10-Q 1 osbc-20150630x10q.htm 10-Q osbc-Current Folio_10Q_2014Taxonomy

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 June 30, 2015

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

 

Picture 2

(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 August 6, 2015, the Registrant had outstanding 29,478,429 shares of common stock, $1.00 par value per share.

 

 

 

 

 

 

 


 

OLD SECOND BANCORP, INC.

 

Form 10-Q Quarterly Report

 

Table of Contents

 

 

2

 


 

 

PART I - FINANCIAL INFORMATION

Item 1.  Financial Statements

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Balance Sheets

(In thousands, except share data)

 

 

 

 

 

 

 

 

 

(Unaudited)

 

 

 

 

 

June 30, 

 

December 31, 

 

    

2015

    

2014

Assets

 

 

 

 

 

 

Cash and due from banks

 

$

29,164

 

$

30,101

Interest bearing deposits with financial institutions

 

 

9,352

 

 

14,096

Cash and cash equivalents

 

 

38,516

 

 

44,197

Securities available-for-sale, at fair value

 

 

399,836

 

 

385,486

Securities held-to-maturity, at amortized cost

 

 

253,419

 

 

259,670

Federal Home Loan Bank and Federal Reserve Bank stock

 

 

8,271

 

 

9,058

Loans held-for-sale

 

 

6,208

 

 

5,072

Loans

 

 

1,158,883

 

 

1,159,332

Less: allowance for loan losses

 

 

18,321

 

 

21,637

Net loans

 

 

1,140,562

 

 

1,137,695

Premises and equipment, net

 

 

41,696

 

 

42,335

Other real estate owned

 

 

31,964

 

 

31,982

Mortgage servicing rights, net

 

 

5,884

 

 

5,462

Bank-owned life insurance (BOLI)

 

 

57,444

 

 

56,807

Deferred tax assets, net

 

 

65,473

 

 

70,141

Other assets

 

 

15,780

 

 

13,882

Total assets

 

$

2,065,053

 

$

2,061,787

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

Noninterest bearing demand

 

$

432,773

 

$

400,447

Interest bearing:

 

 

 

 

 

 

Savings, NOW, and money market

 

 

877,587

 

 

865,103

Time

 

 

403,192

 

 

419,505

Total deposits

 

 

1,713,552

 

 

1,685,055

Securities sold under repurchase agreements

 

 

32,415

 

 

21,036

Other short-term borrowings

 

 

20,000

 

 

45,000

Junior subordinated debentures

 

 

58,378

 

 

58,378

Subordinated debt

 

 

45,000

 

 

45,000

Notes payable and other borrowings

 

 

500

 

 

500

Other liabilities

 

 

9,967

 

 

12,655

Total liabilities

 

 

1,879,812

 

 

1,867,624

 

 

 

 

 

 

 

Stockholders’ Equity

 

 

 

 

 

 

Preferred stock

 

 

31,553

 

 

47,331

Common stock

 

 

34,423

 

 

34,365

Additional paid-in capital

 

 

115,651

 

 

115,332

Retained earnings

 

 

106,791

 

 

100,697

Accumulated other comprehensive loss

 

 

(7,211)

 

 

(7,713)

Treasury stock

 

 

(95,966)

 

 

(95,849)

Total stockholders’ equity

 

 

185,241

 

 

194,163

Total liabilities and stockholders’ equity

 

$

2,065,053

 

$

2,061,787

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2015

 

December 31, 2014

 

 

Preferred

 

Common

 

Preferred

 

Common

 

    

Stock

    

Stock

    

Stock

    

Stock

Par value

 

$

1

 

$

1

 

$

1

 

$

1

Liquidation value

 

 

1,000

 

 

n/a

 

 

1,000

 

 

n/a

Shares authorized

 

 

300,000

 

 

60,000,000

 

 

300,000

 

 

60,000,000

Shares issued

 

 

31,553

 

 

34,422,234

 

 

47,331

 

 

34,364,734

Shares outstanding

 

 

31,553

 

 

29,478,429

 

 

47,331

 

 

29,442,508

Treasury shares

 

 

-

 

 

4,943,805

 

 

-

 

 

4,922,226

 

See accompanying notes to consolidated financial statements.

3

 


 

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Income

(In thousands, except share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(unaudited)

 

(unaudited)

 

 

Three Months Ended

 

Six Months Ended

 

 

June 30, 

 

June 30, 

 

    

2015

    

2014

    

2015

    

2014

Interest and dividend income

 

 

 

 

 

 

 

 

 

 

 

 

Loans, including fees

 

$

13,467

 

$

13,046

 

$

26,685

 

$

25,984

Loans held-for-sale

 

 

72

 

 

29

 

 

115

 

 

54

Securities:

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

 

3,372

 

 

3,352

 

 

6,747

 

 

6,854

Tax exempt

 

 

163

 

 

118

 

 

304

 

 

266

Dividends from Federal Reserve Bank and Federal Home Loan Bank stock

 

 

77

 

 

78

 

 

154

 

 

154

Interest bearing deposits with financial institutions

 

 

19

 

 

20

 

 

31

 

 

35

Total interest and dividend income

 

 

17,170

 

 

16,643

 

 

34,036

 

 

33,347

Interest expense

 

 

 

 

 

 

 

 

 

 

 

 

Savings, NOW, and money market deposits

 

 

183

 

 

188

 

 

362

 

 

387

Time deposits

 

 

771

 

 

1,210

 

 

1,578

 

 

2,531

Other short-term borrowings

 

 

7

 

 

3

 

 

16

 

 

5

Junior subordinated debentures

 

 

1,071

 

 

1,388

 

 

2,143

 

 

2,775

Subordinated debt

 

 

202

 

 

198

 

 

399

 

 

394

Notes payable and other borrowings

 

 

 -

 

 

4

 

 

4

 

 

8

Total interest expense

 

 

2,234

 

 

2,991

 

 

4,502

 

 

6,100

Net interest and dividend income

 

 

14,936

 

 

13,652

 

 

29,534

 

 

27,247

Loan loss reserve release

 

 

(2,300)

 

 

(1,000)

 

 

(2,300)

 

 

(2,000)

Net interest and dividend income after provision for loan losses

 

 

17,236

 

 

14,652

 

 

31,834

 

 

29,247

Noninterest income

 

 

 

 

 

 

 

 

 

 

 

 

Trust income

 

 

1,596

 

 

1,677

 

 

3,082

 

 

3,136

Service charges on deposits

 

 

1,779

 

 

1,796

 

 

3,320

 

 

3,516

Secondary mortgage fees

 

 

281

 

 

155

 

 

525

 

 

267

Mortgage servicing gain, net of changes in fair value

 

 

500

 

 

64

 

 

292

 

 

17

Net gain on sales of mortgage loans

 

 

1,695

 

 

1,038

 

 

3,318

 

 

1,700

Securities (loss) gain, net

 

 

(12)

 

 

295

 

 

(121)

 

 

226

Increase in cash surrender value of bank-owned life insurance

 

 

283

 

 

366

 

 

637

 

 

724

Debit card interchange income

 

 

1,050

 

 

930

 

 

2,009

 

 

1,760

Other income

 

 

1,092

 

 

1,160

 

 

3,175

 

 

2,456

Total noninterest income

 

 

8,264

 

 

7,481

 

 

16,237

 

 

13,802

Noninterest expense

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

9,149

 

 

9,183

 

 

18,404

 

 

18,284

Occupancy expense, net

 

 

1,094

 

 

1,185

 

 

2,365

 

 

2,666

Furniture and equipment expense

 

 

1,065

 

 

984

 

 

2,066

 

 

1,967

FDIC insurance

 

 

377

 

 

627

 

 

650

 

 

906

General bank insurance

 

 

310

 

 

343

 

 

667

 

 

832

Amortization of core deposit

 

 

 -

 

 

511

 

 

 -

 

 

1,023

Advertising expense

 

 

353

 

 

459

 

 

558

 

 

762

Debit card interchange expense

 

 

400

 

 

412

 

 

752

 

 

790

Legal fees

 

 

420

 

 

409

 

 

643

 

 

666

Other real estate expense, net

 

 

2,388

 

 

1,650

 

 

3,740

 

 

2,658

Other expense

 

 

3,371

 

 

3,289

 

 

6,235

 

 

6,014

Total noninterest expense

 

 

18,927

 

 

19,052

 

 

36,080

 

 

36,568

Income before income taxes

 

 

6,573

 

 

3,081

 

 

11,991

 

 

6,481

Provision for income taxes

 

 

2,444

 

 

1,060

 

 

4,363

 

 

2,258

Net income

 

$

4,129

 

$

2,021

 

$

7,628

 

$

4,223

Preferred stock dividends and accretion of discount

 

 

710

 

 

1,348

 

 

1,534

 

 

2,920

Dividends waived upon preferred stock redemption

 

 

 -

 

 

(5,433)

 

 

 -

 

 

(5,433)

Gain on preferred stock redemption

 

 

 -

 

 

(1,348)

 

 

 -

 

 

(1,348)

Net income available to common stockholders

 

$

3,419

 

$

7,454

 

$

6,094

 

$

8,084

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

$

0.12

 

$

0.26

 

$

0.21

 

$

0.38

Diluted earnings per share

 

 

0.12

 

 

0.26

 

 

0.21

 

 

0.38

 

See accompanying notes to consolidated financial statements.

4

 


 

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Unaudited)

 

(Unaudited)

 

 

Three Months Ended

 

Six Months Ended

 

 

June 30, 

 

June 30, 

 

    

2015

    

2014

    

2015

    

2014

Net Income

 

$

4,129

 

$

2,021

 

$

7,628

 

$

4,223

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

(575)

 

 

3,710

 

 

346

 

 

2,621

Related tax benefit (expense)

 

 

228

 

 

(1,527)

 

 

(210)

 

 

(1,079)

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

 

 

(347)

 

 

2,183

 

 

136

 

 

1,542

 

 

 

 

 

 

 

 

 

 

 

 

 

Less: Reclassification adjustment for the net (losses) gains realized during the period

 

 

 

 

 

 

 

 

 

 

 

 

Net realized (losses) gains

 

 

(12)

 

 

295

 

 

(121)

 

 

226

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

 

 

3

 

 

(121)

 

 

48

 

 

(93)

Net realized (losses) gains after tax

 

 

(9)

 

 

174

 

 

(73)

 

 

133

Other comprehensive (loss) income on available-for-sale securities

 

 

(338)

 

 

2,009

 

 

209

 

 

1,409

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

254

 

 

247

 

 

497

 

 

494

Related tax expense

 

 

(104)

 

 

(102)

 

 

(204)

 

 

(204)

Other comprehensive income on held-to-maturity securities

 

 

150

 

 

145

 

 

293

 

 

290

Total other comprehensive (loss) income

 

 

(188)

 

 

2,154

 

 

502

 

 

1,699

Total comprehensive income

 

$

3,941

 

$

4,175

 

$

8,130

 

$

5,922

 

See accompanying notes to consolidated financial statements.

 

5

 


 

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(In thousands)

 

 

 

 

 

 

 

 

 

 

(Unaudited)

 

 

Six Months Ended

 

 

June 30, 

 

 

2015

    

2014

Cash flows from operating activities

 

 

 

 

 

 

Net income

 

$

7,628

 

$

4,223

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

 

 

 

 

 

 

Depreciation and amortization of leasehold improvement

 

 

1,216

 

 

1,272

Change in fair value of mortgage servicing rights

 

 

513

 

 

630

Loan loss reserve release

 

 

(2,300)

 

 

(2,000)

Provision for deferred tax expense

 

 

4,206

 

 

2,335

Originations of loans held-for-sale

 

 

(114,718)

 

 

(52,057)

Proceeds from sales of loans held-for-sale

 

 

115,940

 

 

52,784

Net gain on sales of mortgage loans

 

 

(3,318)

 

 

(1,700)

Change in current income taxes receivable (payable)

 

 

27

 

 

(78)

Increase in cash surrender value of bank-owned life insurance

 

 

(637)

 

 

(724)

Change in accrued interest receivable and other assets

 

 

(1,899)

 

 

(4,399)

Change in accrued interest payable and other liabilities

 

 

(2,474)

 

 

(21,066)

Net premium amortization/discount (accretion) on securities

 

 

154

 

 

(950)

Securities losses (gains), net

 

 

121

 

 

(226)

Amortization of core deposit

 

 

 -

 

 

1,023

Stock based compensation

 

 

344

 

 

82

Net gain on sale of other real estate owned

 

 

(337)

 

 

(409)

Provision for other real estate owned losses

 

 

2,697

 

 

1,261

Net cash provided by (used in) operating activities

 

 

7,163

 

 

(19,999)

Cash flows from investing activities

 

 

 

 

 

 

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

 

 

28,292

 

 

14,606

Proceeds from sales of securities available-for-sale

 

 

56,121

 

 

163,107

Purchases of securities available-for-sale

 

 

(98,806)

 

 

(132,073)

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

 

 

6,983

 

 

3,902

Purchases of securities held-to-maturity

 

 

 -

 

 

(11,212)

Proceeds from sales of Federal Home Loan Bank stock

 

 

787

 

 

 -

Net change in loans

 

 

(7,582)

 

 

(42,259)

Improvements in other real estate owned

 

 

 -

 

 

(131)

Proceeds from sales of other real estate owned

 

 

4,673

 

 

10,927

Net purchases of premises and equipment

 

 

(577)

 

 

(509)

Net cash (used in) provided by investing activities

 

 

(10,109)

 

 

6,358

Cash flows from financing activities

 

 

 

 

 

 

Net change in deposits

 

 

28,497

 

 

18,696

Net change in securities sold under repurchase agreements

 

 

11,379

 

 

15,573

Net change in other short-term borrowings

 

 

(25,000)

 

 

(5,000)

Redemption of preferred stock

 

 

(15,778)

 

 

(24,321)

Proceeds from the issuance of common stock

 

 

 -

 

 

64,395

Dividends paid on preferred stock

 

 

(1,716)

 

 

(10,258)

Purchase of treasury stock

 

 

(117)

 

 

(46)

Net cash (used in) provided by financing activities

 

 

(2,735)

 

 

59,039

Net change in cash and cash equivalents

 

 

(5,681)

 

 

45,398

Cash and cash equivalents at beginning of period

 

 

44,197

 

 

47,660

Cash and cash equivalents at end of period

 

$

38,516

 

$

93,058

 

6

 


 

 

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Cash Flows - Continued

(In thousands)

 

 

 

 

 

 

 

 

(Unaudited)

 

Six Months Ended

 

June 30, 

Supplemental cash flow information

2015

    

2014

Income taxes paid

$

130

 

$

 -

Interest paid for deposits

 

1,993

 

 

3,027

Interest paid for borrowings

 

2,564

 

 

20,150

Non-cash transfer of loans to other real estate owned

 

7,015

 

 

9,343

Change in dividends accrued

 

(182)

 

 

(9,123)

Accretion on preferred stock discount

 

 -

 

 

58

 

See accompanying notes to consolidated financial statements.

