|
|
|
Carrying
|
|
|
|
|
|
Carrying
|
|
|
|
|
|
|
Amount
|
|
|
Fair Value
|
|
|
Amount
|
|
|
Fair Value
|
|
|
|
(In Thousands)
|
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
17,624
|
|
|
$
|
17,624
|
|
|
$
|
19,461
|
|
|
$
|
19,461
|
|
Securities
available-for-sale
|
|
|
97,378
|
|
|
|
97,378
|
|
|
|
100,008
|
|
|
|
100,008
|
|
Loans and lease receivables
|
|
|
771,633
|
|
|
|
788,879
|
|
|
|
639,867
|
|
|
|
636,436
|
|
Federal Home Loan Bank stock
|
|
|
2,367
|
|
|
|
2,367
|
|
|
|
2,024
|
|
|
|
2,024
|
|
Cash surrender value of life insurance
|
|
|
14,757
|
|
|
|
14,757
|
|
|
|
13,469
|
|
|
|
13,469
|
|
Accrued interest receivable
|
|
|
3,566
|
|
|
|
3,566
|
|
|
|
3,407
|
|
|
|
3,407
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
$
|
776,060
|
|
|
$
|
782,075
|
|
|
$
|
640,226
|
|
|
$
|
637,700
|
|
Federal funds purchased
|
|
|
14,250
|
|
|
|
14,250
|
|
|
|
33,300
|
|
|
|
33,300
|
|
Securities sold under agreements to repurchase
|
|
|
-
|
|
|
|
-
|
|
|
|
451
|
|
|
|
451
|
|
Federal Home Loan Bank and other borrowings
|
|
|
67,736
|
|
|
|
68,818
|
|
|
|
59,219
|
|
|
|
58,634
|
|
Interest rate swaps
|
|
|
10
|
|
|
|
10
|
|
|
|
5
|
|
|
|
5
|
|
Accrued interest payable
|
|
|
5,911
|
|
|
|
5,911
|
|
|
|
3,993
|
|
|
|
3,993
|
|
Off balance sheet items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Standby letters of credit
|
|
|
55
|
|
|
|
55
|
|
|
|
55
|
|
|
|
55
|
|
Commitments to extend credit
|
|
|
-
|
|
|
|
|
*
|
|
|
-
|
|
|
|
|
*
|
69
|
|
Note 18
|
Derivative
and Hedging Activities
|
Derivative gains and losses reclassified from accumulated other
comprehensive income to current period earnings are included in
the line item in which the hedged cash flows are recorded. At
December 31, 2007 and 2006 and other comprehensive income
included unrealized after tax (loss) gains of $(5,000) and
$3,000 respectively, related to derivatives used to hedge
funding cash flows. The estimated amount of loss expected to be
classified into earnings from accumulated other comprehensive
income due to net expenses on cash flow hedges within the next
twelve months is not expected to be material.
The unrealized holding losses, net of tax effect, included in
accumulated other comprehensive income at December 31, 2007
and 2006, was $6,000 and $3,000, respectively.
Interest rate swap agreements consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
Notional
|
|
|
Maturity
|
|
Fixed
|
|
|
Variable
|
|
|
Notional
|
|
|
Maturity
|
|
Fixed
|
|
|
Variable
|
|
|
|
Amount
|
|
|
Date
|
|
Rate
|
|
|
Rate
|
|
|
Amount
|
|
|
Date
|
|
Rate
|
|
|
Rate
|
|
|
|
(In Thousands)
|
|
|
Cash flow hedge:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pay-fixed interest rate swap
|
|
$
|
447
|
|
|
April, 2009
|
|
|
5.24
|
%
|
|
|
3.56
|
%
|
|
$
|
618
|
|
|
April, 2009
|
|
|
5.24
|
%
|
|
|
5.04
|
%
|
In the first quarter of 2006 four callable-receive fixed
interest rate swaps were terminated prior to their maturities.
