osbc-Current Folio_10Q_2014Taxonomy

Table of Contents

I  

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

 

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

 

THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2014

OR

 

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

 

SECURITIES EXCHANGE ACT OF 1934

 

For transition period from          to          

 

Commission File Number 0 -10537

 

OLD SECOND BANCORP, INC.

(Exact name of Registrant as specified in its charter)

 

 

 

 

Delaware

 

36-3143493

(State or other jurisdiction

 

(I.R.S. Employer Identification Number)

of incorporation or organization)

 

 

 

37 South River Street, Aurora, Illinois     60507

(Address of principal executive offices)  (Zip Code)

 

(630) 892-0202

(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         No 

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  No 

 

Indicate by check mark whether 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 Act).  (check one):

 

Large accelerated filer   Accelerated filer   Non-accelerated filer   (do not check if a smaller reporting company)  Smaller reporting company

 

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).

Yes         No 

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date: As of November 7, 2014, the Registrant had outstanding 29,442,508 shares of common stock, $1.00 par value per share.

 

 

 

 

 

 

 

 

 


 

Table of Contents

OLD SECOND BANCORP, INC.

 

Form 10-Q Quarterly Report

 

Table of Contents

 

 

 

 

 

PART I

 

 

 

Page Number

Item 1. 

Financial Statements

3

Item 2. 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

35

Item 3. 

Quantitative and Qualitative Disclosures about Market Risk

50

Item 4. 

Controls and Procedures

51

 

PART II

 

 

 

 

Item 1. 

Legal Proceedings

53

Item 1.A. 

Risk Factors

53

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

53

Item 3. 

Defaults Upon Senior Securities

53

Item 4. 

Mine Safety Disclosure

53

Item 5. 

Other Information

53

Item 6. 

Exhibits

53

 

 

 

 

Signatures

54

 

2

 


 

Table of Contents

 

PART I - FINANCIAL INFORMATION

Item 1.  Financial Statements

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Balance Sheets

(In thousands, except share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Unaudited)

 

 

 

 

 

September 30, 

 

December 31, 

 

    

2014

    

2013

Assets

 

 

 

 

 

 

Cash and due from banks

 

$

33,260 

 

$

33,210 

Interest bearing deposits with financial institutions

 

 

10,797 

 

 

14,450 

Cash and cash equivalents

 

 

44,057 

 

 

47,660 

Securities available-for-sale, at fair value

 

 

362,243 

 

 

372,191 

Securities held-to-maturity, at amortized cost

 

 

263,040 

 

 

256,571 

Federal Home Loan Bank and Federal Reserve Bank stock

 

 

9,058 

 

 

10,292 

Loans held-for-sale

 

 

3,422 

 

 

3,822 

Loans

 

 

1,140,882 

 

 

1,101,256 

Less: allowance for loan losses

 

 

23,330 

 

 

27,281 

Net loans

 

 

1,117,552 

 

 

1,073,975 

Premises and equipment, net

 

 

42,557 

 

 

46,005 

Other real estate owned

 

 

40,877 

 

 

41,537 

Mortgage servicing rights, net

 

 

5,640 

 

 

5,807 

Core deposit, net

 

 

 - 

 

 

1,177 

Bank-owned life insurance (BOLI)

 

 

56,438 

 

 

55,410 

Deferred tax assets, net

 

 

71,375 

 

 

75,303 

Other assets

 

 

16,840 

 

 

14,284 

Total assets

 

$

2,033,099 

 

$

2,004,034 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

Noninterest bearing demand

 

$

380,687 

 

$

373,389 

Interest bearing:

 

 

 

 

 

 

Savings, NOW, and money market

 

 

848,372 

 

 

836,300 

Time

 

 

427,696 

 

 

472,439 

Total deposits

 

 

1,656,755 

 

 

1,682,128 

Securities sold under repurchase agreements

 

 

29,438 

 

 

22,560 

Other short-term borrowings

 

 

40,000 

 

 

5,000 

Junior subordinated debentures

 

 

58,378 

 

 

58,378 

Subordinated debt

 

 

45,000 

 

 

45,000 

Notes payable and other borrowings

 

 

500 

 

 

500 

Other liabilities

 

 

10,337 

 

 

42,776 

Total liabilities

 

 

1,840,408 

 

 

1,856,342 

 

 

 

 

 

 

 

Stockholders’ Equity

 

 

 

 

 

 

Preferred stock

 

 

47,331 

 

 

72,942 

Common stock

 

 

34,365 

 

 

18,830 

Additional paid-in capital

 

 

115,290 

 

 

66,212 

Retained earnings

 

 

98,786 

 

 

92,549 

Accumulated other comprehensive loss

 

 

(7,232)

 

 

(7,038)

Treasury stock

 

 

(95,849)

 

 

(95,803)

Total stockholders’ equity

 

 

192,691 

 

 

147,692 

Total liabilities and stockholders’ equity

 

$

2,033,099 

 

$

2,004,034 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2014

 

December 31, 2013

 

 

Preferred

 

Common

 

Preferred

 

Common

 

    

Stock

    

Stock

    

Stock

    

Stock

Par value

 

$

 

$

 

$

 

$

Liquidation value

 

 

1,000 

 

 

n/a

 

 

1,000 

 

 

n/a

Shares authorized

 

 

300,000 

 

 

60,000,000 

 

 

300,000 

 

 

60,000,000 

Shares issued

 

 

47,331 

 

 

34,364,734 

 

 

73,000 

 

 

18,829,734 

Shares outstanding

 

 

47,331 

 

 

29,442,508 

 

 

73,000 

 

 

13,917,108 

Treasury shares

 

 

- 

 

 

4,922,226 

 

 

- 

 

 

4,912,626 

 

See accompanying notes to consolidated financial statements.

3

 


 

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Operations

(In thousands, except share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(unaudited)

 

(unaudited)

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30, 

 

September 30, 

 

    

2014

    

2013

    

2014

    

2013

Interest and dividend income

 

 

 

 

 

 

 

 

 

 

 

 

Loans, including fees

 

$

13,362 

 

$

14,327 

 

$

39,346 

 

$

43,153 

Loans held-for-sale

 

 

38 

 

 

38 

 

 

92 

 

 

124 

Securities:

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

 

3,586 

 

 

3,113 

 

 

10,440 

 

 

8,109 

Tax exempt

 

 

110 

 

 

148 

 

 

376 

 

 

441 

Dividends from Federal Reserve Bank and Federal Home Loan Bank stock

 

 

78 

 

 

76 

 

 

232 

 

 

228 

Interest bearing deposits with financial institutions

 

 

25 

 

 

22 

 

 

60 

 

 

91 

Total interest and dividend income

 

 

17,199 

 

 

17,724 

 

 

50,546 

 

 

52,146 

Interest expense

 

 

 

 

 

 

 

 

 

 

 

 

Savings, NOW, and money market deposits

 

 

175 

 

 

206 

 

 

562 

 

 

655 

Time deposits

 

 

1,073 

 

 

1,674 

 

 

3,604 

 

 

5,327 

Other short-term borrowings

 

 

 

 

 

 

10 

 

 

26 

Junior subordinated debentures

 

 

1,072 

 

 

1,336 

 

 

3,847 

 

 

3,937 

Subordinated debt

 

 

199 

 

 

209 

 

 

593 

 

 

610 

Notes payable and other borrowings

 

 

 

 

 

 

12 

 

 

12 

Total interest expense

 

 

2,528 

 

 

3,435 

 

 

8,628 

 

 

10,567 

Net interest and dividend income

 

 

14,671 

 

 

14,289 

 

 

41,918 

 

 

41,579 

Loan loss reserve release

 

 

 - 

 

 

(1,750)

 

 

(2,000)

 

 

(6,050)

Net interest and dividend income after provision for loan losses

 

 

14,671 

 

 

16,039 

 

 

43,918 

 

 

47,629 

Noninterest income

 

 

 

 

 

 

 

 

 

 

 

 

Trust income

 

 

1,483 

 

 

1,494 

 

 

4,619 

 

 

4,666 

Service charges on deposits

 

 

1,838 

 

 

1,904 

 

 

5,354 

 

 

5,379 

Secondary mortgage fees

 

 

174 

 

 

183 

 

 

441 

 

 

680 

Mortgage servicing gain, net of changes in fair value

 

 

252 

 

 

235 

 

 

269 

 

 

1,222 

Net gain on sales of mortgage loans

 

 

914 

 

 

814 

 

 

2,614 

 

 

4,601 

Securities gains (loss), net

 

 

1,231 

 

 

(7)

 

 

1,457 

 

 

2,191 

Increase in cash surrender value of bank-owned life insurance

 

 

304 

 

 

419 

 

 

1,028 

 

 

1,198 

Death benefit realized on bank-owned life insurance

 

 

 - 

 

 

 

 

 - 

 

 

381 

Debit card interchange income

 

 

1,011 

 

 

873 

 

 

2,771 

 

 

2,565 

Other income

 

 

1,116 

 

 

1,549 

 

 

3,572 

 

 

4,434 

Total noninterest income

 

 

8,323 

 

 

7,470 

 

 

22,125 

 

 

27,317 

Noninterest expense

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

8,856 

 

 

9,299 

 

 

27,140 

 

 

27,508 

Occupancy expense, net

 

 

1,143 

 

 

1,266 

 

 

3,809 

 

 

3,787 

Furniture and equipment expense

 

 

989 

 

 

1,026 

 

 

2,956 

 

 

3,274 

FDIC insurance

 

 

649 

 

 

987 

 

 

1,555 

 

 

3,046 

General bank insurance

 

 

371 

 

 

489 

 

 

1,203 

 

 

1,829 

Amortization of core deposit

 

 

154 

 

 

524 

 

 

1,177 

 

 

1,574 

Advertising expense

 

 

291 

 

 

347 

 

 

1,053 

 

 

841 

Debit card interchange expense

 

 

418 

 

 

366 

 

 

1,208 

 

 

1,072 

Legal fees

 

 

332 

 

 

615 

 

 

998 

 

 

1,424 

Other real estate expense, net

 

 

2,007 

 

 

2,544 

 

 

4,665 

 

 

8,943 

Other expense

 

 

3,134 

 

 

3,119 

 

 

9,148 

 

 

9,773 

Total noninterest expense

 

 

18,344 

 

 

20,582 

 

 

54,912 

 

 

63,071 

Income before income taxes

 

 

4,650 

 

 

2,927 

 

 

11,131 

 

 

11,875 

Provision (benefit) for income taxes

 

 

1,726 

 

 

(69,997)

 

 

3,984 

 

 

(69,997)

Net income

 

$

2,924 

 

$

72,924 

 

$

7,147 

 

$

81,872 

Preferred stock dividends and accretion of discount

 

 

1,065 

 

 

1,323 

 

 

3,985 

 

 

3,917 

Dividends waived upon preferred stock redemption

 

 

 - 

 

 

 - 

 

 

(5,433)

 

 

 - 

Gain on preferred stock redemption

 

 

 -

 

 

 - 

 

 

(1,348)

 

 

 - 

Net income available to common stockholders

 

$

1,859 

 

$

71,601 

 

$

9,943 

 

$

77,955 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

$

0.06 

 

$

5.08 

 

$

0.41 

 

$

5.52 

Diluted earnings per share

 

 

0.06 

 

 

5.08 

 

 

0.41 

 

 

5.52 

 

See accompanying notes to consolidated financial statements.

4

 


 

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income (Loss)

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Unaudited)

 

(Unaudited)

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30, 

 

September 30, 

 

    

2014

    

2013

    

2014

    

2013

Net Income

 

$

2,924 

 

$

72,924 

 

$

7,147 

 

$

81,872 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized holding (losses) gains on available-for-sale securities arising during the period

 

 

(2,224)

 

 

(3,411)

 

 

397 

 

 

(16,780)

Related tax benefit (expense)

 

 

918 

 

 

1,405 

 

 

(161)

 

 

6,913 

Holding (losses) gains after tax on available-for-sale securities

 

 

(1,306)

 

 

(2,006)

 

 

236 

 

 

(9,867)

 

 

 

 

 

 

 

 

 

 

 

 

 

Less: Reclassification adjustment for the net gains realized during the period

 

 

 

 

 

 

 

 

 

 

 

 

Net realized  gains (losses)

 

 

1,231 

 

 

(7)

 

 

1,457 

 

 

2,191 

Income tax (expense) benefit on net realized gains (losses)

 

 

(504)

 

 

 

 

(597)

 

 

(899)

Net realized gains (losses) after tax

 

 

727 

 

 

(4)

 

 

860 

 

 

1,292 

Other comprehensive loss on available-for-sale securities

 

 

(2,033)

 

 

(2,002)

 

 

(624)

 

 

(11,159)

 

 

 

 

 

 

 

 

 

 

 

 

 

Accretion of net unrealized holding losses on held-to-maturity transferred from available-for-sale securities

 

 

237 

 

 

87 

 

 

731 

 

 

87 

Related tax expense

 

 

(97)

 

 

(36)

 

 

(301)

 

 

(36)

Other comprehensive income on held-to-maturity securities

 

 

140 

 

 

51 

 

 

430 

 

 

51 

Total other comprehensive loss

 

 

(1,893)

 

 

(1,951)

 

 

(194)

 

 

(11,108)

Total comprehensive income

 

$

1,031 

 

$

70,973 

 

$

6,953 

 

$

70,764 

 

See accompanying notes to consolidated financial statements.

 

5

 


 

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Unaudited)

 

 

Nine Months Ended

 

 

September 30, 

 

    

2014

    

2013

Cash flows from operating activities

 

 

 

 

 

 

Net income

 

$

7,147 

 

$

81,872 

Adjustments to reconcile net income to net cash (used in) provided by operating activities:

 

 

 

 

 

 

Depreciation and amortization of leasehold improvement

 

 

1,887 

 

 

2,147 

Change in fair value of mortgage servicing rights

 

 

761 

 

 

(81)

Loan loss reserve release

 

 

(2,000)

 

 

(6,050)

Gain on recapture of restricted stock

 

 

 -

 

 

(612)

Provision for deferred tax expense (benefit)

 

 

4,063 

 

 

(70,161)

Originations of loans held-for-sale

 

 

(85,172)

 

 

(151,601)

Proceeds from sales of loans held-for-sale

 

 

87,569 

 

 

160,966 

Net gain on sales of mortgage loans

 

 

(2,614)

 

 

(4,601)

Change in current income taxes payable

 

 

(79)

 

 

(101)

Increase in cash surrender value of bank-owned life insurance

 

 

(1,028)

 

 

(1,198)

Death claim on bank-owned life insurance

 

 

 -

 

 

396 

Change in accrued interest receivable and other assets

 

 

(3,633)

 

 

(334)

Change in accrued interest payable and other liabilities

 

 

(22,108)

 

 

4,341 

Net discount accretion on securities

 

 

(1,408)

 

 

(131)

Securities gains, net

 

 

(1,457)

 

 

(2,191)

Amortization of core deposit

 

 

1,177 

 

 

1,574 

Stock based compensation

 

 

189 

 

 

123 

Net gain on sale of other real estate owned

 

 

(610)

 

 

(1,175)

Provision for other real estate owned losses

 

 

2,781 

 

 

6,537 

Net gain on disposal of fixed assets

 

 

 -

 

 

(5)

Loss on transfer of premises to other real estate owned

 

 

121 

 

 

 -

Net cash (used in) provided by operating activities

 

 

(14,414)

 

 

19,715 

Cash flows from investing activities

 

 

 

 

 

 

Proceeds from maturities and calls including pay down of securities available-for-sale

 

 

15,430 

 

 

38,175 

Proceeds from sales of securities available-for-sale

 

 

264,502 

 

 

484,112 

Purchases of securities available-for-sale

 

 

(268,639)

 

 

(564,372)

Proceeds from maturities and calls including pay down of securities held-to-maturity

 

 

5,934 

 

 

541 

Purchases of securities held-to-maturity

 

 

(11,212)

 

 

(21,382)

Proceeds from sales of Federal Home Loan Bank stock

 

 

1,234 

 

 

910 

Net change in loans

 

 

(53,037)

 

 

49,885 

Improvements in other real estate owned

 

 

(637)

 

 

(60)

Proceeds from sales of other real estate owned

 

 

12,746 

 

 

32,103 

Proceeds from disposition of fixed assets

 

 

 

 

Net purchases of premises and equipment

 

 

(721)

 

 

(1,538)

Net cash (used in) provided by investing activities

 

 

(34,399)

 

 

18,380 

Cash flows from financing activities

 

 

 

 

 

 

Net change in deposits

 

 

(25,373)

 

 

(44,096)

Net change in securities sold under repurchase agreements

 

 

6,878 

 

 

2,844 

Net change in other short-term borrowings

 

 

35,000 

 

 

(45,000)

Redemption of preferred stock

 

 

(24,321)

 

 

 -

Proceeds from issuance of common stock

 

 

64,395 

 

 

 -

Dividends paid

 

 

(11,323)

 

 

 -

Purchase of treasury stock

 

 

(46)

 

 

(278)

Net cash provided by (used in) financing activities

 

 

45,210 

 

 

(86,530)

Net change in cash and cash equivalents

 

 

(3,603)

 

 

(48,435)

Cash and cash equivalents at beginning of period

 

 

47,660 

 

 

128,507 

Cash and cash equivalents at end of period

 

$

44,057 

 

$

80,072 

 

6

 


 

Table of Contents

 

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Cash Flows - Continued

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Unaudited)

 

 

Nine Months Ended

 

 

September 30, 

Supplemental cash flow information

    

2014

    

2013

Income taxes paid

 

$

 -

 

$

266 

Interest paid for deposits

 

 

4,412 

 

 

6,144 

Interest paid for borrowings

 

 

21,425 

 

 

656 

Non-cash transfer of loans to other real estate owned

 

 

11,460 

 

 

14,196 

Non-cash transfer of premises to other real estate owned

 

 

2,160 

 

 

 -

Non-cash transfer of loans to securities available-for-sale

 

 

 -

 

 

5,329 

Non-cash transfer of securities available-for-sale to securities held-to-maturity

 

 

 -

 

 

237,154 

Change in dividends accrued and declared but not paid

 

 

(9,123)

 

 

510 

Accretion on preferred stock discount

 

 

58 

 

 

798 

Fair value difference on recapture of restricted stock

 

 

 -

 

 

43 

 

See accompanying notes to consolidated financial statements.

 

 

7

 


 

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Changes in

Stockholders’ Equity

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

Other

 

 

 

 

Total

 

 

Common

 

Preferred

 

Paid-In

 

Retained

 

Comprehensive

 

Treasury

 

Stockholders’

 

    

Stock

    

Stock

    

Capital

    

Earnings

    

Income (Loss)

    

Stock

    

Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2012

 

$

18,729 

 

$

71,869 

 

$

66,189 

 

$

12,048 

 

$

(1,327)

 

$

(94,956)

 

$

72,552 

Net income

 

 

 

 

 

 

 

 

 

 

 

81,872 

 

 

 

 

 

 

 

 

81,872 

Other comprehensive loss, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(11,108)

 

 

 

 

 

(11,108)

Change in restricted stock

 

 

101 

 

 

 

 

 

(101)

 

 

 

 

 

 

 

 

 

 

 

 -

Recapture of restricted stock

 

 

 

 

 

 

 

 

(43)

 

 

 

 

 

 

 

 

(569)

 

 

(612)

Stock based compensation

 

 

 

 

 

 

 

 

123 

 

 

 

 

 

 

 

 

 

 

 

123 

Purchase of treasury stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(278)

 

 

(278)

Preferred stock accretion and declared dividends

 

 

 

 

 

798 

 

 

 

 

 

(1,308)

 

 

 

 

 

 

 

 

(510)

Balance, September 30, 2013

 

$

18,830 

 

$

72,667 

 

$

66,168 

 

$

92,612 

 

$

(12,435)

 

$

(95,803)

 

$

142,039 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2013

 

$

18,830 

 

$

72,942 

 

$

66,212 

 

$

92,549 

 

$

(7,038)

 

$

(95,803)

 

$

147,692 

Net income

 

 

 

 

 

 

 

 

 

 

 

7,147 

 

 

 

 

 

 

 

 

7,147 

Other comprehensive loss, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(194)

 

 

 

 

 

(194)

Change in restricted stock

 

 

10 

 

 

 

 

 

(10)

 

 

 

 

 

 

 

 

 

 

 

 -

Tax effect from vesting of restricted stock

 

 

 

 

 

 

 

 

29 

 

 

 

 

 

 

 

 

 

 

 

29 

Stock based compensation

 

 

 

 

 

 

 

 

189 

 

 

 

 

 

 

 

 

 

 

 

189 

Purchase of treasury stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(46)

 

 

(46)

Redemption of preferred stock

 

 

 

 

 

(25,669)

 

 

 

 

 

1,348 

 

 

 

 

 

 

 

 

(24,321)

Common stock offering

 

 

15,525 

 

 

 

 

 

48,870 

 

 

 

 

 

 

 

 

 

 

 

64,395 

Preferred stock accretion and declared dividends

 

 

 

 

 

58 

 

 

 

 

 

(2,258)

 

 

 

 

 

 

 

 

(2,200)

Balance, September 30, 2014

 

$

34,365 

 

$

47,331 

 

$

115,290 

 

$

98,786 

 

$

(7,232)

 

$

(95,849)

 

$

192,691 

 

See accompanying notes to consolidated financial statements.

 

 

 

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Table of Contents

 

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Table amounts in thousands, except per share data, unaudited)

 

Note 1 – Summary of Significant Accounting Policies

 

The accounting policies followed in the preparation of the interim consolidated financial statements are consistent with those used in the preparation of the annual financial information.  The interim consolidated financial statements reflect all normal and recurring adjustments, which are necessary, in the opinion of management, for a fair statement of results for the interim period presented.  Results for the period ended September 30, 2014, are not necessarily indicative of the results that may be expected for the year ending December 31, 2014.  These interim consolidated financial statements are unaudited and should be read in conjunction with the audited financial statements and notes included in Old Second Bancorp, Inc.’s (the “Company”) annual report on Form 10-K for the year ended December 31, 2013.  Unless otherwise indicated, amounts in the tables contained in the notes to the consolidated financial statements are in thousands.  Certain items in prior periods have been reclassified to conform to the current presentation.

 

The Company’s consolidated financial statements are prepared in accordance with United States generally accepted accounting principles (“GAAP”) and follow general practices within the banking industry.  Application of these principles requires management to make estimates, assumptions, and judgments that affect the amounts reported in the consolidated financial statements and accompanying notes.  These estimates, assumptions, and judgments are based on information available as of the date of the consolidated financial statements.  Future changes in information may affect these estimates, assumptions, and judgments, which, in turn, may affect amounts reported in the consolidated financial statements.

 

All significant accounting policies are presented in Note 1 to the consolidated financial statements included in the Company’s annual report on Form 10-K for the year ended December 31, 2013.  These policies, along with the disclosures presented in the other financial statement notes and in this discussion, provide information on how significant assets and liabilities are valued in the consolidated financial statements and how those values are determined.

 

Recent Accounting Pronouncements

 

In July 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2013-11 “Income Taxes (Topic 740) — Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists.” ASU 2013-11 amended existing guidance related to the presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss or a tax credit carryforward exists. These amendments provide that an unrecognized tax benefit, or a portion thereof, be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except to the extent that a net operating loss carryforward, a similar tax loss, or  a tax credit carryforward is not available at the reporting date to settle any additional income taxes that would result from disallowance of a tax position, or the tax law does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, then the unrecognized tax benefit should be presented as a liability.  These amendments are effective for interim and annual reporting periods beginning after December 15, 2013, and are incorporated in the financial statements contained in this report.  The effect of adopting this standard does not have a material effect on the Company’s operating results or financial condition.

 

In January 2014, the FASB issued ASU No. 2014-04 Receivables Troubled Debt Restructurings by Creditors (Subtopic 310-40) “Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure.”  ASU 2014-04 is intended to reduce diversity in practice by clarifying when an in substance repossession or foreclosure occurs, that is, when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan should be derecognized and the real estate property recognized.  ASU 2014-04 requires a creditor to reclassify a collateralized consumer mortgage loan to real estate property upon obtaining legal title to the real estate collateral, or the borrower voluntarily conveying all interest in the real estate property to the lender to satisfy the loan through a deed in lieu of foreclosure or similar legal agreement.  ASU 2014-04 is effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. For entities other than public business entities, the amendments in the ASU are effective for annual periods beginning after December 15, 2014, and interim periods within annual periods beginning after December 15, 2015.  The adoption of this standard is not expected to have a material effect to the Company’s operating results or financial condition.

 

In May 2014, the FASB issued ASU No. 2014-09 "Revenue from Contracts with Customers (Topic 606)."  The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services.  ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period.  The amendments can be applied retrospectively to each prior reporting period or retrospectively with the cumulative effect of initially applying this update recognized at the date of initial application.  Early application is not permitted.  The Company is assessing the impact of ASU 2014-09 on its accounting and disclosures.