 

 

7

 


 

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

    

Loss

    

Stock

    

Equity

Balance, December 31, 2013

 

$

18,830

 

$

72,942

 

$

66,212

 

$

92,549

 

$

(7,038)

 

$

(95,803)

 

$

147,692

Net income

 

 

 

 

 

 

 

 

 

 

 

4,223

 

 

 

 

 

 

 

 

4,223

Other comprehensive gain, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,699

 

 

 

 

 

1,699

Change in restricted stock

 

 

10

 

 

 

 

 

(10)

 

 

 

 

 

 

 

 

 

 

 

 -

Tax effect from vesting of restricted stock

 

 

 

 

 

 

 

 

29

 

 

 

 

 

 

 

 

 

 

 

29

Stock based compensation

 

 

 

 

 

 

 

 

82

 

 

 

 

 

 

 

 

 

 

 

82

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

 

 

 

 

 

(1,193)

 

 

 

 

 

 

 

 

(1,135)

Balance, June 30, 2014

 

$

34,365

 

$

47,331

 

$

115,183

 

$

96,927

 

$

(5,339)

 

$

(95,849)

 

$

192,618

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2014

 

$

34,365

 

$

47,331

 

$

115,332

 

$

100,697

 

$

(7,713)

 

$

(95,849)

 

$

194,163

Net income

 

 

 

 

 

 

 

 

 

 

 

7,628

 

 

 

 

 

 

 

 

7,628

Other comprehensive gain, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

502

 

 

 

 

 

502

Change in restricted stock

 

 

58

 

 

 

 

 

(58)

 

 

 

 

 

 

 

 

 

 

 

 -

Tax effect from vesting of restricted stock

 

 

 

 

 

 

 

 

33

 

 

 

 

 

 

 

 

 

 

 

33

Stock based compensation

 

 

 

 

 

 

 

 

344

 

 

 

 

 

 

 

 

 

 

 

344

Purchase of treasury stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(117)

 

 

(117)

Redemption of preferred stock

 

 

 

 

 

(15,778)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(15,778)

Preferred stock accretion and declared dividends

 

 

 

 

 

 

 

 

 

 

 

(1,534)

 

 

 

 

 

 

 

 

(1,534)

Balance, June 30, 2015

 

$

34,423

 

$

31,553

 

$

115,651

 

$

106,791

 

$

(7,211)

 

$

(95,966)

 

$

185,241

 

See accompanying notes to consolidated financial statements.

 

 

 

8

 


 

 

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, that are necessary, in the opinion of management, for a fair statement of results for the interim period presented.  Results for the period ended June 30, 2015, are not necessarily indicative of the results that may be expected for the year ending December 31, 2015.  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, 2014.  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, 2014.  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 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 was to be 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.  On April 1, 2015, the FASB voted to propose a delay in the effective date of ASU 2014-09.  On April 29, 2015, FASB issued a proposed accounting standards update to defer the effective date of an additional year.  The deferral of the effective date was approved on July 9, 2015, and will be effective for annual reporting periods beginning after December 15, 2017.

 

Note 2 – Securities

 

Investment Portfolio Management

 

Our investment portfolio serves the liquidity needs and income objectives 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.

 

9

 


 

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 $3.5 million at June 30, 2015, and $4.3 million at December 31, 2014.  Reserve Bank stock was recorded at $4.8 million at June 30, 2015, and December 31, 2014.  Our FHLBC stock is necessary to maintain access to FHLBC advances.

 

The following table summarizes the amortized cost and fair value of the securities portfolio at June 30, 2015,  and December 31, 2014, and the corresponding amounts of gross unrealized gains and losses (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

June 30, 2015:

    

Cost

    

Gains

    

Losses

    

Value

Securities Available-for-Sale

 

 

 

 

 

 

 

 

U.S. Treasury

 

$

1,519

 

$

1

 

$

 -

 

$

1,520

U.S. government agencies

 

 

1,697

 

 

 -

 

 

(102)

 

 

1,595

U.S. government agencies mortgage-backed

 

 

5,545

 

 

 -

 

 

 -

 

 

5,545

States and political subdivisions

 

 

13,053

 

 

368

 

 

(172)

 

 

13,249

Corporate bonds

 

 

31,376

 

 

 -

 

 

(771)

 

 

30,605

Collateralized mortgage obligations

 

 

76,519

 

 

50

 

 

(1,575)

 

 

74,994

Asset-backed securities

 

 

181,625

 

 

220

 

 

(3,190)

 

 

178,655

Collateralized loan obligations

 

 

94,243

 

 

59

 

 

(629)

 

 

93,673

Total Securities Available-for-Sale

 

$

405,577

 

$

698

 

$

(6,439)

 

$

399,836

Securities Held-to-Maturity

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agency mortgage-backed

 

$

36,995

 

$

1,791

 

$

 -

 

$

38,786

Collateralized mortgage obligations

 

 

216,424

 

 

3,391

 

 

(634)

 

 

219,181

Total Securities Held-to-Maturity

 

$

253,419

 

$

5,182

 

$

(634)

 

$

257,967

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

December 31, 2014:

    

Cost

    

Gains

    

Losses

    

Value

Securities Available-for-Sale

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury

 

$

1,529

 

$

 -

 

$

(2)

 

$

1,527

U.S. government agencies

 

 

1,711

 

 

 -

 

 

(87)

 

 

1,624

States and political subdivisions

 

 

21,682

 

 

432

 

 

(96)

 

 

22,018

Corporate bonds

 

 

31,243

 

 

309

 

 

(567)

 

 

30,985

Collateralized mortgage obligations

 

 

65,728

 

 

31

 

 

(2,132)

 

 

63,627

Asset-backed securities

 

 

175,565

 

 

199

 

 

(2,268)

 

 

173,496

Collateralized loan obligations

 

 

94,236

 

 

176

 

 

(2,203)

 

 

92,209

Total Securities Available-for-Sale

 

$

391,694

 

$

1,147

 

$

(7,355)

 

$

385,486

Securities Held-to-Maturity

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agency mortgage-backed

 

$

37,125

 

$

2,030

 

$

 -

 

$

39,155

Collateralized mortgage obligations

 

 

222,545

 

 

3,005

 

 

(1,439)

 

 

224,111

Total Securities Held-to-Maturity

 

$

259,670

 

$

5,035

 

$

(1,439)

 

$

263,266

 

10

 


 

The fair value, amortized cost and weighted average yield of debt securities at June 30, 2015, 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

 

$

2,141

 

1.63%

 

$

2,159

 

Due after one year through five years

 

 

6,900

 

2.99%

 

 

7,073

 

Due after five years through ten years

 

 

33,501

 

2.43%

 

 

32,811

 

Due after ten years

 

 

5,103

 

3.28%

 

 

4,926

 

 

 

 

47,645

 

2.56%

 

 

46,969

 

Mortgage-backed and collateralized mortgage obligations

 

 

82,064

 

1.44%

 

 

80,539

 

Asset-backed securities

 

 

181,625

 

1.22%

 

 

178,655

 

Collateralized loan obligations

 

 

94,243

 

2.87%

 

 

93,673

 

 

 

$

405,577

 

1.81%

 

$

399,836

 

Securities Held-to-Maturity

 

 

 

 

 

 

 

 

 

Mortgage-backed and collateralized mortgage obligations

 

$

253,419

 

3.02%

 

$

257,967

 

 

Securities with unrealized losses at June 30, 2015, and December 31, 2014, 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

 

 

 

 

 

 

 

 

June 30, 2015

 

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. government agencies

 

 -

 

$

 -

 

$

 -

 

1

 

$

102

 

$

1,595

 

1

 

$

102

 

$

1,595

States and political subdivisions

 

2

 

 

37

 

 

1,841

 

1

 

 

135

 

 

1,720

 

3

 

 

172

 

 

3,561

Corporate bonds

 

6

 

 

311

 

 

16,064

 

3

 

 

460

 

 

14,541

 

9

 

 

771

 

 

30,605

Collateralized mortgage obligations

 

6

 

 

335

 

 

44,131

 

4

 

 

1,240

 

 

19,400

 

10

 

 

1,575

 

 

63,531

Asset-backed securities

 

7

 

 

2,046

 

 

98,917

 

5

 

 

1,144

 

 

61,397

 

12

 

 

3,190

 

 

160,314

Collateralized loan obligations

 

8

 

 

387

 

 

44,231

 

4

 

 

242

 

 

24,488

 

12

 

 

629

 

 

68,719

 

 

29

 

$

3,116

 

$

205,184

 

18

 

$

3,323

 

$

123,141

 

47

 

$

6,439

 

$

328,325

Securities Held-to-Maturity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Collateralized mortgage obligations

 

6

 

$

189

 

$

31,761

 

4

 

$

445

 

$

46,400

 

10

 

$

634

 

$

78,161

 

 

6

 

$

189

 

$

31,761

 

4

 

$

445

 

$

46,400

 

10

 

$

634

 

$

78,161

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less than 12 months

 

Greater than 12 months

 

 

 

 

 

 

 

 

December 31, 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

 

 

$

 

$

1,527 

 

 -

 

$

 -

 

$

 -

 

 

$

 

$

1,527 

U.S. government agencies

 

 -

 

 

 -

 

 

 -

 

 

 

87 

 

 

1,624 

 

 

 

87 

 

 

1,624 

States and political subdivisions

 

 

 

96 

 

 

4,896 

 

 -

 

 

 -

 

 

 -

 

 

 

96 

 

 

4,896 

Corporate bonds

 

 

 

486 

 

 

15,246 

 

 

 

81 

 

 

1,921 

 

 

 

567 

 

 

17,167 

Collateralized mortgage obligations

 

 

 

900 

 

 

38,284 

 

 

 

1,232 

 

 

21,604 

 

 

 

2,132 

 

 

59,888 

Asset-backed securities

 

 

 

1,077 

 

 

99,286 

 

 

 

1,191 

 

 

43,662 

 

12 

 

 

2,268 

 

 

142,948 

Collateralized loan obligations

 

12 

 

 

2,203 

 

 

82,387 

 

 -

 

 

 -

 

 

 -

 

12 

 

 

2,203 

 

 

82,387 

 

 

35 

 

$

4,764 

 

$

241,626 

 

 

$

2,591 

 

$

68,811 

 

43 

 

$

7,355 

 

$

310,437 

Securities Held-to-Maturity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Collateralized mortgage obligations

 

 

$

457 

 

$

49,302 

 

 

$

982 

 

$

46,283 

 

11 

 

 

1,439 

 

 

95,585 

 

 

 

$

457 

 

$

49,302 

 

 

$

982 

 

$

46,283 

 

11 

 

$

1,439 

 

$

95,585 

 

Recognition of other-than-temporary impairment was not necessary in the three and six months ending June 30, 2015, or the year ended December 31, 2014.  The changes in fair value related primarily to interest rate fluctuations.  Our review of other-than-temporary impairment determined that there was no credit quality deterioration.

11

 


 

Note 3 – Loans

 

Major classifications of loans were as follows:

 

 

 

 

 

 

 

 

 

 

    

June 30, 2015

    

December 31, 2014

 

Commercial

 

$

123,372

 

$

119,158

 

Real estate - commercial

 

 

612,379

 

 

600,629

 

Real estate - construction

 

 

32,157

 

 

44,795

 

Real estate - residential

 

 

365,989

 

 

370,191

 

Consumer

 

 

3,854

 

 

3,504

 

Overdraft

 

 

408

 

 

649

 

Lease financing receivables

 

 

8,571

 

 

8,038

 

Other

 

 

11,391

 

 

11,630

 

 

 

 

1,158,121

 

 

1,158,594

 

Net deferred loan fees

 

 

762

 

 

738

 

 

 

$

1,158,883

 

$

1,159,332

 

 

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 87.2% and 87.6% of the portfolio at June 30, 2015, and December 31, 2014, respectively.

 

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

June 30, 2015

    

Past Due

    

Past Due

    

Due

    

Due

    

Current

    

Nonaccrual

    

Total Loans

    

Accruing

Commercial

 

$

 -

 

$

 -

 

$

 -

 

$

 -

 

$

131,343

 

$

600

 

$

131,943

 

$

 -

Real estate - commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied general purpose

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

127,516

 

 

1,915

 

 

129,431

 

 

 -

Owner occupied special purpose

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

173,200

 

 

790

 

 

173,990

 

 

 -

Non-owner occupied general purpose

 

 

270

 

 

 -

 

 

 -

 

 

270

 

 

156,771

 

 

730

 

 

157,771

 

 

 -

Non-owner occupied special purpose

 

 

4,021

 

 

 -

 

 

 -

 

 

4,021

 

 

92,865

 

 

 -

 

 

96,886

 

 

 -

Retail properties

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

41,016

 

 

 -

 

 

41,016

 

 

 -

Farm

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

12,013

 

 

1,272

 

 

13,285

 

 

 -

Real estate - construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Homebuilder

 

 

 -

 

 

41

 

 

 -

 

 

41

 

 

2,654

 

 

 -

 

 

2,695

 

 

 -

Land

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

2,573

 

 

 -

 

 

2,573

 

 

 -

Commercial speculative

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

2,286

 

 

3,472

 

 

5,758

 

 

 -

All other

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

20,651

 

 

480

 

 

21,131

 

 

 -

Real estate - residential

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investor

 

 

168

 

 

 -

 

 

 -

 

 

168

 

 

138,474

 

 

792

 

 

139,434

 

 

 -

Owner occupied

 

 

31

 

 

297

 

 

 -

 

 

328

 

 

110,140

 

 

6,273

 

 

116,741

 

 

 -

Revolving and junior liens

 

 

418

 

 

 -

 

 

 -

 

 

418

 

 

106,744

 

 

2,652

 

 

109,814

 

 

 -

Consumer

 

 

50

 

 

 -

 

 

 -

 

 

50

 

 

3,804

 

 

 -

 

 

3,854

 

 

 -

All other1

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

12,561

 

 

 -

 

 

12,561

 

 

 -

 

 

$

4,958

 

$

338

 

$

 -

 

$

5,296

 

$

1,134,611

 

$

18,976

 

$

1,158,883

 

$

 -

 

 

12

 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recorded

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

90 days or

 

 

 

 

 

 

 

 

90 Days or

 

 

 

 

 

 

 

 

 

 

 

 

 

Greater Past

 

 

30-59 Days

 

60-89 Days

 

Greater Past

 

Total Past

 

 

 

 

 

 

 

 

 

 

Due and

December 31, 2014

    

Past Due

    

Past Due

    

Due

    

Due

    

Current

    

Nonaccrual

    

Total Loans

    

Accruing

Commercial

 

$

38

 

$

 -

 

$

 -

 

$

38

 

$

125,658

 

$

1,500

 

$

127,196

 

$

 -

Real estate - commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied general purpose

 

 

699

 

 

 -

 

 

 -

 

 

699

 

 

126,029

 

 

5,937

 

 

132,665

 

 

 -

Owner occupied special purpose

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

167,874

 

 

1,441

 

 

169,315

 

 

 -

Non-owner occupied general purpose

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

153,328

 

 

4,907

 

 

158,235

 

 

 -

Non-owner occupied special purpose

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

87,054

 

 

1,423

 

 

88,477

 

 

 -

Retail properties

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

37,780

 

 

 -

 

 

37,780

 

 

 -

Farm

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

14,157

 

 

 -

 

 

14,157

 

 

 -

Real estate - construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Homebuilder

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

3,204

 

 

 -

 

 

3,204

 

 

 -

Land

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

1,658

 

 

 -

 

 

1,658

 

 

 -

Commercial speculative

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

13,431

 

 

 -

 

 

13,431

 

 

 -

All other

 

 

71

 

 

29

 

 

 -

 

 

100

 

 

25,841

 

 

561

 

 

26,502

 

 

 -

Real estate - residential

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investor

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

135,273

 

 

1,942

 

 

137,215

 

 

 -

Owner occupied

 

 

1,076

 

 

914

 

 

 -

 

 

1,990

 

 

107,727

 

 

6,711

 

 

116,428

 

 

 -

Revolving and junior liens

 

 

94

 

 

44

 

 

 -

 

 

138

 

 

113,906

 

 

2,504

 

 

116,548

 

 

 -

Consumer

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

3,504

 

 

 -

 

 

3,504

 

 

 -

All other1

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

13,017

 

 

 -

 

 

13,017

 

 

 -

 

 

$

1,978

 

$

987

 

$

 -

 

$

2,965

 

$

1,129,441

 

$

26,926

 

$

1,159,332

 

$

 -

 

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.

 

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.