This action resulted in a cash payment totaling
$1.1 million. A pay-fixed interest rate swap scheduled to
mature in June, 2011 was terminated in the second quarter of
2006 resulting in a cash payment of $296,000. The Corporation
had recognized in the income statement the change in market
value of these five terminated derivatives in the period the
change occurred.
At December 31, 2007 and 2006, the fair value of the
interest rate swap designated as a cash flow hedge represented a
liability of $10,000 and $5,000, respectively. At
December 31, 2007 and 2006, there were no other derivatives
owned by the Corporation.
The Corporation amortized to non-interest income, over the
remaining term of the swap, the market loss of the interest rate
swap that no longer qualified for cash flow hedge accounting
because upon adoption of FIN 46R, the Corporation did not
re-designate a new hedging relationship.
70
|
|
Note 19
|
Condensed
Parent Only Financial Information
|
The following represents the unconsolidated financial
information of the Parent of the Corporation:
Condensed
Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In Thousands)
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
29
|
|
|
$
|
180
|
|
Investments in subsidiaries, at equity
|
|
|
82,124
|
|
|
|
68,720
|
|
Leasehold improvements and equipment, net
|
|
|
724
|
|
|
|
651
|
|
Other
|
|
|
449
|
|
|
|
161
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
83,326
|
|
|
$
|
69,712
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders Equity
|
|
|
|
|
|
|
|
|
Borrowed funds
|
|
$
|
33,210
|
|
|
$
|
22,635
|
|
Other liabilities
|
|
|
1,564
|
|
|
|
1,321
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
34,774
|
|
|
|
23,956
|
|
Stockholders equity
|
|
|
48,552
|
|
|
|
45,756
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
83,326
|
|
|
$
|
69,712
|
|
|
|
|
|
|
|
|
|
|
Condensed
Statements of Income
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In Thousands)
|
|
|
Interest income
|
|
$
|
17
|
|
|
$
|
-
|
|
Interest expense
|
|
|
2,010
|
|
|
|
1,981
|
|
|
|
|
|
|
|
|
|
|
Net interest expense
|
|
|
(1,993
|
)
|
|
|
(1,981
|
)
|
|
|
|
|
|
|
|
|
|
Non-interest income
|
|
|
|
|
|
|
|
|
Consulting and rental income from subsidiaries
|
|
|
3,956
|
|
|
|
2,030
|
|
Other
|
|
|
3
|
|
|
|
109
|
|
|
|
|
|
|
|
|
|
|
Total non-interest income
|
|
|
3,959
|
|
|
|
2,139
|
|
|
|
|
|
|
|
|
|
|
Non-interest expense
|
|
|
6,268
|
|
|
|
3,928
|
|
|
|
|
|
|
|
|
|
|
Loss before tax benefit and equity in undistributed net income
of subsidiaries
|
|
|
(4,302
|
)
|
|
|
(3,770
|
)
|
Income tax benefit
|
|
|
(1,522
|
)
|
|
|
(1,253
|
)
|
|
|
|
|
|
|
|
|
|
Loss before equity in undistributed net income of subsidiaries
|
|
|
(2,780
|
)
|
|
|
(2,517
|
)
|
Equity in undistributed net income of subsidiaries
|
|
|
6,036
|
|
|
|
6,264
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
3,256
|
|
|
$
|
3,747
|
|
|
|
|
|
|
|
|
|
|
71
Condensed
Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In Thousands)
|
|
|
Operating activities
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
3,256
|
|
|
$
|
3,747
|
|
Adjustments to reconcile net income to net cash used in
operating activities:
|
|
|
|
|
|
|
|
|
Equity in undistributed earnings of subsidiaries
|
|
|
(6,036
|
)
|
|
|
(6,264
|
)
|
Share-based compensation
|
|
|
135
|
|
|
|
58
|
|
Change in fair value of interest rate swaps
|
|
|
-
|
|
|
|
(96
|
)
|
Increase (Decrease) in liabilities
|
|
|
260
|
|
|
|
(822
|
)
|
Other, net
|
|
|
(391
|
)
|
|
|
1,392
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(2,776
|
)
|
|
|
(1,985
|
)
|
|
|
|
|
|
|
|
|
|
