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Section 1: 10-Q (FORM 10-Q)

Document
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ
 
Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2018
OR
¨
 
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Commission file number 001-34095
FIRST BUSINESS FINANCIAL SERVICES, INC.
(Exact name of registrant as specified in its charter)
Wisconsin
 
39-1576570
 
 
 
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
401 Charmany Drive, Madison, WI
 
53719
 
 
 
(Address of Principal Executive Offices)
 
(Zip Code)
(608) 238-8008
Registrant’s telephone number, including area code
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and such files). Yes þ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ¨
 
Accelerated filer þ
 
Non-accelerated filer ¨
 
Smaller reporting company ¨
 
Emerging growth company ¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ
The number of shares outstanding of the registrant’s sole class of common stock, par value $0.01 per share, on October 19, 2018 was 8,793,341 shares.


Table of Contents

FIRST BUSINESS FINANCIAL SERVICES, INC.
INDEX — FORM 10-Q






Table of Contents

PART I. Financial Information
Item 1. Financial Statements
First Business Financial Services, Inc.
Consolidated Balance Sheets
 
 
September 30,
2018
 
December 31,
2017
 
 
(Unaudited)
 
 
 
(In Thousands, Except Share Data)
Assets
 
 
 
 
Cash and due from banks
 
$
20,099

 
$
17,059

Short-term investments
 
20,194

 
35,480

Cash and cash equivalents
 
40,293

 
52,539

Securities available-for-sale, at fair value
 
134,995

 
126,005

Securities held-to-maturity, at amortized cost
 
39,950

 
37,778

Loans held for sale
 
4,712

 
2,194

Loans and leases receivable, net of allowance for loan and lease losses of $20,455 and $18,763, respectively
 
1,578,152

 
1,482,832

Premises and equipment, net
 
3,247

 
3,156

Foreclosed properties
 
1,454

 
1,069

Bank-owned life insurance
 
41,212

 
40,323

Federal Home Loan Bank stock, at cost
 
6,890

 
5,670

Goodwill and other intangible assets
 
12,132

 
12,652

Accrued interest receivable and other assets
 
31,293

 
29,848

Total assets
 
$
1,894,330

 
$
1,794,066

Liabilities and Stockholders’ Equity
 
 
 
 
Deposits
 
$
1,408,903

 
$
1,394,331

Federal Home Loan Bank advances and other borrowings
 
281,430

 
207,898

Junior subordinated notes
 
10,029

 
10,019

Accrued interest payable and other liabilities
 
16,426

 
12,540

Total liabilities
 
1,716,788

 
1,624,788

Stockholders’ equity:
 
 
 
 
Preferred stock, $0.01 par value, 2,500,000 shares authorized, none issued or outstanding
 

 

Common stock, $0.01 par value, 25,000,000 shares authorized, 9,064,784 and 9,021,985 shares issued, 8,793,941 and 8,763,539 shares outstanding at September 30, 2018 and December 31, 2017, respectively
 
91

 
90

Additional paid-in capital
 
79,369

 
78,620

Retained earnings
 
107,460

 
98,906

Accumulated other comprehensive loss
 
(2,000
)
 
(1,238
)
Treasury stock, 270,843 and 258,446 shares at September 30, 2018 and December 31, 2017, respectively, at cost
 
(7,378
)
 
(7,100
)
Total stockholders’ equity
 
177,542

 
169,278

Total liabilities and stockholders’ equity
 
$
1,894,330

 
$
1,794,066


See accompanying Notes to Unaudited Consolidated Financial Statements.


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Table of Contents

First Business Financial Services, Inc.
Consolidated Statements of Income (Unaudited)
 
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
 
2018
 
2017
 
2018
 
2017
 
 
(In Thousands, Except Per Share Data)
Interest income
 
 
 
 
 
 
 
 
Loans and leases
 
$
22,266

 
$
17,686

 
$
63,171

 
$
53,492

Securities
 
1,002

 
771

 
2,796

 
2,326

Short-term investments
 
295

 
177

 
787

 
488

Total interest income
 
23,563

 
18,634

 
66,754

 
56,306

Interest expense
 
 
 
 
 
 
 
 
Deposits
 
4,232

 
2,708

 
10,271

 
8,039

Federal Home Loan Bank advances and other borrowings
 
1,957

 
763

 
5,424

 
2,185

Junior subordinated notes
 
280

 
280

 
832

 
832

Total interest expense
 
6,469

 
3,751

 
16,527

 
11,056

Net interest income
 
17,094

 
14,883

 
50,227

 
45,250

Provision for loan and lease losses
 
(546
)
 
1,471

 
4,508

 
5,699

Net interest income after provision for loan and lease losses
 
17,640

 
13,412

 
45,719

 
39,551

Non-interest income
 
 
 
 
 
 
 
 
Trust and investment service fees
 
1,941

 
1,653

 
5,826

 
4,930

Gain on sale of Small Business Administration loans
 
641

 
606

 
1,184

 
1,501

Service charges on deposits
 
788

 
756

 
2,292

 
2,287

Loan fees
 
459

 
391

 
1,375

 
1,525

Increase in cash surrender value of bank-owned life insurance
 
301

 
314

 
890

 
940

Commercial loan swap fees
 
306

 
418

 
1,009

 
866

Other non-interest income
 
435

 
201

 
943

 
1,091

Total non-interest income
 
4,871

 
4,339

 
13,519

 
13,140

Non-interest expense
 
 
 
 
 
 
 
 
Compensation
 
9,819

 
7,645

 
28,006

 
24,710

Occupancy
 
560

 
527

 
1,632

 
1,521

Professional fees
 
1,027

 
995

 
2,990

 
3,046

Data processing
 
512

 
592

 
1,748

 
1,810

Marketing
 
593

 
594

 
1,518

 
1,546

Equipment
 
403

 
285

 
1,089

 
868

Computer software
 
814

 
715

 
2,235

 
2,037

FDIC insurance
 
457

 
320

 
1,125

 
1,081

Collateral liquidation costs
 
230

 
371

 
454

 
556

Net loss on foreclosed properties
 
30

 