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Table of Contents

 

In June 2014, FASB issued Accounting Standards Update (ASU) No. 2014-12 "Compensation - Stock Compensation (Topic 718) - Accounting for Share Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period."  ASU 2014-12 requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition.  ASU 2014-12 is effective for interim and annual periods beginning after December 15, 2015.  The amendments can be applied prospectively to all awards granted or modified after the effective date or retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented and to all new or modified awards thereafter. Early adoption is permitted.  The adoption of this standard is not expected to have a material effect to the Company’s operating results or financial condition.

 

In August 2014, FASB issued ASU No. 2014-15 “Presentation of Financial Statements—Going Concern (Subtopic 205-40) Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern.”  ASU 2014-15 provide guidance in GAAP about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures.  ASU 2014-15 is effective for interim and annual periods beginning after December 15, 2016.  The amendments in this Update are effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted.  The adoption of this standard is not expected to have a material effect to the Company’s operating results or financial condition.

 

Note 2 – Securities

 

Investment Portfolio Management

 

Our investment portfolio serves the liquidity and income needs of the Company.  While the portfolio serves as an important component of the overall liquidity management at the Bank, portions of the portfolio will also serve as income producing assets.  The size and composition of the portfolio reflects liquidity needs, loan demand and interest income objectives.

 

Portfolio size and composition will be adjusted from time to time.  While a significant portion of the portfolio consists of readily marketable securities to address liquidity, other parts of the portfolio may reflect funds invested pending future loan demand or to maximize interest income without undue interest rate risk.

 

Investments are comprised of debt securities and non-marketable equity investments.  Securities available-for-sale are carried at fair value.  Unrealized gains and losses, net of tax, on securities available-for-sale are reported as a separate component of equity.  This balance sheet component changes as interest rates and market conditions change.  Unrealized gains and losses are not included in the calculation of regulatory capital.

 

Securities held-to-maturity are carried at amortized cost and the discount or premium created in the 2013 transfer from available-for-sale securities or at the time of purchase thereafter is accreted or amortized to the maturity or expected payoff date but not an earlier call.  In accordance with GAAP, the Company has the positive intent and ability to hold the securities to maturity.

 

Nonmarketable equity investments include Federal Home Loan Bank of Chicago (“FHLBC”) stock and Federal Reserve Bank of Chicago (“Reserve Bank”) stock.  FHLBC stock was recorded at $4.3 million and $5.5 million at September 30, 2014, and December 31, 2013, respectively.  Reserve Bank stock was recorded at $4.8 million at September 30, 2014, and December 31, 2013.  Our FHLBC stock is necessary to maintain access to FHLBC advances.

 

10

 


 

Table of Contents

The following table summarizes the amortized cost and fair value of the securities portfolio at September 30, 2014 and December 31, 2013 and the corresponding amounts of gross unrealized gains and losses (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

September 30, 2014:

    

Cost

    

Gains

    

Losses

    

Value

Securities Available-for-Sale

 

 

 

 

 

 

 

 

U.S. Treasury

 

$

1,533 

 

$

 -

 

$

(1)

 

$

1,532 

U.S. government agencies

 

 

1,718 

 

 

 -

 

 

(80)

 

 

1,638 

States and political subdivisions

 

 

13,794 

 

 

313 

 

 

(228)

 

 

13,879 

Corporate bonds

 

 

31,272 

 

 

65 

 

 

(556)

 

 

30,781 

Collateralized mortgage obligations

 

 

29,951 

 

 

41 

 

 

(1,575)

 

 

28,417 

Asset-backed securities

 

 

194,927 

 

 

98 

 

 

(2,227)

 

 

192,798 

Collateralized loan obligations

 

 

94,202 

 

 

-

 

 

(1,004)

 

 

93,198 

Total Securities Available-for-Sale

 

$

367,397 

 

$

517 

 

$

(5,671)

 

$

362,243 

Securities Held-to-Maturity

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agency mortgage-backed

 

$

37,321 

 

$

1,346 

 

$

(11)

 

$

38,656 

Collateralized mortgage obligations

 

 

225,719 

 

 

2,017 

 

 

(2,049)

 

 

225,687 

Total Securities Held-to-Maturity

 

$

263,040 

 

$

3,363 

 

$

(2,060)

 

$

264,343 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

December 31, 2013:

 

Cost

    

Gains

    

Losses

    

Value

Securities Available-for-Sale

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury

 

$

1,549 

 

$

 -

 

$

(5)

 

$

1,544 

U.S. government agencies

 

 

1,738 

 

 

 -

 

 

(66)

 

 

1,672 

States and political subdivisions

 

 

16,382 

 

 

629 

 

 

(217)

 

 

16,794 

Corporate bonds

 

 

15,733 

 

 

17 

 

 

(648)

 

 

15,102 

Collateralized mortgage obligations

 

 

66,766 

 

 

256 

 

 

(3,146)

 

 

63,876 

Asset-backed securities

 

 

274,118 

 

 

2,168 

 

 

(3,083)

 

 

273,203 

Total Securities Available-for-Sale

 

$

376,286 

 

$

3,070 

 

$

(7,165)

 

$

372,191 

Securities Held-to-Maturity

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agency mortgage-backed

 

$

35,268 

 

$

45 

 

$

(73)

 

$

35,240 

Collateralized mortgage obligations

 

 

221,303 

 

 

643 

 

 

(2,858)

 

 

219,088 

Total Securities Held-to-Maturity

 

$

256,571 

 

$

688 

 

$

(2,931)

 

$

254,328 

 

The fair value, amortized cost and weighted average yield of debt securities at September 30, 2014, by contractual maturity, were as follows in the table below.  Securities not due at a single maturity date are shown separately.  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

Amortized

 

Average

 

Fair

Securities Available-for-Sale

    

Cost

    

Yield

    

Value

Due in one year or less

 

$

410 

 

4.50% 

 

$

421 

Due after one year through five years

 

 

5,811 

 

2.87% 

 

 

5,992 

Due after five years through ten years

 

 

36,724 

 

2.44% 

 

 

36,218 

Due after ten years

 

 

5,372 

 

3.31% 

 

 

5,199 

 

 

 

48,317 

 

2.61% 

 

 

47,830 

Collateralized mortgage obligations

 

 

29,951 

 

2.46% 

 

 

28,417 

Asset-back securities

 

 

194,927 

 

2.10% 

 

 

192,798 

Collateralized loan obligations

 

 

94,202 

 

2.78% 

 

 

93,198 

 

 

$

367,397 

 

2.37% 

 

$

362,243 

Securities Held-to-Maturity

 

 

 

 

 

 

 

 

Mortgage-backed and collateralized mortgage obligations

 

$

263,040 

 

3.05% 

 

$

264,343 

 

11

 


 

Table of Contents

Securities with unrealized losses at September 30, 2014, and December 31, 2013, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, were as follows (in thousands except for number of securities):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less than 12 months

 

Greater than 12 months

 

 

 

 

 

 

 

 

September 30, 2014

 

in an unrealized loss position

 

in an unrealized loss position

 

Total

 

 

Number of

 

Unrealized

 

Fair

 

Number of

 

Unrealized

 

Fair

 

Number of

 

Unrealized

 

Fair

Securities Available-for-Sale

    

Securities

    

Losses

    

Value

    

Securities

    

Losses

    

Value

    

Securities

    

Losses

    

Value

U.S. Treasury

 

 

$

 

$

1,532 

 

 - 

 

$

 - 

 

$

 - 

 

 

$

 

$

1,532 

U.S. government agencies

 

 - 

 

 

 - 

 

 

 - 

 

 

 

80 

 

 

1,638 

 

 

 

80 

 

 

1,638 

States and political subdivisions

 

 

 

215 

 

 

4,450 

 

 

 

13 

 

 

1,862 

 

 

 

228 

 

 

6,312 

Corporate bonds

 

 

 

463 

 

 

20,581 

 

 

 

93 

 

 

2,411 

 

 

 

556 

 

 

22,992 

Collateralized mortgage obligations

 

 

 

18 

 

 

4,739 

 

 

 

1,557 

 

 

21,704 

 

 

 

1,575 

 

 

26,443 

Asset-backed securities

 

10 

 

 

1,231 

 

 

117,440 

 

 

 

996 

 

 

44,042 

 

13 

 

 

2,227 

 

 

161,482 

Collateralized loan obligations

 

13 

 

 

1,004 

 

 

93,198 

 

 - 

 

 

 - 

 

 

 - 

 

13 

 

 

1,004 

 

 

93,198 

 

 

33 

 

$

2,932 

 

$

241,940 

 

11 

 

$

2,739 

 

$

71,657 

 

44 

 

$

5,671 

 

$

313,597 

Securities Held-to-Maturity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agency mortgage-backed

 

 

$

11 

 

$

1,972 

 

 - 

 

$

 - 

 

$

 - 

 

 

$

11 

 

$

1,972 

Collateralized mortgage obligations

 

13 

 

 

1,164 

 

 

83,545 

 

 

 

885 

 

 

37,828 

 

15 

 

 

2,049 

 

 

121,373 

 

 

14 

 

$

1,175 

 

$

85,517 

 

 

$

885 

 

$

37,828 

 

16 

 

$

2,060 

 

$

123,345 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less than 12 months

 

Greater than 12 months

 

 

 

 

 

 

 

 

December 31, 2013

 

in an unrealized loss position

 

in an unrealized loss position

 

Total

 

 

Number of

 

Unrealized

 

 

Fair

 

Number of

 

Unrealized

 

 

Fair

 

Number of

 

Unrealized

 

 

Fair

Securities Available-for-Sale

    

Securities

    

Losses

    

 

Value

    

Securities

    

Losses

    

 

Value

    

Securities

    

Losses

    

 

Value

U.S. Treasury

 

 

$

 

$

1,544 

 

 - 

 

$

 - 

 

$

 -  

 

 

$

 

$

1,544 

U.S. government agencies

 

 - 

 

 

 - 

 

 

 - 

 

 

 

66 

 

 

1,672 

 

 

 

66 

 

 

1,672 

States and political subdivisions

 

 

 

217 

 

 

4,625 

 

 - 

 

 

 - 

 

 

 - 

 

 

 

217 

 

 

4,625 

Corporate bonds

 

 

 

429 

 

 

10,493 

 

 

 

219 

 

 

2,796 

 

 

 

648 

 

 

13,289 

Collateralized mortgage obligations

 

 

 

3,146 

 

 

54,021 

 

 - 

 

 

 - 

 

 

 - 

 

 

 

3,146 

 

 

54,021 

Asset-backed securities

 

11 

 

 

2,836 

 

 

99,466 

 

 

 

247 

 

 

6,368 

 

13 

 

 

3,083 

 

 

105,834 

 

 

27 

 

$

6,633 

 

$

170,149 

 

 

$

532 

 

$

10,836 

 

32 

 

$

7,165 

 

$

180,985 

Securities Held-to-Maturity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agency mortgage-backed

 

 

$

73 

 

$

19,134 

 

 - 

 

$

 - 

 

$

 - 

 

 

$

73 

 

$

19,134 

Collateralized mortgage obligations

 

19 

 

 

2,858 

 

 

156,632 

 

 - 

 

 

 - 

 

 

 - 

 

19 

 

 

2,858 

 

 

156,632 

 

 

25 

 

$

2,931 

 

$

175,766 

 

 - 

 

$

 - 

 

$

 - 

 

25 

 

$

2,931 

 

$

175,766 

 

Recognition of other-than-temporary impairment was not necessary in the nine months ended September 30, 2014, or the year ended December 31, 2013.  The changes in fair value related primarily to interest rate fluctuations.  Our review of other-than-temporary impairment confirmed no credit quality deterioration.

Note 3 – Loans

 

Major classifications of loans were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

September 30, 2014

    

December 31, 2013

Commercial

 

$

106,592 

 

$

94,736 

Real estate - commercial

 

 

600,649 

 

 

560,233 

Real estate - construction

 

 

41,936 

 

 

29,351 

Real estate - residential

 

 

365,602 

 

 

390,201 

Consumer

 

 

3,142 

 

 

2,760 

Overdraft

 

 

1,198 

 

 

628 

Lease financing receivables

 

 

8,398 

 

 

10,069 

Other

 

 

12,757 

 

 

12,793 

 

 

 

1,140,274 

 

 

1,100,771 

Net deferred loan fees

 

 

608 

 

 

485 

 

 

$

1,140,882 

 

$

1,101,256 

 

It is the policy of the Company to review each prospective credit in order to determine if an adequate level of security or collateral was obtained prior to making a loan.  The type of collateral, when required, will vary from liquid assets to real estate.  The Company’s access to collateral, in the event of borrower default, is assured through adherence to lending laws, the Company’s lending standards and credit monitoring procedures.  The Bank generally makes loans solely within its market area.  There are no significant concentrations of loans where the customers’ ability to honor loan terms is dependent upon a single economic sector although the real estate related categories listed above represent 88.4% and 89.0% of the portfolio at September 30, 2014, and December 31, 2013, respectively.

 

12

 


 

Table of Contents

Aged analysis of past due loans by class of loans were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recorded

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

90 days or

 

 

 

 

 

 

 

 

90 Days or

 

 

 

 

 

 

 

 

 

 

 

 

 

Greater Past

 

 

30-59 Days

 

60-89 Days

 

Greater Past

 

Total Past

 

 

 

 

 

 

 

 

 

 

Due and

September 30, 2014

    

Past

    

Past Due

    

Due

    

Due

    

Current

    

Nonaccrual

    

Total Loans

    

Accruing

Commercial

 

$

99 

 

$

 - 

 

$

 - 

 

$

99 

 

$

113,246 

 

$

1,645 

 

$

114,990 

 

$

 - 

Real estate - commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied general purpose

 

 

32 

 

 

 - 

 

 

 - 

 

 

32 

 

 

132,123 

 

 

5,973 

 

 

138,128 

 

 

 - 

Owner occupied special purpose

 

 

 - 

 

 

 - 

 

 

 - 

 

 

 - 

 

 

166,561 

 

 

3,802 

 

 

170,363 

 

 

 - 

Non-owner occupied general purpose

 

 

 - 

 

 

 - 

 

 

 - 

 

 

 - 

 

 

150,073 

 

 

6,421 

 

 

156,494 

 

 

 - 

Non-owner occupied special purpose

 

 

 - 

 

 

 - 

 

 

 - 

 

 

 - 

 

 

84,410 

 

 

1,472 

 

 

85,882 

 

 

 - 

Retail properties

 

 

 - 

 

 

 - 

 

 

 - 

 

 

 - 

 

 

34,692 

 

 

 - 

 

 

34,692 

 

 

 - 

Farm

 

 

 - 

 

 

 - 

 

 

 - 

 

 

 - 

 

 

15,090 

 

 

 - 

 

 

15,090 

 

 

 - 

Real estate - construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Homebuilder

 

 

 - 

 

 

 - 

 

 

 - 

 

 

 - 

 

 

3,232 

 

 

 - 

 

 

3,232 

 

 

 - 

Land

 

 

 - 

 

 

 - 

 

 

 - 

 

 

 - 

 

 

1,684 

 

 

209 

 

 

1,893 

 

 

 - 

Commercial speculative

 

 

 - 

 

 

 - 

 

 

 - 

 

 

 - 

 

 

15,859 

 

 

 - 

 

 

15,859 

 

 

 - 

All other

 

 

 - 

 

 

 - 

 

 

 - 

 

 

 - 

 

 

20,367 

 

 

585 

 

 

20,952 

 

 

 - 

Real estate - residential

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investor

 

 

173 

 

 

722 

 

 

 - 

 

 

895 

 

 

127,490 

 

 

1,901 

 

 

130,286 

 

 

 - 

Owner occupied

 

 

96 

 

 

230 

 

 

 - 

 

 

326 

 

 

109,990 

 

 

7,204 

 

 

117,520 

 

 

 - 

Revolving and junior liens

 

 

105 

 

 

78 

 

 

44 

 

 

227 

 

 

115,273 

 

 

2,296 

 

 

117,796 

 

 

44 

Consumer

 

 

 

 

 - 

 

 

 - 

 

 

 

 

3,136 

 

 

 - 

 

 

3,142 

 

 

 - 

All other1

 

 

 - 

 

 

 - 

 

 

 - 

 

 

 - 

 

 

14,563 

 

 

 - 

 

 

14,563 

 

 

 - 

 

 

$

511 

 

$

1,030 

 

$

44 

 

$

1,585 

 

$

1,107,789 

 

$

31,508 

 

$

1,140,882 

 

$

44 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recorded

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

90 days or

 

 

 

 

 

 

 

 

90 Days or

 

 

 

 

 

 

 

 

 

 

 

 

 

Greater Past

 

 

30-59 Days

 

60-89 Days

 

Greater Past

 

Total Past

 

 

 

 

 

 

 

 

 

 

Due and

December 31, 2013

    

Past

    

Past Due

    

Due

    

Due

    

Current

    

Nonaccrual

    

Total Loans

    

Accruing

Commercial

 

$

 - 

 

$

 - 

 

$

 - 

 

$

 - 

 

$

104,778 

 

$

27 

 

$

104,805 

 

$

 - 

Real estate - commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied general purpose

 

 

290 

 

 

526 

 

 

 - 

 

 

816 

 

 

117,938 

 

 

3,180 

 

 

121,934 

 

 

 - 

Owner occupied special purpose

 

 

511 

 

 

 - 

 

 

 - 

 

 

511 

 

 

164,277 

 

 

7,671 

 

 

172,459 

 

 

 - 

Non-owner occupied general purpose

 

 

218 

 

 

 - 

 

 

 - 

 

 

218 

 

 

132,331 

 

 

5,708 

 

 

138,257 

 

 

 - 

Non-owner occupied special purpose

 

 

 - 

 

 

 - 

 

 

 - 

 

 

 - 

 

 

73,325 

 

 

661 

 

 

73,986 

 

 

 - 

Retail properties

 

 

 - 

 

 

 - 

 

 

 - 

 

 

 - 

 

 

34,034 

 

 

3,144 

 

 

37,178 

 

 

 - 

Farm

 

 

 - 

 

 

 - 

 

 

 - 

 

 

 - 

 

 

16,419 

 

 

 - 

 

 

16,419 

 

 

 - 

Real estate - construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Homebuilder

 

 

 - 

 

 

 - 

 

 

 - 

 

 

 - 

 

 

3,515 

 

 

168 

 

 

3,683 

 

 

 - 

Land

 

 

 - 

 

 

 - 

 

 

 - 

 

 

 - 

 

 

4,436 

 

 

209 

 

 

4,645 

 

 

 - 

Commercial speculative

 

 

 - 

 

 

 - 

 

 

 - 

 

 

 - 

 

 

11,235 

 

 

1,913 

 

 

13,148 

 

 

 - 

All other

 

 

32 

 

 

 - 

 

 

 - 

 

 

32 

 

 

7,404 

 

 

439 

 

 

7,875 

 

 

 - 

Real estate - residential

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investor

 

 

581 

 

 

171 

 

 

 - 

 

 

752 

 

 

140,926 

 

 

6,615 

 

 

148,293 

 

 

 - 

Owner occupied

 

 

4,414 

 

 

308 

 

 

87 

 

 

4,809 

 

 

106,184 

 

 

5,967 

 

 

116,960 

 

 

87 

Revolving and junior liens

 

 

650 

 

 

76 

 

 

 - 

 

 

726 

 

 

121,013 

 

 

3,209 

 

 

124,948 

 

 

 - 

Consumer

 

 

 

 

 - 

 

 

 - 

 

 

 

 

2,755 

 

 

 - 

 

 

2,760 

 

 

 - 

All other1

 

 

 - 

 

 

 - 

 

 

 - 

 

 

 - 

 

 

13,906 

 

 

 - 

 

 

13,906 

 

 

 - 

 

 

$

6,701 

 

$

1,081 

 

$

87 

 

$

7,869 

 

$

1,054,476 

 

$

38,911 

 

$

1,101,256 

 

$

87 

 

1. The “All other” class includes overdrafts and net deferred costs.

 

Credit Quality Indicators:

 

The Company categorizes loans into credit risk categories based on current financial information, overall debt service coverage, comparison against industry averages, historical payment experience, and current economic trends.  This analysis includes loans with outstanding balances or commitments greater than $50,000 and excludes homogeneous loans such as home equity lines of credit and residential mortgages.  Loans with a classified risk rating are reviewed quarterly regardless of size or loan type.  The Company uses the following definitions for classified risk ratings:

 

Special Mention.  Loans classified as special mention have a potential weakness that deserves management’s close attention.  If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan at some future date.

13

 


 

Table of Contents

 

Substandard. Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any.  Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

 

Doubtful.  Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

 

Credits that are not covered by the definitions above are pass credits, which are not considered to be adversely rated.

 

Credit Quality Indicators by class of loans were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2014

 

 

 

 

Special

 

 

 

 

 

 

 

 

 

 

    

Pass

    

Mention

    

Substandard 1

    

Doubtful

    

Total

Commercial

 

$

106,620 

 

$

4,119 

 

$

4,251 

 

$

-

 

$

114,990 

Real estate - commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied general purpose

 

 

129,530 

 

 

913 

 

 

7,685 

 

 

-

 

 

138,128 

Owner occupied special purpose

 

 

151,663 

 

 

12,558 

 

 

6,142 

 

 

-

 

 

170,363 

Non-owner occupied general purpose

 

 

145,153 

 

 

1,872 

 

 

9,469 

 

 

-

 

 

156,494 

Non-owner occupied special purpose

 

 

76,267 

 

 

8,143 

 

 

1,472 

 

 

-

 

 

85,882 

Retail Properties

 

 

32,450 

 

 

2,242 

 

 

 -

 

 

-

 

 

34,692 

Farm

 

 

15,090 

 

 

 -

 

 

 -

 

 

-

 

 

15,090 

Real estate - construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Homebuilder

 

 

3,232 

 

 

 -

 

 

 -

 

 

-

 

 

3,232 

Land

 

 

1,684 

 

 

 -

 

 

209 

 

 

-

 

 

1,893 

Commercial speculative

 

 

11,815 

 

 

540 

 

 

3,504 

 

 

-

 

 

15,859 

All other

 

 

20,367 

 

 

 -

 

 

585 

 

 

-

 

 

20,952 

Real estate - residential

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investor

 

 

126,879 

 

 

 -

 

 

3,407 

 

 

-

 

 

130,286 

Owner occupied

 

 

109,723 

 

 

 -

 

 

7,797 

 

 

-

 

 

117,520 

Revolving and junior liens

 

 

113,933 

 

 

188 

 

 

3,675 

 

 

-

 

 

117,796 

Consumer

 

 

3,141 

 

 

 -

 

 

 

 

-

 

 

3,142 

All other

 

 

14,563 

 

 

 -

 

 

 -

 

 

-

 

 

14,563 

Total

 

$

1,062,110 

 

$

30,575 

 

$

48,197 

 

$

 -

 

$

1,140,882 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2013

 

 

 

 

Special

 

 

 

 

 

 

 

 

 

 

 

Pass

    

Mention

    

Substandard 1

    

Doubtful

    

Total

Commercial

 

$

96,371 

 

$

7,953 

 

$

481 

 

$

-

 

$

104,805 

Real estate - commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied general purpose

 

 

105,683 

 

 

9,048 

 

 

7,203 

 

 

-

 

 

121,934 

Owner occupied special purpose

 

 

162,586 

 

 

1,968 

 

 

7,905 

 

 

-

 

 

172,459 

Non-owner occupied general purpose

 

 

122,844 

 

 

1,826 

 

 

13,587 

 

 

-

 

 

138,257 

Non-owner occupied special purpose

 

 

59,674 

 

 

9,840 

 

 

4,472 

 

 

-

 

 

73,986 

Retail Properties

 

 

30,059 

 

 

2,989 

 

 

4,130 

 

 

-

 

 

37,178 

Farm

 

 

16,419 

 

 

 -

 

 

 -

 

 

-

 

 

16,419 

Real estate - construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Homebuilder

 

 

1,745 

 

 

1,770 

 

 

168 

 

 

-

 

 

3,683 

Land

 

 

4,436 

 

 

 -

 

 

209 

 

 

-

 

 

4,645 

Commercial speculative

 

 

7,674 

 

 

3,561 

 

 

1,913 

 

 

-

 

 

13,148 

All other

 

 

7,109 

 

 

32 

 

 

734 

 

 

-

 

 

7,875 

Real estate - residential

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investor

 

 

135,136 

 

 

3,407 

 

 

9,750 

 

 

-

 

 

148,293 

Owner occupied

 

 

109,261 

 

 

 -

 

 

7,699 

 

 

-

 

 

116,960 

Revolving and junior liens

 

 

120,589 

 

 

388 

 

 

3,971 

 

 

-

 

 

124,948 

Consumer

 

 

2,759 

 

 

 -

 