 

13

 


 

Credit Quality Indicators by class of loans were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2015

 

 

 

 

Special

 

 

 

 

 

 

 

 

 

 

    

Pass

    

Mention

    

Substandard 1

    

Doubtful

    

Total

Commercial

 

$

124,831

 

$

6,414

 

$

698

 

$

-

 

$

131,943

Real estate - commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied general purpose

 

 

124,737

 

 

2,779

 

 

1,915

 

 

-

 

 

129,431

Owner occupied special purpose

 

 

171,862

 

 

1,338

 

 

790

 

 

-

 

 

173,990

Non-owner occupied general purpose

 

 

150,971

 

 

5,800

 

 

1,000

 

 

-

 

 

157,771

Non-owner occupied special purpose

 

 

92,865

 

 

4,021

 

 

 -

 

 

-

 

 

96,886

Retail Properties

 

 

39,506

 

 

1,510

 

 

 -

 

 

-

 

 

41,016

Farm

 

 

11,484

 

 

529

 

 

1,272

 

 

-

 

 

13,285

Real estate - construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Homebuilder

 

 

2,695

 

 

 -

 

 

 -

 

 

-

 

 

2,695

Land

 

 

2,573

 

 

 -

 

 

 -

 

 

-

 

 

2,573

Commercial speculative

 

 

2,286

 

 

 -

 

 

3,472

 

 

-

 

 

5,758

All other

 

 

20,651

 

 

 -

 

 

480

 

 

-

 

 

21,131

Real estate - residential

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investor

 

 

138,459

 

 

 -

 

 

975

 

 

-

 

 

139,434

Owner occupied

 

 

109,690

 

 

 -

 

 

7,051

 

 

-

 

 

116,741

Revolving and junior liens

 

 

106,334

 

 

188

 

 

3,292

 

 

-

 

 

109,814

Consumer

 

 

3,853

 

 

 -

 

 

1

 

 

-

 

 

3,854

All other

 

 

12,561

 

 

 -

 

 

 -

 

 

-

 

 

12,561

Total

 

$

1,115,358

 

$

22,579

 

$

20,946

 

$

 -

 

$

1,158,883

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2014

 

 

 

 

Special

 

 

 

 

 

 

 

 

 

 

    

Pass

    

Mention

    

Substandard 1

    

Doubtful

    

Total

Commercial

 

$

118,845

 

$

3,948

 

$

4,403

 

$

-

 

$

127,196

Real estate - commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied general purpose

 

 

124,936

 

 

253

 

 

7,476

 

 

-

 

 

132,665

Owner occupied special purpose

 

 

154,225

 

 

11,607

 

 

3,483

 

 

-

 

 

169,315

Non-owner occupied general purpose

 

 

148,212

 

 

3,235

 

 

6,788

 

 

-

 

 

158,235

Non-owner occupied special purpose

 

 

78,957

 

 

8,097

 

 

1,423

 

 

-

 

 

88,477

Retail Properties

 

 

36,779

 

 

1,001

 

 

 -

 

 

-

 

 

37,780

Farm

 

 

14,157

 

 

 -

 

 

 -

 

 

-

 

 

14,157

Real estate - construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Homebuilder

 

 

3,204

 

 

 -

 

 

 -

 

 

-

 

 

3,204

Land

 

 

1,658

 

 

 -

 

 

 -

 

 

-

 

 

1,658

Commercial speculative

 

 

9,947

 

 

 -

 

 

3,484

 

 

-

 

 

13,431

All other

 

 

25,941

 

 

 -

 

 

561

 

 

-

 

 

26,502

Real estate - residential

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investor

 

 

134,952

 

 

 -

 

 

2,263

 

 

-

 

 

137,215

Owner occupied

 

 

109,085

 

 

 -

 

 

7,343

 

 

-

 

 

116,428

Revolving and junior liens

 

 

112,647

 

 

188

 

 

3,713

 

 

-

 

 

116,548

Consumer

 

 

3,503

 

 

 -

 

 

1

 

 

-

 

 

3,504

All other

 

 

13,017

 

 

 -

 

 

 -

 

 

-

 

 

13,017

Total

 

$

1,090,065

 

$

28,329

 

$

40,938

 

$

 -

 

$

1,159,332

 

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

 

The Company did not have any repossessed assets reported in other assets as of June 30, 2015,  and December 31, 2014.  The Company had $3.2 million and $3.5 million residential assets in the process of foreclosure as of June 30, 2015,  and December 31, 2014, respectively.

 

14

 


 

Impaired loans by class of loans were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

As of June 30, 2015

 

June 30, 2015

 

 

 

 

 

Unpaid

 

 

 

 

Average

 

Interest

 

 

Recorded

 

Principal

 

Related

 

Recorded

 

Income

 

    

Investment

    

Balance

    

Allowance

    

Investment

    

Recognized

With no related allowance recorded

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

600

 

$

776

 

$

 -

 

$

1,050

 

$

 -

Commercial real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied general purpose

 

 

3,079

 

 

3,769

 

 

 -

 

 

5,102

 

 

39

Owner occupied special purpose

 

 

1,141

 

 

1,236

 

 

 -

 

 

1,470

 

 

12

Non-owner occupied general purpose

 

 

729

 

 

1,162

 

 

 -

 

 

2,780

 

 

 -

Non-owner occupied special purpose

 

 

 -

 

 

 -

 

 

 -

 

 

711

 

 

 -

Retail properties

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Farm

 

 

1,272

 

 

1,338

 

 

 -

 

 

636

 

 

 -

Construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Homebuilder

 

 

 -

 

 

 -

 

 

 -

 

 

896

 

 

 -

Land

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Commercial speculative

 

 

3,472

 

 

3,472

 

 

 -

 

 

1,736

 

 

 -

All other

 

 

229

 

 

287

 

 

 -

 

 

260

 

 

 -

Residential

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investor

 

 

1,519

 

 

1,864

 

 

 -

 

 

2,057

 

 

19

Owner occupied

 

 

11,435

 

 

12,894

 

 

 -

 

 

11,427

 

 

90

Revolving and junior liens

 

 

2,437

 

 

3,671

 

 

 -

 

 

2,337

 

 

2

Consumer

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Total impaired loans with no recorded allowance

 

 

25,913

 

 

30,469

 

 

 -

 

 

30,462

 

 

162

With an allowance recorded

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Commercial real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied general purpose

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Owner occupied special purpose

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Non-owner occupied general purpose

 

 

 -

 

 

 -

 

 

 -

 

 

38

 

 

 -

Non-owner occupied special purpose

 

 

177

 

 

293

 

 

 -

 

 

89

 

 

9

Retail properties

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Farm

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Homebuilder

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Land

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Commercial speculative

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

All other

 

 

251

 

 

294

 

 

27

 

 

260

 

 

 -

Residential

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investor

 

 

 -

 

 

 -

 

 

 -

 

 

68

 

 

 -

Owner occupied

 

 

13

 

 

56

 

 

22

 

 

18

 

 

 -

Revolving and junior liens

 

 

462

 

 

505

 

 

89

 

 

416

 

 

2

Consumer

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Total impaired loans with a recorded allowance

 

 

903

 

 

1,148

 

 

138

 

 

889

 

 

11

Total impaired loans

 

$

26,816

 

$

31,617

 

$

138

 

$

31,351

 

$

173

 

15

 


 

Impaired loans by class of loans were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

As of December 31, 2014

 

June 30, 2014

 

 

 

 

Unpaid 

 

 

 

Average 

 

Interest 

 

 

Recorded

 

Principal 

 

Related 

 

Recorded 

 

Income 

 

    

 Investment

    

Balance

    

Allowance

    

Investment

    

Recognized

With no related allowance recorded

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

1,500

 

$

2,114

 

$

-

 

$

24

 

$

 -

Commercial real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied general purpose

 

 

7,125

 

 

7,870

 

 

-

 

 

2,527

 

 

2

Owner occupied special purpose

 

 

1,798

 

 

1,941

 

 

-

 

 

3,151

 

 

 -

Non-owner occupied general purpose

 

 

4,831

 

 

5,653

 

 

-

 

 

5,964

 

 

30

Non-owner occupied special purpose

 

 

1,423

 

 

1,930

 

 

-

 

 

600

 

 

 -

Retail properties

 

 

 -

 

 

 -

 

 

-

 

 

3,078

 

 

 -

Farm

 

 

 -

 

 

 -

 

 

-

 

 

 -

 

 

 -

Construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Homebuilder

 

 

1,791

 

 

1,791

 

 

-

 

 

1,904

 

 

47

Land

 

 

 -

 

 

 -

 

 

-

 

 

209

 

 

 -

Commercial speculative

 

 

 -

 

 

 -

 

 

-

 

 

369

 

 

 -

All other

 

 

291

 

 

323

 

 

-

 

 

156

 

 

 -

Residential

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investor

 

 

2,595

 

 

3,024

 

 

-

 

 

4,294

 

 

1

Owner occupied

 

 

11,419

 

 

12,816

 

 

-

 

 

9,483

 

 

88

Revolving and junior liens

 

 

2,238

 

 

3,541

 

 

-

 

 

1,851

 

 

3

Consumer

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Total impaired loans with no recorded allowance

 

 

35,011

 

 

41,003

 

 

 -

 

 

33,610

 

 

171

With an allowance recorded

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Commercial real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied general purpose

 

 

 -

 

 

 -

 

 

 -

 

 

609

 

 

 -

Owner occupied special purpose

 

 

 -

 

 

 -

 

 

 -

 

 

2,450

 

 

 -

Non-owner occupied general purpose

 

 

76

 

 

76

 

 

21

 

 

745

 

 

 -

Non-owner occupied special purpose

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Retail properties

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Farm

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Homebuilder

 

 

 -

 

 

 -

 

 

 -

 

 

84

 

 

 -

Land

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Commercial speculative

 

 

 -

 

 

 -

 

 

 -

 

 

587

 

 

 -

All other

 

 

270

 

 

306

 

 

98

 

 

363

 

 

 -

Residential

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investor

 

 

135

 

 

145

 

 

24

 

 

960

 

 

 -

Owner occupied

 

 

23

 

 

65

 

 

38

 

 

1,028

 

 

7

Revolving and junior liens

 

 

371

 

 

405

 

 

97

 

 

914

 

 

 -

Consumer

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Total impaired loans with a recorded allowance

 

 

875

 

 

997

 

 

278

 

 

7,740

 

 

7

Total impaired loans

 

$

35,886

 

$

42,000

 

$

278

 

$

41,350

 

$

178

 

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

16

 


 

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.

 

TDRs that were modified during the period are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

TDR Modifications

 

TDR Modifications

 

 

 

Three Months Ended June 30, 2015

 

Six Months Ended June 30, 2015

 

 

 

# 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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bifurcate1

 

 -

 

$

 -

 

$

 -

 

1

 

$

300

 

$

177

 

Real estate - residential

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other2

 

1

 

 

46

 

 

45

 

3

 

 

404

 

 

414

 

Revolving and junior liens

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

HAMP3

 

4

 

 

233

 

 

233

 

4

 

 

233

 

 

233

 

 

 

5

 

$

279

 

$

278

 

8

 

$

937

 

$

824

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

TDR Modifications

 

TDR Modifications

 

 

 

Three Months Ended June 30, 2014

 

Six Months Ended June 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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other2

 

 -

 

$

 -

 

$

 -

 

2

 

$

1,320

 

$

1,159

 

Real estate - residential

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

HAMP3

 

 -

 

 

 -

 

 

 -

 

1

 

 

102

 

 

75

 

Deferral4

 

1

 

 

107

 

 

107

 

2

 

 

344

 

 

231

 

 

 

1

 

$

107

 

$

107

 

5

 

$

1,766

 

$

1,465

 

 

1  Bifurcate: Refers to an “A/B” restructure separated into two notes, charging off the entire B portion of the note.

2 Other: Change of terms from bankruptcy court

3 HAMP: Home Affordable Modification Program

4  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.  There was no TDR default activity for the three and six months ended June 30, 2015, and June 30, 2014, that  was restructured within the 12 month period prior to default.

 

 

17

 


 

Note 4 – Allowance for Loan Losses

 

Changes in the allowance for loan losses by segment of loans based on method of impairment for three and six months ending June 30, 2015, were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses:

 

 

 

Real Estate

 

Real Estate

 

Real Estate

 

 

 

 

 

 

 

   

Commercial

   

Commercial 

   

Construction

   

Residential

   

Consumer

   

Unallocated

   

Total

Three months ended June 30, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

1,512

 

$

14,033

 

$

1,272

 

$

1,917

 

$

1,417

 

$

1,030

 

$

21,181

Charge-offs

 

 

858

 

 

1,031

 

 

1

 

 

159

 

 

93

 

 

 -

 

 

2,142

Recoveries

 

 

83

 

 

965

 

 

61

 

 

403

 

 

70

 

 

 -

 

 

1,582

(Release) provision

 

 

895

 

 

(3,766)

 

 

(670)

 

 

(301)

 

 

(145)

 

 

1,687

 

 

(2,300)

Ending balance

 

$

1,632

 

$

10,201

 

$

662

 

$

1,860

 

$

1,249

 

$

2,717

 

$

18,321

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six months ended June 30, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

1,644

 

$

12,577

 

$

1,475

 

$

1,981

 

$

1,454

 

$

2,506

 

$

21,637

Charge-offs

 

 

890

 

 

1,526

 

 

2

 

 

777

 

 

211

 

 

 -

 

 

3,406

Recoveries

 

 

224

 

 

1,295

 

 

66

 

 

627

 

 

178

 

 

 -

 

 

2,390

(Release) provision

 

 

654

 

 

(2,145)

 

 

(877)

 

 

29

 

 

(172)

 

 

211

 

 

(2,300)

Ending balance

 

$

1,632

 

$

10,201

 

$

662

 

$

1,860

 

$

1,249

 

$

2,717

 

$

18,321

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance: Individually evaluated for impairment

 

$

 -

 

$

 -

 

$

27

 

$

111

 

$

 -

 

$

-

 

$

138

Ending balance: Collectively evaluated for impairment

 

$

1,632

 

$

10,201

 

$

635

 

$

1,749

 

$

1,249

 

$

2,717

 

$

18,183

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance

 

$

131,943

 

$

612,379

 

$

32,157

 

$

365,989

 

$

3,854

 

$

12,561

 

$

1,158,883

Ending balance: Individually evaluated for impairment

 

$

600

 

$

6,398

 

$

3,952

 

$

15,866

 

$

-

 

$

-

 

$

26,816

Ending balance: Collectively evaluated for impairment

 

$

131,343

 

$

605,981

 

$

28,205

 

$

350,123

 

$

3,854

 

$

12,561

 

$

1,132,067

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses:

 

 

 

Real Estate

 

Real Estate

 

Real Estate

 

 

 

 

 

 

 

   

Commercial

   

Commercial 

   

Construction

   

Residential

   

Consumer

   

Unallocated

   

Total

Three months ended June 30, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

2,326

 

$

14,066

 

$

1,998

 

$

2,268

 

$

1,495

 

$

3,323

 

$

25,476

Charge-offs

 

 

3

 

 

760

 

 

105

 

 

978

 

 

139

 

 

 -

 

 

1,985

Recoveries

 

 

35

 

 

87

 

 

467

 

 

689

 

 

87

 

 

 -

 

 

1,365

(Release) provision

 

 

(367)

 

 

(165)

 

 

(606)

 

 

394

 

 

21

 

 

(277)

 

 

(1,000)

Ending balance

 

$

1,991

 

$

13,228

 

$

1,754

 

$

2,373

 

$

1,464

 

$

3,046

 

$

23,856

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six months ended June 30, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

2,250

 

$

16,763

 

$

1,980

 

$

2,837

 

$

1,439

 

$

2,012

 

$

27,281

Charge-offs

 

 

7

 

 

1,089

 

 

173

 

 

1,827

 

 

249

 

 

 -

 

 

3,345

Recoveries

 

 

50

 

 

228

 

 

504

 

 

939

 

 

199

 

 

 -

 

 

1,920

(Release) provision

 

 

(302)

 

 

(2,674)

 

 

(557)

 

 

424

 

 

75

 

 

1,034

 

 

(2,000)

Ending balance

 

$

1,991

 

$

13,228

 

$

1,754

 

$

2,373

 

$

1,464

 

$

3,046

 

$

23,856

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance: Individually evaluated for impairment

 

$

 -

 

$

803

 

$

135

 

$

502

 

$

 -

 

$

 -

 

$

1,440

Ending balance: Collectively evaluated for impairment

 

$

1,991

 

$

12,425

 

$

1,619

 

$

1,871

 

$

1,464

 