 
30

 

Impairment of tax credit investments
 
113

 
112

 
554

 
338

SBA recourse provision
 
314

 
1,315

 
118

 
2,095

Other non-interest expense
 
874

 
760

 
2,621

 
2,404

Total non-interest expense
 
15,746

 
14,231

 
44,120

 
42,012

Income before income tax expense
 
6,765

 
3,520

 
15,118

 
10,679

Income tax expense
 
1,464

 
936

 
2,879

 
2,812

Net income
 
$
5,301

 
$
2,584

 
$
12,239

 
$
7,867

Earnings per common share
 
 
 
 
 
 
 
 
Basic
 
$
0.60

 
$
0.30

 
$
1.40

 
$
0.90

Diluted
 
0.60

 
0.30

 
1.40

 
0.90

Dividends declared per share
 
0.14

 
0.13

 
0.42

 
0.39


See accompanying Notes to Unaudited Consolidated Financial Statements.

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First Business Financial Services, Inc.
Consolidated Statements of Comprehensive Income (Unaudited)

 
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
 
2018
 
2017
 
2018
 
2017
 
 
(In Thousands)
Net income
 
$
5,301

 
$
2,584

 
$
12,239

 
$
7,867

Other comprehensive loss, before tax
 
 
 
 
 
 
 
 
Securities available-for-sale:
 
 
 
 
 
 
 
 
Unrealized securities (losses) gains arising during the period
 
(634
)
 
172

 
(2,524
)
 
199

Securities held-to-maturity:
 
 
 
 
 
 
 
 
Amortization of net unrealized losses transferred from available-for-sale
 
18

 
25

 
54

 
79

Interest rate swaps:
 
 
 
 
 
 
 
 
Unrealized gains on interest rate swaps arising during the period
 
382

 

 
1,412

 

Income tax benefit (expense)
 
56

 
(76
)
 
296

 
(126
)
     Total other comprehensive (loss) income
 
(178
)
 
121

 
(762
)
 
152

Comprehensive income
 
$
5,123

 
$
2,705

 
$
11,477

 
$
8,019


See accompanying Notes to Unaudited Consolidated Financial Statements.

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Table of Contents

First Business Financial Services, Inc.
Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)


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

 
$
90

 
$
77,542

 
$
91,317

 
$
(522
)
 
$
(6,777
)
 
$
161,650

Net income
 

 

 

 
7,867

 

 

 
7,867

Other comprehensive income
 

 

 

 

 
152

 

 
152

Share-based compensation - restricted shares, net
 
57,106

 

 
811

 

 

 

 
811

Cash dividends ($0.39 per share)
 

 

 

 
(3,399
)
 

 

 
(3,399
)
Treasury stock purchased
 
(14,039
)
 

 

 

 

 
(300
)
 
(300
)
Balance at September 30, 2017
 
8,758,923

 
$
90

 
$
78,353

 
$
95,785

 
$
(370
)
 
$
(7,077
)
 
$
166,781


 
 
Common Shares Outstanding
 
Common
Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Loss
 
Treasury
Stock
 
Total
 
 
(In Thousands, Except Share Data)
Balance at December 31, 2017
 
8,763,539

 
$
90

 
$
78,620

 
$
98,906

 
$
(1,238
)
 
$
(7,100
)
 
$
169,278

Net income
 

 

 

 
12,239

 

 

 
12,239

Other comprehensive loss
 

 

 

 

 
(762
)
 

 
(762
)
Share-based compensation - restricted shares, net
 
42,799

 
1

 
749

 

 

 

 
750

Cash dividends ($0.42 per share)
 

 

 

 
(3,685
)
 

 

 
(3,685
)
Treasury stock purchased
 
(12,397
)
 

 

 

 

 
(278
)
 
(278
)
Balance at September 30, 2018
 
8,793,941

 
$
91

 
$
79,369

 
$
107,460

 
$
(2,000
)
 
$
(7,378
)
 
$
177,542


See accompanying Notes to Unaudited Consolidated Financial Statements.


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Table of Contents

First Business Financial Services, Inc.
Consolidated Statements of Cash Flows (Unaudited)
 
 
For the Nine Months Ended September 30,
 
 
2018
 
2017
 
 
(In Thousands)
Operating activities
 
 
 
 
Net income
 
$
12,239

 
$
7,867

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Deferred income taxes, net
 
382

 
(1,603
)
Impairment of tax credit investments
 
554

 
338

Provision for loan and lease losses
 
4,508

 
5,699

Depreciation, amortization and accretion, net
 
1,099

 
1,148

Share-based compensation
 
750

 
811

Increase in value of bank-owned life insurance policies
 
(890
)
 
(940
)
Origination of loans for sale
 
(64,985
)
 
(24,606
)
Sale of loans originated for sale
 
63,651

 
27,244

Gain on sale of loans originated for sale
 
(1,184
)
 
(1,527
)
Net loss on foreclosed properties, including impairment valuation
 
30

 

Loan servicing right impairment valuation
 
69

 

Excess tax benefit from share-based compensation
 
(43
)
 
(59
)
Returns on investments in limited partnerships
 
413

 
92

Net increase in accrued interest receivable and other assets
 
(1,242
)
 
(1,759
)
Net increase in accrued interest payable and other liabilities
 
4,945

 
6,739

Net cash provided by operating activities
 
20,296

 
19,444

Investing activities
 
 
 
 
Proceeds from maturities, redemptions and paydowns of available-for-sale securities
 
26,719

 
29,802

Proceeds from maturities, redemptions and paydowns of held-to-maturity securities
 
2,655

 
2,723

Proceeds from sale of available-for-sale securities
 

 
11,702

Purchases of available-for-sale securities
 
(38,486
)
 