 

 

 

-

 

 

2,760 

All other

 

 

13,906 

 

 

 -

 

 

 -

 

 

-

 

 

13,906 

Total

 

$

996,251 

 

$

42,782 

 

$

62,223 

 

$

 -

 

$

1,101,256 

 

1 The substandard credit quality indicator includes both potential problem loans that are currently performing and nonperforming loans

 

14

 


 

Table of Contents

Impaired loans by class of loan were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

As of September 30, 2014

 

September 30, 2014

 

 

 

 

 

Unpaid

 

 

 

 

Average

 

Interest

 

 

Recorded

 

Principal

 

Related

 

Recorded

 

Income

 

    

Investment

    

Balance

    

Allowance

    

Investment

    

Recognized

With no related allowance recorded

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

1,645 

 

$

2,173 

 

$

 -

 

$

836 

 

$

 -

Commercial real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied general purpose

 

 

7,176 

 

 

7,840 

 

 

 -

 

 

4,860 

 

 

81 

Owner occupied special purpose

 

 

3,217 

 

 

4,147 

 

 

 -

 

 

3,294 

 

 

 -

Non-owner occupied general purpose

 

 

7,065 

 

 

8,052 

 

 

 -

 

 

6,246 

 

 

45 

Non-owner occupied special purpose

 

 

1,472 

 

 

1,935 

 

 

 -

 

 

1,067 

 

 

 -

Retail properties

 

 

 -

 

 

 -

 

 

 -

 

 

1,572 

 

 

 -

Farm

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Homebuilder

 

 

1,791 

 

 

1,791 

 

 

 -

 

 

1,903 

 

 

69 

Land

 

 

209 

 

 

312 

 

 

 -

 

 

209 

 

 

 -

Commercial speculative

 

 

 -

 

 

 -

 

 

 -

 

 

369 

 

 

 -

All other

 

 

306 

 

 

347 

 

 

 -

 

 

155 

 

 

 -

Residential

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investor

 

 

2,553 

 

 

3,538 

 

 

 -

 

 

4,269 

 

 

32 

Owner occupied

 

 

11,735 

 

 

13,214 

 

 

 -

 

 

10,457 

 

 

128 

Revolving and junior liens

 

 

2,028 

 

 

3,163 

 

 

 -

 

 

1,899 

 

 

Consumer

 

 

 -

 

 

 -

 

 

 

 

 

 -

 

 

 -

Total impaired loans with no recorded allowance

 

 

39,197 

 

 

46,512 

 

 

 -

 

 

37,136 

 

 

359 

With an allowance recorded

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Commercial real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied general purpose

 

 

 -

 

 

 -

 

 

 -

 

 

365 

 

 

 -

Owner occupied special purpose

 

 

585 

 

 

676 

 

 

167 

 

 

2,443 

 

 

 -

Non-owner occupied general purpose

 

 

 -

 

 

 -

 

 

 -

 

 

469 

 

 

 -

Non-owner occupied special purpose

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Retail properties

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Farm

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Homebuilder

 

 

 -

 

 

 -

 

 

 -

 

 

84 

 

 

 -

Land

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Commercial speculative

 

 

 -

 

 

 -

 

 

 -

 

 

588 

 

 

 -

All other

 

 

279 

 

 

312 

 

 

107 

 

 

357 

 

 

 -

Residential

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investor

 

 

139 

 

 

149 

 

 

79 

 

 

412 

 

 

 -

Owner occupied

 

 

259 

 

 

394 

 

 

59 

 

 

912 

 

 

15 

Revolving and junior liens

 

 

327 

 

 

358 

 

 

129 

 

 

912 

 

 

 -

Consumer

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Total impaired loans with a recorded allowance

 

 

1,589 

 

 

1,889 

 

 

541 

 

 

6,542 

 

 

15 

Total impaired loans

 

$

40,786 

 

$

48,401 

 

$

541 

 

$

43,678 

 

$

374 

 

15

 


 

Table of Contents

Impaired loans by class of loans were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

As of December 31, 2013

 

September 30, 2013

 

 

 

 

Unpaid 

 

 

 

Average 

 

Interest 

 

 

Recorded

 

Principal 

 

Related 

 

Recorded 

 

Income 

 

    

 Investment

    

Balance

    

Allowance

    

Investment

    

Recognized

With no related allowance recorded

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

27 

 

$

34 

 

$

-

 

$

113 

 

$

-

Commercial real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied general purpose

 

 

2,543 

 

 

3,006 

 

 

-

 

 

3,565 

 

 

Owner occupied special purpose

 

 

3,371 

 

 

4,117 

 

 

-

 

 

5,913 

 

 

-

Non-owner occupied general purpose

 

 

5,428 

 

 

6,709 

 

 

-

 

 

11,995 

 

 

113 

Non-owner occupied special purpose

 

 

661 

 

 

919 

 

 

-

 

 

457 

 

 

-

Retail properties

 

 

3,144 

 

 

3,811 

 

 

-

 

 

6,918 

 

 

-

Farm

 

 

 -

 

 

 -

 

 

-

 

 

1,259 

 

 

-

Construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Homebuilder

 

 

2,016 

 

 

2,016 

 

 

-

 

 

3,597 

 

 

120 

Land

 

 

209 

 

 

308 

 

 

-

 

 

231 

 

 

-

Commercial speculative

 

 

738 

 

 

742 

 

 

-

 

 

2,089 

 

 

-

All other

 

 

 

 

35 

 

 

-

 

 

188 

 

 

-

Residential

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investor

 

 

5,984 

 

 

8,338 

 

 

-

 

 

5,845 

 

 

 -

Owner occupied

 

 

9,179 

 

 

10,451 

 

 

-

 

 

9,606 

 

 

151 

Revolving and junior liens

 

 

1,771 

 

 

2,313 

 

 

-

 

 

1,668 

 

 

Consumer

 

 

 -

 

 

 -

 

 

 

 

 

12 

 

 

-

Total impaired loans with no recorded allowance

 

 

35,075 

 

 

42,799 

 

 

 -

 

 

53,456 

 

 

392 

With an allowance recorded

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

 -

 

 

 -

 

 

 -

 

 

283 

 

 

-

Commercial real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied general purpose

 

 

730 

 

 

792 

 

 

264 

 

 

974 

 

 

-

Owner occupied special purpose

 

 

4,300 

 

 

4,702 

 

 

759 

 

 

2,777 

 

 

-

Non-owner occupied general purpose

 

 

939 

 

 

1,030 

 

 

129 

 

 

1,481 

 

 

-

Non-owner occupied special purpose

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

-

Retail properties

 

 

 -

 

 

 -

 

 

 -

 

 

876 

 

 

-

Farm

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

Construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Homebuilder

 

 

168 

 

 

604 

 

 

76 

 

 

97 

 

 

-

Land

 

 

-

 

 

 -

 

 

 -

 

 

 -

 

 

-

Commercial speculative

 

 

1,175 

 

 

1,808 

 

 

17 

 

 

2,971 

 

 

-

All other

 

 

436 

 

 

468 

 

 

262 

 

 

465 

 

 

-

Residential

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investor

 

 

684 

 

 

913 

 

 

160 

 

 

3,263 

 

 

-

Owner occupied

 

 

1,565 

 

 

1,831 

 

 

170 

 

 

3,448 

 

 

12 

Revolving and junior liens

 

 

1,498 

 

 

1,848 

 

 

558 

 

 

1,527 

 

 

-

Consumer

 

 

 -

 

 

-

 

 

-

 

 

-

 

 

-

Total impaired loans with a recorded allowance

 

 

11,495 

 

 

13,996 

 

 

2,395 

 

 

18,162 

 

 

12 

Total impaired loans

 

$

46,570 

 

$

56,795 

 

$

2,395 

 

$

71,618 

 

$

404 

 

Troubled debt restructurings (“TDRs”) are loans for which the contractual terms have been modified and both of these conditions exist: (1) there is a concession to the borrower and (2) the borrower is experiencing financial difficulties.  Loans are restructured on a case-by-case basis during the loan collection process with modifications generally initiated at the request of the borrower.  These modifications may include reduction in interest rates, extension of term, deferrals of principal, and other modifications.  The Bank participates in the U.S. Department of the Treasury’s (the “Treasury”) Home Affordable Modification Program (“HAMP”) which gives qualifying homeowners an opportunity to refinance into more affordable monthly payments.

 

The specific allocation of the allowance for loan losses on a TDR is determined by either discounting the modified cash flows at the original effective rate of the loan before modification or is based on the underlying collateral value less costs to sell, if repayment of the loan is collateral-dependent. If the resulting amount is less than the recorded book value, the Bank either establishes a valuation allowance (i.e. specific reserve) as a component of the allowance for loan losses or charges off the impaired balance if it determines that such amount is a confirmed loss. This method is used consistently for all segments of the portfolio. The allowance for loan losses also includes an allowance based on a loss migration analysis for each loan category on loans that are not individually evaluated for specific impairment. All loans charged-off, including TDRs charged-off, are factored into this calculation by portfolio segment.

16

 


 

Table of Contents

 

TDRs that were modified during the period are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

TDR Modifications

 

TDR Modifications

 

 

Three Months Ended September 30, 2014

 

Nine Months Ended September 30, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

# of 

 

Pre-modification 

 

Post-modification 

 

# of 

 

Pre-modification 

 

Post-modification 

 

    

contracts

    

recorded investment

    

recorded investment

    

contracts

    

recorded investment

    

recorded investment

Troubled debt restructurings

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate - commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other1

 

 -

 

$

 -

 

$

 -

 

 

$

1,320 

 

$

1,118 

Real estate - residential

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investor

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other1

 

 

 

155 

 

 

153 

 

 

 

155 

 

 

153 

Owner occupied

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

HAMP2

 

 -

 

 

 -

 

 

 -

 

 

 

102 

 

 

74 

Deferral3

 

 -

 

 

 -

 

 

 -

 

 

 

344 

 

 

226 

Revolving and junior liens

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other1

 

 

 

62 

 

 

59 

 

 

 

222 

 

 

218 

 

 

 

$

217 

 

$

212 

 

 

$

2,143 

 

$

1,789 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

TDR Modifications

 

TDR Modifications

 

 

Three Months Ended September 30, 2013

 

Nine Months Ended September 30, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

# of 

 

Pre-modification 

 

Post-modification 

 

# of 

 

Pre-modification 

 

Post-modification 

 

    

contracts

    

recorded investment

    

recorded investment

    

contracts

    

recorded investment

    

recorded investment

Troubled debt restructurings

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate - commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferral3

 

 -

 

$

 -

 

$

 -

 

 

$

610 

 

$

472 

Real estate - residential

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferral3

 

 -

 

 

 -

 

 

 -

 

 

 

137 

 

 

137 

Revolving and junior liens

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other1

 

 -

 

 

 -

 

 

 -

 

 

 

30 

 

 

29 

 

 

 -

 

$

 -

 

$

 -

 

 

$

777 

 

$

638 

 

 

1  Other: Change of terms from bankruptcy court

2 HAMP: Home Affordable Modification Program

3 Deferral: Refers to the deferral of principal

 

TDRs are classified as being in default on a case-by-case basis when they fail to be in compliance with the modified terms. The following table presents TDRs that defaulted during the periods shown and were restructured within the 12 month period prior to default. There was no TDR default activity for the three and nine months ended September 30, 2014.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

TDR Default Activity

 

TDR Default Activity

 

 

Three Months Ended September 30, 2013

 

Nine Months Ended September 30, 2013

Troubled debt restructurings that

 

# of 

 

 

Pre-modification outstanding

 

# of 

 

 

Pre-modification outstanding

Subsequently Defaulted

    

contracts

    

 

        recorded investment        

    

contracts

    

 

        recorded investment        

Real estate - commercial

 

 

 

 

 

 

 

 

 

 

Owner occupied special purpose

 

 

$

610 

 

 

$

610 

Real estate - residential

 

 

 

 

 

 

 

 

 

 

Investor

 

 -

 

 

 -

 

 

 

155 

Owner occupied

 

 

 

175 

 

 

 

175 

Revolving and junior liens

 

 

 

30 

 

 

 

30 

 

 

 

$

815 

 

 

$

970 

 

17

 


 

Table of Contents

Note 4 – Allowance for Loan Losses

 

Changes in the allowance for loan losses by segment of loans based on method of impairment for the three and nine months ended September 30, 2014, were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses:

 

 

 

Real Estate

 

Real Estate

 

Real Estate

 

 

 

 

 

 

 

    

Commercial

    

Commercial 1

    

Construction

    

Residential

    

Consumer

    

Unallocated

    

Total

Three months ended  September 30, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

1,991 

 

$

13,228 

 

$

1,754 

 

$

2,373 

 

$

1,464 

 

$

3,046 

 

$

23,856 

Charge-offs

 

 

512 

 

 

545 

 

 

 

 

925 

 

 

174 

 

 

 - 

 

 

2,157 

Recoveries

 

 

 

 

878 

 

 

 

 

646 

 

 

98 

 

 

 - 

 

 

1,631 

Provision (release)

 

 

41 

 

 

(744)

 

 

141 

 

 

 

 

16 

 

 

539 

 

 

 - 

Ending balance

 

$

1,526 

 

$

12,817 

 

$

1,897 

 

$

2,101 

 

$

1,404 

 

$

3,585 

 

$

23,330 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

2,250 

 

$

16,763 

 

$

1,980 

 

$

2,837 

 

$

1,439 

 

$

2,012 

 

$

27,281 

Charge-offs

 

 

519 

 

 

1,634 

 

 

174 

 

 

2,752 

 

 

423 

 

 

 - 

 

 

5,502 

Recoveries

 

 

56 

 

 

1,106 

 

 

507 

 

 

1,585 

 

 

297 

 

 

 - 

 

 

3,551 

(Release) provision

 

 

(261)

 

 

(3,418)

 

 

(416)

 

 

431 

 

 

91 

 

 

1,573 

 

 

(2,000)

Ending balance

 

$

1,526 

 

$

12,817 

 

$

1,897 

 

$

2,101 

 

$

1,404 

 

$

3,585 

 

$

23,330 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance: Individually evaluated for impairment

 

$

 - 

 

$

167 

 

$

107 

 

$

267 

 

$

 - 

 

$

- 

 

$

541 

Ending balance: Collectively evaluated for impairment

 

$

1,526 

 

$

12,650 

 

$

1,790 

 

$

1,834 

 

$

1,404 

 

$

3,585 

 

$

22,789 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financing receivables:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance

 

$

114,990 

 

$

600,649 

 

$

41,936 

 

$

365,602 

 

$

3,142 

 

$

14,563 

 

$

1,140,882 

Ending balance: Individually evaluated for impairment

 

$

1,645 

 

$

19,515 

 

$

2,585 

 

$

17,041 

 

$

- 

 

$

- 

 

$

40,786 

Ending balance: Collectively evaluated for impairment

 

$

113,345 

 

$

581,134 

 

$

39,351 

 

$

348,561 

 

$

3,142 

 

$

14,563 

 

$

1,100,096 

 

1 As of September 30, 2014, this segment consisted of performing loans that included a higher risk pool of loans rated as substandard that totaled $7.1 million.  The amount of general allocation that was estimated for that portion of these performing substandard rated loans was $1.2 million at September 30, 2014.

 

Changes in the allowance for loan losses by segment of loans based on method of impairment for the three and nine months ended September 30, 2013, were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses:

 

 

 

Real Estate

 

Real Estate

 

Real Estate

 

 

 

 

 

 

 

    

Commercial

    

Commercial 1

    

Construction

    

Residential

    

Consumer

    

Unallocated

    

Total

Three Months Ended

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

3,332 

 

$

18,097 

 

$

2,690 

 

$

5,021 

 

$

1,372 

 

$

4,530 

 

$

35,042 

Charge-offs

 

 

29 

 

 

851 

 

 

53 

 

 

3,594 

 

 

168 

 

 

 - 

 

 

4,695 

Recoveries

 

 

60 

 

 

523 

 

 

15 

 

 

209 

 

 

143 

 

 

 - 

 

 

950 

(Release) provision

 

 

(469)

 

 

(1,354)

 

 

(252)

 

 

1,352 

 

 

162 

 

 

(1,189)

 

 

(1,750)

Ending balance

 

$

2,894 

 

$

16,415 

 

$

2,400 

 

$

2,988 

 

$

1,509 

 

$

3,341 

 

$

29,547 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

4,517 

 

$

20,100 

 

$

3,837 

 

$

4,535 

 

$

1,178 

 

$

4,430 

 

$

38,597 

Charge-offs

 

 

308 

 

 

2,377 

 

 

951 

 

 

5,193 

 

 

474 

 

 

 - 

 

 

9,303 

Recoveries

 

 

104 

 

 

3,752 

 

 

1,265 

 

 

792 

 

 

390 

 

 

 - 

 

 

6,303 

(Release) provision

 

 

(1,419)

 

 

(5,060)

 

 

(1,751)

 

 

2,854 

 

 

415 

 

 

(1,089)

 

 

(6,050)

Ending balance

 

$

2,894 

 

$

16,415 

 

$

2,400 

 

$

2,988 

 

$

1,509 

 

$

3,341 

 

$

29,547 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance: Individually evaluated for impairment

 

$

 - 

 

$

750 

 

$

412 

 

$

988 

 

$

- 

 

$

- 

 

$

2,150 

Ending balance: Collectively evaluated for impairment

 

$

2,894 

 

$

15,665 

 

$

1,988 

 

$

2,000 

 

$

1,509 

 

$

3,341 

 

$

27,397 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financing receivables:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance

 

$

98,026 

 

$

554,874 

 

$

30,996 

 

$

376,859 

 

$

2,570 

 

$

14,315 

 

$

1,077,640 

Ending balance: Individually evaluated for impairment

 

$

29 

 

$

24,849 

 

$

7,698 

 

$

21,675 

 

$

- 

 

$

- 

 

$

54,251 

Ending balance: Collectively evaluated for impairment

 

$

97,997 

 

$

530,025 

 

$

23,298 

 

$

355,184 

 

$

2,570 

 

$

14,315 

 

$

1,023,389 

 

1 As of September 30, 2013, this segment consisted of performing loans that included a higher risk pool of loans rated as substandard that totaled $14.4 million.  The amount of general allocation that was estimated for that portion of these performing substandard rated loans was $2.7 million at September 30, 2013.

 

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Note 5 – Other Real Estate Owned

 

Details related to the activity in the other real estate owned (“OREO”) portfolio, net of valuation reserve, for the periods presented are itemized in the following table:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

    

September 30, 

    

September 30, 

Other real estate owned

    

2014

    

2013

    

2014

    

2013

Balance at beginning of period

 

$

39,232 

 

$

59,465 

 

$

41,537 

 

$

72,423 

Property additions

 

 

4,277 

 

 

3,015 

 

 

13,620 

 

 

14,196 

Property improvements

 

 

506 

 

 

10 

 

 

637 

 

 

60 

Less:

 

 

 

 

 

 

 

 

 

 

 

 

Property disposals, net of gains/losses

 

 

1,618 

 

 

11,463 

 

 

12,136 

 

 

30,928 

Period valuation adjustments

 

 

1,520 

 

 

1,961 

 

 

2,781 

 

 

6,685 

Balance at end of period

 

$

40,877 

 

$

49,066 

 

$

40,877 

 

$

49,066 

 

Activity in the valuation allowance was as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30, 

 

September 30, 

 

    

2014

    

2013

    

2014

    

2013

Balance at beginning of period

 

$

17,873 

 

$

30,487 

 

$

22,284 

 

$

31,454 

Provision for unrealized losses

 

 

1,520 

 

 

1,961 

 

 

2,781 

 

 

6,537 

Reductions taken on sales

 

 

(348)

 

 

(7,571)

 

 

(5,431)

 

 

(13,305)

Other adjustments

 

 

 -

 

 

(290)

 

 

(589)

 

 

(99)

Balance at end of period

 

$

19,045 

 

$

24,587 

 

$

19,045 

 

$

24,587 

 

Expenses related to OREO, net of lease revenue includes:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30, 

 

September 30, 

 

    

2014

    

2013

    

2014

    

2013

Gain on sales, net

 

$

(201)

 

$

(608)

 

$

(610)

 

$

(1,175)

Provision for unrealized losses

 

 

1,520 

 

 

1,961 

 

 

2,781 

 

 

6,537 

Operating expenses

 

 

884 

 

 

1,500 

 

 

3,132 

 

 

4,555 

Less:

 

 

 

 

 

 

 

 

 

 

 

 

Lease revenue

 

 

196 

 

 

309 

 

 

638 

 

 

974 

 

 

$

2,007 

 

$

2,544 

 

$

4,665 

 

$

8,943 

 

 

 

Note 6 – Deposits

 

Major classifications of deposits were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

September 30, 2014

    

December 31, 2013

Noninterest bearing demand

 

$

380,687 

 

$

373,389 

Savings

 

 

236,289 

 

 

228,589 

NOW accounts

 

 

315,665 

 

 

297,852 

Money market accounts

 

 

296,418 

 

 

309,859 

Certificates of deposit of less than $100,000

 

 

256,452 

 

 

288,345 

Certificates of deposit of $100,000 or more

 

 

171,244 

 

 

184,094 

 

 

$

1,656,755 

 

$

1,682,128 

 

 

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Note 7 – Borrowings

 

The following table is a summary of borrowings as of September 30, 2014, and December 31, 2013.  Junior subordinated debentures are discussed in detail in Note 8:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

September 30, 2014

    

December 31, 2013

Securities sold under repurchase agreements

 

$

29,438 

 

$

22,560 

FHLBC advances

 

 

40,000 

 

 

5,000 

Junior subordinated debentures

 

 

58,378 

 

 

58,378 

Subordinated debt

 

 

45,000 

 

 

45,000 

Notes payable and other borrowings

 

 

500 

 

 

500 

 

 

$

173,316 

 

$

131,438 

 

The Company enters into deposit sweep transactions where the transaction amounts are secured by pledged securities.  These transactions consistently mature within 1 to 90 days from the transaction date and are governed by sweep repurchase agreements.  All sweep repurchase agreements are treated as financings secured by U.S. government agencies and collateralized mortgage-backed securities and have a carrying amount of $29.4 million at September 30, 2014, and $22.6 million at December 31, 2013. The fair value of the pledged collateral was $43.4 million and $39.2 million at September 30, 2014 and December 31, 2013, respectively. At September 30, 2014, there were no customers with secured balances exceeding 10% of stockholders’ equity.

 

The Company’s borrowings at the FHLBC require the Bank to be a member and invest in the stock of the FHLBC.  Total borrowings are generally limited to the lower of 35% of total assets or 60% of the book value of certain mortgage loans.  As of September 30, 2014, the Bank had taken an advance of $40.0 million on the FHLBC stock valued at $4.3 million, collateralized securities with a fair value of $93.1 million and loans with a principal balance of $52.4 million, which carry a combined collateral value of $91.2 million.  The Company has excess collateral of $49.9 million available to secure borrowings.

 

One of the Company’s most significant borrowing relationships continued to be the $45.5 million credit facility with a correspondent bank. That credit began in January 2008 and was originally composed of a $30.5 million senior debt facility, which included $500,000 in term debt, and $45.0 million of subordinated debt.  The subordinated debt and the term debt portion of the senior debt facility mature on March 31, 2018.  The interest rate on the senior debt facility resets quarterly and at the Company’s option, is based on, either the lender’s prime rate or three-month LIBOR plus 90 basis points.  The interest rate on the subordinated debt resets quarterly, and is equal to three-month LIBOR plus 150 basis points.  The Company had no principal outstanding balance on the senior line of credit portion of the senior debt facility when it matured and was terminated.  The Company had $500,000 in principal outstanding in term debt and $45.0 million in principal outstanding in subordinated debt at the end of both September 30, 2014, and December 31, 2013.  The term debt is secured by all of the outstanding capital stock of the Bank.  The Company has made all required interest payments on the outstanding principal balance on a timely basis.

 

The credit facility agreement contains usual and customary provisions regarding acceleration of the senior debt upon the occurrence of an event of default by the Company under the senior debt agreement.  The senior debt agreement also contains certain customary representations and warranties, and financial covenants.  At September 30, 2014, the Company was out of compliance with two of the financial covenants contained within the credit agreement.  As of June 30, 2014, the Company reported being out of compliance on one of the financial covenants contained in the referenced credit agreement.  Prior to 2013, the Company had been out of compliance with two of the financial covenants.  The agreement provides that noncompliance is an event of default and as the result of the Company’s failure to comply with a financial covenant, the lender may (i) terminate all commitments to extend further credit, (ii) increase the interest rate on the revolving line of the term debt by 200 basis points, (iii) declare the senior debt immediately due and payable and (iv) exercise all of its rights and remedies at law, in equity and/or pursuant to any or all collateral documents, including foreclosing on the collateral.  The total outstanding principal of the senior debt is the $500,000 in term debt. Because the subordinated debt is treated as Tier 2 capital for regulatory capital purposes, the senior debt agreement does not provide the lender with any rights of acceleration or other remedies with regard to the subordinated debt upon an event of default caused by the Company’s failure to comply with a financial covenant.  Specifically, the covenants that were not met address the Bank’s return on average assets and nonperforming assets as a percentage of the Bank’s primary capital, when calculated per the debt agreement.