Investing activities
|
|
|
|
|
|
|
|
|
Payments for investment in and advances to subsidiaries
|
|
|
(6,500
|
)
|
|
|
(2,000
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(6,500
|
)
|
|
|
(2,000
|
)
|
|
|
|
|
|
|
|
|
|
Financing activities
|
|
|
|
|
|
|
|
|
Exercise of stock options
|
|
|
37
|
|
|
|
136
|
|
Proceeds from advances and other borrowed funds
|
|
|
7,075
|
|
|
|
5,585
|
|
Repayment of advances and other borrowed funds
|
|
|
(6,500
|
)
|
|
|
(6,700
|
)
|
Proceeds from issuance of long-term debt
|
|
|
10,000
|
|
|
|
21,000
|
|
Repayment of long-term debt
|
|
|
-
|
|
|
|
(5,000
|
)
|
Repayment of junior subordinated debentures
|
|
|
-
|
|
|
|
(10,310
|
)
|
Purchase of treasury stock
|
|
|
(843
|
)
|
|
|
(21
|
)
|
Dividends paid
|
|
|
(644
|
)
|
|
|
(592
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
9,125
|
|
|
|
4,098
|
|
|
|
|
|
|
|
|
|
|
(Decrease) Increase in cash and cash equivalents
|
|
|
(151
|
)
|
|
|
113
|
|
Cash and cash equivalents at beginning of year
|
|
|
180
|
|
|
|
67
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
29
|
|
|
$
|
180
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 20
|
Condensed
Quarterly Earnings (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
|
(Dollars in Thousands, Except per Share Data)
|
|
|
Interest income
|
|
$
|
13,816
|
|
|
$
|
14,488
|
|
|
$
|
15,275
|
|
|
$
|
15,909
|
|
|
$
|
10,811
|
|
|
$
|
11,536
|
|
|
$
|
12,165
|
|
|
$
|
13,148
|
|
Interest expense
|
|
|
(8,435
|
)
|
|
|
(8,850
|
)
|
|
|
(9,413
|
)
|
|
|
(9,582
|
)
|
|
|
(6,287
|
)
|
|
|
(6,730
|
)
|
|
|
(7,448
|
)
|
|
|
(8,223
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
5,381
|
|
|
|
5,638
|
|
|
|
5,862
|
|
|
|
6,327
|
|
|
|
4,524
|
|
|
|
4,806
|
|
|
|
4,717
|
|
|
|
4,925
|
|
Provision for loan losses
|
|
|
(576
|
)
|
|
|
(701
|
)
|
|
|
(596
|
)
|
|
|
(1,031
|
)
|
|
|
-
|
|
|
|
(71
|
)
|
|
|
(413
|
)
|
|
|
(1,036
|
)
|
Non-interest income
|
|
|
1,002
|
|
|
|
1,157
|
|
|
|
1,101
|
|
|
|
1,156
|
|
|
|
734
|
|
|
|
936
|
|
|
|
1,004
|
|
|
|
1,000
|
|
Non-interest expense
|
|
|
(4,876
|
)
|
|
|
(4,787
|
)
|
|
|
(4,944
|
)
|
|
|
(5,050
|
)
|
|
|
(3,990
|
)
|
|
|
(4,060
|
)
|
|
|
(4,133
|
)
|
|
|
(3,515
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
931
|
|
|
|
1,307
|
|
|
|
1,423
|
|
|
|
1,402
|
|
|
|
1,268
|
|
|
|
1,611
|
|
|
|
1,175
|
|
|
|
1,374
|
|
Income taxes
|
|
|
(332
|
)
|
|
|
(448
|
)
|
|
|
(538
|
)
|
|
|
(489
|
)
|
|
|
(411
|
)
|
|
|
(532
|
)
|
|
|
(309
|
)
|
|
|
(429
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
599
|
|
|
$
|
859
|
|
|
$
|
885
|
|
|
$
|
913
|
|
|
$
|
857
|
|
|
$
|
1,079
|
|
|
$
|
866
|
|
|
$
|
945
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per share data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
0.24
|
|
|
$
|
0.35
|
|
|
$
|
0.36
|
|
|
$
|
0.37
|
|
|
$
|
0.35
|
|
|
$
|
0.44
|
|
|
$
|
0.35
|
|
|
$
|
0.39
|
|
Diluted earnings per share
|
|
$
|
0.24
|
|
|
$
|
0.35
|
|
|
$
|
0.36
|
|
|
$
|
0.37
|
|
|
$
|
0.35
|
|
|
$
|
0.44
|
|
|
$
|
0.35
|
|
|
$
|
0.38
|
|
Dividends
|
|
$
|
0.065
|
|
|
$
|
0.065
|
|
|
$
|
0.065
|
|
|
$
|
0.065
|
|
|
$
|
0.06
|
|
|
$
|
0.06
|
|
|
$
|
0.06
|
|
|
$
|
0.06
|
|
72
Report of
Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
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, 2007 and 2006, and the related
consolidated statements of income, changes in stockholders
equity and comprehensive income, and cash flows for each of the
years in the two-year period ended December 31, 2007. These
consolidated financial statements are the responsibility of the
Companys 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, 2007 and 2006, and the