(27,125
)
Purchases of held-to-maturity securities

 
(4,867
)
 
(3,016
)
Net increase in loans and leases
 
(100,185
)
 
(22,530
)
Investments in limited partnerships
 

 
(500
)
Returns of investments in limited partnerships
 
316

 

Investment in historic development entities
 
(905
)
 
(417
)
Investment in Federal Home Loan Bank stock
 
(8,118
)
 
(12,223
)
Proceeds from the sale of Federal Home Loan Bank stock
 
6,898

 
9,271

Purchases of leasehold improvements and equipment, net
 
(720
)
 
(942
)
Net cash used in investing activities
 
(116,693
)
 
(13,255
)
Financing activities
 
 
 
 
Net increase (decrease) in deposits
 
14,572

 
(115,107
)
Repayment of Federal Home Loan Bank advances
 
(698,600
)
 
(470,416
)
Proceeds from Federal Home Loan Bank advances
 
772,100

 
580,415

Proceeds from issuance of subordinated notes payable
 

 
9,090

Repayment of subordinated notes payable
 

 
(7,889
)
Net increase (decrease) in other borrowed funds
 
42

 
(2,904
)
Cash dividends paid
 
(3,685
)
 
(3,399
)
Purchase of treasury stock
 
(278
)
 
(300
)
Net cash provided by (used in) financing activities
 
84,151

 
(10,510
)
Net decrease in cash and cash equivalents
 
(12,246
)
 
(4,321
)
Cash and cash equivalents at the beginning of the period
 
52,539

 
77,517

Cash and cash equivalents at the end of the period
 
$
40,293

 
$
73,196

Supplementary cash flow information
 
 
 
 
Cash paid during the period for:
 
 
 
 
Interest paid on deposits and borrowings
 
$
15,214

 
$
10,504

Income taxes paid
 
882

 
490

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

 
8,366

Transfer from loans to foreclosed properties
 
415

 

Transfer from premises and equipment to foreclosed properties

 

 
1,113

See accompany Notes to Unaudited Consolidated Financial Statements

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Table of Contents

Notes to Unaudited Consolidated Financial Statements

Note 1 — Nature of Operations and Summary of Significant Accounting Policies
Nature of Operations
The accounting and reporting practices of First Business Financial Services, Inc. (the “Corporation”), through our wholly owned subsidiary, First Business Bank (“FBB” or the “Bank”), have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). FBB operates as a commercial banking institution primarily in the Wisconsin and greater Kansas City markets. FBB also offers trust and investment services through First Business Trust & Investments (“FBTI”) and investment portfolio administrative services and asset/liability management services through First Business Consulting Services (“FBCS”), both divisions of FBB. The Bank provides a full range of financial services to businesses, business owners, executives, professionals and high net worth individuals. The Bank is subject to competition from other financial institutions and service providers and is also subject to state and federal regulations. FBB has the following wholly owned subsidiaries: First Business Capital Corp. (“FBCC”), First Madison Investment Corp. (“FMIC”), First Business Equipment Finance, LLC (“FBEF”), ABKC Real Estate, LLC (“ABKC”), Rimrock Road Investment Fund, LLC (“Rimrock Road”), BOC Investment, LLC (“BOC”), Mitchell Street Apartments Investment, LLC (“Mitchell Street”) and FBB Tax Credit Investment LLC (“FBB Tax Credit”). FMIC is located in and was formed under the laws of the state of Nevada.
Basis of Presentation
The accompanying unaudited Consolidated Financial Statements were prepared in accordance with GAAP and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements and should be read in conjunction with the Corporation’s Consolidated Financial Statements and footnotes thereto included in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2017. The unaudited Consolidated Financial Statements include the accounts of the Corporation and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. In accordance with the provisions of Accounting Standards Codification (“ASC”) Topic 810, the Corporation’s ownership interest in FBFS Statutory Trust II (“Trust II”) has not been consolidated into the financial statements.
Management of the Corporation is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements as well as reported amounts of revenues and expenses during the reporting period. Actual results could differ significantly from those estimates. Material estimates that could significantly change in the near-term include the value of securities and interest rate swaps, level of the allowance for loan and lease losses, lease residuals, property under operating leases, goodwill, level of the Small Business Administration (“SBA”) recourse reserve and income taxes. The results of operations for the nine month period ended September 30, 2018 are not necessarily indicative of results that may be expected for any other interim period or the entire fiscal year ending December 31, 2018. Certain amounts in prior periods may have been reclassified to conform to the current presentation. Subsequent events have been evaluated through the date of the issuance of the unaudited Consolidated Financial Statements. No significant subsequent events have occurred through this date requiring adjustment to the financial statements or disclosures.
The Corporation has not changed its significant accounting and reporting policies from those disclosed in the Corporation’s Form 10-K for the year ended December 31, 2017.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606).” The ASU is a converged standard between the FASB and the International Accounting Standards Board that provides a single comprehensive revenue recognition model for all contracts with customers across transactions and industries. The primary objective of the ASU is revenue recognition that represents the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. The Corporation adopted ASU 2014-09 and all subsequent amendments to the ASU (collectively, “ASC 606”) in the first quarter of 2018 with no material impact on its results of operations, financial position and liquidity.
In January 2016, the FASB issued ASU No. 2016-01, “Financial Instruments (Subtopic 825-10).” The ASU amends certain aspects of recognition, measurement, presentation and disclosure of financial instruments. This amendment supersedes the guidance to classify equity securities with readily determinable fair values into different categories, requires equity securities to be measured at fair value with changes in the fair value recognized through net income and simplifies the impairment assessment of equity investments without readily determinable fair values. The amendment requires public business entities