 

Note 8 Junior Subordinated Debentures

 

The Company completed the sale of $27.5 million of cumulative trust preferred securities by its unconsolidated subsidiary, Old Second Capital Trust I in June 2003.  An additional $4.1 million of cumulative trust preferred securities were sold in July 2003.  The trust preferred securities may remain outstanding for a 30-year term but, subject to regulatory approval, can be called in whole or in part by the Company after June 30, 2008.  When not in deferral, distributions on the securities are payable quarterly at an annual rate of 7.80%.  The Company issued a new $32.6 million subordinated debenture to Old Second Capital Trust I in return for the aggregate net proceeds of this trust preferred offering.  The interest rate and payment frequency on the debenture are equivalent to the cash distribution basis on the trust preferred securities.

 

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The Company issued an additional $25.0 million of cumulative trust preferred securities through a private placement completed by an additional, unconsolidated subsidiary, Old Second Capital Trust II, in April 2007. These trust preferred securities also mature in 30 years, but subject to the aforementioned regulatory approval, can be called in whole or in part on a quarterly basis commencing June 15, 2017.  The quarterly cash distributions on the securities are fixed at 6.77% through June 15, 2017 and float at 150 basis points over three-month LIBOR thereafter.  The Company issued a new $25.8 million subordinated debenture to the Old Second Capital Trust II in return for the aggregate net proceeds of this trust preferred offering.  The interest rate and payment frequency on the debenture are equivalent to the cash distribution basis on the trust preferred securities.

 

Under the terms of the subordinated debentures issued to each of Old Second Capital Trust I and II, the Company is allowed to defer payments of interest for 20 quarterly periods without default or penalty, but such amounts continue to accrue.  Also during a deferral period, the Company generally may not pay cash dividends on or repurchase its common stock or preferred stock, including the Series B Fixed Rate Cumulative Perpetual Preferred Stock (the “Series B Stock”), as discussed in Note 15.  In August of 2010, the Company elected to defer regularly scheduled interest payments on the $58.4 million of junior subordinated debentures.  Because of the deferral on the subordinated debentures, the trusts deferred regularly scheduled dividends on the trust preferred securities.  On April 21, 2014, the Company paid all outstanding interest, which totaled $19.7 million, on the trust preferred securities to the trustees for payment to holders as of the next record date set forth in the indentures and terminated the deferral period.  The Company paid $1.1 million of interest due in the third quarter of 2014.   Both of the debentures issued by the Company are disclosed on the Consolidated Balance Sheet as junior subordinated debentures and the related interest expense for each issuance is included in the Consolidated Statements of of Operations. 

 

Note 9 Equity Compensation Plans

There are stock-based awards outstanding under the Company’s 2008 Equity Incentive Plan (the “2008 Plan”) and the Company’s 2014 Equity Incentive Plan (the “2014 Plan,” and together with the 2008 Plan, the “Plans”).  The 2014 Plan was approved at the 2014 annual meeting of stockholders.  Following approval of the 2014 Plan, no further awards will be granted under the 2008 Plan or any other Company equity compensation plan.  A maximum of 375,000 shares may be issued under the 2014 Plan.  The Plan authorizes the granting of qualified stock options, non-qualified stock options, restricted stock, restricted stock units, and stock appreciation rights.  Awards may be granted to selected directors and officers or employees under the 2014 Plan at the discretion of the Compensation Committee of the Company’s Board of Directors.  As of September 30, 2014, 210,500 shares remained available for issuance under the 2014 Plan.

Total compensation cost that has been charged for the plans was $189,000 in the first nine months of 2014 and $123,000 in the first nine months of 2013.

There were no stock options granted in the third quarter of 2014 or 2013.  All stock options are granted for a term of ten years.  There were no stock options exercised during the third quarter of 2014 or 2013.  There is no unrecognized compensation cost related to unvested stock options as all stock options of the Company’s common stock have vested.

A summary of stock option activity in the Plans for the nine months ending September 30, 2014, is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

Weighted

 

Average

 

 

 

 

 

 

 

Average

 

Remaining

 

 

 

 

 

 

 

Exercise

 

Contractual

 

Aggregate

 

    

Shares

    

Price

    

Term (years)

    

Intrinsic Value

 

 

 

 

 

 

 

 

 

 

 

Beginning outstanding

 

325,500 

 

$

29.56 

 

 

 

 

 

Canceled

 

 -

 

 

 -

 

 

 

 

 

Ending outstanding

 

325,500 

 

$

29.56 

 

1.8 

 

$

-

 

 

 

 

 

 

 

 

 

 

 

Exercisable at end of period

 

325,500 

 

$

29.56 

 

1.8 

 

$

-

 

Generally, restricted stock and restricted stock units granted under the Plans vest three years from the grant date, but the Compensation Committee of the Company’s Board of Directors has discretionary authority to change some terms including the amount of time until the vest date.

 

Awards under the 2008 Plan will become fully vested upon a merger or change in control of the Company.  Under the 2014 Plan, upon a change in control of the Company, if (i) the 2014 Plan is not an obligation of the successor entity following the change in control, or (ii) the 2014 Plan is an obligation of the successor entity following the change in control and the participant incurs an involuntary termination, then the stock options, stock appreciation rights, stock awards and cash incentive awards under the 2014 Plan will become fully exercisable and vested.  Performance-based awards generally will vest based upon the level of achievement of the applicable performance measures through the change in control.

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The Company granted restricted stock under its equity compensation plans beginning in 2005 and it began granting restricted stock units in February 2009.  Restricted stock awards under the Plans generally entitle holders to voting and dividend rights upon grant and are subject to forfeiture until certain restrictions have lapsed including employment for a specific period.  Restricted stock units under the Plans are also subject to forfeiture until certain restrictions have lapsed including employment for a specific period, and generally entitle holders to receive dividend equivalents during the restricted period but do not entitle holders to voting rights until the restricted period ends and shares are transferred in connection with the units.

There were no restricted awards issued under the Plans during the third quarter of 2014 and 184,500 restricted awards issued during the nine months ending September 30, 2014.  There were no restricted awards issued during the third quarter of 2013 and 155,500 restricted awards issued for the nine months ending September 30, 2013.  Compensation expense is recognized over the vesting period of the restricted award based on the market value of the award on the issue date.

 

A summary of changes in the Company’s unvested restricted awards for the nine months ending September 30, 2014, is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2014

 

 

 

 

Weighted

 

 

Restricted

 

Average

 

 

Stock Shares

 

Grant Date

 

    

and Units

    

Fair Value

Nonvested at January 1

 

185,500 

 

$

2.95 

Granted

 

184,500 

 

 

4.82 

Vested

 

(25,000)

 

 

2.06 

Forfeited

 

(20,000)

 

 

1.74 

Nonvested at September 30

 

325,000 

 

$

4.15 

 

 

 

 

 

 

 

Total unrecognized compensation cost of restricted awards was $1.0 million as of September 30, 2014, which is expected to be recognized over a weighted-average period of 2.48 years.  Total unrecognized compensation cost of restricted awards was $411,000 as of September 30, 2013, which was expected to be recognized over a weighted-average period of 2.46 years.

 

 

Note 10 – Earnings Per Share

 

The earnings per share – both basic and diluted – are included below as of September 30 (in thousands except for share data):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30, 

 

September 30, 

 

    

2014

    

2013

    

2014

    

2013

Basic earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average common shares outstanding

 

 

29,442,508 

 

 

13,885,884 

 

 

23,905,205 

 

 

13,947,606 

Weighted-average common shares less stock based awards

 

 

29,442,508 

 

 

13,870,884 

 

 

23,902,403 

 

 

13,895,136 

Weighted-average common shares stock based awards

 

 

325,000 

 

 

231,152 

 

 

225,232 

 

 

217,107 

Net income from operations

 

$

2,924 

 

$

72,924 

 

$

7,147 

 

$

81,872 

Gain on preferred stock redemption

 

 

 -

 

 

 -

 

 

(1,348)

 

 

 -

Preferred stock dividends and accretion, net of dividends waived

 

 

1,065 

 

 

1,323 

 

 

(1,448)

 

 

3,917 

Net earnings available to common stockholders

 

 

1,859 

 

 

71,601 

 

 

9,943 

 

 

77,955 

Undistributed earnings

 

 

1,859 

 

 

71,601 

 

 

9,943 

 

 

77,955 

Basic earnings per share common undistributed earnings

 

 

0.06 

 

 

5.08 

 

 

0.41 

 

 

5.52 

Basic earnings per share

 

 

0.06 

 

 

5.08 

 

 

0.41 

 

 

5.52 

Diluted earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average common shares outstanding

 

 

29,442,508 

 

 

13,885,884 

 

 

23,905,205 

 

 

13,947,606 

Dilutive effect of nonvested restricted awards1

 

 

325,000 

 

 

216,152 

 

 

222,430 

 

 

164,637 

Diluted average common shares outstanding

 

 

29,767,508 

 

 

14,102,036 

 

 

24,127,635 

 

 

14,112,243 

Net earnings available to common stockholders

 

$

1,859 

 

$

71,601 

 

$

9,943 

 

$

77,955 

Diluted earnings per share

 

$

0.06 

 

$

5.08 

 

$

0.41 

 

$

5.52 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of antidilutive options excluded from the diluted earnings per share calculation

 

 

1,140,839 

 

 

1,224,839 

 

 

1,140,839 

 

 

1,224,839 

1 Includes the common stock equivalents for restricted share rights that are dilutive.

 

 

 

 

 

 

 

 

 

 

 

 

 

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Table of Contents

The above earnings per share calculation did not include a warrant for 815,339 shares of common stock that was outstanding as of September 30, 2014, and September 30, 2013 because the warrant was anti-dilutive.  Of note, the warrant was sold at auction by the Treasury in June 2013 to a third party investor.

 

The Company completed the redemption of 25,669 shares of its Series B Stock in the second quarter of 2014.  As previously disclosed, the Company completed a public offering of 15,525,000 shares of common stock in April of 2014.  Net proceeds of over $64.0 million were used to pay the accrued but unpaid interest on the Company’s  trust preferred securities or junior subordinated debentures discussed in Note 8, the accumulated but unpaid dividends on the Series B Stock and to complete this redemption.  The amount remaining after the completion of these transactions was retained at the Company for use in addressing general corporate matters.  The redemption price for such Series B Stock was 94.75% of the liquidation value of the Series B Stock provided that the holders of shares entered into agreements to forebear payment of dividends due and to waive any rights to such dividend upon redemption.  The Company redeemed all shares of Series B Stock held by directors of the Company on the same terms.

 

Note 11 Regulatory & Capital Matters

 

The Bank is subject to the risk-based capital regulatory guidelines, which include the methodology for calculating the risk-weighted Bank assets, developed by the Office of the Comptroller of the Currency (the “OCC”) and the other bank regulatory agencies.  In connection with the current economic environment, the Bank’s current level of nonperforming assets and the risk-based capital guidelines, the Bank’s board of directors has determined that the Bank should maintain a Tier 1 leverage capital ratio at or above eight percent (8%) and a total risk-based capital ratio at or above twelve percent (12%).  The Bank currently exceeds those thresholds.

 

The Bank exceeded both board of directors’ capital ratio objectives.  At September 30, 2014, the Bank’s Tier 1 capital leverage ratio was 11.67%, up 70 basis points from December 31, 2013, and well above the 8.00% objective.  The Bank’s total capital ratio was 18.47%, up 43 basis points from December 31, 2013, and also well above the objective of 12.00%.

 

On July 22, 2011, the Company entered into a Written Agreement with the Reserve Bank designed to maintain the financial soundness of the Company. Pursuant to the Written Agreement, the Company took certain actions and operated in compliance with the Written Agreement’s provisions during its term.  On January 17, 2014, the Reserve Bank terminated the Written Agreement.  Although the Written Agreement has been terminated, the Company expects that it will continue to seek approval from the Reserve Bank prior to paying any dividends on its capital stock and incurring any additional indebtedness.

 

Bank holding companies are required to maintain minimum levels of capital in accordance with capital guidelines implemented by the Board of Governors of the Federal Reserve System.  The general bank and holding company capital adequacy guidelines are shown in the accompanying table, as are the capital ratios of the Company and the Bank, as of September 30, 2014, and December 31, 2013.  The Company’s total risk-based capital ratio has been adjusted to correctly account for the Company's subordinated debt, a portion of which was excluded from Tier 2 capital because the subordinated debt is within five years of maturity.  This change has also been made in all relevant prior quarters and has resulted in an immaterial reduction in the Company's total risk-based capital ratio for those periods.  The reduction in regulatory capital amounts and ratios has no impact on the Company's historical consolidated financial statements or stockholders' equity, which were stated in accordance with GAAP.

 

The Company completed the redemption of certain of its Series B Fixed Rate Cumulative Preferred Stock (the “Series B Stock”) in the second quarter, 2014.  The Company completed a public offering of common stock in April.  Net proceeds of over $64.0 million were used to pay the accrued but unpaid interest on trust preferred securities, the accumulated but unpaid dividends on the Series B Stock and to complete this redemption.  All ratios for September 30, 2014 reflect these changes in the Company’s capital.

 

At September 30, 2014, the Company, on a consolidated basis, exceeded the minimum thresholds to be considered “adequately capitalized” under current regulatory defined capital ratios.  The Company and the Bank are subject to regulatory capital requirements administered by federal banking agencies.

 

23

 


 

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Capital levels and industry defined regulatory minimum required levels:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Minimum Required

 

 

Minimum Required

 

 

 

 

 

 

 

 

 

for Capital

 

 

to be Well

 

 

 

Actual

 

Adequacy Purposes

 

Capitalized 1

 

 

    

Amount

    

Ratio

    

Amount

    

Ratio

    

Amount

    

Ratio

 

September 30, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total capital to risk weighted assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

$

234,500 

 

17.56 

%

 

$

106,834 

 

8.00 

%

 

 

N/A

 

N/A

 

Old Second Bank

 

 

246,873 

 

18.47 

 

 

 

106,929 

 

8.00 

 

 

$

133,662 

 

10.00 

%

Tier 1 capital to risk weighted assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

 

190,724 

 

14.28 

 

 

 

53,424 

 

4.00 

 

 

 

N/A

 

N/A

 

Old Second Bank

 

 

230,087 

 

17.22 

 

 

 

53,446 

 

4.00 

 

 

 

80,170 

 

6.00 

 

Tier 1 capital to average assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

 

190,724 

 

9.68 

 

 

 

78,812 

 

4.00 

 

 

 

N/A

 

N/A

 

Old Second Bank

 

 

230,087 

 

11.67 

 

 

 

78,864 

 

4.00 

 

 

 

98,581 

 

5.00 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total capital to risk weighted assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

$

191,139 

 

15.16 

%

 

$

100,865 

 

8.00 

%

 

 

N/A

 

N/A

 

Old Second Bank

 

 

227,467 

 

18.04 

 

 

 

100,872 

 

8.00 

 

 

$

126,090 

 

10.00 

%

Tier 1 capital to risk weighted assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

 

134,199 

 

10.65 

 

 

 

50,403 

 

4.00 

 

 

 

N/A

 

N/A

 

Old Second Bank

 

 

211,568 

 

16.78 

 

 

 

50,433 

 

4.00 

 

 

 

75,650 

 

6.00 

 

Tier 1 capital to average assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

 

134,199 

 

6.96 

 

 

 

77,126 

 

4.00 

 

 

 

N/A

 

N/A

 

Old Second Bank

 

 

211,568 

 

10.97 

 

 

 

77,144 

 

4.00 

 

 

 

96,430 

 

5.00 

 

 

1 The Bank exceeded the general minimum regulatory requirements to be considered “well capitalized”.

 

The Company’s credit facility with Bank of America includes $45.0 million in subordinated debt.  That debt obligation qualifies at 60% and 80% of the original amount for Tier 2 regulatory capital at September 30, 2014 and December 31, 2013, respectively.  In addition, the trust preferred securities continue to qualify as Tier 1 regulatory capital, and the Company treats the maximum amount of this security type allowable under regulatory guidelines as Tier 1 capital.  As of September 30, 2014 all $56.6 million of the trust preferred proceeds qualified as Tier 1 regulatory capital.  As of December 31, 2013, trust preferred proceeds of $51.6 million qualified as Tier 1 regulatory capital and $5.0 million qualified as Tier 2 regulatory capital. All of the Series B Stock qualified as Tier 1 regulatory capital as of September 30, 2014, and December 31, 2013.

 

Dividend Restrictions and Deferrals

 

In addition to the above requirements, banking regulations and capital guidelines generally limit the amount of dividends that may be paid by a Bank without prior regulatory approval.  Under these regulations, the amount of dividends that may be paid in any calendar year is limited to the current year’s profits, combined with the retained profit of the previous two years, subject to the capital requirements described above.  The Bank has the ability and the authority to pay dividends to the Company to pay debt and to meet preferred dividend requirements.

 

As discussed in Note 8, as of September 30, 2014, the Company had $58.4 million of junior subordinated debentures held by two statutory business trusts that it controls.  The Company has the right to defer interest payments on the debentures for a period of up to 20 consecutive quarters, and elected to begin such a deferral in August 2010.  However, all deferred interest must be paid before the Company may pay dividends on its common stock.  In the second quarter of 2014, the Company terminated the deferral period and paid all accumulated and unpaid interest on the junior subordinated debentures which totaled $19.7 million.  The Company is currently paying interest as it comes due and $1.1 million was paid in the third quarter of 2014.

 

Furthermore, as with the debentures discussed above, the Company is prohibited from paying dividends on its common stock unless it has fully paid all deferred dividends on the Series B Stock. In August 2010, it also began to defer the payment of dividends on such Series B Stock. Therefore, in addition to paying all the accrued and unpaid distributions on the debentures set forth above, the Company must also fully pay all deferred and unpaid dividends on the Series B Stock before it may reinstate the payment of dividends on the common stock.

 

On April 15, 2014, the Company declared a dividend of approximately $15.8 million on its Series B Stock to stockholders of record on May 1, 2014.  Series B Stock dividends of $10.3 million were paid on May 15, 2014.  The Company is currently paying dividends as they come due and $1.1 million paid was paid on August 15, 2014.

 

24

 


 

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On April 28, 2014, the Company redeemed 25,669 shares of the Series B Stock from certain holders, which included certain of the Company’s directors, at a redemption price of 94.75% of the per share liquidation value, or $947.50 per share, for a total price of approximately $24.3 million.  The Company paid $22.9 million to a large private investor and an additional $1.4 million to Company directors for these purchases.  The holders of such shares waived their rights to any dividends on the Series B Stock, and such holders did not receive any part of the declared dividend on the Series B Stock. In May, the Company paid $10.3 million in Series B Stock dividends.  In the second quarter, the Company also recognized benefit from $5.4 million in net income available to common stockholders reflecting both reversal of dividends previously accrued as well as dividends accumulated but not accrued by the Company and waived by holders upon redemption.

 

Further detail on the junior subordinated debentures, the Series B Stock and the deferral of interest and dividends thereon is described in Notes 8 and 15.

 

Note 12 Fair Value Option and Fair Value Measurements

 

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.  The fair value hierarchy established by the Company also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.  Three levels of inputs that may be used to measure fair value are:

 

Level 1:  Quoted prices (unadjusted) for identical assets or liabilities in active markets that the Company has the ability to access as of the measurement date.

 

Level 2:  Significant observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, and other inputs that are observable or can be corroborated by observable market data.

 

Level 3:  Significant unobservable inputs that reflect a company’s own view about the assumptions that market participants would use in pricing an asset or liability.

 

Transfers between levels are deemed to have occurred at the end of the reporting period.  For the quarters ended September 30, 2014, and 2013 there were no significant transfers between levels.

 

Except for auction rate asset-backed securities, the majority of securities (available-for-sale and held-to-maturity) are valued by external pricing services or dealer market participants and are classified in Level 2 of the fair value hierarchy.  Both market and income valuation approaches are utilized.  Quarterly, the Company evaluates the methodologies used by the external pricing services or dealer market participants to develop the fair values to determine whether the results of the valuations are representative of an exit price in the Company’s principal markets and an appropriate representation of fair value.  The Company uses the following methods and significant assumptions to estimate fair value:

 

·

Government-sponsored agency debt securities are primarily priced using available market information through processes such as benchmark curves, market valuations of like securities, sector groupings and matrix pricing.

·

Other government-sponsored agency securities, MBS and some of the actively traded real estate mortgage investment conduits and collateralized mortgage obligations are priced using available market information including benchmark yields, prepayment speeds, spreads, volatility of similar securities and trade date.

·

State and political subdivisions are largely grouped by characteristics (e.g.., geographical data and source of revenue in trade dissemination systems).  Because some securities are not traded daily and due to other grouping limitations, active market quotes are often obtained using benchmarking for like securities.

·

During 2013, asset-backed auction rate securities were acquired and priced using data from dealer market participants until December 31, 2013.  At December 31, 2013, to present and including asset-backed auction rate securities acquired in 2014, the Company utilized pricing data from a nationally recognized valuation firm providing specialized securities valuation services.  Therefore, the valuations of auction rate asset-backed securities are considered Level 3 valuations.

·

During the third quarter of 2014, asset-backed collateralized loan obligations were acquired and priced using data from a pricing matrix support by our bond accounting service provider and are therefore considered Level 2 valuations.

·

Residential mortgage loans eligible for sale in the secondary market are carried at fair market value.  The fair value of loans held-for-sale is determined using quoted secondary market prices.

·

Lending related commitments to fund certain residential mortgage loans, e.g. residential mortgage loans with locked interest rates to be sold in the secondary market and forward commitments for the future delivery of mortgage loans to third party investors as well as forward commitments for future delivery of MBS are considered derivatives.  Fair values are estimated based on observable changes in mortgage interest rates including prices for MBS from the date of the commitment and do not typically involve significant judgments by management.

·

The fair value of mortgage servicing rights is based on a valuation model that calculates the present value of estimated net servicing income.  The valuation model incorporates assumptions that market participants would use in estimating future net

25

 


 

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servicing income to derive the resultant value.  The Company is able to compare the valuation model inputs, such as the discount rate, prepayment speeds, weighted average delinquency and foreclosure/bankruptcy rates  to widely available published industry data for reasonableness.

·

Interest rate swap positions, both assets and liabilities, are based on valuation pricing models using an income approach reflecting readily observable market parameters such as interest rate yield curves.

·

Both the credit valuation reserve on current interest rate swap positions and on receivables related to unwound customer interest rate swap positions were determined based upon management’s estimate of the amount of credit risk exposure, including by available collateral protection and/or by utilizing an estimate related to a probability of default as indicated in the Bank credit policy.  Such adjustments would result in a Level 3 classification.

·

The fair value of impaired loans with specific allocations of the allowance for loan losses is essentially based on recent real estate appraisals.  These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach.  Adjustments are made in the appraisal process by the appraisers to reflect differences between the available comparable sales and income data.  Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value.

·

Nonrecurring adjustments to certain commercial and residential real estate properties classified as OREO are measured at the lower of carrying amount or fair value, less costs to sell.  Fair values are based on third party appraisals of the property, resulting in a Level 3 classification.  In cases where the carrying amount exceeds the fair value, less costs to sell, an impairment loss is recognized.