$

3,046

 

$

22,416

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance

 

$

115,474

 

$

599,796

 

$

32,265

 

$

368,592

 

$

3,064

 

$

13,556

 

$

1,132,747

Ending balance: Individually evaluated for impairment

 

$

21

 

$

17,131

 

$

2,598

 

$

16,379

 

$

-

 

$

-

 

$

36,129

Ending balance: Collectively evaluated for impairment

 

$

115,453

 

$

582,665

 

$

29,667

 

$

352,213

 

$

3,064

 

$

13,556

 

$

1,096,618

 

 

18

 


 

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

 

Six Months Ended

 

 

    

June 30, 

    

June 30, 

  

Other real estate owned

    

2015

    

2014

    

2015

    

2014

 

Balance at beginning of period

 

$

35,461

 

$

40,220

 

$

31,982

 

$

41,537

 

Property additions

 

 

907

 

 

4,655

 

 

7,015

 

 

9,343

 

Property improvements

 

 

 -

 

 

131

 

 

 -

 

 

131

 

Less:

 

 

 

 

 

 

 

 

 

 

 

 

 

Property disposals, net of gains/losses

 

 

2,316

 

 

4,949

 

 

4,336

 

 

10,518

 

Period valuation adjustments

 

 

2,088

 

 

825

 

 

2,697

 

 

1,261

 

Balance at end of period

 

$

31,964

 

$

39,232

 

$

31,964

 

$

39,232

 

 

Activity in the valuation allowance was as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

2015

    

2014

    

2015

    

2014

  

Balance at beginning of period

 

$

19,456

 

$

19,484

 

$

19,229

 

$

22,284

 

Provision for unrealized losses

 

 

2,088

 

 

825

 

 

2,697

 

 

1,261

 

Reductions taken on sales

 

 

(1,568)

 

 

(2,436)

 

 

(1,950)

 

 

(5,083)

 

Other adjustments

 

 

93

 

 

 -

 

 

93

 

 

(589)

 

Balance at end of period

 

$

20,069

 

$

17,873

 

$

20,069

 

$

17,873

 

 

Expenses related to OREO, net of lease revenue includes:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

2015

    

2014

    

2015

    

2014

 

Gain on sales, net

 

$

(242)

 

$

(23)

 

$

(337)

 

$

(409)

 

Provision for unrealized losses

 

 

2,088

 

 

825

 

 

2,697

 

 

1,261

 

Operating expenses

 

 

749

 

 

1,011

 

 

1,750

 

 

2,248

 

Less:

 

 

 

 

 

 

 

 

 

 

 

 

 

Lease revenue

 

 

207

 

 

163

 

 

370

 

 

442

 

 

 

$

2,388

 

$

1,650

 

$

3,740

 

$

2,658

 

 

 

 

 

Note 6 – Deposits

 

Major classifications of deposits were as follows:

 

 

 

 

 

 

 

 

 

 

    

June 30, 2015

    

December 31, 2014

  

Noninterest bearing demand

 

$

432,773

 

$

400,447

 

Savings

 

 

251,307

 

 

239,845

 

NOW accounts

 

 

330,897

 

 

328,641

 

Money market accounts

 

 

295,383

 

 

296,617

 

Certificates of deposit of less than $100,000

 

 

242,870

 

 

251,108

 

Certificates of deposit of $100,000 through $250,000

 

 

109,204

 

 

112,515

 

Certificates of deposit of more than $250,000

 

 

51,118

 

 

55,882

 

 

 

$

1,713,552

 

$

1,685,055

 

 

 

 

19

 


 

Note 7 – Borrowings

 

The following table is a summary of borrowings as of June 30, 2015, and December 31, 2014.  Junior subordinated debentures are discussed in detail in Note 8:

 

 

 

 

 

 

 

 

 

 

    

June 30, 2015

    

December 31, 2014

  

Securities sold under repurchase agreements

 

$

32,415

 

$

21,036

 

FHLBC advances

 

 

20,000

 

 

45,000

 

Junior subordinated debentures

 

 

58,378

 

 

58,378

 

Subordinated debt

 

 

45,000

 

 

45,000

 

Notes payable and other borrowings

 

 

500

 

 

500

 

 

 

$

156,293

 

$

169,914

 

 

The Company enters into deposit sweep transactions where the transaction amounts are secured by pledged securities.  These transactions consistently mature overnight 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 $32.4 million at June 30, 2015, and $21.0 million at December 31, 2014. The fair value of the pledged collateral was $47.1 million at June 30, 2015 and $43.4 million at December 31, 2014.  At June 30, 2015, 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 June 30, 2015, the Bank had taken an advance of $20.0 million on the FHLBC stock valued at $3.5 million, collateralized by securities with a fair value of $74.3 million and loans with a principal balance of $46.8 million, which carry a FHLBC calculated combined collateral value of $121.5 million.  The Company has excess collateral of $100.2 million available to secure borrowings.  At December 31, 2014, the Bank had an advance of $45.0 million on FBLBC stock valued at $4.3 million.

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 June 30, 2015, and December 31, 2014.  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 June 30, 2015, and December 31, 2014, the Company was in compliance with all covenants contained within the credit 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.

 

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 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.

 

20

 


 

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 Income.  As of June 30, 2015, the Company is current on the payments due on these securities.

 

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 June 30, 2015, 125,000 shares remained available for issuance under the 2014 Plan.

Total compensation cost that has been charged for the Plans was $344,000 in the first half of 2015.

There were no stock options granted in the second quarter of 2015 and 2014 or for the first half of 2015 and 2014.  All stock options are granted for a term of ten years.  There were no stock options exercised during the second quarter of 2015 and 2014 or for the first half of 2015 and 2014.  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 six months ending June 30, 2015, is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-

 

 

 

 

 

 

 

Weighted

 

Average

 

 

 

 

 

 

 

Average

 

Remaining

 

 

 

 

 

 

 

Exercise

 

Contractual

 

Aggregate

 

    

Shares

    

Price

    

Term (years)

    

Intrinsic Value

 

 

 

 

 

 

 

 

 

 

 

Beginning outstanding

 

229,000

 

$

28.28

 

 

 

 

 

Canceled

 

 -

 

 

 -

 

 

 

 

 

Expired

 

 -

 

 

 -

 

 

 

 

 

Ending outstanding

 

229,000

 

$

28.28

 

1.7

 

$

-

 

 

 

 

 

 

 

 

 

 

 

Exercisable at end of period

 

229,000

 

$

28.28

 

1.7

 

$

-

 

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.

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 101,500 restricted awards issued under the Plans during the six months ending June 30, 2015.  There were 184,500 restricted awards issued during the six months ending June 30, 2014.  Compensation expense is recognized over the vesting period of the restricted award based on the market value of the award on the issue date.

 

21

 


 

A summary of changes in the Company’s unvested restricted awards for the six months ending June 30, 2015, is as follows:

 

 

 

 

 

 

 

 

 

June 30, 2015

 

 

 

 

Weighted

 

 

Restricted

 

Average

 

 

Stock Shares

 

Grant Date

 

    

and Units

    

Fair Value

Nonvested at January 1

 

325,000

 

$

4.15

Granted

 

101,500

 

 

5.38

Vested

 

(57,500)

 

 

4.04

Forfeited

 

(16,000)

 

 

4.43

Nonvested at June 30

 

353,000

 

$

4.51

 

Total unrecognized compensation cost of restricted awards was $989,000 as of June 30, 2015, which is expected to be recognized over a weighted-average period of 2.35 years.  Total unrecognized compensation cost of restricted awards was $1.1 million as of June 30, 2014, which was expected to be recognized over a weighted-average period of 2.71 years.

 

Note 10 – Earnings Per Share

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 

 

Six Months Ended June 30, 

 

    

2015

    

2014

    

2015

    

2014

Basic earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average common shares outstanding

 

 

29,475,682

 

 

28,181,519

 

 

29,473,004

 

 

21,090,665

Weighted-average common shares less stock based awards

 

 

29,475,682

 

 

28,181,519

 

 

29,473,004

 

 

21,086,438

Weighted-average common shares stock based awards

 

 

 -

 

 

179,874

 

 

 -

 

 

174,522

Net income

 

$

4,129

 

$

2,021

 

$

7,628

 

$

4,223

Gain on preferred stock redemption

 

 

 -

 

 

(1,348)

 

 

 -

 

 

(1,348)

Preferred stock dividends and accretion, net of dividends waived

 

 

710

 

 

(4,085)

 

 

1,534

 

 

(2,513)

Net earnings available to common stockholders

 

 

3,419

 

 

7,454

 

 

6,094

 

 

8,084

Basic earnings per share common undistributed earnings

 

 

N/A

 

 

0.26

 

 

N/A

 

 

0.38

Basic earnings per share

 

 

0.12

 

 

0.26

 

 

0.21

 

 

0.38

Diluted earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average common shares outstanding

 

 

29,475,682

 

 

28,181,519

 

 

29,473,004

 

 

21,090,665

Dilutive effect of nonvested restricted awards1

 

 

271,571

 

 

179,874

 

 

239,948

 

 

170,295

Diluted average common shares outstanding

 

 

29,747,253

 

 

28,361,393

 

 

29,712,952

 

 

21,260,960

Net earnings available to common stockholders

 

$

3,419

 

$

7,454

 

$

6,094

 

$

8,084

Diluted earnings per share

 

$

0.12

 

$

0.26

 

$

0.21

 

$

0.38

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

1,044,339

 

 

1,140,839

 

 

1,044,339

 

 

1,140,839

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

The above earnings per share calculation did not include a warrant for 815,339 shares of common stock, at an exercise price of $13.43,that was outstanding as of June 30, 2015, and June 30, 2014 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 Fixed Rate Cumulative Perpetual Preferred Stock, Series B (the “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 the 2014 redemption of the Series B Stock.  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 shares and the holders of the redeemed shares agreed to forebear payment of dividends due and waived 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.

 

22

 


 

On January 31, 2015, the Company redeemed 15,778 shares of its Series B Stock at a redemption price equal to the stated liquidation value of $1,000 per share, together with accrued and unpaid dividends accumulated to, but excluding, the redemption date. As of December 30, 2014, there were 47,331 shares of the Series B Stock outstanding, and redeeming one-third of the Series B Stock resulted in the redemption of 15,778 shares of Series B Stock.  The redemption was successfully completed in the first quarter.  As of June 30, 2015, 31,553 shares of the Series B Stock remained outstanding.

 

In July 2015, the Company announced that it would redeem the remaining 31,553 outstanding shares of Series B Stock on August 14, 2015 at the redemption price, equal to the stated liquidation value of $1,000 per share, together with any accrued and unpaid dividends accumulated to, but excluding, the redemption date.  Please see the Capital section of Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations capital section for further information on this topic.

 

 

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%).  At June 30, 2015, the Bank exceeded those thresholds.

 

At June 30, 2015, the Bank’s Tier 1 capital leverage ratio was 12.33%, up 31 basis points from December 31, 2014, and well above the 8.00% objective.  The Bank’s total capital ratio was 18.68%, down 5 basis points from December 31, 2014, and also well above the objective of 12.00%.

 

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 June 30, 2015, and December 31, 2014.

 

In July 2013, the U.S. federal banking authorities issued final rules (the “Basel III Rules”) establishing more stringent regulatory capital requirements for U.S. banking institutions, which went into effect on January 1, 2015.  A detailed discussion of the Basel III Rules is included in Part I, Item 1 of the Company’s Form 10-K for the year ended December 31, 2014, under the heading “Supervision and Regulation.”

 

At June 30, 2015, the Company, on a consolidated basis, exceeded the minimum thresholds to be considered “adequately capitalized” under current regulatory defined capital ratios.  For all periods prior to 2015, all capital ratios displayed were calculated without giving effect to the final Basel III capital rules.

 

23

 


 

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

 

June 30, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common equity tier 1 capital to risk weighted assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

$

141,573

 

9.78

%

 

$

65,141

 

4.50

%

 

 

N/A

 

N/A

 

Old Second Bank

 

 

252,436

 

17.42

 

 

 

65,210

 

4.50

 

 

$

94,193

 

6.50

%

Total capital to risk weighted assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

 

246,680

 

17.04

 

 

 

115,812

 

8.00

 

 

 

N/A

 

N/A

 

Old Second Bank

 

 

270,662

 

18.68

 

 

 

115,915

 

8.00

 

 

 

144,894

 

10.00

 

Tier 1 capital to risk weighted assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

 

204,856

 

14.15

 

 

 

86,865

 

6.00

 

 

 

N/A

 

N/A

 

Old Second Bank

 

 

252,436

 

17.42

 

 

 

86,947

 

6.00

 

 

 

115,929

 

8.00

 

Tier 1 capital to average assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

 

204,856

 

10.02

 

 

 

81,779

 

4.00

 

 

 

N/A

 

N/A

 

Old Second Bank

 

 

252,436

 

12.33

 

 

 

81,893

 

4.00

 

 

 

102,367

 

5.00

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total capital to risk weighted assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

$

240,566

 

17.68

%

 

$

108,853

 

8.00

%

 

 

N/A

 

N/A

 

Old Second Bank

 

 

254,897

 

18.73

 

 

 

108,872

 

8.00

 

 

$

136,090

 

10.00

%

Tier 1 capital to risk weighted assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

 

196,499

 

14.44

 

 

 

54,432

 

4.00

 

 

 

N/A

 

N/A

 

Old Second Bank

 

 

237,828

 

17.47

 

 

 

54,454

 

4.00

 

 

 

81,681

 

6.00

 

Tier 1 capital to average assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

 

196,499

 

9.93

 

 

 

79,154

 

4.00

 

 

 

N/A

 

N/A

 

Old Second Bank

 

 

237,828

 

12.02

 

 

 

79,144

 

4.00

 

 

 

98,930

 

5.00

 

 

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

 

The Company’s credit facility with a correspondent bank includes $45.0 million in subordinated debt.  That debt obligation qualifies at 40% and 60% of the original amount for Tier 2 regulatory capital at June 30, 2015 and December 31, 2014, 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.  At June 30, 2015 $51.2 million and $5.4 million of the trust preferred proceeds qualified as Tier 1 regulatory capital and Tier 2 regulatory capital, respectively. All $56.6 million of the trust preferred proceeds qualified as Tier 1 regulatory capital as of December 31, 2014.  All of the Series B Stock qualified as Tier 1 regulatory capital as of June 30, 2015, and December 31, 2014.  

 

Dividend Restrictions

 

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.  Pursuant to the Basel III rules that came into effect January 1, 2015, the Bank must keep a buffer of 0.625% for 2016, 1.25% for 2017, 1.875% for 2018, and 2.5% for 2019 and thereafter of Common Equity Tier 1 minimum requirement in order to avoid additional limitations on capital distributions.  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 June 30, 2015, 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.

 

 

24

 


 

Note 12 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 June 30, 2015 and 2014 there were no significant transfers between levels.

 

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.  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.