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that are required to disclose the fair value of financial instruments measured at amortized cost on the balance sheet to measure that fair value using the exit price notion. The amendment requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option. The Corporation adopted the accounting standard during the first quarter of 2018 and modified its fair value disclosure of financial instruments to reflect an exit price notion. The adoption of the standard did not have a material impact on the Corporation’s results of operations, financial position and liquidity.
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).” The ASU intends to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities and disclosing key information about leasing arrangements. The ASU will require lessees to recognize the following for all leases (with the exception of short-term leases) at the commencement date: (1) a lease liability, which is a lessees’ obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. Certain targeted improvements were made to align, where necessary, lessor accounting with the lessee accounting model and Topic 606, Revenue from Contracts with Customers. The new lease guidance simplifies the accounting for sale and leaseback transactions primarily because lessees must recognize lease assets and lease liabilities. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) may apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may also elect to apply the amendments in the ASU through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. The ASU is effective for public companies for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. The Corporation intends to adopt the accounting standard during the first quarter of 2019, as required. The Corporation leases office space, loan production offices and specialty financing production offices under noncancelable operating leases which expire on various dates through 2028. The Corporation also leases office equipment. The implementation efforts are ongoing, including the review of our leases and related accounting policies. Future minimum lease payments associated with 29 noncancelable operating leases as of September 30, 2018 was $10.6 million. The Corporation does not expect the accounting standard to have a material impact on its results of operations and liquidity. The estimated impact on its financial position continues to be refined, which may also change based on decisions to modify or renew leases prior to the implementation date.
In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments- Credit Losses (Topic 326).” The ASU replaces the incurred loss impairment methodology for recognizing credit losses with a methodology that reflects all expected credit losses. The ASU also requires consideration of a broader range of information to inform credit loss estimates, including such factors as past events, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. The amendments affect loans, debt securities, trade receivables, net investments in leases, off-balance-sheet credit exposures and any other financial asset not excluded from the scope that have the contractual right to receive cash. Entities will apply the amendments in the ASU through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. The ASU is effective for public companies for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted as of the fiscal years beginning after December 15, 2018. The Corporation intends to adopt the accounting standard during the first quarter of 2020, as required, and is currently evaluating the impact on its results of operations, financial position and liquidity. A cross-functional team has been established and a third-party software solution has been obtained to assist with the implementation of the standard. Management is in the process of gathering necessary data and reviewing potential methods to calculate the expected credit losses.
In June 2018, the FASB issued ASU No. 2018-07, “Compensation- Stock Compensation (Topic 718).” The ASU expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. The ASU is effective for public companies for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. The Corporation is in the process of evaluating the impact of this standard but does not expect this standard to have a material impact on its results of operations, financial position and liquidity.
In August 2018, the FASB issued ASU No. 2018-15, “Intangibles-Goodwill and Other Internal-Use Software (Subtopic 350-40).” The ASU aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). Implementation costs incurred in the application development stage are capitalized depending on the nature of the costs, while costs incurred during the preliminary project and post implementation stages are expensed as the activities are performed. The amendment also requires entities to expense the capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement

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and in the same income statement line item as the fees associated with the hosting element. The ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted. The Corporation is in the process of evaluating the impact of this standard but does not expect this standard to have a material impact on its results of operations, financial position and liquidity.

Note 2 — Earnings per Common Share
Earnings per common share are computed using the two-class method. Basic earnings per common share are computed by dividing net income allocated to common shares by the weighted-average number of shares outstanding during the applicable period, excluding outstanding participating securities. Participating securities include unvested restricted shares. Unvested restricted shares are considered participating securities because holders of these securities receive non-forfeitable dividends, or dividend equivalents, at the same rate as holders of the Corporation’s common stock. Diluted earnings per share are computed by dividing net income allocated to common shares, adjusted for reallocation of undistributed earnings of unvested restricted shares, by the weighted-average number of shares determined for the basic earnings per common share computation plus the dilutive effect of common stock equivalents using the treasury stock method.
There were no anti-dilutive employee share-based awards for the three and nine month periods ended September 30, 2018 and 2017.
 
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
 
2018
 
2017
 
2018
 
2017
 
 
(Dollars in Thousands, Except Per Share Data)
Basic earnings per common share
 
 
 
 
 
 
 
 
Net income
 
$
5,301

 
$
2,584

 
$
12,239

 
$
7,867

Less: earnings allocated to participating securities
 
77

 
35

 
180

 
105

Basic earnings allocated to common stockholders
 
$
5,224

 
$
2,549

 
$
12,059

 
$
7,762

Weighted-average common shares outstanding, excluding participating securities
 
8,650,057

 
8,621,311

 
8,634,890

 
8,606,080

Basic earnings per common share
 
$
0.60

 
$
0.30

 
$
1.40

 
$
0.90

 
 
 
 
 
 
 
 
 
Diluted earnings per common share
 
 
 
 
 
 
 
 
Earnings allocated to common stockholders
 
$
5,224

 
$
2,549

 
$
12,059

 
$
7,762

Weighted-average diluted common shares outstanding, excluding participating securities
 
8,650,057

 
8,621,311

 
8,634,890

 
8,606,080

Diluted earnings per common share
 
$
0.60

 
$
0.30

 
$
1.40

 
$
0.90


Note 3 — Share-Based Compensation
The Corporation adopted the 2012 Equity Incentive Plan (the “Plan”) during the quarter ended June 30, 2012. The Plan is administered by the Compensation Committee of the Board of Directors of the Corporation and provides for the grant of equity ownership opportunities through incentive stock options and nonqualified stock options, restricted stock, restricted stock units, dividend equivalent units and any other type of award permitted by the Plan. As of September 30, 2018, 169,036 shares were available for future grants under the Plan. Shares covered by awards that expire, terminate or lapse will again be available for the grant of awards under the Plan. The Corporation may issue new shares and shares from its treasury stock for shares delivered under the Plan.
Restricted Stock
Under the Plan, the Corporation may grant restricted stock, restricted stock units and other stock-based awards to plan participants, subject to forfeiture upon the occurrence of certain events until the dates specified in the participant’s award agreement. While restricted stock is subject to forfeiture, restricted stock participants may exercise full voting rights and will receive all dividends and other distributions paid with respect to the restricted shares. Restricted stock units do not have voting rights and are provided dividend equivalents. The restricted stock granted under the Plan is typically subject to a vesting period. Compensation expense is recognized over the requisite service period of generally four years for the entire award on a straight-