 

Assets and Liabilities Measured at Fair Value on a Recurring Basis:

 

The tables below present the balance of assets and liabilities at September 30, 2014, and December 31, 2013, respectively, measured by the Company at fair value on a recurring basis:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2014

 

    

Level 1

    

Level 2

    

Level 3

    

Total

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Investment securities available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury

 

$

1,532 

 

$

 -

 

$

 -

 

$

1,532 

U.S. government agencies

 

 

 -

 

 

1,638 

 

 

 -

 

 

1,638 

States and political subdivisions

 

 

 -

 

 

13,754 

 

 

125 

 

 

13,879 

Corporate Bonds

 

 

 -

 

 

30,781 

 

 

 -

 

 

30,781 

Collateralized mortgage obligations

 

 

 -

 

 

28,417 

 

 

 -

 

 

28,417 

Asset-backed securities

 

 

 -

 

 

109,017 

 

 

83,781 

 

 

192,798 

Collateralized loan obligations

 

 

 -

 

 

93,198 

 

 

 -

 

 

93,198 

Loans held-for-sale

 

 

 -

 

 

3,422 

 

 

 -

 

 

3,422 

Mortgage servicing rights

 

 

 -

 

 

 -

 

 

5,640 

 

 

5,640 

Other assets (Interest rate swap agreements net of swap credit valuation)

 

 

 -

 

 

42 

 

 

 -

 

 

42 

Other assets (Mortgage banking derivatives)

 

 

 -

 

 

266 

 

 

 -

 

 

266 

Total

 

$

1,532 

 

$

280,535 

 

$

89,546 

 

$

371,613 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Other liabilities (Interest rate swap agreements)

 

$

 -

 

$

42 

 

$

 -

 

$

42 

Total

 

$

 -

 

$

42 

 

$

 -

 

$

42 

 

 

26

 


 

Table of Contents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2013

 

    

Level 1

    

Level 2

    

Level 3

    

Total

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Investment securities available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury

 

$

1,544 

 

$

 -

 

$

 -

 

$

1,544 

U.S. government agencies

 

 

 -

 

 

1,672 

 

 

 -

 

 

1,672 

States and political subdivisions

 

 

 -

 

 

16,669 

 

 

125 

 

 

16,794 

Corporate bonds

 

 

 -

 

 

15,102 

 

 

 -

 

 

15,102 

Collateralized mortgage obligations

 

 

 -

 

 

63,876 

 

 

 -

 

 

63,876 

Asset-backed securities

 

 

 -

 

 

119,066 

 

 

154,137 

 

 

273,203 

Loans held-for-sale

 

 

 -

 

 

3,822 

 

 

 -

 

 

3,822 

Mortgage servicing rights

 

 

 -

 

 

 -

 

 

5,807 

 

 

5,807 

Other assets (Interest rate swap agreements net of swap credit valuation)

 

 

 -

 

 

229 

 

 

(6)

 

 

223 

Other assets (Mortgage banking derivatives)

 

 

 -

 

 

315 

 

 

 -

 

 

315 

Total

 

$

1,544 

 

$

220,751 

 

$

160,063 

 

$

382,358 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Other liabilities (Interest rate swap agreements)

 

$

 -

 

$

229 

 

$

 -

 

$

229 

Total

 

$

 -

 

$

229 

 

$

 -

 

$

229 

 

The changes in Level 3 assets and liabilities measured at fair value on a recurring basis are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30, 2014

 

 

Securities available-for- sale

 

 

 

 

 

 

 

 

 

 

 

 

States and

 

Mortgage

 

Interest Rate

 

 

 

 

 

 

Political

 

Servicing

 

Swap

 

    

 

Asset-backed

 

Subdivisons

    

Rights

    

Valuation

Beginning balance January 1, 2014

 

 

$

154,137 

 

$

125 

 

$

5,807 

 

$

(6)

Transfers into Level 3

 

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Total gains or losses

 

 

 

 

 

 

 

 

 

 

 

 

 

Included in earnings (or changes in net assets)

 

 

 

3,178 

 

 

 -

 

 

(761)

 

 

Included in other comprehensive income

 

 

 

(1,748)

 

 

 -

 

 

 -

 

 

 -

Purchases, issuances, sales, and settlements

 

 

 

 

 

 

 

 

 

 

 

 

 

Purchases

 

 

 

63,704 

 

 

 -

 

 

 -

 

 

 -

Issuances

 

 

 

 -

 

 

 -

 

 

594 

 

 

 -

Sales

 

 

 

(135,490)

 

 

-

 

 

-

 

 

-

Ending balance September 30, 2014

 

 

$

83,781 

 

$

125 

 

$

5,640 

 

$

 -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30, 2013

 

 

Securities available-for- sale

 

 

 

 

 

 

 

 

 

 

 

 

 

States and

 

Mortgage

 

Interest Rate

 

 

Collateralized Debt

 

 

 

Political

 

Servicing

 

Swap

 

    

Obligations

    

Asset-backed

    

Subdivisons

    

Rights

    

Valuation

Beginning balance January 1, 2013

 

$

9,957 

 

$

 -

 

$

132 

 

$

4,116 

 

$

(47)

Transfers into Level 3

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Transfers out of Level 3

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Total gains or losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Included in earnings (or changes in net assets)

 

 

178 

 

 

485 

 

 

 -

 

 

81 

 

 

34 

Included in other comprehensive income

 

 

1,898 

 

 

(1,487)

 

 

 -

 

 

 -

 

 

 -

Purchases, issuances, sales, and settlements

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Purchases

 

 

 -

 

 

168,753 

 

 

 -

 

 

 -

 

 

 -

Issuances

 

 

 -

 

 

 -

 

 

 -

 

 

1,259 

 

 

 -

Settlements

 

 

(946)

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Sales

 

 

 -

 

 

(20,539)

 

 

 -

 

 

 -

 

 

 -

Ending balance September 30, 2013

 

$

11,087 

 

$

147,212 

 

$

132 

 

$

5,456 

 

$

(13)

 

27

 


 

Table of Contents

The following table and commentary presents quantitative (dollars in thousands) and qualitative information about Level 3 fair value measurements as of September 30, 2014:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted

Measured at fair value

 

 

 

 

 

 

Unobservable

 

 

 

Average

on a recurring basis:

    

Fair Value

    

Valuation Methodology

    

Inputs

    

Range of Input

    

of Inputs

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage Servicing rights

 

 

5,640 

 

Discounted Cash Flow

 

Discount Rate

 

10.0-30.75%

 

10.3 

%

 

 

 

 

 

 

 

Prepayment Speed

 

3.97-77.99%

 

9.5 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset-backed securities

 

 

83,781 

 

Discounted Cash Flow

 

Credit Risk Premium

 

0.8-1.2%

 

1.0 

%

 

 

 

 

 

with comparable transaction yields

 

Liquidity Discount

 

4.0-4.3%

 

4.2 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The following table and commentary presents quantitative (dollars in thousands) and qualitative information about Level 3 fair value measurements as of December 31, 2013:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted

Measured at fair value

 

 

 

 

 

 

Unobservable

 

 

 

Average

on a recurring basis:

    

Fair Value

    

Valuation Methodology

    

Inputs

    

Range of Input

    

of Inputs

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage Servicing rights

 

 

5,807 

 

Discounted Cash Flow

 

Discount Rate

 

10.2%

 

10.2 

%

 

 

 

 

 

 

 

Prepayment Speed

 

9.7%

 

9.7 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Rate Swap Valuation

 

 

(6)

 

Management estimate of

 

Probability of Default

 

5.0-20%

 

12.5 

%

 

 

 

 

 

 credit risk exposure

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset-backed securities

 

 

154,137 

 

Discounted Cash Flow

 

Credit Risk Premium

 

1.1-1.5%

 

1.2 

%

 

 

 

 

 

with comparable transaction yields

 

Liquidity Discount

 

4.5-5.1%

 

4.9 

%

 

The $125,000 on the state and political subdivisions line at September 30, 2014 and December 31, 2013, under Level 3 represents a security from a small, local municipality.  Given the small dollar amount and size of the municipality involved, this is categorized as Level 3 based on the payment stream received by the Company from the municipality.  That payment stream is otherwise an unobservable input.

 

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis:

 

The Company may be required, from time to time, to measure certain other assets at fair value on a nonrecurring basis in accordance with GAAP.  These assets consist of impaired loans and OREO.  For assets measured at fair value on a nonrecurring basis at September 30, 2014, and December 31, 2013, respectively, the following tables provide the level of valuation assumptions used to determine each valuation and the carrying value of the related assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2014

 

    

Level 1

 

Level 2

    

Level 3

    

Total

Impaired loans1

 

$

 -

 

$

 -

 

$

957 

 

$

957 

Other real estate owned, net2

 

 

 -

 

 

 -

 

 

40,877 

 

 

40,877 

Total

 

$

 -

 

$

 -

 

$

41,834 

 

$

41,834 

 

1   Represents carrying value and related write-downs of loans for which adjustments are substantially based on the appraised value of collateral for collateral-dependent loans, had a carrying amount of $1.5 million, with a valuation allowance of $541,000,  resulting in a decrease of specific allocations within the allowance for loan losses of $1.9 million for the nine months ended months ending September 30, 2014.

 

2   OREO is measured at the lower of carrying or fair value less costs to sell, and had a net carrying amount of $40.9 million, which is made up of the outstanding balance of $61.7 million, net of a valuation allowance of $19.0 million and participations of $1.8 million, at September 30, 2014.

 

28

 


 

Table of Contents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2013

 

    

Level 1

    

Level 2

    

Level 3

    

Total

Impaired loans1

 

$

 -

 

$

 -

 

$

9,103 

 

$

9,103 

Other real estate owned, net2

 

 

 -

 

 

 -

 

 

41,537 

 

 

41,537 

Total

 

$

 -

 

$

 -

 

$

50,640 

 

$

50,640 

 

1   Represents carrying value and related write-downs of loans for which adjustments are substantially based on the appraised value of collateral for collateral-dependent loans, had a carrying amount of $11.5 million, with a valuation allowance of $2.4 million, resulting in a decrease of specific allocations within the provision for loan losses of $3.9 million for the year ending December 31, 2013.

 

2   OREO is measured at the lower of carrying or fair value less costs to sell, and had a net carrying amount of $41.5 million, which is made up of the outstanding balance of $65.9 million, net of a valuation allowance of $22.3 million and participations of $2.1 million, at December 31, 2013.

 

The Company also has assets that under certain conditions are subject to measurement at fair value on a nonrecurring basis.  These assets include OREO and impaired loans.  The Company has estimated the fair values of these assets based primarily on Level 3 inputs.  OREO and impaired loans are generally valued using the fair value of collateral provided by third party appraisals.  These valuations include assumptions related to cash flow projections, discount rates, and recent comparable sales.  The numerical range of unobservable inputs for these valuation assumptions are not meaningful.

 

Note 13 – Financial Instruments with Off-Balance Sheet Risk and Derivative Transactions

 

To meet the financing needs of its customers, the Bank, as a subsidiary of the Company, is a party to various financial instruments with off-balance-sheet risk in the normal course of business.  These off-balance-sheet financial instruments include commitments to originate and sell loans as well as financial standby, performance standby and commercial letters of credit.  The instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheet.  The Bank’s exposure to credit loss for loan commitments and letters of credit is represented by the dollar amount of those instruments.  Management generally uses the same credit policies and collateral requirements in making commitments and conditional obligations as it does for on-balance-sheet instruments.

 

Interest Rate Swaps

 

The Bank also has interest rate derivative positions to assist with risk management that are not designated as hedging instruments.  These derivative positions relate to transactions in which the Bank enters an interest rate swap with a client while at the same time entering into an offsetting interest rate swap with another financial institution.  Due to financial covenant violations relating to nonperforming loans, the Bank had $3.1 million in investment securities pledged to support interest rate swap activity with three correspondent financial institutions at September 30, 2014.  The Bank had $3.1 million in investment securities pledged to support interest rate swap activity with three correspondent financial institutions at December 31, 2013.

 

In connection with each transaction, the Bank agreed to pay interest to the client on a notional amount at a variable interest rate and receive interest from the client on the same notional amount at a fixed interest rate.  At the same time, the Bank agreed to pay another financial institution the same fixed interest rate on the same notional amount and receive the same variable interest rate on the same notional amount.  The transaction allows the client to convert a variable rate loan to a fixed rate loan and is part of the Company’s interest rate risk management strategy.  Because the Bank acts as an intermediary for the client, changes in the fair value of the underlying derivative contracts offset each other and do not generally affect the results of operations.  Fair value measurements include an assessment of credit risk related to the client’s ability to perform on their contract position, however, and valuation estimates related to that exposure are discussed in Note 12 above.  At September 30, 2014, the notional amount of non-hedging interest rate swaps was $19.0 million with a weighted average maturity of 2.6 years.  At December 31, 2013, the notional amount of non-hedging interest rate swaps was $51.9 million with a weighted average maturity of 1.5 years.  The Bank offsets derivative assets and liabilities that are subject to a master netting arrangement.

 

The Bank also grants mortgage loan interest rate lock commitments to borrowers, subject to normal loan underwriting standards.  The interest rate risk associated with these loan interest rate lock commitments is managed with contracts for future deliveries of loans as well as selling forward mortgage-backed securities contracts.  Loan interest rate lock commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee.  Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.  Commitments to originate residential mortgage loans held-for-sale and forward commitments to sell residential mortgage loans or forward MBS contracts are considered derivative instruments and changes in the fair value are recorded to mortgage banking revenue.  Fair values are estimated based on observable changes in mortgage interest rates including mortgage-backed securities prices from the date of the commitment.

 

29

 


 

Table of Contents

The following table presents derivatives not designated as hedging instruments as of September 30, 2014, and periodic changes in the values of the interest rate swaps are reported in other noninterest income.  Periodic changes in the value of the forward contracts related to mortgage loan origination are reported in the net gain on sales of mortgage loans.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset Derivatives

 

Liability Derivatives

 

 

Notional or

 

 

 

 

 

 

 

 

 

 

Contractual

 

Balance Sheet

 

 

 

 

Balance Sheet

 

 

 

 

    

Amount

    

Location

    

Fair Value

    

Location

    

Fair Value

Interest rate swap contracts net of credit valuation

 

$

19,018 

 

Other Assets

 

$

42 

 

Other Liabilities

 

$

42 

Commitments1

 

 

215,264 

 

Other Assets

 

 

266 

 

N/A

 

 

 -

Forward contracts2

 

 

15,000 

 

N/A

 

 

 -

 

Other Liabilities

 

 

 -

Total

 

 

 

 

 

 

$

308 

 

 

 

$

42 

 

1Includes unused loan commitments and interest rate lock commitments.

2Includes forward MBS contracts and forward loan contracts.

 

The following table presents derivatives not designated as hedging instruments as of December 31, 2013.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset Derivatives

 

Liability Derivatives

 

 

Notional or

 

 

 

 

 

 

 

 

 

 

Contractual

 

Balance Sheet

 

 

 

 

Balance Sheet

 

 

 

 

    

Amount

    

Location

    

Fair Value

    

Location

    

Fair Value

Interest rate swap contracts net of credit valuation

 

$

51,877 

 

Other Assets

 

$

223 

 

Other Liabilities

 

$

229 

Commitments1

 

 

206,965 

 

Other Assets

 

 

315 

 

N/A

 

 

 -

Forward contracts2

 

 

11,500 

 

N/A

 

 

 -

 

Other Liabilities

 

 

 -

Total

 

 

 

 

 

 

$

538 

 

 

 

$

229 

 

1Includes unused loan commitments and interest rate lock commitments.

2Includes forward MBS contracts.

 

The Bank also issues letters of credit, which are conditional commitments that guarantee the performance of a customer to a third party.  The credit risk involved and collateral obtained in issuing letters of credit are essentially the same as that involved in extending loan commitments to our customers.  In addition to customer related commitments, the Company is responsible for letters of credit commitments that relate to properties held in OREO.  The following table represents the Company’s contractual commitments due to letters of credit as of September 30, 2014, and December 31, 2013.

 

The following table is a summary of letter of credit commitments (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2014

 

December 31, 2013

 

    

Fixed

    

Variable

    

Total

    

Fixed

    

Variable

    

Total

Letters of credit:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Borrower:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial standby

 

$

55 

 

$

4,432 

 

$

4,487 

 

$

10 

 

$

3,886 

 

$

3,896 

Commercial standby

 

 

 -

 

 

49 

 

 

49 

 

 

 -

 

 

51 

 

 

51 

Performance standby

 

 

416 

 

 

5,819 

 

 

6,235 

 

 

1,580 

 

 

2,723 

 

 

4,303 

 

 

 

471 

 

 

10,300 

 

 

10,771 

 

 

1,590 

 

 

6,660 

 

 

8,250 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nonborrower:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performance standby

 

 

 -

 

 

622 

 

 

622 

 

 

 -

 

 

867 

 

 

867 

 

 

 

 -

 

 

622 

 

 

622 

 

 

 -

 

 

867 

 

 

867 

Total letters of credit

 

$

471 

 

$

10,922 

 

$

11,393 

 

$

1,590 

 

$

7,527 

 

$

9,117 

 

 

 

30

 


 

Table of Contents

Note 14 – Fair Values of Financial Instruments

 

The estimated fair values approximate carrying amount for all items except those described in the following table.  Investment security fair values are based upon market prices or dealer quotes, and if no such information is available, on the rate and term of the security.  The carrying value of FHLBC stock approximates fair value as the stock is nonmarketable and can only be sold to the FHLBC or another member institution at par. During the years ended December 31, 2013, and 2012, the Company participated in multiple redemptions with the FHLBC and, using the redemption values as the carrying value, FHLBC stock is carried at a Level 2 fair value since December 31, 2012.  The Company had redemptions of $1.2 million in the third quarter of 2014.  These redemptions were the only redemptions processed by the Company in the first nine months of 2014.  Fair values of loans were estimated for portfolios of loans with similar financial characteristics, such as type and fixed or variable interest rate terms.  Cash flows were discounted using current rates at which similar loans would be made to borrowers with similar ratings and for similar maturities.  The fair value of time deposits is estimated using discounted future cash flows at current rates offered for deposits of similar remaining maturities.  The fair values of borrowings were estimated based on interest rates available to the Company for debt with similar terms and remaining maturities.  The fair value of off balance sheet volume is not considered material.

 

The carrying amount and estimated fair values of financial instruments were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2014

 

 

Carrying

 

Fair

 

 

 

 

 

 

 

 

 

 

    

Amount

    

Value

    

Level 1

    

Level 2

    

Level 3

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

33,260 

 

$

33,260 

 

$

33,260 

 

$

 -

 

$

 -

Interest bearing deposits with financial institutions

 

 

10,797 

 

 

10,797 

 

 

10,797 

 

 

 -

 

 

 -

Securities available-for-sale

 

 

362,243 

 

 

362,243 

 

 

1,532 

 

 

276,805 

 

 

83,906 

Securities held-to-maturity

 

 

263,040 

 

 

264,343 

 

 

 -

 

 

264,343 

 

 

 -

FHLBC and Reserve Bank Stock

 

 

9,058 

 

 

9,058 

 

 

 -

 

 

9,058 

 

 

 -

Bank-owned life insurance

 

 

56,438 

 

 

56,438 

 

 

 -

 

 

56,438 

 

 

 -

Loans held for sale

 

 

3,422 

 

 

3,422 

 

 

 -

 

 

3,422 

 

 

 -

Loans, net

 

 

1,117,552 

 

 

1,119,781 

 

 

 -

 

 

 -

 

 

1,119,781 

Accrued interest receivable

 

 

4,931 

 

 

4,931 

 

 

 -

 

 

4,931 

 

 

 -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest bearing deposits

 

$

380,687 

 

$

380,687 

 

$

380,687 

 

$

 -

 

$

 -

Interest bearing deposits

 

 

1,276,068 

 

 

1,275,036 

 

 

 -

 

 

1,275,036 

 

 

 -

Securities sold under repurchase agreements

 

 

29,438 

 

 

29,438 

 

 

 -

 

 

29,438 

 

 

 -

Other short-term borrowings

 

 

40,000 

 

 

40,000 

 

 

 -

 

 

40,000 

 

 

 -

Junior subordinated debentures

 

 

58,378 

 

 

54,840 

 

 

32,532 

 

 

22,308 

 

 

 -

Subordinated debenture

 

 

45,000 

 

 

38,691 

 

 

 -

 

 

38,691 

 

 

 -

Note payable and other borrowings

 

 

500 

 

 

414 

 

 

 -

 

 

414 

 

 

 -

Borrowing interest payable

 

 

73 

 

 

73 

 

 

 -

 

 

73 

 

 

 -

Deposit interest payable

 

 

518 

 

 

518 

 

 

 -

 

 

518 

 

 

 -

 

31

 


 

Table of Contents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2013

 

 

Carrying

 

Fair

 

 

 

 

 

 

 

    

Amount

    

Value

    

Level 1

    

Level 2

    

Level 3

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

33,210 

 

$

33,210 

 

$

33,210 

 

$

 -

 

$

 -

Interest bearing deposits with financial institutions

 

 

14,450 

 

 

14,450 

 

 

14,450 

 

 

 -

 

 

 -

Securities available-for-sale

 

 

372,191 

 

 

372,191 

 

 

1,544 

 

 

216,385 

 

 

154,262 

Securities held-to-maturity

 

 

256,571 

 

 

254,328 

 

 

 -

 

 

254,328 

 

 

 -

FHLBC and Reserve Bank Stock

 

 

10,292 

 

 

10,292 

 

 

 -

 

 

10,292 

 

 

 -

Bank-owned life insurance

 

 

55,410 

 

 

55,410 

 

 

 -

 

 

55,410 

 

 

 -

Loans held-for-sale

 

 

3,822 

 

 

3,822 

 

 

 -

 

 

3,822 

 

 

 -

Loans, net

 

 

1,073,975 

 

 

1,072,837 

 

 

 -

 

 

 -

 

 

1,072,837 

Accrued interest receivable

 

 

4,248 

 

 

4,248 

 

 

 -

 

 

4,248 

 

 

 -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest bearing deposits

 

$

373,389 

 

$

373,389 

 

$

373,389 

 

$

 -

 

$

 -

Interest bearing deposits

 

 

1,308,739 

 

 

1,312,476 

 

 

 -

 

 

1,312,476 

 

 

 -

Securities sold under repurchase agreements

 

 

22,560 

 

 

22,560 

 

 

 -

 

 

22,560 

 

 

 -

Other short-term borrowings

 

 

5,000 

 

 

5,000 

 

 

 -

 

 

5,000 

 

 

 -

Junior subordinated debentures

 

 

58,378 

 

 

67,053 

 

 

39,777 

 

 

27,276 

 

 

 -

Subordinated debenture

 

 

45,000 

 

 

39,896 

 

 

 -

 

 

39,896 

 

 

 -

Note payable and other borrowings

 

 

500 

 

 

423 

 

 

 -

 

 

423 

 

 

 -

Borrowing interest payable

 

 

17,037 

 

 

17,037 

 

 

10,122 

 

 

6,915 

 

 

 -

Deposit interest payable

 

 

762 

 

 

762 

 

 

 -

 

 

762 

 

 

 -

 

 

 

Note 15 – Series B Preferred Stock (“Series B Stock”)

 

The Series B Stock was issued as part of the Treasury’s Troubled Asset Relief Program and Capital Purchase Program ( the “CPP”).  The Series B Stock qualifies as Tier 1 capital and pays cumulative dividends on the liquidation preference amount on a quarterly basis at a rate of 5% per annum for the first five years, and 9% per annum thereafter effective in February 2014.  Concurrent with issuing the Series B Stock, the Company issued to the Treasury a ten year warrant to purchase 815,339 shares of the Company’s common stock at an exercise price of $13.43 per share.

 

Subsequent to the Company’s receipt of the $73.0 million in proceeds from the Treasury in the first quarter of 2009, the Company allocated the proceeds between the Series B Stock and the warrant that was issued. The Company recorded the warrant as equity, and the allocation was based on their relative fair values in accordance with accounting guidance.  The fair value was determined for both the Series B Stock and the warrant as part of the allocation process in the amounts of $68.2 million and $4.8 million, respectively.

 

On August 31, 2010, the Company announced that it would begin deferring quarterly cash dividends on its outstanding Series B Stock.  Further, as discussed in Note 8, the Company also elected to defer interest payments on certain of its subordinated debentures. However, under the terms of the Series B Stock, if the Company failed to pay dividends for an aggregate of six quarters on the Series B Stock, whether or not consecutive, the holders would have the right to appoint representatives to the Company’s board of directors.  As the Company elected to defer dividends for more than six quarters, a new director was appointed by the Treasury to join the board during the fourth quarter of 2012.  The terms of the Series B Stock also prevent the Company from paying cash dividends or generally repurchasing its common stock while Series B Stock dividends are in arrears.

 

The Treasury sold all of the Series B Stock held to third parties, including certain of our directors, in auctions that were completed in the first quarter of 2013.  The Treasury also sold the warrant to a third party at a subsequent auction.  Upon completion by Treasury of the auction, the Company’s board affirmed the director appointed by Treasury to ongoing board membership, and the Series B director was elected by the holders of the Series B Stock at the Company’s 2013 annual meeting.

 

As a result of the completed 2013 auctions, the Company’s Board elected to stop accruing the dividend on the Series B Stock in the first quarter of 2013.  Previously, the Company had accrued the dividend on the Series B Stock quarterly throughout the deferral period.  Given the discount reflected in the results of the auction, the board believed that the Company would likely be able to redeem the Series B Stock at a price less than the face amount of the Series B Stock plus accrued and unpaid dividends.  While the Company did not fully accrue the dividend on the Series B Stock in the first quarter of 2013 and did not accrue for it in subsequent quarters, the Company continued to evaluate whether accruing dividends on the Series B Stock was appropriate.  In the second quarter of 2014, the Company completed redemption of 25,669 shares of its Series B Stock at a price equal to 94.75% of liquidation value provided that the holders of shares entered into agreements to forebear payment of dividends due and to waive any rights to such dividends upon redemption.  Following the redemption, the Company resumed accrual in the second quarter of 2014.  The Company currently intends to declare and pay future dividends on these shares.  On August 15, 2014 the Company paid $1.1 million in dividends on the Series B Stock.  Payments of $24.3 million resulted in redemption of 25,669 shares of Series B Stock in the second quarter of 2014.  At

32

 


 

Table of Contents

September 30, 2014, the Company carried $47.3 million of Series B Stock in total stockholders’ equity.  At December 31, 2013, the Company carried $72.9 million of Series B Stock in total stockholders’ equity.