·

From December 31, 2013, to December 31, 2014, the Company utilized pricing data from a nationally recognized valuation firm providing specialized securities valuation services for auction rate asset-backed securities.  Beginning March 31, 2015, these securities are priced using market spreads, cash flows, prepayment speeds, and loss analytics.  Therefore, the valuations of auction rate asset-backed securities are considered Level 2 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 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

25

 


 

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 June 30, 2015, and December 31, 2014, respectively, measured by the Company at fair value on a recurring basis:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2015

 

    

Level 1

    

Level 2

    

Level 3

    

Total

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Investment securities available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury

 

$

1,520

 

$

 -

 

$

 -

 

$

1,520

U.S. government agencies

 

 

 -

 

 

1,595

 

 

 -

 

 

1,595

U.S. government agencies mortgage-backed

 

 

 -

 

 

5,545

 

 

 -

 

 

5,545

States and political subdivisions

 

 

 -

 

 

13,131

 

 

118

 

 

13,249

Corporate Bonds

 

 

 -

 

 

30,605

 

 

 -

 

 

30,605

Collateralized mortgage obligations

 

 

 -

 

 

74,994

 

 

 -

 

 

74,994

Asset-backed securities

 

 

 -

 

 

178,655

 

 

 -

 

 

178,655

Collateralized loan obligations

 

 

 -

 

 

93,673

 

 

 -

 

 

93,673

Loans held-for-sale

 

 

 -

 

 

6,208

 

 

 -

 

 

6,208

Mortgage servicing rights

 

 

 -

 

 

 -

 

 

5,884

 

 

5,884

Other assets (Interest rate swap agreements)

 

 

 -

 

 

28

 

 

 -

 

 

28

Other assets (Mortgage banking derivatives)

 

 

 -

 

 

257

 

 

 -

 

 

257

Total

 

$

1,520

 

$

404,691

 

$

6,002

 

$

412,213

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Other liabilities (Interest rate swap agreements)

 

$

 -

 

$

28

 

$

 -

 

$

28

Total

 

$

 -

 

$

28

 

$

 -

 

$

28

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2014

 

    

Level 1

    

Level 2

    

Level 3

    

Total

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Investment securities available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury

 

$

1,527

 

$

 -

 

$

 -

 

$

1,527

U.S. government agencies

 

 

 -

 

 

1,624

 

 

 -

 

 

1,624

States and political subdivisions

 

 

 -

 

 

21,900

 

 

118

 

 

22,018

Corporate bonds

 

 

 -

 

 

30,985

 

 

 -

 

 

30,985

Collateralized mortgage obligations

 

 

 -

 

 

63,627

 

 

 -

 

 

63,627

Asset-backed securities

 

 

 -

 

 

120,555

 

 

52,941

 

 

173,496

Collateralized loan obligations

 

 

 -

 

 

92,209

 

 

 -

 

 

92,209

Loans held-for-sale

 

 

 -

 

 

5,072

 

 

 -

 

 

5,072

Mortgage servicing rights

 

 

 -

 

 

 -

 

 

5,462

 

 

5,462

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

 

 

 -

 

 

30

 

 

 -

 

 

30

Other assets (Mortgage banking derivatives)

 

 

 -

 

 

143

 

 

 -

 

 

143

Total

 

$

1,527

 

$

336,145

 

$

58,521

 

$

396,193

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Other liabilities (Interest rate swap agreements)

 

$

 -

 

$

30

 

$

 -

 

$

30

Total

 

$

 -

 

$

30

 

$

 -

 

$

30

 

26

 


 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six months ended June 30, 2015

 

 

Securities available-for-sale

 

 

 

 

 

 

 

 

States and

 

Mortgage

 

 

Asset-

 

Political

 

Servicing

 

   

backed

   

Subdivisions

   

Rights

Beginning balance January 1, 2015

 

$

52,941

 

$

118

 

$

5,462

Transfers out of Level 3

 

 

(24,917)

 

 

 -

 

 

 -

Total gains or losses

 

 

 

 

 

 

 

 

 

Included in earnings (or changes in net assets)

 

 

(28)

 

 

 -

 

 

(137)

Included in other comprehensive income

 

 

(541)

 

 

 -

 

 

 -

Purchases, issuances, sales, and settlements

 

 

 

 

 

 

 

 

 

Issuances

 

 

 -

 

 

 -

 

 

935

Settlements

 

 

-

 

 

 -

 

 

(376)

Sales

 

 

(27,455)

 

 

-

 

 

-

Ending balance June 30, 2015

 

$

 -

 

$

118

 

$

5,884

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six months ended June 30, 2014

 

 

Securities available-for-sale

 

 

 

 

 

 

 

 

 

 

States and

 

Mortgage

 

Interest Rate

 

 

Asset-

 

Political

 

Servicing

 

Swap

 

    

backed

    

Subdivisions

    

Rights

    

Valuation

Beginning balance January 1, 2014

 

$

154,137

 

$

125

 

$

5,807

 

$

(6)

Total gains or losses

 

 

 

 

 

 

 

 

 

 

 

 

Included in earnings (or changes in net assets)

 

 

1,671

 

 

 -

 

 

(630)

 

 

6

Included in other comprehensive income

 

 

513

 

 

 -

 

 

 -

 

 

 -

Purchases, issuances, sales, and settlements

 

 

 

 

 

 

 

 

 

 

 

 

Purchases

 

 

58,047

 

 

 -

 

 

 -

 

 

 -

Issuances

 

 

 -

 

 

 -

 

 

324

 

 

 -

Settlements

 

 

-

 

 

 -

 

 

 -

 

 

-

Sales

 

 

(77,282)

 

 

-

 

 

-

 

 

-

Ending balance June 30, 2014

 

$

137,086

 

$

125

 

$

5,501

 

$

 -

 

The following table and commentary presents quantitative and qualitative information about Level 3 fair value measurements as of June 30, 2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted

Measured at fair value

 

 

 

 

 

 

Unobservable

 

 

 

Average

on a recurring basis:

   

Fair Value

   

Valuation Methodology

   

Inputs

   

Range of Input

   

of Inputs

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage Servicing rights

 

$

5,884

 

Discounted Cash Flow

 

Discount Rate

 

10.0-15.5%

 

10.2

%

 

 

 

 

 

 

 

Prepayment Speed

 

6.0-34.1%

 

9.7

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The following table and commentary presents quantitative and qualitative information about Level 3 fair value measurements as of December 31, 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

 

$

5,462 

 

Discounted Cash Flow

 

Discount Rate

 

9.7-108.2%

 

10.2 

%

 

 

 

 

 

 

 

Prepayment Speed

 

5.0-78.4%

 

10.9 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset-backed securities

 

 

52,941 

 

Discounted Cash Flow

 

Credit Risk Premium

 

0.9-0.9%

 

0.9 

%

 

 

 

 

 

with comparable transaction yields

 

Liquidity Discount

 

3.5-3.7%

 

3.6 

%

 

The $118,000 on the state and political subdivisions line at June 30, 2015, 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.

 

27

 


 

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 June 30, 2015, and December 31, 2014, respectively, the following tables provide the level of valuation assumptions used to determine each valuation and the carrying value of the related assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2015

 

    

Level 1

    

Level 2

    

Level 3

    

Total

Impaired loans1

 

$

 -

 

$

 -

 

$

451

 

$

451

Other real estate owned, net2

 

 

 -

 

 

 -

 

 

31,964

 

 

31,964

Total

 

$

 -

 

$

 -

 

$

32,415

 

$

32,415

 

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 $589,000, with a valuation allowance of $138,000 resulting in an increase of specific allocations within the allowance for loan losses of $140,000 for the six months ending June 30, 2015.

 

2   OREO is measured at the lower of carrying or fair value less costs to sell, and had a net carrying amount of $32.0 million, which is made up of the outstanding balance of $53.8 million, net of a valuation allowance of $20.1 million and participations of $1.7 million, at June 30, 2015.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2014

 

    

Level 1

    

Level 2

    

Level 3

    

Total

Impaired loans1

 

$

 -

 

$

 -

 

$

564

 

$

564

Other real estate owned, net2

 

 

 -

 

 

 -

 

 

31,982

 

 

31,982

Total

 

$

 -

 

$

 -

 

$

32,546

 

$

32,546

 

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 $842,000, with a valuation allowance of $278,000, resulting in a decrease of specific allocations within the provision for loan losses of $2.1 million for the year ending December 31, 2014.

 

2   OREO is measured at the lower of carrying or fair value less costs to sell, and had a net carrying amount of $32.0 million, which is made up of the outstanding balance of $53.0 million, net of a valuation allowance of $19.2 million and participations of $1.8 million, at December 31, 2014.

 

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.  Per contractual requirements with the correspondent financial institution, the Bank had $1.0 million in investment securities pledged to support interest rate swap activity with one correspondent financial institution at June 30, 2015.  The Bank had $3.0 million in investment securities pledged to support interest rate swap activity with three correspondent financial institutions at December 31, 2014.

28

 


 

 

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 June 30, 2015, the notional amount of non-hedging interest rate swaps was $9.8 million with a weighted average maturity of 2.7 years.  At December 31, 2014, the notional amount of non-hedging interest rate swaps was $16.3 million with a weighted average maturity of 2.7 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.

 

The following table presents derivatives not designated as hedging instruments as of June 30, 2015, 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

 

$

9,765

 

Other Assets

 

$

28

 

Other Liabilities

 

$

28

Commitments1

 

 

211,192

 

Other Assets

 

 

257

 

N/A

 

 

 -

Forward contracts2

 

 

20,500

 

N/A

 

 

 -

 

Other Liabilities

 

 

 -

Total

 

 

 

 

 

 

$

285

 

 

 

$

28

 

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, 2014.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

16,334

 

Other Assets

 

$

30

 

Other Liabilities

 

$

30

Commitments1

 

 

201,946

 

Other Assets

 

 

143

 

N/A

 

 

 -

Forward contracts2

 

 

14,000

 

N/A

 

 

 -

 

Other Liabilities

 

 

 -

Total

 

 

 

 

 

 

$

173

 

 

 

$

30

 

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 June 30, 2015, and December 31, 2014.

 

29

 


 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2015

 

December 31, 2014

 

 

    

Fixed

    

Variable

    

Total

    

Fixed

    

Variable

    

Total

  

Letters of credit:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Borrower:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial standby

 

$

55

 

$

3,697

 

$

3,752

 

$

55

 

$

4,745

 

$

4,800

 

Commercial standby

 

 

 -

 

 

47

 

 

47

 

 

 -

 

 

49

 

 

49

 

Performance standby

 

 

404

 

 

6,603

 

 

7,007

 

 

416

 

 

5,690

 

 

6,106

 

 

 

 

459

 

 

10,347

 

 

10,806

 

 

471

 

 

10,484

 

 

10,955

 

Non-borrower:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performance standby

 

 

 -

 

 

576

 

 

576

 

 

 -

 

 

572

 

 

572

 

 

 

 

 -

 

 

576

 

 

576

 

 

 -

 

 

572

 

 

572

 

Total letters of credit

 

$

459

 

$

10,923

 

$

11,382

 

$

471

 

$

11,056

 

$

11,527

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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, 2014, and 2013, 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 year 2014.  The Company redeemed $787,000 in April of 2015.  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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2015

 

 

Carrying

 

Fair

 

 

 

 

 

 

 

 

 

 

    

Amount

    

Value

    

Level 1

    

Level 2

    

Level 3

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

29,164

 

$

29,164

 

$

29,164

 

$

 -

 

$

 -

Interest bearing deposits with financial institutions

 

 

9,352

 

 

9,352

 

 

9,352

 

 

 -

 

 

 -

Securities available-for-sale

 

 

399,836

 

 

399,836

 

 

1,520

 

 

398,198

 

 

118

Securities held-to-maturity

 

 

253,419

 

 

257,967

 

 

 -

 

 

257,967

 

 

 -

FHLBC and Reserve Bank Stock

 

 

8,271

 

 

8,271

 

 

 -

 

 

8,271

 

 

 -

Bank-owned life insurance

 

 

57,444

 

 

57,444

 

 

 -

 

 

57,444

 

 

 -

Loans held-for-sale

 

 

6,208

 

 

6,208

 

 

 -

 

 

6,208

 

 

 -

Loans, net

 

 

1,140,562

 

 

1,147,129

 

 

 -

 

 

 -

 

 

1,147,129

Accrued interest receivable

 

 

4,192

 

 

4,192

 

 

 -

 

 

4,192

 

 

 -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest bearing deposits

 

$

432,773

 

$

432,773

 

$

432,773

 

$

 -

 

$

 -

Interest bearing deposits

 

 

1,280,779

 

 

1,282,979

 

 

 -

 

 

1,282,979

 

 

 -

Securities sold under repurchase agreements

 

 

32,415

 

 

32,415

 

 

 -

 

 

32,415

 

 

 -

Other short-term borrowings

 

 

20,000

 

 

20,000

 

 

 -

 

 

20,000

 

 

 -

Junior subordinated debentures

 

 

58,378

 

 

55,181

 

 

32,734

 

 

22,447

 

 

 -

Subordinated debenture

 

 

45,000

 

 

40,143

 

 

 -

 

 

40,143

 

 

 -

Note payable and other borrowings

 

 

500

 

 

432

 

 

 -

 

 

432

 

 

 -

Borrowing interest payable

 

 

75

 

 

75

 

 

 -

 

 

75

 

 

 -

Deposit interest payable

 

 

413

 

 

413

 

 

 -

 

 

413

 

 

 -

 

30

 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2014

 

 

Carrying

 

Fair

 

 

 

 

 

 

 

    

Amount

    

Value

    

Level 1

    

Level 2

    

Level 3

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

30,101

 

$

30,101

 

$

30,101

 

$

 -

 

$

 -

Interest bearing deposits with financial institutions

 

 

14,096

 

 

14,096

 

 

14,096

 

 

 -

 

 

 -

Securities available-for-sale

 

 

385,486

 

 

385,486

 

 

1,527

 

 

330,900

 

 

53,059

Securities held-to-maturity

 

 

259,670

 

 

263,266

 

 

 -

 

 

263,266

 

 

 -

FHLBC and Reserve Bank Stock

 

 

9,058

 

 

9,058

 

 

 -

 

 

9,058

 

 

 -

Bank-owned life insurance

 

 

56,807

 

 

56,807

 

 

 -

 

 

56,807

 

 

 -

Loans held-for-sale

 

 

5,072

 

 

5,072

 

 

 -

 

 

5,072

 

 

 -

Loans, net

 

 

1,137,695

 

 

1,151,223

 

 

 -

 

 

 -

 

 

1,151,223

Accrued interest receivable

 

 

4,888

 

 

4,888

 

 

 -

 

 

4,888

 

 

 -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest bearing deposits

 

$

400,447

 

$

400,447

 

$

400,447

 

$

 -

 

$

 -

Interest bearing deposits

 

 

1,284,608

 

 

1,284,887

 

 

 -

 

 

1,284,887

 

 

 -

Securities sold under repurchase agreements

 

 

21,036

 

 

21,036

 

 

 -

 

 

21,036

 

 

 -

Other short-term borrowings

 

 

45,000

 

 

45,000

 

 

 -

 

 

45,000

 

 

 -

Junior subordinated debentures

 

 

58,378

 

 

54,686

 

 

32,441

 

 

22,245

 

 

 -

Subordinated debenture

 

 

45,000

 

 

39,366

 

 

 -

 

 

39,366

 

 

 -

Note payable and other borrowings

 

 

500

 

 

422

 

 

 -

 

 

422

 

 

 -

Borrowing interest payable

 

 

75

 

 

75

 

 

 -

 

 

75

 

 

 -

Deposit interest payable

 

 

467

 

 

467

 

 

 -

 

 

467

 

 

 -

 

 

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, 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 prevented the Company from paying cash dividends or generally repurchasing its common stock while Series B Stock dividends were 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, or an aggregate of $24.3 million, and the holders of shares agreed to forebear payment of dividends due and waived any rights to such dividends upon redemption.  Following the redemption, the Company resumed accrual in the second quarter of 2014.

31

 


 

 

On December 30, 2014, the Company provided notice that it was redeeming approximately one-third of the issued and outstanding shares of the Company’s Series B Stock.  The effective date for the redemption was January 31, 2015, and the redemption price was the stated liquidation value of $1,000 per share, together with any accrued and unpaid dividends accumulated to, but excluding, the redemption date. As of December 30, 2014, there were 47,331 shares of the Series B Stock outstanding, and redeeming one-third of the Series B Stock resulted in the redemption of 15,778 shares of Series B Stock.  The redemption was successfully completed in the first quarter.  As of March 31, 2015, 31,553 shares of the Series B Stock remain outstanding.

 

At June 30, 2015, the Company carried $31.6 million of Series B Stock in total stockholders’ equity.  The Company carried $47.3 million and $72.9 million of Series B Stock in total stockholders’ equity at December 31, 2014, and December 31, 2013, respectively.  In July 2015, the Company announced that it would redeem the remaining 31,553 outstanding shares of Series B Stock on August 14, 2015 at the redemption price, equal to the stated liquidation value of $1,000 per share, together with any accrued and unpaid dividends accumulated to, but excluding, the redemption date.  Please see the Capital section of Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations capital section for further information on this topic.