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line basis. Upon vesting of restricted stock, the benefit of tax deductions in excess of recognized compensation expense is reflected as an income tax benefit in the unaudited Consolidated Statements of Income.
Restricted stock activity for the year ended December 31, 2017 and the nine months ended September 30, 2018 was as follows:
 
 
Number of
Restricted Shares/Units
 
Weighted Average
Grant-Date
Fair Value
Nonvested balance as of December 31, 2016
 
116,245

 
$
21.13

Granted
 
71,130

 
21.67

Vested
 
(48,550
)
 
21.51

Forfeited
 
(8,384
)
 
21.65

Nonvested balance as of December 31, 2017
 
130,441

 
21.43

Granted
 
51,870

 
22.61

Vested
 
(41,703
)
 
20.91

Forfeited
 
(9,071
)
 
22.09

Nonvested balance as of September 30, 2018
 
131,537

 
$
22.01


As of September 30, 2018, the Corporation had $2.7 million of deferred unvested compensation expense, which the Corporation expects to recognize over a weighted-average period of approximately 2.99 years.

Share-based compensation expense related to restricted stock included in the unaudited Consolidated Statements of Income was as follows:
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
 
(In Thousands)
Share-based compensation expense
$
244

 
$
268

 
$
750

 
$
811


  

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

 
 
As of September 30, 2018
 
 
Amortized Cost
 
Gross
Unrealized Gains
 
Gross
Unrealized Losses
 
Fair Value
 
 
(In Thousands)
Available-for-sale:
 
 
 
 
 
 
 
 
U.S. government agency obligations - government-sponsored enterprises
 
$
999

 
$

 
$
(15
)
 
$
984

Municipal obligations
 
5,842

 

 
(113
)
 
5,729

Collateralized mortgage obligations - government issued
 
20,811

 
54

 
(585
)
 
20,280

Collateralized mortgage obligations - government-sponsored enterprises
 
108,738

 
10

 
(3,129
)
 
105,619

Other securities
 
2,450

 

 
(67
)
 
2,383

 
 
$
138,840

 
$
64

 
$
(3,909
)
 
$
134,995



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As of December 31, 2017
 
 
Amortized Cost
 
Gross
Unrealized Gains
 
Gross
Unrealized Losses
 
Fair Value
 
 
(In Thousands)
Available-for-sale:
 
 
 
 
 
 
 
 
U.S. government agency obligations - government-sponsored enterprises
 
$
999

 
$
1

 
$

 
$
1,000

Municipal obligations
 
9,494

 
2

 
(82
)
 
9,414

Collateralized mortgage obligations - government issued
 
22,313

 
149

 
(213
)
 
22,249

Collateralized mortgage obligations - government-sponsored enterprises
 
91,480

 
24

 
(1,199
)
 
90,305

Other securities
 
3,040

 
3

 
(6
)
 
3,037

 
 
$
127,326

 
$
179

 
$
(1,500
)
 
$
126,005


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

 
 
As of September 30, 2018
 
 
Amortized Cost
 
Gross
Unrealized Gains
 
Gross
Unrealized Losses
 
Fair Value
 
 
(In Thousands)
Held-to-maturity:
 
 
 
 
 
 
 
 
U.S. government agency obligations - government-sponsored enterprises
 
$
1,500

 
$

 
$
(3
)
 
$
1,497

Municipal obligations
 
21,135

 
20

 
(229
)
 
20,926

Collateralized mortgage obligations - government issued
 
7,749

 

 
(301
)
 
7,448

Collateralized mortgage obligations - government-sponsored enterprises
 
9,566

 

 
(307
)
 
9,259

 
 
$
39,950

 
$
20

 
$
(840
)
 
$
39,130


 
 
As of December 31, 2017
 
 
Amortized Cost
 
Gross
Unrealized Gains
 
Gross
Unrealized Losses
 
Fair Value
 
 
(In Thousands)
Held-to-maturity:
 
 
 
 
 
 
 
 
U.S. government agency obligations - government-sponsored enterprises
 
$
1,499

 
$

 
$
(9
)
 
$
1,490

Municipal obligations
 
21,680

 
176

 
(34
)
 
21,822

Collateralized mortgage obligations - government issued
 
9,072

 
1

 
(130
)
 
8,943

Collateralized mortgage obligations - government-sponsored enterprises
 
5,527

 

 
(86
)
 
5,441

 
 
$
37,778

 
$
177

 
$
(259
)
 
$
37,696


U.S. government agency obligations - government-sponsored enterprises represent securities issued by the Federal Home Loan Bank (“FHLB”), the Federal Home Loan Mortgage Corporation (“FHLMC”) and the Federal National Mortgage Association (“FNMA”). Municipal obligations include securities issued by various municipalities located primarily within the State of Wisconsin and are primarily general obligation bonds that are tax-exempt in nature. Collateralized mortgage obligations - government issued represent securities guaranteed by the Government National Mortgage Association. Collateralized mortgage obligations - government-sponsored enterprises include securities guaranteed by FHLMC and FNMA. Other securities

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represent certificates of deposit of insured banks and savings institutions with an original maturity greater than three months. No sales of available-for-sale securities occurred during the nine months ended September 30, 2018 and 14 sales of available-for-sale securities occurred during the nine months ended September 30, 2017.

At September 30, 2018 and December 31, 2017, securities with a fair value of $2.4 million and $2.8 million, respectively, were pledged to secure interest rate swap contracts.
The amortized cost and fair value of securities by contractual maturity at September 30, 2018 are shown below. Actual maturities may differ from contractual maturities because issuers have the right to call or prepay certain obligations with or without call or prepayment penalties.
 