 

Note 16 Income Taxes

 

Income tax expense (benefit) for year to date September 30, 2014 and September 30, 2013 was as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2014

    

September 30, 2013

Current federal

 

$

(62)

 

$

129 

Current state

 

 

(17)

 

 

35 

Deferred federal

 

 

3,017 

 

 

2,935 

Deferred state

 

 

1,046 

 

 

1,049 

Change in valuation allowance

 

 

 -

 

 

(74,145)

 

 

$

3,984 

 

$

(69,997)

 

The following were the components of the deferred tax assets and liabilities as of September 30, 2014 and December 31, 2013:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

September 30, 2014

    

December 31, 2013

Allowance for loan losses

 

$

10,648 

 

$

12,725 

Deferred compensation

 

 

798 

 

 

788 

Amortization of core deposit

 

 

1,993 

 

 

1,656 

Goodwill amortization/impairment

 

 

14,042 

 

 

15,252 

Stock option expense

 

 

642 

 

 

583 

OREO write downs

 

 

8,901 

 

 

10,041 

Federal net operating loss (“NOL”) carryforward

 

 

27,882 

 

 

28,023 

State net operating loss (“NOL”) carryforward

 

 

11,768 

 

 

11,847 

Deferred tax credit

 

 

1,453 

 

 

1,444 

Other assets

 

 

983 

 

 

1,166 

Total deferred tax assets

 

 

79,110 

 

 

83,525 

 

 

 

 

 

 

 

Accumulated depreciation on premises and equipment

 

 

(834)

 

 

(1,035)

Accretion on securities

 

 

(31)

 

 

(8)

Mortgage servicing rights

 

 

(2,491)

 

 

(2,571)

State tax benefits

 

 

(6,667)

 

 

(6,994)

Other liabilities

 

 

(411)

 

 

(178)

Total deferred tax liabilities

 

 

(10,434)

 

 

(10,786)

Net deferred tax asset before valuation allowance

 

 

68,676 

 

 

72,739 

Tax effect on net unrealized losses on securities

 

 

5,062 

 

 

4,927 

Valuation allowance

 

 

(2,363)

 

 

(2,363)

Net deferred tax asset

 

$

71,375 

 

$

75,303 

 

At September 30, 2014, the Company had  a $79.7 million federal net operating loss carryforward of which, $24.4 million expires in 2030, $31.4 million expires in 2031, $8.6 million expires in 2032, and $15.3 million expires in 2033.  The Company had  a $123.9 million state net operating loss carryforward of which, $28.2 million expires in 2021, and $95.7 million expires in 2025.  In addition, the Company had  a $1.5 million alternative minimum tax credit subject to indefinite carryforward.

 

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The components of the provision for deferred income tax expense (benefit) were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

September 30, 2014

    

September 30, 2013

Allowance for loan losses

 

$

2,077 

 

$

4,536 

Deferred Compensation

 

 

(10)

 

 

(40)

Amortization of core-deposit

 

 

(337)

 

 

(519)

Stock option expense

 

 

(59)

 

 

177 

OREO write-downs

 

 

1,140 

 

 

5,560 

Federal net operating loss carryforward

 

 

141 

 

 

(5,634)

State net operating loss carryforward

 

 

79 

 

 

(1,248)

Deferred tax credit

 

 

(9)

 

 

 -

Depreciation

 

 

(201)

 

 

(117)

Net premiums and discounts on securities

 

 

23 

 

 

(109)

Mortgage servicing rights

 

 

(80)

 

 

596 

Goodwill amortization/impairment

 

 

1,210 

 

 

1,151 

State tax benefits

 

 

(327)

 

 

(333)

Change in valuation allowance

 

 

 -

 

 

(74,145)

Other, net

 

 

416 

 

 

(36)

Total deferred tax expense

 

$

4,063 

 

$

(70,161)

 

Effective tax rates differ from federal statutory rates applied to financial statement income (loss) due to the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

September 30, 2014

    

September 30, 2013

Tax at statutory federal income tax rate

 

$

3,896 

 

$

4,156 

Nontaxable interest income, net of disallowed interest deduction

 

 

(182)

 

 

(183)

BOLI income

 

 

(360)

 

 

(553)

State income taxes, net of federal benefit

 

 

606 

 

 

780 

Change in valuation allowance

 

 

 -

 

 

(74,145)

Deficiency from restricted stock

 

 

 -

 

 

10 

Other, net

 

 

24 

 

 

(62)

Tax at effective tax rate

 

$

3,984 

 

$

(69,997)

 

 

 

 

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Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Overview

 

The Company is a financial services company with its main headquarters located in Aurora, Illinois.  The Company is the holding company of Old Second National Bank (the “Bank”), a national banking organization headquartered in Aurora, Illinois that provides commercial and retail banking services, as well as a full complement of trust and wealth management services.  The Company has offices located in Cook, Kane, Kendall, DeKalb, DuPage, LaSalle and Will counties in Illinois.  The following management’s discussion and analysis presents information concerning our financial condition as of September 30, 2014, as compared to December 31, 2013, and the results of operations for the three and nine months ended September 30, 2014 and 2013.  This discussion and analysis is best read in conjunction with our consolidated financial statements as well as the financial and statistical data appearing elsewhere in this report and our 2013 Form 10-K.

 

In the markets where the Company operates, economies continued to gain momentum at a lackluster pace.  Management believes the national economic statistics indicate an improving economy.  However, economies in the Company’s markets created only low levels of loan demand.  Commercial Real Estate in our market areas remains stabilized with only vacant land in the far western portions of our operating area showing signs of stress.  Residential mortgage demand was steady in the quarter but has yet to return to  levels seen in 2013.  Management continues to focus on growing commercial business.  In the third quarter, existing commercial customers continued to see modest growth and profit margin improvement.

The Company remains vigilant in analyzing loan portfolio quality and making decisions to charge-off loans.  Management review of the loan portfolio concluded that the reserve for loan and lease loss was adequate and appropriate for losses estimable at September 30, 2014.  No loan loss reserve release or provision was recorded in the quarter.  This compared to a $1.8  million loan loss reserve release for the third quarter of  2013 and a $1.0 million loan loss reserve release in each prior quarter of 2014.

Net income before taxes of $4.7 million in the third quarter of 2014 compares to $2.9 million for the third quarter of 2013 and $3.1 million in the second quarter of 2014.  Last year’s quarter included lower levels of net interest income and gains on securities sales as well as higher levels of compensation and OREO noninterest expense.  When compared to the third quarter, the second quarter 2014 reflected a lower level of gains on securities sales and net interest income as well as a $1.0 million loan loss reserve release offset by higher noninterest expenses.

On September 17, 2014, the Company announced that James L. Eccher will be appointed the Chief Executive Officer and President of the Company, effective as of January 1, 2015, and that William B. Skoglund will retire from the position of Chief Executive Officer and President of the Company on the same date.  Mr. Eccher will remain the Chief Executive Officer and President of the Bank.  Following his retirement, Mr. Skoglund will remain the Chairman of the Board of both the Company and the Bank.

On September 16, 2014, the Company entered into an Employment Agreement (the “Agreement”) with Mr. Eccher.  Pursuant to the terms of the Agreement, Mr. Eccher will serve as Chief Executive Officer and President of the Company for a term of two (2) years beginning January 1, 2015, which term shall automatically extend for one additional year beginning on January 1, 2016 and each January 1 thereafter.  Mr. Eccher will remain eligible for all other benefits currently available to him, including a monthly car allowance, reimbursement of country club dues, the Company’s incentive plans and medical, dental, disability, group and executive life insurance.

Results of Operations

 

In the third quarter of 2014, earnings per share were $0.06 per diluted share on net income available to common shareholders of $1.9 million.  Earnings per share for the second quarter of 2014 were $0.26 per diluted share on $7.5 million of net income to common stockholders.  Absent the benefits from gain on redemption of the Series B Stock and the Series B Stock dividends that were waived by the holders of Series B Stock that was redeemed, the Company realized $0.02 per diluted share in the second quarter.  These results compare to $0.15 per diluted share, on net income to common stockholders of $2.2 million for the second quarter of 2013 and net income available to common stockholders of $630,000 for the first quarter of 2014.  All 2014 Series B Stock dividends incorporate an increase in the dividend rate from 5% to 9% in February of 2014.

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Third quarter net income before taxes increased by $1.7 million from the third quarter of 2013 and $1.6 million from the second quarter of 2014.  The increase from the third quarter of 2013 was driven by sharply higher gains on securities sales (a loss item in 2013), improved debit card interchange income reflecting an improving trend seen over recent quarters, and lower noninterest expense, notably Other Real Estate Owned (“OREO”) expenses were down because of lower valuation expenses.  The linked quarter increase reflects improved net interest income, markedly higher gains on securities sales (up $936,000) and reduced noninterest expense as the core deposit intangible asset reached full amortization and compensation costs moderated.

Third quarter net income available to common stockholders was $1.9 million compared to $1.6 million, after excluding the $70.0 million tax benefit mainly from the reversal of a valuation allowance related to deferred tax assets, in the third quarter of 2013.  On a linked quarter basis, third quarter net income available to common stockholders is compared to $673,000 in the second quarter of this year, upon excluding the second quarter $6.8 million benefit from the Company's redemption of a large amount of Series B Stock.

 

 

Net Interest Income

 

Net interest and dividend income increased $1.0 million from $13.7 million for the quarter ended June 30, 2014, to $14.7 million for the quarter ended September 30, 2014.  Average earning assets for the third quarter of 2014 decreased $16.5 million, or 0.9%, from a total of $1.81 billion in the second quarter of 2014.  Loan production and participations or purchases in 2014 drove third quarter average loans, including loans held for sale, to a linked quarter nominal improvement of $16.2 million, reversing the trend of declining average loan volume seen in 2013.  Average loan volume for the third quarter, including loans held for sale, increased $48.2 million when compared to the third quarter of 2013.

 

Repeating comments from previous reports, management continues to develop loan pipelines and expects that pipeline volume will generate future loan growth.  As loan volume continues measured but slow paced growth, management decreased total securities in the third quarter of 2014 to 30.8% of total assets down from 31.4% at the end of 2013.

 

The net interest margin (tax-equivalent basis), expressed as a percentage of average earning assets, increased slightly from 3.25% in the third quarter of 2013 to 3.26% in the third quarter of 2014.  The average tax-equivalent yield on earning assets decreased from 3.99% in the third quarter of 2013 to 3.78% in the third quarter of 2014.  For the same comparative period, the cost of funds on interest bearing liabilities decreased from 0.94% to 0.70% providing some offset to the decrease in earning asset yield.

 

Period loan yields are reflective of competitive pressures on new loan yield.  Additionally, management continued to see pressure to reduce interest rates on loans retained at renewal and found it necessary to accept rate concessions to retain business.

 

Management, in order to evaluate and measure performance, uses certain non-GAAP performance measures and ratios.  This includes tax-equivalent net interest income (including its individual components) and net interest margin (including its individual components) to total average interest earning assets.  Management believes that these measures and ratios provide users of the financial information with a more accurate view of the performance of the interest earning assets and interest bearing liabilities and of the Company’s operating efficiency for comparison purposes.  Other financial holding companies may define or calculate these measures and ratios differently.  See the tables and notes below for supplemental data and the corresponding reconciliations to GAAP financial measures for the three and nine-month periods ended September 30, 2014, and 2013.

 

The following tables set forth certain information relating to the Company’s average consolidated balance sheets and reflect the yield on average earning assets and cost of average liabilities for the periods indicated.  Dividing the related interest by the average balance of assets or liabilities derives the disclosed rates.  Average balances are derived from daily balances.  For purposes of discussion, net interest income and net interest income to total earning assets on the following tables have been adjusted to a non-GAAP tax equivalent (“TE”) basis using a marginal rate of 35% to more appropriately compare returns on tax-exempt loans and securities to other earning assets.

 

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ANALYSIS OF AVERAGE BALANCES,

TAX EQUIVALENT INTEREST AND RATES

Three Months Ended September 30, 2014 and 2013

(Dollar amounts in thousands - unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2014

 

2013

 

Average

 

 

 

 

 

 

 

Average

 

 

 

 

 

 

 

Balance

 

Interest

 

Rate

 

Balance

 

Interest

 

Rate

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest bearing deposits

$

38,603 

 

 

$

25 

 

0.25 

%

 

$

36,456 

 

 

$

22 

 

0.24 

%

Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

600,386 

 

 

 

3,586 

 

2.39 

 

 

 

605,546 

 

 

 

3,113 

 

2.06 

 

  Non-taxable (TE)

 

12,237 

 

 

 

169 

 

5.52 

 

 

 

13,937 

 

 

 

228 

 

6.54 

 

Total securities

 

612,623 

 

 

 

3,755 

 

2.45 

 

 

 

619,483 

 

 

 

3,341 

 

2.16 

 

Dividends from Reserve Bank and FHLBC stock

 

9,085 

 

 

 

78 

 

3.43 

 

 

 

10,292 

 

 

 

76 

 

2.95 

 

Loans and loans held-for-sale (1)

 

1,137,137 

 

 

 

13,429 

 

4.62 

 

 

 

1,088,936 

 

 

 

14,382 

 

5.17 

 

Total interest earning assets

 

1,797,448 

 

 

 

17,287 

 

3.78 

 

 

 

1,755,167 

 

 

 

17,821 

 

3.99 

 

Cash and due from banks

 

32,459 

 

 

 

 -

 

 -

 

 

 

19,584 

 

 

 

 -

 

 -

 

Allowance for loan losses

 

(24,492)

 

 

 

 -

 

 -

 

 

 

(34,197)

 

 

 

 -

 

 -

 

Other noninterest bearing assets

 

230,232 

 

 

 

 -

 

 -

 

 

 

190,836 

 

 

 

 -

 

 -

 

Total assets

$

2,035,647 

 

 

 

 

 

 

 

 

$

1,931,390 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NOW accounts

$

321,968 

 

 

$

68 

 

0.08 

%

 

$

283,192 

 

 

$

63 

 

0.09 

%

Money market accounts

 

299,846 

 

 

 

70 

 

0.09 

 

 

 

311,213 

 

 

 

104 

 

0.13 

 

Savings accounts

 

238,528 

 

 

 

37 

 

0.06 

 

 

 

225,825 

 

 

 

39 

 

0.07 

 

Time deposits

 

437,597 

 

 

 

1,073 

 

0.97 

 

 

 

493,722 

 

 

 

1,674 

 

1.35 

 

Interest bearing deposits

 

1,297,939 

 

 

 

1,248 

 

0.38 

 

 

 

1,313,952 

 

 

 

1,880 

 

0.57 

 

Securities sold under repurchase agreements

 

27,266 

 

 

 

 

0.01 

 

 

 

21,646 

 

 

 

 

0.02 

 

Other short-term borrowings

 

12,174 

 

 

 

 

0.13 

 

 

 

15,707 

 

 

 

 

0.12 

 

Junior subordinated debentures

 

58,378 

 

 

 

1,072 

 

7.35 

 

 

 

58,378 

 

 

 

1,336 

 

9.15 

 

Subordinated debt

 

45,000 

 

 

 

199 

 

1.73 

 

 

 

45,000 

 

 

 

209 

 

1.82 

 

Notes payable and other borrowings

 

500 

 

 

 

 

3.13 

 

 

 

500 

 

 

 

 

3.13 

 

Total interest bearing liabilities

 

1,441,257 

 

 

 

2,528 

 

0.70 

 

 

 

1,455,183 

 

 

 

3,435 

 

0.94 

 

Noninterest bearing deposits

 

389,246 

 

 

 

 -

 

 -

 

 

 

366,889 

 

 

 

 -

 

 -

 

Other liabilities

 

11,416 

 

 

 

 -

 

 -

 

 

 

37,466 

 

 

 

 -

 

 -

 

Stockholders' equity

 

193,728 

 

 

 

 -

 

 -

 

 

 

71,852 

 

 

 

 -

 

 -

 

Total liabilities and stockholders' equity

$

2,035,647 

 

 

 

 

 

 

 

 

$

1,931,390 

 

 

 

 

 

 

 

Net interest income (TE)

 

 

 

 

$

14,759 

 

 

 

 

 

 

 

 

$

14,386 

 

 

 

Net interest income (TE)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

to total earning assets

 

 

 

 

 

 

 

3.26 

%

 

 

 

 

 

 

 

 

3.25 

%

Interest bearing liabilities to earning assets

 

80.18 

%

 

 

 

 

 

 

 

 

82.91 

%

 

 

 

 

 

 

 

(1).Interest income from loans is shown on a TE basis as discussed below and includes fees of $600,000 and $793,000 for the third quarter of 2014 and 2013, respectively.  Nonaccrual loans are included in the above-stated average balances.

 

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ANALYSIS OF AVERAGE BALANCES,

TAX EQUIVALENT INTEREST AND RATES

Nine Months Ended September 30, 2014 and 2013

(Dollar amounts in thousands - unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2014

 

2013

 

Average

 

 

 

 

 

 

 

Average

 

 

 

 

 

 

 

Balance

 

Interest

 

Rate

 

Balance

 

Interest

 

Rate

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest bearing deposits

$

30,958 

 

 

$

60 

 

0.26 

%

 

$

49,676 

 

 

$

91 

 

0.24 

%

Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

615,136 

 

 

 

10,440 

 

2.26 

 

 

 

574,761 

 

 

 

8,109 

 

1.88 

 

  Non-taxable (TE)

 

18,114 

 

 

 

579 

 

4.26 

 

 

 

14,912 

 

 

 

679 

 

6.07 

 

Total securities

 

633,250 

 

 

 

11,019 

 

2.32 

 

 

 

589,673 

 

 

 

8,788 

 

1.99 

 

Dividends from Reserve Bank and FHLBC stock

 

9,886 

 

 

 

232 

 

3.13 

 

 

 

10,742 

 

 

 

228 

 

2.83 

 

Loans and loans held-for-sale (1)

 

1,121,600 

 

 

 

39,521 

 

4.65 

 

 

 

1,116,964 

 

 

 

43,327 

 

5.12 

 

Total interest earning assets

 

1,795,694 

 

 

 

50,832 

 

3.74 

 

 

 

1,767,055 

 

 

 

52,434 

 

3.92 

 

Cash and due from banks

 

33,071 

 

 

 

 -

 

 -

 

 

 

24,110 

 

 

 

 -

 

 -

 

Allowance for loan losses

 

(25,570)

 

 

 

 -

 

 -

 

 

 

(37,122)

 

 

 

 -

 

 -

 

Other noninterest bearing assets

 

233,127 

 

 

 

 -

 

 -

 

 

 

196,298 

 

 

 

 -

 

 -

 

Total assets

$

2,036,322 

 

 

 

 

 

 

 

 

$

1,950,341 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NOW accounts

$

311,701 

 

 

$

197 

 

0.08 

%

 

$

290,691 

 

 

$

192 

 

0.09 

%

Money market accounts

 

308,109 

 

 

 

247 

 

0.11 

 

 

 

319,876 

 

 

 

342 

 

0.14 

 

Savings accounts

 

238,480 

 

 

 

118 

 

0.07 

 

 

 

226,193 

 

 

 

121 

 

0.07 

 

Time deposits

 

454,406 

 

 

 

3,604 

 

1.06 

 

 

 

498,846 

 

 

 

5,327 

 

1.43 

 

Interest bearing deposits

 

1,312,696 

 

 

 

4,166 

 

0.42 

 

 

 

1,335,606 

 

 

 

5,982 

 

0.60 

 

Securities sold under repurchase agreements

 

25,687 

 

 

 

 

0.01 

 

 

 

22,206 

 

 

 

 

0.01 

 

Other short-term borrowings

 

8,352 

 

 

 

 

0.13 

 

 

 

20,000 

 

 

 

24 

 

0.16 

 

Junior subordinated debentures

 

58,378 

 

 

 

3,847 

 

8.79 

 

 

 

58,378 

 

 

 

3,937 

 

8.99 

 

Subordinated debt

 

45,000 

 

 

 

593 

 

1.74 

 

 

 

45,000 

 

 

 

610 

 

1.79 

 

Notes payable and other borrowings

 

500 

 

 

 

12 

 

3.16 

 

 

 

500 

 

 

 

12 

 

3.16 

 

Total interest bearing liabilities

 

1,450,613 

 

 

 

8,628 

 

0.79 

 

 

 

1,481,690 

 

 

 

10,567 

 

0.95 

 

Noninterest bearing deposits

 

384,350 

 

 

 

 -

 

 -

 

 

 

359,438 

 

 

 

 -

 

 -

 

Other liabilities

 

22,927 

 

 

 

 -

 

 -

 

 

 

35,432 

 

 

 

 -

 

 -

 

Stockholders' equity

 

178,432 

 

 

 

 -

 

 -

 

 

 

73,781 

 

 

 

 -

 

 -

 

Total liabilities and stockholders' equity

$

2,036,322 

 

 

 

 

 

 

 

 

$

1,950,341 

 

 

 

 

 

 

 

Net interest income (TE)

 

 

 

 

$

42,204 

 

 

 

 

 

 

 

 

$

41,867 

 

 

 

Net interest income (TE)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

to total earning assets

 

 

 

 

 

 

 

3.14 

%

 

 

 

 

 

 

 

 

3.17 

%

Interest bearing liabilities to earning assets

 

80.78 

%

 

 

 

 

 

 

 

 

83.85 

%

 

 

 

 

 

 

 

1    Interest income from loans is shown on a TE basis as discussed below and includes fees of $1.7 million and $2.0 million for the first nine months of 2014 and 2013, respectively.  Nonaccrual loans are included in the above stated average balances.

 

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As indicated previously, net interest income and net interest income to earning assets have been adjusted to a non-GAAP TE basis using a marginal rate of 35% to more appropriately compare returns on tax-exempt loans and securities to other earning assets.  The table below provides a reconciliation of each non-GAAP TE measure to the GAAP equivalent for the periods indicated:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

(in thousands)

September 30, 

 

September 30, 

 

2014

 

2013

 

2014

 

2013

Net Interest Margin

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income (GAAP)

$

17,199 

 

$

17,724 

 

 

$

50,546 

 

 

$

52,146 

 

Taxable-equivalent adjustment:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans

 

29 

 

 

17 

 

 

 

83 

 

 

 

50 

 

Securities

 

59 

 

 

80 

 

 

 

203 

 

 

 

238 

 

Interest income - TE

 

17,287 

 

 

17,821 

 

 

 

50,832 

 

 

 

52,434 

 

Interest expense (GAAP)

 

2,528 

 

 

3,435 

 

 

 

8,628 

 

 

 

10,567 

 

Net interest income -TE

$

14,759 

 

$

14,386 

 

 

$

42,204 

 

 

$

41,867 

 

Net interest income  (GAAP)

$

14,671 

 

$

14,289 

 

 

$

41,918 

 

 

$

41,579 

 

Average interest earning assets

$

1,797,448 

 

$

1,755,167 

 

 

$

1,795,694 

 

 

$

1,767,055 

 

Net interest margin (GAAP)

 

3.24 

%

 

3.23 

%

 

 

3.12 

%

 

 

3.15 

%

Net interest margin - TE

 

3.26 

%

 

3.25 

%

 

 

3.14 

%

 

 

3.17 

%

 

 

Asset Quality

 

The Company had no loan loss reserve release or provision in the third quarter of 2014.  By comparison, the Company recognized a $1.8 million reserve release in the third quarter of 2013 and a $1.0 million reserve release in the second quarter of 2014.  The provision for loan loss creates a reserve for probable and estimable losses inherent in the loan portfolio.  On a quarterly basis, management estimates the amount required and records the appropriate provision or release to maintain an adequate reserve for all potential and estimated loan losses.