 

 

 

 

 

32

 


 

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 June 30, 2015, as compared to December 31, 2014, and the results of operations for the three and six months ended June 30, 2015 and 2014.   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 2014 Form 10-K.  The results of operations for the quarter and six months ended June 30, 2015 are not necessarily indicative of future results.

 

Our exemplary community banking franchise has emerged from the difficult years following 2008 and is positioned for further success as an enduring entity.  We expect to work through difficult industry and regulatory developments which make it more challenging to attain the levels of profitability and growth we experienced prior to 2008.  However, as we look to provide value to our customers and the communities in which we operate, we still find steady but sluggish growth in our local markets similar to information discussed on the issues faced in the national economy.  While progress is being made, we see continued uncertainty and a widespread reluctance by individuals and businesses to invest for their growth.  As the Company’s residential mortgage business experienced strong performance in the first six months of 2015, our other services continued to encounter fierce competition in our chosen communities. 

 

Results of Operations

 

Management has remained vigilant in analyzing loan portfolio quality and making decisions to charge-off loans.  The second quarter review of the loan portfolio concluded that the reserve for loan and lease loss was adequate and appropriate for estimable losses at June 30, 2015.  A loan loss reserve release of $2.3 million was recorded in the second quarter of 2015.  This compared to a $1.3 million loan loss reserve release for the fourth quarter of 2014 and neither a provision nor a release in the first quarter of 2015.

Net income before taxes of $6.6 million in the second quarter of 2015 compares to $4.8 million for the fourth quarter of 2014 and $5.4 million in the first quarter of 2015.  When compared to the first quarter of 2015, the second quarter of 2015 reflected an improved level of net interest income, especially after the second quarter loan loss reserve release.  Noninterest income strengthened on higher residential mortgage revenue and several other smaller improvements.  Noninterest expense increased on a linked quarter basis largely on increased expenses related to OREO.

 

In the second quarter of 2015, earnings per share was $0.12 per diluted share on net income available to common stockholders of $3.4 million.  Earnings per share for the first quarter of 2015 was $0.09 per diluted share on $2.7 million of net income available to common stockholders.  All information reflects management actions to redeem outstanding Series B Stock (with resulting benefit in net income available to common stockholders) both in second quarter of last year and in the first quarter of 2015.

 

In June, the Bank announced that a branch in Batavia, Illinois would be closed as of September 30, 2015.  Management expects that closing this location will not have a material impact on future Bank performance.  Another existing branch, also in Batavia, is located near the branch that will be closed.

 

Net Interest Income

 

Net interest and dividend income increased $338,000 from $14.6 million for the quarter ended March 31, 2015, to $14.9 million for the quarter ended June 30, 2015.  Average earning assets for the second quarter of 2015 increased $28.3 million from the first quarter of 2015, or 1.6%, to a total of $1.86 billion,  reflecting increases in available-for-sale securities.  Average loans for the second quarter of 2015, including loans held-for-sale, increased $31.6 million when compared to the second quarter of 2014.

 

For the six month period, net interest income improved year over year by $2.3 million to a total of $29.5 million.  A modest $689,000 increase in interest income reflects higher interest and fees on loans somewhat offset by lower interest related revenue from the Company’s securities portfolio.  Interest expense reflects sharply lower interest on time deposits and lower interest expense on the Company’s junior subordinated debentures.

 

Management continues to develop loan pipelines and expects that pipeline volume will generate future loan growth.  As loan volume continues at a modest growth pace, management also increased available-for-sale securities during the six months ended June 30, 2015, by $14.4 million, or 3.7%.

 

33

 


 

The net interest margin (tax-equivalent basis), expressed as a percentage of average earning assets, decreased slightly from 3.26% in the first quarter of 2015 to 3.25% in the second quarter of 2015.  The average tax-equivalent yield on earning assets decreased from 3.71% in the first quarter of 2015 to 3.69% in the second quarter of 2015.  For the same comparative period, the cost of funds on interest bearing liabilities decreased from 0.63% to 0.61% providing a marginal 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 competitive pressure to reduce interest rates on loans retained at renewal.

 

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-month periods ended June 30, 2015,  March 31, 2015, and June 30, 2014.

 

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.

 

34

 


 

ANALYSIS OF AVERAGE BALANCES,

TAX EQUIVALENT INTEREST AND RATES

(In thousands - unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarters Ended

 

June 30, 2015

 

March 31, 2015

 

June 30, 2014

 

Average

 

 

 

 

Rate

 

Average

 

 

 

 

Rate

 

Average

 

 

 

 

Rate

 

Balance

 

Interest

 

%

 

Balance

 

Interest

 

%

 

Balance

 

Interest

 

%

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest bearing deposits with financial institutions

$

29,880

 

$

19

 

0.25

 

$

18,022

 

$

12

 

0.27

 

$

30,333

 

$

20

 

0.26

Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

635,469

 

 

3,372

 

2.12

 

 

615,299

 

 

3,375

 

2.19

 

 

628,766

 

 

3,352

 

2.13

Non-taxable (TE)

 

29,424

 

 

251

 

3.41

 

 

23,518

 

 

217

 

3.69

 

 

23,613

 

 

182

 

3.08

Total securities

 

664,893

 

 

3,623

 

2.18

 

 

638,817

 

 

3,592

 

2.25

 

 

652,379

 

 

3,534

 

2.17

Dividends from Reserve Bank and FHLBC stock

 

8,409

 

 

77

 

3.66

 

 

9,058

 

 

77

 

3.40

 

 

10,292

 

 

78

 

3.03

Loans and loans held-for-sale1

 

1,152,485

 

 

13,566

 

4.66

 

 

1,161,444

 

 

13,289

 

4.58

 

 

1,120,918

 

 

13,104

 

4.62

Total interest earning assets

 

1,855,667

 

 

17,285

 

3.69

 

 

1,827,341

 

 

16,970

 

3.71

 

 

1,813,922

 

 

16,736

 

3.66

Cash and due from banks

 

29,153

 

 

 -

 

 -

 

 

31,744

 

 

 -

 

 -

 

 

36,827

 

 

 -

 

 -

Allowance for loan losses

 

(20,546)

 

 

 -

 

 -

 

 

(21,605)

 

 

 -

 

 -

 

 

(25,146)

 

 

 -

 

 -

Other noninterest bearing assets

 

219,239

 

 

 -

 

 -

 

 

218,544

 

 

 -

 

 -

 

 

233,369

 

 

 -

 

 -

Total assets

$

2,083,513

 

 

 

 

 

 

$

2,056,024

 

 

 

 

 

 

$

2,058,972

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NOW accounts

$

334,694

 

$

73

 

0.09

 

$

338,385

 

$

72

 

0.09

 

$

309,380

 

$

65

 

0.08

Money market accounts

 

296,872

 

 

71

 

0.10

 

 

298,324

 

 

70

 

0.10

 

 

309,843

 

 

83

 

0.11

Savings accounts

 

254,243

 

 

39

 

0.06

 

 

245,005

 

 

37

 

0.06

 

 

242,512

 

 

40

 

0.07

Time deposits

 

410,066

 

 

771

 

0.75

 

 

418,615

 

 

807

 

0.78

 

 

457,818

 

 

1,210

 

1.06

Interest bearing deposits

 

1,295,875

 

 

954

 

0.30

 

 

1,300,329

 

 

986

 

0.31

 

 

1,319,553

 

 

1,398

 

0.42

Securities sold under repurchase agreements

 

31,234

 

 

 -

 

 -

 

 

23,437

 

 

1

 

0.02

 

 

25,224

 

 

 -

 

 -

Other short-term borrowings

 

22,638

 

 

7

 

0.12

 

 

25,722

 

 

8

 

0.12

 

 

8,681

 

 

3

 

0.14

Junior subordinated debentures

 

58,378

 

 

1,071

 

7.34

 

 

58,378

 

 

1,072

 

7.35

 

 

58,378

 

 

1,388

 

9.51

Subordinated debt

 

45,000

 

 

202

 

1.78

 

 

45,000

 

 

197

 

1.75

 

 

45,000

 

 

198

 

1.74

Notes payable and other borrowings

 

500

 

 

 -

 

 -

 

 

500

 

 

4

 

3.20

 

 

500

 

 

4

 

3.16

Total interest bearing liabilities

 

1,453,625

 

 

2,234

 

0.61

 

 

1,453,366

 

 

2,268

 

0.63

 

 

1,457,336

 

 

2,991

 

0.82

Noninterest bearing deposits

 

435,093

 

 

 -

 

 -

 

 

405,933

 

 

 -

 

 -

 

 

389,926

 

 

 -

 

 -

Other liabilities

 

10,962

 

 

 -

 

 -

 

 

11,734

 

 

 -

 

 -

 

 

19,210

 

 

 -

 

 -

Stockholders' equity

 

183,833

 

 

 -

 

 -

 

 

184,991

 

 

 -

 

 -

 

 

192,500

 

 

 -

 

 -

Total liabilities and stockholders' equity

$

2,083,513

 

 

 

 

 

 

$

2,056,024

 

 

 

 

 

 

$

2,058,972

 

 

 

 

 

Net interest income (TE)

 

 

 

$

15,051

 

 

 

 

 

 

$

14,702

 

 

 

 

 

 

$

13,745

 

 

Net interest income (TE)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

to total earning assets

 

 

 

 

 

 

3.25

 

 

 

 

 

 

 

3.26

 

 

 

 

 

 

 

3.04

Interest bearing liabilities to earning assets

 

78.33

%

 

 

 

 

 

 

79.53

%

 

 

 

 

 

 

80.34

%

 

 

 

 

 

(1).Interest income from loans is shown on a TE basis as discussed below and includes fees of $463,000,  $486,000 and $563,000 for the second quarter of 2015, the first quarter of 2015 and the second quarter of 2014, respectively.  Nonaccrual loans are included in the above-stated average balances.

 

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

 

 

 

June 30, 

 

March 31, 

 

June 30, 

 

 

    

2015

    

2015

 

2014

 

Net Interest Margin

 

 

 

 

 

 

 

 

 

 

Interest income (GAAP)

 

$

17,170

 

$

16,866

 

$

16,643

 

Taxable-equivalent adjustment:

 

 

 

 

 

 

 

 

 

 

Loans

 

 

27

 

 

28

 

 

29

 

Securities

 

 

88

 

 

76

 

 

64

 

Interest income - TE

 

 

17,285

 

 

16,970

 

 

16,736

 

Interest expense (GAAP)

 

 

2,234

 

 

2,268

 

 

2,991

 

Net interest income -TE

 

$

15,051

 

$

14,702

 

$

13,745

 

Net interest income  (GAAP)

 

$

14,936

 

$

14,598

 

$

13,652

 

Average interest earning assets

 

$

1,855,667

 

$

1,827,341

 

$

1,813,922

 

Net interest margin (GAAP)

 

 

3.23

%

 

3.24

%

 

3.02

%

Net interest margin - TE

 

 

3.25

%

 

3.26

%

 

3.04

%

 

 

35

 


 

Asset Quality

 

The Company recorded a loan loss reserve release of $2.3 million in the second quarter of 2015.  By comparison, the Company recognized neither a loan loss provision nor a loan loss reserve release in the first quarter of 2015.  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 decreased to $19.3 million at June 30, 2015 from $23.4 million at March 31, 2015, and $28.9 million at June 30, 2015.  The sequential quarter decrease in 2015 is driven by a management decision to sell loans and a small number of properties that migrated to OREO.  Net charge-offs totaled $560,000 in the second quarter of 2015 while net charge-offs totaled $620,000 for the second quarter of 2014.  The distribution of the Company’s remaining nonperforming loans is included in the following table.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2015

 

 

Nonperforming Loans as of

 

Percent Change From

 

(In thousands)

June 30, 

 

March 31, 

 

December 31, 

 

March 31, 

 

December 31, 

 

 

2015

 

2015

 

2014

 

2015

 

2014

 

Real estate-construction

$

3,952

 

$

501

 

$

561

 

688.8

 

 

604.5

 

 

Real estate-residential:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investor

 

792

 

 

1,160

 

 

1,942

 

(31.7)

 

 

(59.2)

 

 

Owner occupied

 

6,534

 

 

7,007

 

 

6,818

 

(6.8)

 

 

(4.2)

 

 

Revolving and junior liens

 

2,699

 

 

2,638

 

 

2,551

 

2.3

 

 

5.8

 

 

Real estate-commercial, nonfarm

 

3,435

 

 

8,784

 

 

13,708

 

(60.9)

 

 

(74.9)

 

 

Real estate-commercial, farm

 

1,272

 

 

1,370

 

 

 -

 

(7.2)

 

 

 -

 

 

Commercial

 

600

 

 

1,897

 

 

1,500

 

(68.4)

 

 

(60.0)

 

 

Other

 

 -

 

 

 -

 

 

 -

 

 -

 

 

 -

 

 

 

$

19,284

 

$

23,357

 

$

27,080

 

(17.4)

 

 

(28.8)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nonperforming loans consist of nonaccrual loans, nonperforming restructured accruing loans and loans 90 days or greater past due.  Remediation work continues in all segments.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loan Charge-offs, net of recoveries

Three Months Ended

(In thousands)

June 30, 

 

% of

 

March 31, 

 

% of

 

December 31, 

 

% of

 

2015

 

Total

 

2015

 

Total

 

2014

 

Total

Real estate-construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Homebuilder

$

(47)

 

(8.4)

 

$

 -

 

 -

 

$

(109)

 

(27.7)

Land

 

(2)

 

(0.4)

 

 

(3)

 

(0.7)

 

 

(14)

 

(3.6)

Commercial speculative

 

 -

 

 -

 

 

 -

 

 -

 

 

 -

 

 -

All other

 

(11)

 

(2.0)

 

 

(1)

 

(0.2)

 

 

(3)

 

(0.8)

Total real estate-construction

 

(60)

 

(10.8)

 

 

(4)

 

(0.9)

 

 

(126)

 

(32.1)

Real estate-residential

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investor

 

(104)

 

(18.6)

 

 

(11)

 

(2.4)

 

 

(23)

 

(5.9)

Owner occupied

 

(25)

 

(4.5)

 

 

67

 

14.7

 

 

(9)

 

(2.3)

Revolving and junior liens

 

(115)

 

(20.5)

 

 

338

 

74.1

 

 

416

 

105.9

Total real estate-residential

 

(244)

 

(43.6)

 

 

394

 

86.4

 

 

384

 

97.7

Real estate-commercial, nonfarm

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner general purpose

 

709

 

126.6

 

 

495

 

108.6

 

 

14

 

3.6

Owner special purpose

 

109

 

19.5

 

 

(4)

 

(0.9)

 

 

111

 

28.2

Non-owner general purpose

 

(915)

 

(163.4)

 

 

(326)

 

(71.5)

 

 

(34)

 

(8.6)

Non-owner special purpose

 

163

 

29.1

 

 

 -

 

 -

 

 

10

 

2.5

Retail properties

 

 -

 

 -

 

 

 -

 

 -

 

 

(3)

 

(0.8)

Total real estate-commercial, nonfarm

 

66

 

11.8

 

 

165

 

36.2

 

 

98

 

24.9

Real estate-commercial, farm

 

 -

 

 -

 

 

 -

 

 -

 

 

 -

 

 -

Commercial

 

775

 

138.4

 

 

(109)

 

(23.9)

 

 

57

 

14.5

Other

 

23

 

4.20

 

 

10

 

2.2

 

 

(20)

 

(5.0)

Total

$

560

 

100.0

 

$

456

 

100.0

 

$

393

 

100.0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

36

 


 

Charge-offs for the second quarter of 2015 were predominately from previously established specific reserves on nonaccrual loans deemed uncollectible.  Gross charge-offs for the second quarter of 2015 were $2.1 million compared to $2.0 million for the second quarter of 2014 reflecting our efforts to improve loan quality in improved but still challenging markets.  Recoveries were $1.6 million and $1.4 million for the same time periods, respectively.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2015

 

 

Classified Loans as of

 

Percent Change From

 

(In thousands)

June 30, 

 

March 31, 

 

December 31, 

 

March 31, 

 

December 31, 

 

 

2015

 

2015

 

2014

 

2015

 

2014

 

Real estate-construction

$

3,952

 

$

3,973

 

$

4,045

 

(0.5)

 

 

(2.3)

 

 

Real estate-residential:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investor

 

975

 

 

1,175

 

 

2,263

 

(17.0)

 

 

(56.9)

 

 

Owner occupied

 

7,051

 

 

7,529

 

 

7,343

 

(6.3)

 

 

(4.0)

 

 

Revolving and junior liens

 

3,292

 

 

3,234

 

 

3,713

 

1.8

 

 

(11.3)

 

 

Real estate-commercial, nonfarm

 

3,705

 

 

14,203

 

 

19,170

 

(73.9)

 

 

(80.7)

 

 

Real estate-commercial, farm

 

1,272

 

 

1,370

 

 

 -

 

(7.2)

 

 

 -

 

 

Commercial

 

698

 

 

4,936

 

 

4,403

 

(85.9)

 

 

(84.1)

 

 

Other

 

1

 

 

1

 

 

1

 

 -

 

 

 -

 

 

 

$

20,946

 

$

36,421

 

$

40,938

 

(42.5)

 

 

(48.8)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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.  Classified loans in the second quarter were reduced by a management directed loan sale and continued credit quality management work.