 
Available-for-Sale
 
Held-to-Maturity
 
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
 
 
(In Thousands)
Due in one year or less
 
$
1,518

 
$
1,515

 
$
2,272

 
$
2,268

Due in one year through five years
 
20,998

 
20,448

 
11,664

 
11,581

Due in five through ten years
 
30,083

 
29,269

 
19,697

 
19,166

Due in over ten years
 
86,241

 
83,763

 
6,317

 
6,115

 
 
$
138,840

 
$
134,995

 
$
39,950

 
$
39,130


The tables below show the Corporation’s gross unrealized losses and fair value of available-for-sale investments aggregated by investment category and length of time that individual investments were in a continuous loss position at September 30, 2018 and December 31, 2017. At September 30, 2018, the Corporation held 168 available-for-sale securities that were in an unrealized loss position. Such securities have not experienced credit rating downgrades; however, they have primarily declined in value due to the current interest rate environment. At September 30, 2018, the Corporation held 87 available-for-sale securities that had been in a continuous unrealized loss position for twelve months or greater.

The Corporation also has not specifically identified available-for-sale securities in a loss position that it intends to sell in the near term and does not believe that it will be required to sell any such securities. The Corporation reviews its securities on a quarterly basis to monitor its exposure to other-than-temporary impairment. Consideration is given to such factors as the length of time and extent to which the security has been in an unrealized loss position, changes in security ratings and an evaluation of the present value of expected future cash flows, if necessary. Based on the Corporation’s evaluation, it is expected that the Corporation will recover the entire amortized cost basis of each security. Accordingly, no other-than-temporary impairment was recorded in the unaudited Consolidated Statements of Income for the nine months ended September 30, 2018 and 2017.

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

 
 
As of September 30, 2018
 
 
Less than 12 Months
 
12 Months or Longer
 
Total
 
 
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
 
 
(In Thousands)
Available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government agency obligations - government-sponsored enterprises
 
$
984

 
$
15

 
$

 
$

 
$
984

 
$
15

Municipal obligations
 
1,536

 
39

 
3,020

 
74

 
4,556

 
113

Collateralized mortgage obligations - government issued
 
8,675

 
223

 
7,906

 
362

 
16,581

 
585

Collateralized mortgage obligations - government-sponsored enterprises
 
56,226

 
1,171

 
46,996

 
1,958

 
103,222

 
3,129

Other securities
 
2,139

 
66

 
244

 
1

 
2,383

 
67

 
 
$
69,560

 
$
1,514

 
$
58,166

 
$
2,395

 
$
127,726

 
$
3,909


 
 
As of December 31, 2017
 
 
Less than 12 Months
 
12 Months or Longer
 
Total
 
 
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
 
 
(In Thousands)
Available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
 
Municipal obligations
 
$
6,132

 
$
43

 
$
2,755

 
$
39

 
$
8,887

 
$
82

Collateralized mortgage obligations - government issued
 
7,104

 
40

 
6,715

 
173

 
13,819

 
213

Collateralized mortgage obligations - government-sponsored enterprises
 
59,256

 
476

 
28,004

 
723

 
87,260

 
1,199

Other securities
 
1,954

 
6

 

 

 
1,954

 
6

 
 
$
74,446

 
$
565

 
$
37,474

 
$
935

 
$
111,920

 
$
1,500


The tables below show the Corporation’s gross unrealized losses and fair value of held-to-maturity investments, aggregated by investment category and length of time that individual investments were in a continuous loss position at September 30, 2018 and December 31, 2017. At September 30, 2018, the Corporation held 94 held-to-maturity securities that were in an unrealized loss position. Such securities have not experienced credit rating downgrades; however, they have primarily declined in value due to the current interest rate environment. There were 25 held-to-maturity securities that had been in a continuous loss position for twelve months or greater as of September 30, 2018. It is expected that the Corporation will recover the entire amortized cost basis of each held-to-maturity security based upon an evaluation of aforementioned factors. Accordingly, no other-than-temporary impairment was recorded in the unaudited Consolidated Statements of Income for the nine months ended September 30, 2018 and 2017.

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


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As of September 30, 2018
 
 
Less than 12 Months
 
12 Months or Longer
 
Total
 
 
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
 
 
(In Thousands)
Held-to-maturity:
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government agency obligations - government-sponsored enterprises
 
$

 
$

 
$
1,497

 
$
3

 
$
1,497

 
$
3

Municipal obligations
 
15,300

 
181

 
1,433

 
48

 
16,733

 
229

Collateralized mortgage obligations - government issued
 

 

 
7,448

 
301

 
7,448

 
301

Collateralized mortgage obligations - government-sponsored enterprises
 
4,723

 
120

 
4,536

 
187

 
9,259

 
307

 
 
$
20,023

 
$
301

 
$
14,914

 
$
539

 
$
34,937

 
$
840


 
 
As of December 31, 2017
 
 
Less than 12 Months
 
12 Months or Longer
 
Total
 
 
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
 
 
(In Thousands)
Held-to-maturity:
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government agency obligations - government-sponsored enterprises
 
$

 
$

 
$
1,499

 
$
9

 
$
1,499

 
$
9

Municipal obligations
 
3,723

 
27

 
259

 
7

 
3,982

 
34

Collateralized mortgage obligations - government issued
 
3,868

 
51

 
4,677

 
79

 
8,545

 
130

Collateralized mortgage obligations - government-sponsored enterprises
 

 

 
5,527

 
86

 
5,527

 
86

 
 
$
7,591

 
$
78

 
$
11,962

 
$
181

 
$
19,553

 
$
259



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Note 5 — Loan and Lease Receivables, Impaired Loans and Leases and Allowance for Loan and Lease Losses

Loan and lease receivables consist of the following:
 
 
September 30,
2018
 
December 31,
2017
 
 
(In Thousands)
Commercial real estate:
 