Nonperforming loans increased to $32.3 million at September 30, 2014 from $28.9 million at June 30, 2014The increase is driven by a small number of specific relationships and does not reflect issues throughout the portfolio.  Net charge-offs totaled $526,000 in the third quarter of 2014 while net charge-offs totaled $3.7 million for the third quarter of 2013.  The distribution of the Company’s remaining nonperforming loans is included in the following table.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2014

 

 

Nonperforming Loans as of

 

Dollar Change From

 

(in thousands)

September 30, 

 

June 30, 

 

December 31, 

 

June 30, 

 

December 31, 

 

 

2014

 

2014

 

2013

 

2014

 

2013

 

Real estate-construction

$

794 

 

$

807 

 

$

2,729 

 

$

(13)

 

$

(1,935)

 

Real estate-residential:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investor

 

1,901 

 

 

3,932 

 

 

6,615 

 

 

(2,031)

 

 

(4,714)

 

Owner occupied

 

7,312 

 

 

5,535 

 

 

6,190 

 

 

1,777 

 

 

1,122 

 

Revolving and junior liens

 

2,340 

 

 

2,199 

 

 

3,209 

 

 

141 

 

 

(869)

 

Real estate-commercial, nonfarm

 

18,312 

 

 

16,390 

 

 

21,024 

 

 

1,922 

 

 

(2,712)

 

Real estate-commercial, farm

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

Commercial

 

1,645 

 

 

56 

 

 

27 

 

 

1,589 

 

 

1,618 

 

Other

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

$

32,304 

 

$

28,919 

 

$

39,794 

 

$

3,385 

 

$

(7,490)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nonperforming loans consist of nonaccrual loans, nonperforming restructured accruing loans and loans 90 days or greater past due.  Remediation work continues in all segments.  New migration to nonaccrual increased to $11.7 million during the third quarter of 2014 compared to $1.6 million in the second quarter of 2014 and $1.5 million in the third quarter of 2013.  For the first nine months of 2014 new migration to nonaccrual was $18.2 million compared to $17.4 million for the nine months ending 2013.

 

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Table of Contents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loan Charge-offs, net of recoveries

Three Months Ended

 

(in thousands)

September 30, 

 

June 30, 

 

December 31, 

 

 

2014

 

2014

 

2013

 

Real estate-construction

 

 

 

 

 

 

 

 

 

Homebuilder

$

 -

 

$

(130)

 

$

 -

 

Land

 

 -

 

 

 -

 

 

(1)

 

Commercial speculative

 

 -

 

 

(226)

 

 

62 

 

All other

 

(2)

 

 

(6)

 

 

 

Total real estate-construction

 

(2)

 

 

(362)

 

 

62 

 

Real estate-residential

 

 

 

 

 

 

 

 

 

Investor

 

59 

 

 

(13)

 

 

547 

 

Owner occupied

 

(108)

 

 

96 

 

 

(15)

 

Revolving and junior liens

 

328 

 

 

206 

 

 

139 

 

Total real estate-residential

 

279 

 

 

289 

 

 

671 

 

Real estate-commercial, nonfarm

 

 

 

 

 

 

 

 

 

Owner general purpose

 

237 

 

 

182 

 

 

 -

 

Owner special purpose

 

49 

 

 

347 

 

 

(3)

 

Non-owner general purpose

 

(419)

 

 

145 

 

 

(1,258)

 

Non-owner special purpose

 

255 

 

 

 -

 

 

 -

 

Retail properties

 

(455)

 

 

(1)

 

 

296 

 

Total real estate-commercial, nonfarm

 

(333)

 

 

673 

 

 

(965)

 

Real estate-commercial, farm

 

 -

 

 

 -

 

 

 -

 

Commercial

 

506 

 

 

(32)

 

 

(7)

 

Other

 

76 

 

 

52 

 

 

 

 

$

526 

 

$

620 

 

$

(234)

 

 

 

 

 

 

 

 

 

 

 

 

Charge-offs for the third quarter of 2014 were, in many instances, from previously established specific reserves on nonaccrual loans deemed uncollectible.  Gross charge-offs for the third quarter of 2014 were $2.2 million compared to $4.7 million for the third quarter of  2013 reflecting our efforts to improve loan quality in better but still challenging markets.  Recoveries were $1.6 million and $950,000 for the same time periods, respectively.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2014

 

 

Classified loans as of

 

Dollar Change From

 

(in thousands)

September 30, 

 

June 30, 

 

December 31, 

 

June 30, 

 

December 31, 

 

 

2014

 

2014

 

2013

 

2014

 

2013

 

Real estate-construction

$

4,298 

 

$

4,330 

 

$

3,024 

 

$

(32)

 

$

1,274 

 

Real estate-residential:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investor

 

3,407 

 

 

5,312 

 

 

9,750 

 

 

(1,905)

 

 

(6,343)

 

Owner occupied

 

7,797 

 

 

5,841 

 

 

7,699 

 

 

1,956 

 

 

98 

 

Revolving and junior liens

 

3,675 

 

 

3,097 

 

 

3,971 

 

 

578 

 

 

(296)

 

Real estate-commercial, nonfarm

 

24,768 

 

 

19,634 

 

 

37,297 

 

 

5,134 

 

 

(12,529)

 

Real estate-commercial, farm

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

Commercial

 

4,251 

 

 

312 

 

 

481 

 

 

3,939 

 

 

3,770 

 

Other

 

 

 

 

 

 

 

 -

 

 

 -

 

 

$

48,197 

 

$

38,527 

 

$

62,223 

 

$

9,670 

 

$

(14,026)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Classified loans include nonaccrual, performing troubled debt restructurings and all other loans considered substandard.  Loans classified as substandard are inadequately protected by either the current net worth and paying capacity of the obligor, or by the collateral pledged to secure the loan, if any.  These loans have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt and carry the distinct possibility that the Company will sustain some loss if deficiencies remain uncorrected.  Management review of classified loans concluded that the September 30, 2014 total was driven by a small number of specific relationships and does not reflect issues throughout the portfolio.

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Table of Contents

Classified assets include both classified loans and OREO.  Management monitors a ratio of classified assets to the sum of Bank Tier 1 capital and the allowance for loan and lease loss reserve as another measure of overall change in loan related asset quality.  With the growth in both classified loans and OREO in the third quarter of 2014, this ratio increased to 35.15% at September 30, 2014 from 31.27% at June 30, 2014 and down from 43.44% at December 31, 2013.

 

Allowance for Loan and Lease Losses

 

Below is a reconciliation of the activity for loan losses for the periods indicated (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

September 30, 

 

June 30, 

 

December 31, 

 

 

2014

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance at beginning of quarter

$

23,856 

 

 

$

25,476 

 

 

$

29,547 

 

 

Charge-offs:

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

512 

 

 

 

 

 

 

 

 

Real estate - commercial

 

545 

 

 

 

760 

 

 

 

608 

 

 

Real estate - construction

 

 

 

 

105 

 

 

 

63 

 

 

Real estate - residential

 

925 

 

 

 

978 

 

 

 

1,100 

 

 

Consumer and other loans

 

174 

 

 

 

139 

 

 

 

123 

 

 

Total charge-offs

 

2,157 

 

 

 

1,985 

 

 

 

1,902 

 

 

Recoveries:

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

 

 

35 

 

 

 

15 

 

 

Real estate - commercial

 

878 

 

 

 

87 

 

 

 

1,573 

 

 

Real estate - construction

 

 

 

 

467 

 

 

 

 

 

Real estate - residential

 

646 

 

 

 

689 

 

 

 

429 

 

 

Consumer and other loans

 

98 

 

 

 

87 

 

 

 

118 

 

 

Total recoveries

 

1,631 

 

 

 

1,365 

 

 

 

2,136 

 

 

Net charge-offs (recoveries)

 

526 

 

 

 

620 

 

 

 

(234)

 

 

Loan loss reserve release

 

 -

 

 

 

(1,000)

 

 

 

(2,500)

 

 

Allowance at end of period

$

23,330 

 

 

$

23,856 

 

 

$

27,281 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average total loans (exclusive of loans held-for-sale)

 

1,133,379 

 

 

 

1,118,089 

 

 

 

1,072,320 

 

 

Net charge-offs to average loans

 

0.05 

%

 

 

0.06 

%

 

 

(0.02)

%

 

Allowance at period end to average loans

 

2.06 

%

 

 

2.13 

%

 

 

2.54 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance: Individually evaluated for impairment

$

541 

 

 

$

1,440 

 

 

$

2,395 

 

 

Ending balance: Collectively evaluated for impairment

$

22,789 

 

 

$

22,416 

 

 

$

24,886 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The coverage ratio of the allowance for loan losses to nonperforming loans was 72.2% at September 30, 2014 down from 82.5% as of June 30, 2014 and improved from 68.6% as of December 31, 2013.  Management updated the estimated specific allocations in the third quarter after receiving more recent appraisals of collateral or information on cash flow trends related to the impaired credits.  This update resulted in a sharply lower amount required in the reserve for estimable losses on these credits at the end of the third quarter 2014 compared to year end 2013 as well as second quarter 2014.  The estimated general risk allocation was also lower when compared to both June 30, 2014 and December 31, 2013.  The third component of the Company’s loan loss reserve analysis showed higher required reserves when compared to June 30, 2014, most notably in the pooled commercial real estate category.  Management determined that the dollar amount of loans in this component was $7.1 million or markedly higher at period end third quarter 2014 compared to $3.2 million at June 30, 2014.  The dollar amount in the pooled commercial real estate category at September 30, 2014 was sharply improved from year end 2013.

After a review of the adequacy of the loan loss reserve at September 30, 2014, management concluded that, for the third quarter of 2014 neither a loan loss provision or a loan loss  reserve release were appropriate.  When measured as a percentage of loans outstanding, the total allowance for loan losses decreased slightly from 2.5% of total loans as of December 31, 2013 to 2.1% of total loans at September 30, 2014.  In management’s judgment, an adequate,  allowance for estimated losses has been established for inherent losses at September 30, 2014; however, there can be no assurance that actual losses will not exceed the estimated amounts in the future.

 

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Other Real Estate Owned

 

OREO increased modestly to $40.9 million at September 30, 2014, from $39.2 million at June 30, 2014 and decreased modestly from $41.5 million at December 31, 2013.  Property additions and improvements exceeded property disposals and valuation adjustments to OREO in the three months ended September 30, 2014.  Third quarter additions to OREO included the reclassification of the New Lenox branch property, which reflected management’s third quarter decision to close the branch on October 24, 2014.  The nine months ended September 30, 2014 saw property disposals and valuation adjustments, exceed property additions and improvements to OREO by a nominal amount.  The quarterly property additions and improvements have been relatively consistent at $4.7 million, $4.8 million and $4.8 million for the quarters ended March 31, 2014, June 30, 2014 and September 30, 2014, respectively.  At the same time, property disposals slowed and valuation adjustments spiked for a combined reduction to OREO of $3.1 million for the quarter ended September 30, 2014, compared to combined reductions of $6.0 million and $5.8 million for the quarters ended March 31, 2014 and June 30, 2014, respectively.  All OREO improvements in 2014 relate to several multifamily properties that were otherwise in severe disrepair.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

(in thousands)

September 30, 

 

June 30, 

 

December 31, 

 

2014

 

2014

 

2013

Beginning balance

$

39,232 

 

$

40,220 

 

$

49,066 

Property additions

 

4,277 

 

 

4,655 

 

 

4,998 

Property improvements

 

506 

 

 

131 

 

 

13 

Less:

 

 

 

 

 

 

 

 

Property disposals

 

1,618 

 

 

4,949 

 

 

10,784 

Period valuation adjustments

 

1,520 

 

 

825 

 

 

1,756 

Other real estate owned

$

40,877 

 

$

39,232 

 

$

41,537 

 

 

 

 

 

 

 

 

 

 

The OREO valuation reserve was $19.0 million, which was 31.8% of gross OREO at September 30, 2014.  The valuation reserve represented 33.4% and 34.9% of gross OREO at September 30, 2013, and December 31, 2013, respectively.  In management’s judgment, the property valuation allowance as established presents OREO at current estimates of fair value less estimated costs to sell; however, there can be no assurance that additional losses will not be incurred on disposal or upon update to valuation in the future.  Of note, one commercial property of five lots valued in total at $1.0 million has been in OREO for over five years.

 

OREO Properties by Type

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

September 30, 2014

 

 

June 30, 2014

 

December 31, 2013

 

 

 

Amount

 

% of Total

 

 

Amount

 

% of Total

 

 

Amount

 

% of Total

Single family residence

$

3,424 

 

%

 

$

3,485 

 

%

 

$

4,658 

 

11 

%

Lots (single family and commercial)

 

14,258 

 

35 

%

 

 

15,002 

 

38 

%

 

 

15,020 

 

36 

%

Vacant land

 

2,595 

 

%

 

 

2,595 

 

%

 

 

3,135 

 

%

Multi-family

 

6,140 

 

15 

%

 

 

5,175 

 

13 

%

 

 

1,783 

 

%

Commercial property

 

14,460 

 

35 

%

 

 

12,975 

 

33 

%

 

 

16,941 

 

41 

%

Total OREO properties

$

40,877 

 

100 

%

 

$

39,232 

 

100 

%

 

$

41,537 

 

100 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

42

 


 

Table of Contents

 

 

Noninterest Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3rd Qtr 2014

 

Three Months Ended

 

Dollar Change From

(in thousands)

3rd Qtr

 

2nd Qtr

 

3rd Qtr

 

2nd Qtr

 

3rd Qtr

 

2014

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trust income

$

1,483 

 

$

1,677 

 

$

1,494 

 

$

(194)

 

$

(11)

Service charges on deposits

 

1,838 

 

 

1,796 

 

 

1,904 

 

 

42 

 

 

(66)

Residential mortgage banking revenue

 

1,340 

 

 

1,257 

 

 

1,232 

 

 

83 

 

 

108 

Securities (loss) gains, net

 

1,231 

 

 

295 

 

 

(7)

 

 

936 

 

 

1,238 

Increase in cash surrender value of bank-owned life insurance

 

304 

 

 

366 

 

 

419 

 

 

(62)

 

 

(115)

Death benefit realized on bank-owned life insurance

 

 - 

 

 

 - 

 

 

 

 

 - 

 

 

(6)

Debit card interchange income

 

1,011 

 

 

930 

 

 

873 

 

 

81 

 

 

138 

Other income

 

1,116 

 

 

1,160 

 

 

1,549 

 

 

(44)

 

 

(433)

Total noninterest income

$

8,323 

 

$

7,481 

 

$

7,470 

 

$

842 

 

$

853 

 

On a linked quarter as well as year over year basis, gains from securities sales drove improved noninterest income.  Debit card interchange income also strengthened while residential mortgage banking revenue improved in a difficult market.  On a year to date basis, residential mortgage banking revenue declined approximately 48.9%.  Trust income declined from second quarter’s level reflecting stronger than normal estate administration fees in second quarter that returned to normal quarterly results.  Second quarter trust income also included nonrecurring tax preparation fees.  Year to date noninterest income is down 19.0% from 2013 essentially across all categories with the large dollar and percentage declines found in residential mortgage banking revenue and securities gains.

 

Noninterest Expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3rd Qtr 2014

 

Three Months Ended

 

Dollar Change From

(in thousands)

3rd Qtr

 

2nd Qtr

 

3rd Qtr

 

2nd Qtr

 

3rd Qtr

 

2014

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries

$

7,141 

 

$

7,128 

 

$

7,010 

 

$

13 

 

$

131 

Bonus

 

475 

 

 

592 

 

 

903 

 

 

(117)

 

 

(428)

Benefits and other

 

1,240 

 

 

1,463 

 

 

1,386 

 

 

(223)

 

 

(146)

   Total salaries and employee benefits

 

8,856 

 

 

9,183 

 

 

9,299 

 

 

(327)

 

 

(443)

Occupancy expense, net

 

1,143 

 

 

1,185 

 

 

1,266 

 

 

(42)

 

 

(123)

Furniture and equipment expense

 

989 

 

 

984 

 

 

1,026 

 

 

 

 

(37)

FDIC insurance

 

649 

 

 

627 

 

 

987 

 

 

22 

 

 

(338)

General bank insurance

 

371 

 

 

343 

 

 

489 

 

 

28 

 

 

(118)

Amortization of core deposit intangible asset

 

154 

 

 

511 

 

 

524 

 

 

(357)

 

 

(370)

Advertising expense

 

291 

 

 

459 

 

 

347 

 

 

(168)

 

 

(56)

Debit card interchange expense

 

418 

 

 

412 

 

 

366 

 

 

 

 

52 

Legal fees

 

332 

 

 

409 

 

 

615 

 

 

(77)

 

 

(283)

Other real estate owned expense, net

 

2,007 

 

 

1,650 

 

 

2,544 

 

 

357 

 

 

(537)

Other expense

 

3,134 

 

 

3,289 

 

 

3,119 

 

 

(155)

 

 

15 

Total noninterest expense

$

18,344 

 

$

19,052 

 

$

20,582 

 

$

(708)

 

$

(2,238)

 

Noninterest expense decreased on a linked quarter basis primarily on reduced compensation costs, cessation of the core deposit amortization expense and reduced advertising with an offset in increased OREO expenses, net.  The OREO expense increase included valuation expense greater than the improvements in net gains on OREO sales and other OREO expense reduction combined.  Reduced compensation costs reflect lower bonus accrual and health care costs quarter to quarter.  The core deposit intangible asset was fully amortized in July of 2014.  Lower advertising expense resulted from reduced expense for online and print advertising of retail

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products.  Expenses decreased in the third quarter of 2014 compared to the same period in 2013 in most categories, including total OREO expense, net.  On a year to date basis, noninterest expense is down 12.9% from 2013.  All expense information incorporates a year end 2013 Company decision to reclassify OREO revenues from noninterest income to noninterest expense.

 

Income Taxes

 

The Company recorded a tax expense of $1.7 million on $4.7 million pre-tax income for the third quarter of 2014.  For the nine months ended September 30, 2014, tax expense was composed of $79,000 in current income tax benefit and $4.1 million in deferred income tax expense.

There have been no significant changes in the Company’s ability to utilize the deferred tax assets through September 30, 2014.  As such, the Company has not changed the valuation reserve on the deferred tax assets in 2014.

On September 12, 2012, the Company and the Bank, as rights agent, entered into the Amended and Restated Rights Agreement and Tax Benefits Preservation Plan (the “Tax Benefits Plan”).  The Tax Benefits Plan amended and restated the Rights Agreement, dated September 17, 2002.  The purpose of the Tax Benefits Plan is to protect the Company’s deferred tax asset against an unsolicited ownership change, which could significantly limit the Company’s ability to utilize its deferred tax assets.  The Tax Benefits Plan was ratified by the Company’s stockholders at the Company’s 2013 annual meeting.  In connection with the public offering, that closed in the second quarter of 2014, the Company amended the Tax Benefits Plan on April 3, 2014, to allow two identified investors who were purchasers in the offering to purchase more than 5% of the Company’s common stock. 

 

Financial Condition

 

Total assets increased $29.1 million, or 1.5%, from December 31, 2013, to $2.03 billion as of September 30, 2014.  Loans increased by $39.6 million, or 3.6%, as management continued to emphasize credit quality under an overarching relationship lending program.  At the same time, loan charge-off activity reduced balances, and collateral that previously secured loans moved to OREO.  OREO decreased $660,000, or 1.6% at September 30, 2014, compared to year end 2013.  Available-for-sale securities decreased by $9.9 million while held-to-maturity securities increased $6.5 million in the nine months ended September 30, 2014.

The core deposit intangible asset related to the Heritage Bank acquisition in February 2008 was fully amortized as of September 30, 2014 with incurred expense of $1.2 million for the nine months ended September 30, 2014.  Management performed an annual review of the core deposit intangible assets as of November 30, 2013.

 

 

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Loans

 

Total loans were $1.14 billion as of September 30, 2014, an increase of $39.6 million from $1.10 billion as of December 31, 2013.  The increase in loans reflects successful loan production work in the period after extensive work in previous periods to build a robust loan pipeline.  In the first nine months of 2014, the Company was successful in adding commercial loans and continued to add real estate loans in commercial construction and real estate while experiencing reductions in residential real estate loan holdings.  A noteworthy specific increase in the third quarter came from two large loans financing commercial real estate construction.  Management views these financings as extensions of credit to highly rated clients with the properties to be constructed reflecting strong and well structured lease documents with excellent tenants.  An overriding effort to develop relationship based loan clients also resulted in current loan clients more closely reflecting our core clientele.  Our existing commercial clients continue to be reluctant in utilizing existing lines of credit.  Challenging economic circumstances and an intensely competitive environment served to temper overall loan growth.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2014

 

Major Classification of Loans as of

 

Dollar Change From

(in thousands)

September 30, 

 

June 30, 

 

December 31, 

 

June 30, 

 

December 31, 

 

2014

 

2014

 

2013

 

2014

 

2013

Commercial

$

106,592 

 

$

106,752 

 

$

94,736 

 

$

(160)

 

$

11,856 

Real estate - commercial

 

600,649 

 

 

599,796 

 

 

560,233 

 

 

853 

 

 

40,416 

Real estate - construction

 

41,936 

 

 

32,265 

 

 

29,351 

 

 

9,671 

 

 

12,585 

Real estate - residential

 

365,602 

 

 

368,592 

 

 

390,201 

 

 

(2,990)

 

 

(24,599)

Consumer

 

3,142 

 

 

3,064 

 

 

2,760 

 

 

78 

 

 

382 

Overdraft

 

1,198 

 

 

381 

 

 

628 

 

 

817 

 

 

570 

Lease financing receivables

 

8,398 

 

 

8,722 

 

 

10,069 

 

 

(324)

 

 

(1,671)

Other

 

12,757 

 

 

12,700 

 

 

12,793 

 

 

57 

 

 

(36)

 

 

1,140,274 

 

 

1,132,272 

 

 

1,100,771 

 

 

8,002 

 

 

39,503 

Net deferred loan costs

 

608 

 

 

475 

 

 

485 

 

 

133 

 

 

123 

 

$

1,140,882 

 

$

1,132,747 

 

$

1,101,256 

 

$

8,135 

 

$

39,626 

 

The quality of the loan portfolio incorporates not only Company credit decisions but also the economic health of the communities in which the Company operates.  The local economies are still subject to the economic headwinds that have been experienced nationwide.  The uneven and occasionally adverse economic conditions continue to affect the Midwest region in particular and financial markets generally.  As the Company is located in a corridor with significant open space and undeveloped real estate, real estate lending (including commercial, residential, and construction) has been and continues to be a sizeable portion of the portfolio.  These categories comprised 88.4% of the portfolio as of September 30, 2014, compared to 89.0% of the portfolio as of December 31, 2013.  The Company continues to oversee and manage its loan portfolio in accordance with interagency guidance on risk management.

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Securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2014

(in thousands)

Securities Portfolio As of

 

Dollar Change From

 

September 30, 

 

June 30, 

 

December 31, 

 

June 30, 

 

December 31, 

Securities available-for-sale, at fair value

2014

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury

$

1,532 

 

$

1,538 

 

$

1,544 

 

$

(6)

 

$

(12)

U.S. government agencies

 

1,638 

 

 

1,653 

 

 

1,672 

 

 

(15)

 

 

(34)

States and political subdivisions

 

13,879 

 

 

15,753 

 

 

16,794 

 

 

(1,874)

 

 

(2,915)

Corporate bonds

 

30,781 

 

 

31,350 

 

 

15,102 

 

 

(569)

 

 

15,679 

Collateralized mortgage obligations

 

28,417 

 

 

33,083 

 

 

63,876 

 

 

(4,666)

 

 

(35,459)

Asset-backed securities

 

192,798 

 

 

246,437 

 

 

273,203 

 

 

(53,639)

 

 

(80,405)

Collateralized loan obligations

 

93,198 

 

 

 -

 

 

 -

 

 

93,198 

 

 

93,198 

Total securities available-for-sale

$

362,243 

 

$

329,814 

 

$

372,191 

 

$

32,429 

 

$

(9,948)

Securities held-to-maturity, at amortized cost

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agency mortgage-backed

$

37,321 

 

$

37,306 

 

$

35,268 

 

$

15 

 

$

2,053 

Collateralized mortgage obligations

 

225,719 

 

 

227,377 

 

 

221,303 

 

 

(1,658)

 

 

4,416 

Total securities held-to-maturity

$

263,040 

 

$

264,683 

 

$

256,571 

 

$

(1,643)

 

$

6,469 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total securities

$

625,283 

 

$

594,497 

 

$

628,762 

 

$

30,786 

 

$

(3,479)

 

 

The total investment portfolio reached $625.3 million at September 30, 2014.  The Available-for-Sale (“AFS”) portfolio increased $32.4 million during the third quarter to end at $362.2 million.  Collateralized loan obligations (“CLO”) totaling $94.2 million were purchased early in the quarter.  Asset-backed security (“ABS”) sales for the quarter were $95.3 million, partially offset by purchases of $42.4 million.  Sales of ABS, some late in the second quarter, provided funding for the CLO purchases.  The Company had no purchase or sale activity in the Held to Maturity portfolio in the third quarter.

Realized gains totaled $1.2 million for the third quarter of 2014.  Unrealized losses on the AFS portfolio before deferred taxes were $5.2 million at September 30, 2014 an increase of $3.5 million for the quarter.

The Company is holding investments by four issuers where each issuer holding exceeds 10% of stockholders’ equity.  Company investment managers have assessed the quality of the issuers to confirm that underwriting standards meet expectation and requirements under the Investment Policy.  All of the investments for these issuers are guaranteed by the U.S. Department of Education.