results of their operations and their cash flows for each of the
years in the two-year period ended December 31, 2007, in
conformity with U.S. generally accepted accounting
principles.
Milwaukee, Wisconsin
March 17, 2008
73
Item 9.
Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
Item 9A(T).
Controls and Procedures
Disclosure
Controls and Procedures
The Corporations management, with the participation of the
Corporations chief executive officer and chief financial
officer, has evaluated the Corporations disclosure
controls and procedures (as defined in
Rules 13a-15(e)
and
15d-15(e)
under the Securities Exchange Act of 1934). Based upon that
evaluation, the Corporations chief executive officer and
chief financial officer have concluded that the
Corporations disclosure controls and procedures were
effective as of December 31, 2007.
Managements
Annual Report on Internal Control over Financial
Reporting
The Corporations 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
Corporations internal control over financial reporting is
a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of the
Corporations 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 Corporations internal control over financial reporting
based on criteria for effective internal control over financial
reporting established in Internal Control
Integrated Framework, issued by the Committee of
Sponsoring Organization of the Treadway Commission (COSO). Based
on this assessment, management has determined that the
Corporations internal control over financial reporting as
of December 31, 2007 is effective.
This annual report does not include an attestation report of the
Corporations registered public accounting firm regarding
internal control over financial reporting. Managements
report was not subject to attestation by the Corporations
registered public accounting firm pursuant to temporary rules of
the Securities and Exchange Commission that permit the
Corporation to provide only managements report in this
annual report.
Changes
in Internal Control over Financial Reporting
There was no change in the Corporations internal control
over financial reporting (as such term is defined in
Rules 13a-15(f)
and
15d-15(f)
under the Exchange Act) that occurred during the year ended
December 31, 2007 that has materially affected, or is
reasonably likely to materially affect, the Corporations
internal control over financial reporting.
Item 9B.
Other Information
On March 14, 2008 the Board of Directors approved the
Annual Incentive Bonus Program that is attached as
Exhibit 10.9. Three performance criteria weighted equally
will be used as measurements in the program as follows: Top Line
Growth defined as net interest income plus fee income, Adjusted
Net Income Growth defined as net income after tax, before loan
loss provision, after actual net charge offs and return on
equity.
74
PART III.
Item 10.
Directors, Executive Officers and Corporate Governance
|
|
|
|
(a)
|
Directors of the Registrant. Information with
respect to the Directors of the registrant, included in the
definitive Proxy Statement for the Annual Meeting of the
Stockholders to be held on May 5, 2008 under the captions
Board of Directors and Section 16(a)
Beneficial Ownership Reporting Compliance is incorporated
herein by reference.
|
|
|
(b)
|
Executive Officers of the Registrant. The
information is presented in Item 1 of this document.
|
|
|
|
|
(c)
|
Code of Ethics. The Corporation has adopted a code
of ethics applicable to all employees, including the principal
executive and principal accounting officer of the Corporation.
The FBFS Code of Ethics is posted on the Corporations
website at www.firstbusiness.com
|
Item 11.
Executive Compensation
Information with respect to compensation for our directors and
officers included in the definitive Proxy Statement for the
Annual Meeting to be held on May 5, 2008 included within
the summary compensation table 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 Stockholders to be
held on May 5, 2008 under the captions Principal
Shareholders and Section 16(a) Beneficial
Ownership Reporting Compliance 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 Stockholders to be held on May 5,
2008 under the caption Related Party Transactions 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 Stockholders to be held on May 5,
2008 under the caption Independent Registered Public
Accounting Firm is incorporated herein by reference.
ITEM IV.
Item 15.
Exhibits, Financial Statements 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.
75
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.
Corey A. Chambas
Chief Executive Officer
March 17, 2008
76
|
|
|
Exhibit No.
|
|
Exhibit Name
|
|
3.1
|
|
Amended and Restated Articles of Incorporation of First Business
Financial Services, Inc. (previously filed as Exhibit 3.1 and
incorporated by reference in the Amended Registration Statement
on Form 10 filed April 28, 2005)
|
3.2
|
|
Amended and Restated Bylaws of First Business Financial
Services, Inc. (previously filed as Exhibit 3.2 and incorporated
by reference in the Amended Registration Statement on Form 10
filed April 28, 2005)
|
4
|
|
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 Registration Statement on Form 10. No
such instrument authorizes securities in excess of 10% of the
total assets of the Registrant.
|
10.1
|
|
1993 Incentive Stock Option Plan (previously filed in the
Registration Statement on Form S-8 filed September 28, 2006)
|
10.2
|
|
2001 Equity Incentive Plan (previously filed as Exhibit 10.1 and
incorporated by reference in the Amended Registration Statement
on Form 10 filed April 28, 2005)
|
10.3
|
|
Form of Stock Option Agreement (previously filed as Exhibit 10.2
and incorporated by reference in the Amended Registration
Statement on Form 10 filed April 28, 2005)
|
10.4
|
|
2006 Equity Incentive Plan (previously filed in the Registration
Statement on Form S-8 filed September 28, 2006)
|
10.5
|
|
Form of Restricted Stock Agreement (previously filed as Exhibit
4.4 in the Registration Statement on Form S-8 filed September
28, 2006)
|
10.6
|
|
Restated Employment Agreement dated December 14, 2005 between
the Registrant and Jerome J. Smith (previously filed as Exhibit
10.1 to the current report on Form 8-K filed on December 16,
2005)
|
10.7
|
|
Employment and Repayment Agreement between First Business
Capital Corp. and Charles H. Batson, dated December 14, 2005 and
amended February 6, 2006 (previously filed as Exhibits 10.1 and
10.2 to the current reports on Form 8-K filed on December 20,
2005 and February 10, 2006)
|
10.8
|
|
Restated Employment Agreement dated November 7, 2006 between the
Registrant and Corey A. Chambas (previously filed as Exhibit
10.1 to the current report on Form 8-K filed on November 13,
2006)
|
10.9
|
|
Annual Incentive Bonus Program
|
21
|
|
Subsidiaries of the Registrant (previously filed as
Exhibit 21 and incorporated by reference in the Amended
Registration Statement on Form 10 filed 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
|
|
Certification of the Chief Executive Officer and Senior Vice
President and Chief Financial Officer pursuant to 18 U.S.C.
Section 1350
|
99
|
|
Proxy Statement for the Annual Meeting of the Stockholders (to
be filed with the SEC under Regulation 14A within 120 days
after December 31, 2007; except to the extent specifically
incorporated by reference, the Proxy Statement for the Annual
Meeting of the Stockholders shall not be deemed to be filed with
the SEC as part of this Annual Report on Form 10-K)
|
77