 
 
 
Commercial real estate — owner occupied
 
$
203,733

 
$
200,387

Commercial real estate — non-owner occupied
 
487,842

 
470,236

Land development
 
45,009

 
40,154

Construction
 
132,271

 
125,157

Multi-family
 
174,664

 
136,978

1-4 family
 
35,729

 
44,976

Total commercial real estate
 
1,079,248

 
1,017,888

Commercial and industrial
 
457,932

 
429,002

Direct financing leases, net
 
31,090

 
30,787

Consumer and other:
 
 
 
 
Home equity and second mortgages
 
8,388

 
7,262

Other
 
23,451

 
18,099

Total consumer and other
 
31,839

 
25,361

Total gross loans and leases receivable
 
1,600,109

 
1,503,038

Less:
 
 
 
 
   Allowance for loan and lease losses
 
20,455

 
18,763

   Deferred loan fees
 
1,502

 
1,443

Loans and leases receivable, net
 
$
1,578,152

 
$
1,482,832

The total amount of the Corporation’s ownership of SBA loans comprised of the following:
 
 
September 30,
2018
 
December 31,
2017
 
 
(In Thousands)
Retained, unguaranteed portions of sold SBA loans
 
$
26,640

 
$
30,071

Other SBA loans(1)
 
20,183

 
22,254

Total SBA loans
 
$
46,823

 
$
52,325

(1)
Primarily consisted of SBA CAPLine, Express and impaired loans that were repurchased from the secondary market, all of which were not saleable as of September 30, 2018 and December 31, 2017, respectively.
As of September 30, 2018 and December 31, 2017, $12.0 million and $11.1 million of SBA loans were considered impaired, respectively.
Loans transferred to third parties consist of the guaranteed portions of SBA loans which the Corporation sold in the secondary market, participation interests in other originated loans and residential real estate loans. The total principal amount of the guaranteed portions of SBA loans sold during the three months ended September 30, 2018 and 2017 was $4.5 million and $6.3 million, respectively. The total principal amount of the guaranteed portions of SBA loans sold during the nine months ended September 30, 2018 and 2017 was $10.8 million and $15.5 million, respectively. Each of the transfers of these financial assets met the qualifications for sale accounting, and therefore all of the loans transferred during the three and nine months ended September 30, 2018 and 2017 have been derecognized in the unaudited Consolidated Financial Statements. The guaranteed portions of SBA loans were transferred at their fair value and the related gain was recognized upon the transfer as non-interest income in the unaudited Consolidated Financial Statements. The total outstanding balance of sold SBA loans at September 30, 2018 and December 31, 2017 was $91.1 million and $100.3 million, respectively.


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The total principal amount of transferred participation interests in other originated commercial loans during the three months ended September 30, 2018 and 2017 was $17.2 million and $15.9 million, respectively. The total principal amount of transferred participation interests in other originated commercial loans during the nine months ended September 30, 2018 and 2017 was $51.6 million and $36.6 million, respectively, all of which were treated as sales and derecognized under the applicable accounting guidance at the time of transfer. No gain or loss was recognized on participation interests in other originated loans as they were transferred at or near the date of loan origination and the payments received for servicing the portion of the loans participated represents adequate compensation. The total outstanding balance of these transferred loans at September 30, 2018 and December 31, 2017 was $125.7 million and $106.4 million, respectively. As of September 30, 2018 and December 31, 2017, the total amount of the Corporation’s partial ownership of these transferred loans on the unaudited Consolidated Balance Sheets was $206.0 million and $181.7 million, respectively. No loans in this participation portfolio were considered impaired as of September 30, 2018 and December 31, 2017. The Corporation does not share in the participant’s portion of any potential charge-offs. The total amount of loan participations purchased on the unaudited Consolidated Balance Sheets as of September 30, 2018 and December 31, 2017 was $590,000 and $650,000, respectively.

The following tables illustrate ending balances of the Corporation’s loan and lease portfolio, including impaired loans by class of receivable, and considering certain credit quality indicators:
 
 
September 30, 2018
 
 
Category
 
 
 
 
I
 
II
 
III
 
IV
 
Total
 
 
(Dollars in Thousands)
Commercial real estate:
 
 
 
 
 
 
 
 
 
 
Commercial real estate — owner occupied
 
$
177,434

 
$
4,925

 
$
10,904

 
$
10,470

 
$
203,733

Commercial real estate — non-owner occupied
 
466,855

 
19,909

 
1,046

 
32

 
487,842

Land development
 
41,267

 
1,485

 

 
2,257

 
45,009

Construction
 
130,183

 

 
209

 
1,879

 
132,271

Multi-family
 
174,664

 

 

 

 
174,664

1-4 family
 
32,741

 
1,522

 
714

 
752

 
35,729

      Total commercial real estate
 
1,023,144

 
27,841

 
12,873

 
15,390

 
1,079,248

Commercial and industrial
 
370,015

 
27,084

 
45,874

 
14,959

 
457,932

Direct financing leases, net
 
28,197

 
1,709

 
1,184

 

 
31,090

Consumer and other:
 
 
 
 
 
 
 
 
 

Home equity and second mortgages
 
8,384

 
4

 

 

 
8,388

Other
 
23,000

 

 

 
451

 
23,451

      Total consumer and other
 
31,384

 
4

 

 
451

 
31,839

Total gross loans and leases receivable
 
$
1,452,740

 
$
56,638

 
$
59,931

 
$
30,800

 
$
1,600,109

Category as a % of total portfolio
 
90.79
%
 
3.54
%
 
3.75
%
 
1.92
%
 
100.00
%

15

Table of Contents

 
 
December 31, 2017
 
 
Category
 
 
 
 
I
 
II
 
III
 
IV
 
Total
 
 
(Dollars in Thousands)
Commercial real estate:
 
 
 
 
 
 
 
 
 