The Company’s Board of Directors, at their July 15, 2014, meeting approved changes to the Investment Policy to allow purchases of CLO for the investment portfolio.  Policy guidelines dictate that securities purchased are Volcker Rule compliant, are rated “A-“ or higher, and meet other stringent credit assessments.  Policy also limits aggregate holdings and maximum issuer amount as percentages of capital.

As shown above, the addition of CLO to the portfolio and related reductions in other portfolio holdings, were the major events in the Company’s securities asset management both in the third quarter 2014 and the nine month period ended September 30, 2014.  At September 30, 2014, the Company investment managers have assessed the quality of the issuers to confirm that underwriting standards meet expectation and the requirements under the Company’s Investment Policy.

While the Company’s total securities holdings were essentially unchanged in the first nine months of 2014, meaningful changes were made in the period as discussed above to reduce available-for-sale ABS supported by student loan assets largely guaranteed by the U.S. Department of Education while increasing CLO holdings.  The Company added a minor holding in held-to-maturity securities.

 

 

 

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Deposits and Borrowings

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2014

 

Deposit Detail As of

 

Dollar Change From

(in thousands)

September 30, 

 

June 30, 

 

December 31, 

 

June 30, 

 

December 31, 

 

2014

 

2014

 

2013

 

2014

 

2013

Noninterest bearing

$

380,687 

 

$

393,964 

 

$

373,389 

 

$

(13,277)

 

$

7,298 

Savings

 

236,289 

 

 

238,167 

 

 

228,589 

 

 

(1,878)

 

 

7,700 

NOW accounts

 

315,665 

 

 

310,721 

 

 

297,852 

 

 

4,944 

 

 

17,813 

Money market accounts

 

296,418 

 

 

304,766 

 

 

309,859 

 

 

(8,348)

 

 

(13,441)

Certificates of deposits:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

of less than $100,000

 

256,452 

 

 

274,971 

 

 

288,345 

 

 

(18,519)

 

 

(31,893)

of $100,000 or more

 

171,244 

 

 

178,235 

 

 

184,094 

 

 

(6,991)

 

 

(12,850)

 

$

1,656,755 

 

$

1,700,824 

 

$

1,682,128 

 

$

(44,069)

 

$

(25,373)

 

Total deposits decreased $25.4 million, or 1.5%, during the nine month period ended September 30, 2014 to $1.66 billion.  During the same period, savings, NOW and money market deposit volume increased by $12.1 million.  Also during the period, certificates of deposit decreased by $44.7 million while noninterest bearing demand increased $7.3 million.  As of June 30, 2014, we continue to be among market share leaders in our home counties of Kane and Kendall in Illinois..

 

Average balance for interest bearing deposits was $1.31 billion for the first nine months of 2014.  Average balance for noninterest bearing deposits was $384.4 million in the same period.  Similar to the trends discussed above, when compared to the first nine months of 2013, average balances in 2014 reflect lower interest bearing deposit volumes, driven by time deposits, but increased noninterest bearing deposits.  Management believes that reductions in average time deposits reflect  maturities of deposits from past higher rate environments.

 

One of the Company’s most significant borrowing relationships continued to be the $45.5 million credit facility with a correspondent bank. That credit began in January 2008 and was originally composed of a $30.5 million senior debt facility, which included $500,000 in term debt, and $45.0 million of subordinated debt.  The subordinated debt and the term debt portion of the senior debt facility mature on March 31, 2018.  The interest rate on the senior debt facility resets quarterly and at the Company’s option, is based on, either the lender’s prime rate or three-month LIBOR plus 90 basis points.  The interest rate on the subordinated debt resets quarterly, and is equal to three-month LIBOR plus 150 basis points.  The Company had no principal outstanding balance on the senior line of credit portion of the senior debt facility when it matured and was terminated.  The Company had $500,000 in principal outstanding in term debt and $45.0 million in principal outstanding in subordinated debt at the end of both September 30, 2014, and December 31, 2013.  The term debt is secured by all of the outstanding capital stock of the Bank.  The Company has made all required interest payments on the outstanding principal amounts on a timely basis.

The credit facility agreement contains usual and customary provisions regarding acceleration of the senior debt upon the occurrence of an event of default by the Company under the senior debt agreement.  The senior debt agreement also contains certain customary representations and warranties, and financial covenants.  At September 30, 2014, the Company was out of compliance with two of the financial covenants contained within the credit agreement.  As of June 30, 2014, the Company reported being out of compliance on one of the financial covenants contained in the referenced credit agreement.  Prior to 2013, the Company had been out of compliance with two of the financial covenants.  The agreement provides that noncompliance is an event of default and as the result of the Company’s failure to comply with a financial covenant, the lender may (i) terminate all commitments to extend further credit, (ii) increase the interest rate on the revolving line of the term debt by 200 basis points, (iii) declare the senior debt immediately due and payable and (iv) exercise all of its rights and remedies at law, in equity and/or pursuant to any or all collateral documents, including foreclosing on the collateral.  The total outstanding principal of the senior debt is the $500,000 in term debt.   Because the subordinated debt is treated as Tier 2 capital for regulatory capital purposes, the senior debt agreement does not provide the lender with any rights of acceleration or other remedies with regard to the subordinated debt upon an event of default caused by the Company’s failure to comply with a financial covenant.  Specifically, the covenants that were not met address the Bank’s return on average assets and nonperforming assets as a percentage of the Bank’s primary capital, when calculated per the debt agreement.

The Company increased its securities sold under repurchase agreements to $29.4 million at September  30, 2014, from $22.6 million at December 31, 2013.  The Company had taken an advance of $40.0 million at September 30, 2014 representing an increase when compared to $5.0 million at December 31, 2013 and no outstanding advances at June 30, 2014.

 

The Company is also obligated on $58.4 million of junior subordinated debentures related to the trust preferred securities issued by its two statutory trust subsidiaries, Old Second Capital Trust I and Old Second Capital Trust II.  In April 2014, the Company concluded a successful capital raise and used some of the capital raise proceeds to pay interest accrued but previously unpaid on the trust preferred securities.  The Company is currently paying interest as it comes due, and $1.1 million was paid in the third quarter of 2014The Company is current on all payments due on these securities.

 

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Capital

 

As of September 30, 2014, total stockholders’ equity was $192.7 million, which was an increase of $45.0 million from $147.7 million as of December 31, 2013.  This increase was primarily attributable to the capital raise conducted in the second quarter of 2014 in which the Company issued 15,525,000 shares of common stock with net proceeds exceeding $64.0 million. Subsequent to the offering, the Company used $19.7 million to pay all outstanding interest on the junior subordinated debentures and repurchase 25,669 shares of Series B Stock.  The Company repurchased the preferred shares for 94.75% of the liquidation value totaling payments of $24.3 million.  Payments of $22.9 million were made to a large private investor with other payments totaling $1.4 million made to directors of the Company. Lastly, the Company used $10.3 million to pay all accumulated and outstanding Series B Stock dividends.  As part of the Series B Stock repurchase agreements, the holders of the Series B Stock agreed to forbear any rights to accumulated, unpaid dividends.  The remaining proceeds from the capital raise are being held for general corporate purposes.

The Bank is subject to the risk-based capital regulatory guidelines, which include the methodology for calculating the risk-weighting of the Bank’s assets, developed by the OCC and the other bank regulatory agencies.  In connection with the current economic environment, the Bank’s current level of nonperforming assets and the risk-based capital guidelines, the Bank’s board of directors has determined that the Bank should maintain a Tier 1 leverage capital ratio at or above eight percent (8%) and a total risk-based capital ratio at or above twelve percent (12%).  The Bank currently exceeds those thresholds.  See Note 11 -Regulatory and Capital Matters for a complete discussion of all regulatory capital guidelines.

As previously announced in the third quarter of 2010, the Company elected to defer regularly scheduled interest payments on $58.4 million of junior subordinated debentures related to the trust preferred securities issued by its two statutory trust subsidiaries, Old Second Capital Trust I and Old Second Capital Trust II.  Because of the deferral on the subordinated debentures, the trusts deferred regularly scheduled dividends on their trust preferred securities.  On April 21, 2014, the Company paid the accumulated and unpaid interest on the trust preferred securities and terminated the deferral period.  The interest was not immediately paid by the indenture trustees to the holders of such trust preferred securities.  Instead, the trustees held the interest payments in irrevocable deposit accounts to pay such amounts on the next applicable payment dates under the indentures to holders of the securities on the record dates set forth in the appropriate indenture.  In the third quarter of 2014, the Company paid $1.1 million for the regularly scheduled payments.

During the fourth quarter 2012, the Treasury announced the continuation of individual auctions of the Series B Stock that was issued through the CPP.  At that time, the Company was informed that the Series B Stock would be auctioned.  Auction transactions were settled in first quarter 2013 reflecting Treasury’s efforts to conclude the CPP.  The auctions were successful for the Treasury as all of the Series B Stock held by Treasury was sold to third parties, including certain of our directors.  At December 31, 2013 and September 30, 2014, the Company carried $72.million and $47.3 million, respectively of Series B Stock in total stockholders’ equity.  Pursuant to the terms of the Series B Stock, the dividends paid on the Series B Stock increased from 5% to 9% in February 2014.  The Company paid $1.1 million on August 15, 2014 and is current with the Series B Stock dividends.

Management has all options to redeem the Series B Stock, which carries a 9.0% dividend rate, under evaluation.  The Company will take action to redeem the Series B Stock only when it is effective to do so and after a complete review of long term and short term considerations.

Beginning January 1, 2015, the Company and the Bank will be subject to the new capital requirements of Basel III.  The Basel III Rules not only increase selected minimum regulatory capital ratios, but also introduce a new Common Equity Tier 1 capital ratio and the concept of a capital conservation buffer.  The rules revise the criteria that certain instruments must meet to qualify as Tier 1 or Tier 2 capital.  The Basel III Rules permit smaller banking organizations to retain, through a one-time election, the existing treatment of accumulated other comprehensive income.  Management is reviewing the new rules to assess their impact on the Company.

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The Company’s non-GAAP tangible common equity to tangible assets and the Tier 1 common equity to risk weighted assets increased to 7.15% and 6.50%, respectively, at September 30, 2014, compared to 3.67% and 0.77%, respectively, at December 31, 2013.  The issuance of 15,525,000 common shares net of repurchasing 25,669 Series B Stock resulted in a positive impact on the regulatory ratios and the non-GAAP ratios noted above in the quarter ending September 30, 2014.  The Company does not anticipate any significant effect to the Bank’s regulatory ratios as the Company does not have any immediate plans to use any of the proceeds to increase Bank capital.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(unaudited)

 

(unaudited)

 

 

As of September 30, 

 

As of December 31,

(dollars in thousands)

2014

 

2013

 

2013

 

 

 

 

 

 

 

 

 

Tier 1 capital

 

 

 

 

 

 

 

 

Total equity

$

192,691 

 

$

142,039 

 

$

147,692 

Tier 1 adjustments:

 

 

 

 

 

 

 

 

Trust preferred securities allowed

 

56,625 

 

 

51,491 

 

 

51,577 

Cumulative other comprehensive loss

 

7,232 

 

 

12,435 

 

 

7,038 

Disallowed goodwill and intangible assets

 

 -

 

 

(1,702)

 

 

(1,177)

Disallowed deferred tax assets

 

(65,260)

 

 

(71,588)

 

 

(70,350)

Other

 

(564)

 

 

(546)

 

 

(581)

Tier 1 capital

$

190,724 

 

$

132,129 

 

$

134,199 

 

 

 

 

 

 

 

 

 

Total capital

 

 

 

 

 

 

 

 

Tier 1 capital

$

190,724 

 

$

132,129 

 

$

134,199 

Tier 2 additions:

 

 

 

 

 

 

 

 

Allowable portion of allowance for loan losses

 

16,782 

 

 

16,565 

 

 

15,898 

Additional trust preferred securities disallowed for tier 1 capital

 

 -

 

 

5,134 

 

 

5,048 

Subordinated debt

 

27,000 

 

 

36,000 

 

 

36,000 

Tier 2 additions subtotal

 

43,782 

 

 

57,699 

 

 

56,946 

Allowable Tier 2

 

43,782 

 

 

57,699 

 

 

56,946 

Other Tier 2 capital components

 

(6)

 

 

(6)

 

 

(6)

Total capital

$

234,500 

 

$

189,822 

 

$

191,139 

 

 

 

 

 

 

 

 

 

Tangible common equity

 

 

 

 

 

 

 

 

Total equity

$

192,691 

 

$

142,039 

 

$

147,692 

Less:  Preferred equity

 

47,331 

 

 

72,667 

 

 

72,942 

Goodwill and intangible assets

 

 -

 

 

1,702 

 

 

1,177 

Tangible common equity

$

145,360 

 

$

67,670 

 

$

73,573 

 

 

 

 

 

 

 

 

 

Tier 1 common equity

 

 

 

 

 

 

 

 

Tangible common equity

$

145,360 

 

$

67,670 

 

$

73,573 

Tier 1 adjustments:

 

 

 

 

 

 

 

 

Cumulative other comprehensive loss

 

7,232 

 

 

12,435 

 

 

7,038 

Other

 

(65,824)

 

 

(72,134)

 

 

(70,931)

Tier 1 common equity

$

86,768 

 

$

7,971 

 

$

9,680 

 

 

 

 

 

 

 

 

 

Tangible assets

 

 

 

 

 

 

 

 

Total assets

$

2,033,099 

 

$

2,032,788 

 

$

2,004,034 

Less: 

 

 

 

 

 

 

 

 

Goodwill and intangible assets

 

 -

 

 

1,702 

 

 

1,177 

Tangible assets

$

2,033,099 

 

$

2,031,086 

 

$

2,002,857 

 

 

 

 

 

 

 

 

 

Total risk-weighted assets

 

 

 

 

 

 

 

 

On balance sheet

$

1,300,773 

 

$

1,274,628 

 

$

1,224,438 

Off balance sheet

 

34,883 

 

 

37,555 

 

 

36,023 

Total risk-weighted assets

$

1,335,656 

 

$

1,312,183 

 

$

1,260,461 

 

 

 

 

 

 

 

 

 

Average assets

 

 

 

 

 

 

 

 

Total average assets for leverage

$

1,969,823 

 

$

1,857,554 

 

$

1,927,217 

 

 

 

 

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Item 3.  Quantitative and Qualitative Disclosures about Market Risk

 

 

Liquidity and Market Risk

 

Liquidity is the Company’s ability to fund operations, to meet depositor withdrawals, to provide for customers’ credit needs, and to meet maturing obligations and existing commitments.  The liquidity of the Company principally depends on cash flows from operating activities, investment in and maturity of assets, changes in balances of deposits and borrowings, and its ability to borrow funds.  The Company monitors borrowing capacity at correspondent banks as well as the FHLBC and Reserve Bank as part of its liquidity management process as supervised by the Asset and Liability Committee and reviewed by the board of directors.

Net cash outflows from operating activities were $14.4 million during the first nine months of 2014, compared with net cash inflows of $19.7 million in the same period in 2013.  Proceeds from sales of loans held-for-sale, net of funds used to originate loans held-for-sale, continued to be a source of inflows for both of the first nine months of 2014 and 2013.  Interest paid, net of interest received, combined with changes in other assets and liabilities were a source of outflows for the first nine months of 2014 compared to inflows in the first nine months of 2013.  The majority of this outflow was the payment of the accumulated and unpaid interest to the trust preferred securities totaling $20.8 million.  Management of investing and financing activities, as well as market conditions, determines the level and the stability of net interest cash flows.  Management’s policy is to mitigate the impact of changes in market interest rates to the extent possible, as part of the balance sheet management process.

Net cash outflows from investing activities were $34.4 million in the first nine months of 2014, compared to net cash inflows of $18.4 million in the same period in 2013.  In the first nine months of 2014, securities transactions accounted for net inflows of $7.2 million, and net principal disbursed on loans accounted for net outflows of $53.0 million.  In the first nine months of 2013, securities transactions accounted for net outflows of $62.0 million, and net principal received on loans accounted for net inflows of $49.9 million.  Proceeds from sales of OREO accounted for $12.7 million and $32.1 million in investing cash inflows for the first nine months of 2014 and 2013, respectively.

Net cash inflows from financing activities in the first nine months of 2014 were $45.2 million, compared with net cash outflows of $86.5 million in the first nine months of 2013.  Proceeds from the issuance of common stock provided net cash inflows of $64.4 million, while the redemption of Series B Stock and dividends paid on Series B Stock accounted for net cash outflows of $24.3 million and $11.3 million, respectively, in the first nine months of 2014.  Net deposit outflows in the first nine months of 2014 were $25.4 million compared to net deposit outflows of $44.1 million in the first nine months of 2013.  Other short-term borrowings had net cash inflows of $35.0 million and outflows of $45.0 million related to FHLBC advance in the first nine months of 2014 and repayment in the first nine months of 2013.  Changes in securities sold under repurchase agreements accounted for $6.9 million and $2.8 million in net inflows, respectively, in the first nine months of 2014 and 2013.

Interest Rate Risk

As part of its normal operations, the Company is subject to interest-rate risk on the assets it invests in (primarily loans and securities) and the liabilities it funds with (primarily customer deposits and borrowed funds), as well as its ability to manage such risk.  Fluctuations in interest rates may result in changes in the fair market values of the Company’s financial instruments, cash flows, and net interest income.  Like most financial institutions, the Company has an exposure to changes in both short-term and long-term interest rates.

The Company manages various market risks in its normal course of operations, including credit, liquidity, and interest-rate risk.  Other types of market risk, such as foreign currency exchange risk and commodity price risk, do not arise in the normal course of the Company’s business activities and operations.  In addition, since the Company does not hold a trading portfolio, it is not exposed to significant market risk from trading activities.  The Company’s interest rate risk exposures from September 30, 2014, and December 31, 2013, are outlined in the table below.

The Company’s net income can be significantly influenced by a variety of external factors, including: overall economic conditions, policies and actions of regulatory authorities, the amounts of and rates at which assets and liabilities reprice, variances in prepayment of loans and securities other than those that are assumed, early withdrawal of deposits, exercise of call options on borrowings or securities, competition, a general rise or decline in interest rates, changes in the slope of the yield-curve, changes in historical relationships between indices (such as LIBOR and prime), and balance sheet growth or contraction.  The Company’s Asset and Liability Committee seeks to manage interest rate risk under a variety of rate environments by structuring the Company’s balance sheet and off-balance sheet positions, which includes interest rate swap derivatives as discussed in Note 13 of the financial statements included in this quarterly report.  The Company monitors and manages this risk within approved policy limits.

The Company utilizes simulation analysis to quantify the impact of various rate scenarios on net interest income.  The simulation model incorporates specific cash flows, repricing characteristics, and embedded options of the assets and liabilities held by

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the Company.  Earnings at risk is calculated by comparing the net interest income of a stable interest rate environment to the net interest income of different interest rate environments to determine the percentage change.  Significant declines in interest rates that occurred during the first half of 2012 have made it impossible to calculate valid interest rate scenarios for rate declines of 1.0% or more.  Compared to December 31, 2013 the Company had less earnings gains (in both dollars and percentage) if interest rates should rise.  This decrease in rising-rate benefit reflects continued customer demand for longer term, fixed-rate loans.  Federal Funds rates and the Bank’s prime rate were stable throughout the first nine months of 2014, at 0.25% and 3.25%, respectively.

 

The following table summarizes the effect on annual income before income taxes based upon an immediate increase or decrease in interest rates of 0.5%, 1%, and 2% assuming no change in the slope of the yield curve.  The -2% and -1% sections of the table do not show model changes for those magnitudes of decrease due to the low interest rate environment over the relevant time periods.  While it was not possible to calculate net interest income for -0.5% as of December 31, 2013, increases in interest rates during the first nine months of 2014 made that calculation possible as of September 30, 2014, which is reflected in the table.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Analysis of Net Interest Income Sensitivity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Immediate Changes in Rates

 

(2.0)

%

 

(1.0)

%

 

 

(0.5)

%

 

 

0.5 

%

 

 

1.0 

%

 

 

2.0 

%

September 30, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dollar change

N/A

 

 

N/A

 

 

$

(275)

 

 

$

(443)

 

 

$

(198)

 

 

$

479 

 

Percent change

N/A

%

 

N/A

%

 

 

(0.5)

%

 

 

(0.8)

%

 

 

(0.3)

%

 

 

0.8 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dollar change

N/A

 

 

N/A

 

 

 

N/A

 

 

$

70 

 

 

$

249 

 

 

$

1,190 

 

Percent change

N/A

%

 

N/A

%

 

 

N/A

%

 

 

0.1 

%

 

 

0.4 

%

 

 

2.1 

%

 

The amounts and assumptions used in the simulation model should not be viewed as indicative of expected actual results.  Actual results will differ from simulated results due to timing, magnitude and frequency of interest rate changes as well as changes in market conditions and management strategies.  The above results do not take into account any management action to mitigate potential risk.

 

Item 4.  Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

The Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures, as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended, as of September 30, 2014.  Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that as of September 30, 2014, the Company’s internal controls were effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Securities and Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified.

 

There were no changes in the Company’s internal control over financial reporting during the quarter ended September 30, 2014, that have materially affected, or are reasonably likely to affect, the Company’s internal control over financial reporting.

 

Forward-looking Statements

 

This document (including information incorporated by reference) contains, and future oral and written statements of the Company and its management may contain, forward-looking statements, within the meaning of such term in the Private Securities Litigation Reform Act of 1995, with respect to the financial condition, results of operations, plans, objectives, future performance and business of the Company.  Forward-looking statements, which may be based upon beliefs, expectations and assumptions of the Company’s management and on information currently available to management, are generally identifiable by the use of words such as “believe,” “expect,” “anticipate,” “plan,” “intend,” “estimate,” “may,” “will,” “would,” “could,” “should” or other similar expressions.  Additionally, all statements in this document, including forward-looking statements, speak only as of the date they are made, and the Company undertakes no obligation to update any statement in light of new information or future events.

 

The Company’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain.  The factors, which could have a material adverse effect on the operations and future prospects of the Company and its subsidiaries, are detailed in the “Risk Factors” section included under Item 1A. of Part I of the Company’s Form 10-K.  In addition to the risk factors described in that section, there are other factors that may impact any public company, including ours, which could have a material adverse effect on

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the operations and future prospects of the Company and its subsidiaries.  These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements.

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PART II - OTHER INFORMATION

 

Item 1.    Legal Proceedings

 

The Company and its subsidiaries, from time to time, are involved in collection suits in the ordinary course of business against its debtors and are defendants in legal actions arising from normal business activities.  Management, after consultation with legal counsel, believes that the ultimate liabilities, if any, resulting from these actions will not have a material adverse effect on the financial position of the Bank or on the consolidated financial position of the Company.

 

Item 1.A.  Risk Factors

 

There have been no material changes from the risk factors set forth in Part I, Item 1.A. “Risk Factors,” of the Company’s Form 10-K for the year ended December 31, 2013.  Please refer to that section of the Company’s Form 10-K for disclosures regarding the risks and uncertainties related to the Company’s business.

 

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

 

None.

 

Item 3.    Defaults Upon Senior Securities

 

None.

 

Item 4.    Mine Safety Disclosures

 

N/A

 

Item 5.    Other Information

 

None

 

Item 6.  Exhibits

 

Exhibits:

 

 

 

 

 

10.1 

Employment Agreement, dated September 16, 2014, by and among Old Second Bancorp, Inc. and James Eccher (filed as Exhibit 10.1 to the Company’s Form 8-K filed on September 18, 2014 and incorporated herein by reference).

31.1 

Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a)

 

 

31.2 

Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a)

 

 

32.1 

Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

32.2 

Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

101 

Interactive data files pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets at September 30, 2014, and December 31, 2013; (ii) Consolidated Statements of Operations for the three and nine months ended September 30, 2014, and September 30, 2013; (iii) Consolidated Statements of Stockholders’ Equity for the nine months ended September 30, 2014, and September 30, 2013; (iv) Consolidated Statements of Cash Flows for the nine months ended September 30, 2014, and September 30, 2013; and (v) Notes to Consolidated Financial Statements, tagged as blocks of text and in detail.*

 

* As provided in Rule 406T of Regulation S-T, these interactive data files shall not be deemed “filed” for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934 as amended, or otherwise subject to liability under those sections.

 

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SIGNATURES

 

Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

 

 

 

OLD SECOND BANCORP, INC.

 

 

 

 

 

BY:

/s/ William B. Skoglund

 

 

William B. Skoglund

 

 

 

 

 

Chairman of the Board, Director

 

 

President and Chief Executive Officer
(principal executive officer)

 

 

 

 

 

BY:

/s/ J. Douglas Cheatham

 

 

J. Douglas Cheatham

 

 

 

 

 

Executive Vice-President and
Chief Financial Officer, Director
(principal financial and accounting
officer)

 

 

 

 

DATE: November 12, 2014

 

 

54