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.  Beginning in 2015, for the quarter end ratio calculation, management has applied the capital rules as announced effective January 1, 2015, also known as the Basel III regulations, to calculate the Bank Tier 1 capital portion of this ratio.  This ratio ended at 19.5% for the quarter ended June 30, 2015.

 

37

 


 

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

 

 

 

June 30, 

 

March 31, 

 

December 31, 

 

 

2015

 

2015

 

2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance at beginning of quarter

$

21,181

 

 

$

21,637

 

 

$

23,330

 

 

Charge-offs:

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

858

 

 

 

32

 

 

 

59

 

 

Real estate - commercial

 

1,031

 

 

 

495

 

 

 

338

 

 

Real estate - construction

 

1

 

 

 

1

 

 

 

 -

 

 

Real estate - residential

 

159

 

 

 

618

 

 

 

641

 

 

Consumer and other loans

 

93

 

 

 

118

 

 

 

103

 

 

Total charge-offs

 

2,142

 

 

 

1,264

 

 

 

1,141

 

 

Recoveries:

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

83

 

 

 

141

 

 

 

2

 

 

Real estate - commercial

 

965

 

 

 

330

 

 

 

240

 

 

Real estate - construction

 

61

 

 

 

5

 

 

 

126

 

 

Real estate - residential

 

403

 

 

 

224

 

 

 

257

 

 

Consumer and other loans

 

70

 

 

 

108

 

 

 

123

 

 

Total recoveries

 

1,582

 

 

 

808

 

 

 

748

 

 

Net charge-offs (recoveries)

 

560

 

 

 

456

 

 

 

393

 

 

Loan loss reserve release

 

(2,300)

 

 

 

 -

 

 

 

(1,300)

 

 

Allowance at end of period

$

18,321

 

 

$

21,181

 

 

$

21,637

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

1,144,605

 

 

 

1,156,662

 

 

 

1,141,297

 

 

Net charge-offs to average loans

 

0.05

%

 

 

0.04

%

 

 

0.03

%

 

Allowance at period end to average loans

 

1.60

%

 

 

1.83

%

 

 

1.90

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance: Individually evaluated for impairment

$

138

 

 

$

1,784

 

 

$

278

 

 

Ending balance: Collectively evaluated for impairment

$

18,183

 

 

$

19,397

 

 

$

21,359

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The coverage ratio of the allowance for loan losses to nonperforming loans was 95.0% as of June 30, 2015, up from 90.7% as of March 31, 2015, and 79.9% as of December 31, 2014.   Management updated the estimated specific allocations in the second quarter of 2015 after receiving more recent appraisals of collateral or information on cash flow trends related to the impaired credits.  Management directed loan sales also reduced specific allocations at June 30, 2015.  These allocation updates and loan sales resulted in a slightly lower amount required in the reserve for estimable losses on these credits at the end of the second quarter of 2015 compared to year end 2014 and sharply lower when compared to period end March 31, 2015. The estimated general risk allocation was also sharply lower when compared to March 31, 2015, and December 31, 2014.  The third component of the Company’s loan loss reserve analysis reflects management factors applied to loans by type and showed lower required reserves when compared to December 31, 2014, and March 31, 2015.  After a review of the adequacy of the loan loss reserve at June 30, 2015, management concluded that, for the second quarter of 2015 a loan loss reserve release of $2.3 million was appropriate.  When measured as a percentage of loans outstanding, the total allowance for loan losses decreased from 1.9% of total loans as of December 31, 2014, to 1.6% of total loans at June 30, 2015.  In management’s judgment, an adequate  allowance for estimated losses has been established for inherent losses at June 30, 2015. However, there can be no assurance that actual losses will not exceed the estimated amounts in the future.

 

38

 


 

Other Real Estate Owned

 

OREO at June 30, 2015, was essentially unchanged from $32.0 million at December 31, 2014.  New additions to the OREO portfolio in second quarter of 2015 were modest while valuation writedowns continued with an expense of $2.1 million in the quarter.  OREO at June 30, 2014 was $39.2 million.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2015

 

Three Months Ended

 

Percent Change From

(in thousands)

June 30, 

 

March 31, 

 

December 31, 

 

March 31, 

 

December 31, 

 

2015

 

2015

 

2014

 

2015

 

2014

Beginning balance

$

35,461

 

$

31,982

 

$

40,877

 

10.9

 

 

(13.2)

 

Property additions

 

907

 

 

6,108

 

 

2,458

 

(85.2)

 

 

(63.1)

 

Property improvements

 

 -

 

 

 -

 

 

157

 

 -

 

 

(100.0)

 

Less:

 

 

 

 

 

 

 

 

 

 -

 

 

 -

 

Property disposals

 

2,316

 

 

2,020

 

 

9,732

 

14.7

 

 

(76.2)

 

Period valuation adjustments

 

2,088

 

 

609

 

 

1,778

 

242.9

 

 

17.4

 

Other real estate owned

$

31,964

 

$

35,461

 

$

31,982

 

(9.9)

 

 

(0.1)

 

 

The OREO valuation reserve was $20.1 million, which was 38.6% of gross OREO at June 30, 2015.  The valuation reserve represented 31.3% and 37.5% of gross OREO at June 30, 2014, and December 31, 2014, 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, properties valued in total at $2.5 million, or approximately 7.9%, of total OREO at June 30, 2015, have been in OREO for five years or more.

 

OREO Properties by Type

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

June 30, 2015

 

 

March 31, 2015

 

December 31, 2014

 

 

 

Amount

 

% of Total

 

 

Amount

 

% of Total

 

 

Amount

 

% of Total

Single family residence

$

2,381

 

7

%

 

$

3,113

 

9

%

 

$

2,621

 

8

%

Lots (single family and commercial)

 

12,629

 

39

%

 

 

13,407

 

38

%

 

 

13,235

 

41

%

Vacant land

 

2,437

 

8

%

 

 

2,725

 

8

%

 

 

2,725

 

9

%

Multi-family

 

2,526

 

8

%

 

 

2,337

 

6

%

 

 

1,549

 

5

%

Commercial property

 

11,991

 

38

%

 

 

13,879

 

39

%

 

 

11,852

 

37

%

Total OREO properties

$

31,964

 

100

%

 

$

35,461

 

100

%

 

$

31,982

 

100

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2nd Qtr 2015

 

 

 

Three Months Ended

 

Percent Change From

 

(in thousands)

 

2nd Qtr

 

1st Qtr

 

2nd Qtr

 

1st Qtr

 

2nd Qtr

 

 

    

2015

    

2015

    

2014

    

2015

    

2014

 

Trust income

 

$

1,596

 

$

1,486

 

$

1,677

 

7.4

 

(4.8)

 

Service charges on deposits

 

 

1,779

 

 

1,541

 

 

1,796

 

15.4

 

(0.9)

 

Residential mortgage banking revenue

 

 

2,476

 

 

1,659

 

 

1,257

 

49.2

 

97.0

 

Securities (loss) gains, net

 

 

(12)

 

 

(109)

 

 

295

 

89.0

 

(104.1)

 

Increase in cash surrender value of bank-owned life insurance

 

 

283

 

 

354

 

 

366

 

(20.1)

 

(22.7)

 

Debit card interchange income

 

 

1,050

 

 

959

 

 

930

 

9.5

 

12.9

 

Other income

 

 

1,092

 

 

2,083

 

 

1,160

 

(47.6)

 

(5.9)

 

Total noninterest income

 

$

8,264

 

$

7,973

 

$

7,481

 

3.6

 

10.5

 

 

As shown above, noninterest income experienced no significant linked quarter improvements in the second quarter of 2015 except for residential mortgage banking revenue.  The Company experienced strong mortgage loan origination results in the quarter.  Management operated effectively in a favorable market environment.  The first quarter of 2015 other noninterest income includes a nonrecurring incentive payment of $917,000 from a service provider in a long term mutually productive relationship with Old Second.  This category for first quarter also reflects the death benefit realized on a life insurance policy held by the Bank.  Year over year noninterest income increased approximately 10.5%.  For the six month period, total noninterest income improved to $16.2 million in 2015 from $13.8 million in 2014 on the nonrecurring incentive payment mentioned above and sharply improved residential mortgage banking revenues.

39

 


 

 

Noninterest Expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2nd Qtr 2015

 

 

 

Three Months Ended

 

Percent  Change From

 

(in thousands)

 

2nd Qtr

 

1st Qtr

 

2nd Qtr

 

1st Qtr

 

2nd Qtr

 

 

    

2015

    

2015

    

2014

    

2015

    

2014

 

Salaries

 

$

7,292

 

$

7,157

 

$

7,128

 

1.9

 

2.3

 

Bonus

 

 

454

 

 

417

 

 

592

 

8.9

 

(23.3)

 

Benefits and other

 

 

1,403

 

 

1,681

 

 

1,463

 

(16.5)

 

(4.1)

 

Total salaries and employee benefits

 

 

9,149

 

 

9,255

 

 

9,183

 

(1.1)

 

(0.4)

 

Occupancy expense, net

 

 

1,094

 

 

1,271

 

 

1,185

 

(13.9)

 

(7.7)

 

Furniture and equipment expense

 

 

1,065

 

 

1,001

 

 

984

 

6.4

 

8.2

 

FDIC insurance

 

 

377

 

 

273

 

 

627

 

38.1

 

(39.9)

 

General bank insurance

 

 

310

 

 

357

 

 

343

 

(13.2)

 

(9.6)

 

Amortization of core deposit intangible asset

 

 

 -

 

 

 -

 

 

511

 

N/A

 

(100.0)

 

Advertising expense

 

 

353

 

 

205

 

 

459

 

72.2

 

(23.1)

 

Debit card interchange expense

 

 

400

 

 

352

 

 

412

 

13.6

 

(2.9)

 

Legal fees

 

 

420

 

 

223

 

 

409

 

88.3

 

2.7

 

Other real estate owned expense, net

 

 

2,388

 

 

1,352

 

 

1,650

 

76.6

 

44.7

 

Other expense

 

 

3,371

 

 

2,864

 

 

3,289

 

17.7

 

2.5

 

Total noninterest expense

 

$

18,927

 

$

17,153

 

$

19,052

 

10.3

 

(0.7)

 

Efficiency ratio (defined below)

 

 

70.44

%

 

68.77

%

 

79.95

%

 

 

 

 

 

The efficiency ratio shown in the table above is calculated as noninterest expense excluding core deposit intangible amortization and OREO expenses divided by the sum of net interest income on a fully tax equivalent basis, total noninterest income less net gains and losses on securities and with a tax equivalent adjustment on the increase in cash surrender value of bank-owned life insurance.

Noninterest expense increased on a linked quarter basis primarily on sharply higher OREO valuation expense.  Expenses were flat or down in second quarter 2015 compared to the same period in 2014 for most categories, excluding total OREO expense.  OREO expense in the second quarter of 2015 reflects an elevated level of valuation expense.  Year over year total noninterest expense was essentially unchanged with 2015 reflecting no expense from the now fully amortized core deposit intangible asset.  For the six month period, total noninterest expense of $36.1 million in 2015 compares to $36.6 million in 2014.  The 2014 total includes $1.0 million in amortization of the now fully amortized core deposit intangible where 2015 includes an increase of $1.1 million in OREO expenses, net.

 

 

Income Taxes

 

The Company recorded a tax expense of $2.4 million on $6.6 million pre-tax income for the second quarter of 2015.  For the six months ended June 30, 2015, tax expense was composed of $157,000 in current income tax expense and $4.2 million in deferred income tax expense.

There have been no significant changes in the Company’s ability to utilize the deferred tax assets through June 30, 2015. The Company has no valuation reserve on the deferred tax assets as of June 30, 2015.

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 decreased $32.5 million from March 31, 2015, to $2.07 billion at June 30, 2015, primarily due to lower cash and cash equivalent balances.  Total assets at June 30, 2015, are essentially unchanged from $2.06 billion at December 31, 2014, and $2.05 billion at June 30, 2015.  Loans increased by $7.8 million, or 0.7% in three months ended June 30, 2015, and were unchanged from

40

 


 

$1.16 billion at December 31, 2014, as management continued to emphasize credit quality under an overarching relationship lending program.  Loans improved from $1.13 billion at June 30, 2014.  During the six months ended June 30, 2015, loan balances were reduced by net loan charge-off activity and the movement to OREO of collateral that previously secured loans.  OREO was essentially unchanged at $32.0 million at June 30, 2015, compared to December 31, 2014 and down from $39.2 million at June 30, 2014.  Available-for-sale securities increased by $14.4 million while held-to-maturity securities decreased $6.3 million in the six months ending June 30, 2015.  Notably, available-for-sale securities are up sharply from $329.8 million at June 30, 2014.

 

Loans

 

Total loans were $1.16 billion as of June 30, 2015, and December 31, 2014.  Total loans increased from $1.15 billion at March 31, 2015.  Loan portfolio activity in second quarter reflects growth in commercial lending offset by declines in other portfolio segments, notably real estate construction.  The second quarter of 2015 also reflects management directed loan sales.  Challenging economic circumstances, restricted demand and an intensely competitive environment served to temper overall loan growth.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2015

 

Major Classification of Loans as of

 

Percent Change From

(in thousands)

June 30, 

 

March 31, 

 

December 31, 

 

March 31, 

 

December 31, 

 

2015

 

2015

 

2014

 

2015

    

2014

Commercial

$

123,372

 

$

114,241

 

$

119,158

 

8.0

 

3.5

Real estate - commercial

 

612,379

 

 

608,267

 

 

600,629

 

0.7

 

2.0

Real estate - construction

 

32,157

 

 

39,430

 

 

44,795

 

(18.4)

 

(28.2)

Real estate - residential

 

365,989

 

 

363,967

 

 

370,191

 

0.6

 

(1.1)

Consumer

 

3,854

 

 

3,495

 

 

3,504

 

10.3

 

10.0

Overdraft

 

408

 

 

368

 

 

649

 

10.9

 

(37.1)

Lease financing receivables

 

8,571

 

 

8,651

 

 

8,038

 

(0.9)

 

6.6

Other

 

11,391

 

 

11,945

 

 

11,630

 

(4.6)

 

(2.1)

 

 

1,158,121

 

 

1,150,364

 

 

1,158,594

 

0.7

 

(0.0)

Net deferred loan costs

 

762

 

 

705

 

 

738

 

8.1

 

3.3

 

$

1,158,883

 

$

1,151,069

 

$

1,159,332

 

0.7

 

(0.0)

 

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 continue to experience the economic headwinds that have been subject of extensive discussion on state, national and international levels.  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 87.2% of the portfolio as of June 30, 2015, compared to 87.6% of the portfolio as of December 31, 2014.  The Company continues to oversee and manage its loan portfolio in accordance with interagency guidance on risk management.

Securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2015

(in thousands)

 

Securities Portfolio as of

 

Percent Change From

 

 

June 30, 

 

March 31, 

 

December 31, 

 

March 31, 

 

December 31, 

 

    

2015

    

2015

    

2014

    

2015

    

2014

Securities available-for-sale, at fair value

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury

 

$

1,520

 

$

1,525

 

$

1,527

 

(0.3)

 

(0.5)

U.S. government agencies

 

 

1,595

 

 

1,611

 

 

1,624

 

(1.0)

 

(1.8)

U.S. government agency mortgage-backed

 

 

5,545

 

 

 -

 

 

 -

 

 -

 

 -

States and political subdivisions

 

 

13,249

 

 

33,746

 

 

22,018

 

(60.7)

 

(39.8)

Corporate bonds

 

 

30,605

 

 

33,004

 

 

30,985

 

(7.3)

 

(1.2)

Collateralized mortgage obligations

 

 

74,994

 

 

68,093

 

 

63,627

 

10.1

 

17.9

Asset-backed securities

 

 

178,655

 

 

168,256

 

 

173,496

 

6.2

 

3.0

Collateralized loan obligations

 

 

93,673

 

 

93,017

 

 

92,209

 

0.7

 

1.6

Total securities available-for-sale

 

$

399,836

 

$

399,252

 

$

385,486

 

0.1

 

3.7

Securities held-to-maturity, at amortized cost

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agency mortgage-backed

 

$

36,995

 

$

37,135

 

$

37,125

 

(0.4)

 

(0.4)

Collateralized mortgage obligations

 

 

216,424

 

 

220,197

 

 

222,545

 

(1.7)

 

(2.8)

Total securities held-to-maturity

 

$

253,419

 

$

257,332

 

$

259,670

 

(1.5)

 

(2.4)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total securities

 

$

653,255

 

$

656,584

 

$

645,156

 

(0.5)

 

1.3

 

41

 


 

The total investment portfolio reached $653.3 million at June 30, 2015.  Except for maturities and calls, the available-for-sale (“AFS”) portfolio was essentially unchanged during the second quarter both in total and in composition to end at $399.8 million.  The Company had no purchase or sale activity in the held-to-maturity portfolio in the second quarter of 2015.

Net realized losses on securities sales totaled $12,000 for the second quarter of 2015 down from net realized losses of $109,000 in the first quarter of 2015.

 

Deposits and Borrowings

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2015

 

Deposit Detail as of

 

Percent Change From

(in thousands)

June 30, 

 

March 31, 

 

December 31, 

 

March 31, 

 

December 31, 

 

2015

 

2015

 

2014

 

2015

    

2014

Noninterest bearing

$

432,773

 

$

431,843

 

$

400,447

 

0.2

 

8.1

Savings

 

251,307

 

 

252,578

 

 

239,845

 

(0.5)

 

4.8

NOW accounts

 

330,897

 

 

344,737

 

 

328,641

 

(4.0)

 

0.7

Money market accounts

 

295,383

 

 

299,303

 

 

296,617

 

(1.3)

 

(0.4)

Certificates of deposit of less than $100,000

 

242,870

 

 

247,132

 

 

251,108

 

(1.7)

 

(3.3)

Certificates of deposit of $100,000 through $250,000

 

109,204

 

 

113,160

 

 

112,515

 

(3.5)

 

(2.9)

Certificates of deposit of more than $250,000

 

51,118

 

 

56,025

 

 

55,882

 

(8.8)

 

(8.5)

 

$

1,713,552

 

$

1,744,778

 

$

1,685,055

 

(1.8)

 

1.7

 

Total deposits decreased $31.2 million during the quarter ended June 30, 2015, to $1.71 billion.  All categories except for noninterest bearing demand declined.  Demand deposits were essentially unchanged in the quarter.  All categories were essentially unchanged or higher at June 30, 2015, when compared to December 31, 2014, except certificates of deposit.  June 30, 2015 total deposits compares to $1.70 billion at June 30, 2014.

 

Management believes that reductions in average time deposits reflect maturities of deposits from past higher rate environments.  Further, management believes that the increase in transaction account balances at March 31, 2015, and the subsequent decreases at June 30, 2015, reflect customer choices at those dates based on long standing relationships with Old Second.

 

One of the Company’s most significant borrowing relationships continued to be the $45.5 million credit facility with a correspondent bank. 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 $500,000 in principal outstanding in term debt and $45.0 million in principal outstanding in subordinated debt at both June 30, 2015, and December 31, 2014.  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 June 30, 2015, the Company was in compliance with the financial covenants contained within the credit agreement.

The Company increased its securities sold under repurchase agreements to $32.4 million at June 30, 2015, from $21.0 million at December 31, 2014.  The Company had taken an advance from Federal Home Loan Bank of Chicago of $45.0 million at December 31, 2014, and an advance of $20.0 million at June 30, 2015.

 

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 current on all payments due on these securities.

 

Capital

 

As of June 30, 2015, total stockholders’ equity was $185.2 million, which was a decrease of $8.9 million from $194.2 million as of December 31, 2014.  This decrease was directly attributable to the redemption of approximately one-third of the Company’s Series B Stock completed in first quarter of 2015 offset by current year earnings. 

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

42

 


 

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.  In the second quarter of 2015, the Company paid $1.1 million for the regularly scheduled payments.

In the fourth quarter of 2012, the Treasury announced the continuation of auctions of the Series B Stock that was issued through the Capital Purchase Program and the Company was informed that the Series B Stock would be auctioned.  The auction of the Company’s Series B Stock was completed in the first quarter 2013 and all of the Series B Stock held by Treasury was sold to third parties, including certain of our directors.  The Company completed the redemption of 25,669 shares of its Series B Stock in the second quarter of 2014 using the proceeds of the 15,525,000 share common stock offering of April, 2014.  On December 30, 2014, the Company provided notice that it was redeeming approximately one-third of the remaining outstanding shares of the Company’s Series B Stock.  This redemption of 15,778 shares of Series B Stock was completed in the first quarter of 2015.  As of both March 31, 2015, and June 30, 2015, 31,553 shares of the Series B Stock were outstanding.

At December 31, 2013, and December 31, 2014, the Company carried $72.9 million and $47.3 million, respectively of Series B Stock in total stockholders’ equity.  Following the successful 2015 redemption of Series B Stock discussed above, the Company carried $31.6 million of Series B Stock at June 30, 2015.  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 $710,000 on May 15, 2015 on the remaining shares outstanding at that date and is current with the Series B Stock dividends.

On July 14, 2015, the Company provided notice that it was redeeming the remaining 31,553 issued and outstanding shares of the Company’s Series B stock.  The effective date for the redemption is August 14, 2015, and the redemption price will be the stated liquidation value of $1,000 per share, together with any accrued and unpaid dividends accumulated to, but excluding, the redemption dateAfter this redemption, the Company’s total stockholders’ equity will continue to include $4.8 million to reflect the value of a ten year warrant to purchase shares of its common stock (exercise price of $13.43 per share) issued in January, 2009 as part of the original Series B issuance.  A discussion of the 2009 issuance, including this warrant, is included in Item 7. Management’s Discussion and Analysis of Financial Condition of the Company’s Form 10-K for the year ended December 31, 2014 under the heading “Capital”.

 

43

 


 

The Company’s non-GAAP tangible common equity to tangible assets and the Tier 1 common equity to risk weighted assets increased to 7.44% and 9.78%, respectively, at June 30, 2015, compared to 7.12% and 6.80%, respectively, at December 31, 2014.  The issuance of 15,525,000 common shares net of repurchasing Series B Stock in 2014 and additional Series B stock repurchased in the first quarter of 2015 resulted in a positive impact on the regulatory ratios and the non-GAAP ratios noted above in the quarter ending June 30, 2015.  All capital ratios and regulatory capital information for 2015 give full effect to the Basel III capital regulations in effect as of January 1, 2015.  All other capital ratios and regulatory capital information for other periods reflects the regulatory regulations in effect for the relevant time period.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(unaudited)

 

(unaudited)

 

 

 

As of June 30, 

 

As of December 31, 

(In thousands)

    

2015

    

2014

    

2014

 

 

 

 

 

 

 

 

 

 

Tier 1 capital

 

 

 

 

 

 

 

 

 

Total equity

 

$

185,241

 

$

192,618

 

$

194,163

Tier 1 adjustments:

 

 

 

 

 

 

 

 

 

Trust preferred securities allowed

 

 

51,214

 

 

56,625

 

 

56,625

Cumulative other comprehensive loss

 

 

7,211

 

 

5,339

 

 

7,713

Disallowed intangible assets

 

 

 -

 

 

(154)

 

 

 -

Disallowed deferred tax assets

 

 

(38,810)

 

 

(64,302)

 

 

(61,456)

Other

 

 

 -

 

 

(550)

 

 

(546)

Tier 1 capital

 

$

204,856

 

$

189,576

 

$

196,499

 

 

 

 

 

 

 

 

 

 

Total capital

 

 

 

 

 

 

 

 

 

Tier 1 capital

 

$

204,856

 

$

189,576

 

$

196,499

Tier 2 additions:

 

 

 

 

 

 

 

 

 

Allowable portion of allowance for loan losses

 

 

18,419

 

 

16,597

 

 

17,073

Additional trust preferred securities disallowed for tier 1 capital

 

 

5,411

 

 

 -

 

 

 -

Subordinated debt

 

 

18,000

 

 

27,000

 

 

27,000

Tier 2 additions subtotal

 

 

41,830

 

 

43,597

 

 

44,072

Allowable Tier 2

 

 

41,830

 

 

43,597

 

 

44,072

Other Tier 2 capital components

 

 

(6)

 

 

(6)

 

 

(6)

Total capital

 

$

246,680

 

$

233,167

 

$

240,566

 

 

 

 

 

 

 

 

 

 

Tangible common equity

 

 

 

 

 

 

 

 

 

Total equity

 

$

185,241

 

$

192,618

 

$

194,163

Less:  Preferred equity

 

 

31,553

 

 

47,331

 

 

47,331

Intangible assets

 

 

 -

 

 

154

 

 

 -

Tangible common equity

 

$

153,688

 

$

145,133

 

$

146,832

 

 

 

 

 

 

 

 

 

 

Tier 1 common equity

 

 

 

 

 

 

 

 

 

Tangible common equity

 

$

153,688

 

$

145,133

 

$

146,832

Tier 1 adjustments:

 

 

 

 

 

 

 

 

 

Cumulative other comprehensive loss

 

 

7,211

 

 

5,339

 

 

7,713

Other

 

 

(19,326)

 

 

(64,852)

 

 

(62,002)

Tier 1 common equity

 

$

141,573

 

$

85,620

 

$

92,543

 

 

 

 

 

 

 

 

 

 

Tangible assets

 

 

 

 

 

 

 

 

 

Total assets

 

$

2,065,053

 

$

2,046,864

 

$

2,061,787

Less: 

 

 

 

 

 

 

 

 

 

Goodwill and intangible assets

 

 

 -

 

 

154

 

 

 -

Tangible assets

 

$

2,065,053

 

$

2,046,710

 

$

2,061,787

 

 

 

 

 

 

 

 

 

 

Total risk-weighted assets

 

 

 

 

 

 

 

 

 

On balance sheet

 

$

1,382,604

 

$

1,283,134

 

$

1,328,227

Off balance sheet

 

 

64,927

 

 

37,403

 

 

32,707

Total risk-weighted assets

 

$

1,447,531

 

$

1,320,537

 

$

1,360,934

 

 

 

 

 

 

 

 

 

 

Average assets

 

 

 

 

 

 

 

 

 

Total average assets for leverage

 

$

2,044,703

 

$

1,993,966

 

$

1,978,591

 

 

 

 

44

 


 

 

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 the borrowing capacity at the FHLBC as part of its liquidity management process as supervised by the Asset and Liability Committee and reviewed by the board of directors.

Net cash inflows from operating activities were $7.2 million during the first half of 2015, compared with net cash outflows of $20.0 million in the same period in 2014.  Proceeds from sales of loans held-for-sale, net of funds used to originate loans held-for-sale, were a source of inflows for the first half of 2015 and 2014.  Interest paid, net of interest received, combined with changes in other assets and liabilities were a source of outflows for of the first half of 2015 and 2014.  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 $10.1 million in the first half of 2015, compared to net cash inflows of $6.4 million in the same period in 2014.  In the first half of 2015, securities transactions accounted for net outflows of $6.6 million, and net principal disbursed on loans accounted for net outflows of $7.6 million.  In the first half of 2014, securities transactions accounted for net inflows of $38.3 million, and net principal disbursed on loans accounted for net outflows of $42.3 million.  Proceeds from sales of OREO accounted for $4.7 million and $10.9 million in investing cash inflows for the first half of 2015 and 2014, respectively.

Net cash outflows from financing activities in the first half of 2015 were $2.7 million, compared with net cash inflows of $59.0 million in the first half of 2014.  Redemption of 15,778 shares of Series B Stock and dividends paid on Series B Stock accounted for net cash outflows of $17.5 million in the first half of 2015.  Net deposit inflows in the first half of 2015 were $28.5 million compared to net deposit inflows of $18.7 million in the first half of 2014.  Other short-term borrowings had net cash outflows of $25.0 million and $5.0 million related to FHLBC advance in the first half of 2015 and 2014, respectively.  Changes in securities sold under repurchase agreements accounted for $11.4 million and $15.6 million in net inflows in the first half of 2015 and 2014, respectively.

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.

Interest rates through the first half of 2015 have continued at historically low levels.  Market expectations about interest rate increases later in 2015 or 2016 are varied given uncertain domestic and international economic conditions.  The Company manages interest rate risk within guidelines established by policy which limits the amount of rate exposure.  In practice, interest rate risk exposure has been and is maintained well within those guidelines and does not pose a material risk to the future earnings of the Company.

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 June 30, 2015, and December 31, 2014, 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.

45

 


 

The Company utilizes simulation analysis to quantify the impact of various rate scenarios on net interest income.  Specific cash flows, repricing characteristics, and embedded options of the assets and liabilities held by the Company are incorporated into the simulation model.  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, a situation that continues to date.  As of December 31, 2014, the Company had modest amounts of earnings gains (in both dollars and percentage) if interest rates should rise.  Primarily due to increases in low cost deposits through June 30, 2015, higher interest rates would result in a slight increase in the amount of earnings gains.  Management considers the current level of interest rate risk to be low, but intends to continue closely monitoring changes in that risk in case corrective actions might be needed in the future.  Federal Funds rates and the Bank's prime rate were stable 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.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Analysis of Net Interest Income Sensitivity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Immediate Changes in Rates

 

    

(2.0)

%

    

(1.0)

%

    

  

(0.5)

%

    

  

0.5

%

    

  

1.0

%

    

  

2.0

%

June 30, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dollar change

 

N/A

 

 

N/A

 

 

$

(896)

 

 

$

437

 

 

$

1,186

 

 

$

2,497

 

Percent change

 

N/A

 

 

N/A

 

 

 

(1.6)

%

 

 

0.8

%

 

 

2.1

%

 

 

4.4

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dollar change

 

N/A

 

 

N/A

 

 

 

(718)

 

 

$

264

 

 

$

1,086

 

 

$

2,243

 

Percent change

 

N/A

 

 

N/A

 

 

 

(1.2)

%

 

 

0.5

%

 

 

1.9

%

 

 

3.9

%

 

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 June 30, 2015.  Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that as of June 30, 2015, 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 June 30, 2015, 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

46

 


 

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.

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, 2014.  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:

 

 

 

 

 

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 June 30, 2015, and December 31, 2014; (ii) Consolidated Statements of Income for the three and six months ended June 30, 2015 and 2014; (iii) Consolidated Statements of Stockholders’ Equity for the six months ended June 30, 2015 and June 30, 2014; (iv) Consolidated Statements of Cash Flows for the six months ended June 30, 2015 and June 30, 2014; 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.

 

47

 


 

 

 

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/ James L. Eccher

 

 

James L. Eccher

 

 

 

 

 

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: August 7, 2015

 

 

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