 
Commercial real estate — owner occupied
 
$
166,018

 
$
18,442

 
$
8,850

 
$
7,077

 
$
200,387

Commercial real estate — non-owner occupied
 
441,246

 
27,854

 
1,102

 
34

 
470,236

Land development
 
36,470

 
1,057

 

 
2,627

 
40,154

Construction
 
121,528

 
757

 

 
2,872

 
125,157

Multi-family
 
136,978

 

 

 

 
136,978

1-4 family
 
34,598

 
7,735

 
1,220

 
1,423

 
44,976

      Total commercial real estate
 
936,838

 
55,845

 
11,172

 
14,033

 
1,017,888

Commercial and industrial
 
341,875

 
25,344

 
49,453

 
12,330

 
429,002

Direct financing leases, net
 
28,866

 
342

 
1,579

 

 
30,787

Consumer and other:
 
 
 
 
 
 
 
 
 
 
Home equity and second mortgages
 
7,250

 
8

 

 
4

 
7,262

Other
 
17,745

 

 

 
354

 
18,099

      Total consumer and other
 
24,995

 
8

 

 
358

 
25,361

Total gross loans and leases receivable
 
$
1,332,574

 
$
81,539

 
$
62,204

 
$
26,721

 
$
1,503,038

Category as a % of total portfolio
 
88.66
%
 
5.42
%
 
4.14
%
 
1.78
%
 
100.00
%
Each credit is evaluated for proper risk rating upon origination, at the time of each subsequent renewal, upon receipt and evaluation of updated financial information from the Corporation’s borrowers or as other circumstances dictate. The Corporation uses a nine grade risk rating system to monitor the ongoing credit quality of its loans and leases. The risk rating grades follow a consistent definition and are then applied to specific loan types based on the nature of the loan. Each risk rating is subjective and, depending on the size and nature of the credit, subject to various levels of review and concurrence on the stated risk rating. In addition to its nine grade risk rating system, the Corporation groups loans into four loan and related risk categories which determine the level and nature of review by management.
Category I — Loans and leases in this category are performing in accordance with the terms of the contract and generally exhibit no immediate concerns regarding the security and viability of the underlying collateral, financial stability of the borrower, integrity or strength of the borrowers’ management team or the industry in which the borrower operates. The Corporation monitors Category I loans and leases through payment performance, continued maintenance of its personal relationships with such borrowers and continued review of such borrowers’ compliance with the terms of their respective agreements.
Category II — Loans and leases in this category are beginning to show signs of deterioration in one or more of the Corporation’s core underwriting criteria such as financial stability, management strength, industry trends or collateral values. Management will place credits in this category to allow for proactive monitoring and resolution with the borrower to possibly mitigate the area of concern and prevent further deterioration or risk of loss to the Corporation. Category II loans are considered performing but are monitored frequently by the assigned business development officer and by subcommittees of the Bank’s Loan Committee.
Category III — Loans and leases in this category are identified by management as warranting special attention. However, the balance in this category is not intended to represent the amount of adversely classified assets held by the Bank. Category III loans and leases generally exhibit undesirable characteristics, such as evidence of adverse financial trends and conditions, managerial problems, deteriorating economic conditions within the related industry or evidence of adverse public filings and may exhibit collateral shortfall positions. Management continues to believe that it will collect all contractual principal and interest in accordance with the original terms of the contracts relating to the loans and leases in this category, and therefore Category III loans are considered performing with no specific reserves established for this category. Category III loans are monitored by management and subcommittees of the Bank’s Loan Committee on a monthly basis and the Bank’s Board of Directors at each of their regularly scheduled meetings.

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Table of Contents

Category IV — Loans and leases in this category are considered to be impaired. Impaired loans and leases, with the exception of performing troubled debt restructurings, have been placed on non-accrual as management has determined that it is unlikely that the Bank will receive the contractual principal and interest in accordance with the original terms of the agreement. Impaired loans are individually evaluated to assess the need for the establishment of specific reserves or charge-offs. When analyzing the adequacy of collateral, the Corporation obtains external appraisals at least annually for impaired loans and leases. External appraisals are obtained from the Corporation’s approved appraiser listing and are independently reviewed to monitor the quality of such appraisals. To the extent a collateral shortfall position is present, a specific reserve or charge-off will be recorded to reflect the magnitude of the impairment. Loans and leases in this category are monitored by management and subcommittees of the Bank’s Loan Committee on a monthly basis and the Bank’s Board of Directors at each of their regularly scheduled meetings.
Utilizing regulatory classification terminology, the Corporation identified $38.8 million and $32.7 million of loans and leases as Substandard as of September 30, 2018 and December 31, 2017, respectively. No loans and leases were identified as Doubtful as of September 30, 2018. The Corporation identified $4.7 million of loans and leases as Doubtful as of December 31, 2017. The population of Substandard loans is a subset of Category III and Category IV loans.
The delinquency aging of the loan and lease portfolio by class of receivable was as follows:

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Table of Contents

 
 
September 30, 2018
 
 
30-59
Days Past Due
 
60-89
Days Past Due
 
Greater
Than 90 Days Past Due
 
Total Past Due
 
Current
 
Total Loans and Leases
 
 
(Dollars in Thousands)
Accruing loans and leases
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 
 
 
 
 
 
 
 
 
 
 
Owner occupied
 
$

 
$
115

 
$

 
$
115

 
$
193,148

 
$
193,263

Non-owner occupied
 
742

 

 

 
742

 
487,068

 
487,810

Land development
 

 

 

 

 
42,752

 
42,752

Construction
 

 

 

 

 
130,392

 
130,392

Multi-family
 

 

 

 

 
174,664

 
174,664

1-4 family
 

 

 

 

 
35,161

 
35,161

Commercial and industrial
 
1,944

 

 

 
1,944

 
441,032

 
442,976

Direct financing leases, net
 

 

 

 

 
31,090

 
31,090

Consumer and other: