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OLD SECOND BANCORP INC - Quarter Report: 2014 June (Form 10-Q)

Table of Contents

I  

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

 

 

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

 

THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2014

OR

 

 

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

 

SECURITIES EXCHANGE ACT OF 1934

 

For transition period from          to          

 

Commission File Number 0 -10537

 

OLD SECOND BANCORP, INC.

(Exact name of Registrant as specified in its charter)

 

 

 

 

Delaware

 

36-3143493

(State or other jurisdiction

 

(I.R.S. Employer Identification Number)

of incorporation or organization)

 

 

 

37 South River Street, Aurora, Illinois     60507

(Address of principal executive offices)  (Zip Code)

 

(630) 892-0202

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes         No 

 

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

 

Indicate by check mark whether registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Act).  (check one):

 

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

 

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

Yes         No 

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date: As of August 8, 2014, the Registrant had outstanding 29,442,508 shares of common stock, $1.00 par value per share.

 

 

 

 


 

Table of Contents

 

 

OLD SECOND BANCORP, INC.

 

Form 10-Q Quarterly Report

 

Table of Contents

 

 

 

 

 

PART I

 

 

 

Page Number

Item 1. 

Financial Statements

Item 2. 

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

36 

Item 3. 

Quantitative and Qualitative Disclosures about Market Risk

50 

Item 4. 

Controls and Procedures

51 

 

PART II

 

 

 

 

Item 1. 

Legal Proceedings

52 

Item 1.A. 

Risk Factors

52 

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

52 

Item 3. 

Defaults Upon Senior Securities

52 

Item 4. 

Mine Safety Disclosure

52 

Item 5. 

Other Information

52 

Item 6. 

Exhibits

52 

 

 

 

 

Signatures

53 

 

2

 


 

Table of Contents

 

PART I - FINANCIAL INFORMATION

Item 1.  Financial Statements

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Balance Sheets

(In thousands, except share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Unaudited)

 

 

 

 

 

June 30,

 

December 31,

 

    

2014

    

2013

Assets

 

 

 

 

 

 

Cash and due from banks

 

$

73,646 

 

$

33,210 

Interest bearing deposits with financial institutions

 

 

19,412 

 

 

14,450 

Cash and cash equivalents

 

 

93,058 

 

 

47,660 

Securities available-for-sale, at fair value

 

 

329,814 

 

 

372,191 

Securities held-to-maturity, at amortized cost

 

 

264,683 

 

 

256,571 

Federal Home Loan Bank and Federal Reserve Bank stock

 

 

10,292 

 

 

10,292 

Loans held-for-sale

 

 

4,559 

 

 

3,822 

Loans

 

 

1,132,747 

 

 

1,101,256 

Less: allowance for loan losses

 

 

23,856 

 

 

27,281 

Net loans

 

 

1,108,891 

 

 

1,073,975 

Premises and equipment, net

 

 

45,242 

 

 

46,005 

Other real estate owned

 

 

39,232 

 

 

41,537 

Mortgage servicing rights, net

 

 

5,501 

 

 

5,807 

Core deposit, net

 

 

154 

 

 

1,177 

Bank-owned life insurance (BOLI)

 

 

56,134 

 

 

55,410 

Deferred tax assets, net

 

 

71,778 

 

 

75,303 

Other assets

 

 

17,526 

 

 

14,284 

Total assets

 

$

2,046,864 

 

$

2,004,034 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

Noninterest bearing demand

 

$

393,964 

 

$

373,389 

Interest bearing:

 

 

 

 

 

 

Savings, NOW, and money market

 

 

853,654 

 

 

836,300 

Time

 

 

453,206 

 

 

472,439 

Total deposits

 

 

1,700,824 

 

 

1,682,128 

Securities sold under repurchase agreements

 

 

38,133 

 

 

22,560 

Other short-term borrowings

 

 

 -

 

 

5,000 

Junior subordinated debentures

 

 

58,378 

 

 

58,378 

Subordinated debt

 

 

45,000 

 

 

45,000 

Notes payable and other borrowings

 

 

500 

 

 

500 

Other liabilities

 

 

11,411 

 

 

42,776 

Total liabilities

 

 

1,854,246 

 

 

1,856,342 

 

 

 

 

 

 

 

Stockholders’ Equity

 

 

 

 

 

 

Preferred stock

 

 

47,331 

 

 

72,942 

Common stock

 

 

34,365 

 

 

18,830 

Additional paid-in capital

 

 

115,183 

 

 

66,212 

Retained earnings

 

 

96,927 

 

 

92,549 

Accumulated other comprehensive loss

 

 

(5,339)

 

 

(7,038)

Treasury stock

 

 

(95,849)

 

 

(95,803)

Total stockholders’ equity

 

 

192,618 

 

 

147,692 

Total liabilities and stockholders’ equity

 

$

2,046,864 

 

$

2,004,034 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2014

 

December 31, 2013

 

 

Preferred

 

Common

 

Preferred

 

Common

 

    

Stock

    

Stock

    

Stock

    

Stock

Par value

 

$

 

$

 

$

 

$

Liquidation value

 

 

1,000 

 

 

n/a

 

 

1,000 

 

 

n/a

Shares authorized

 

 

300,000 

 

 

60,000,000 

 

 

300,000 

 

 

60,000,000 

Shares issued

 

 

47,331 

 

 

34,364,734 

 

 

73,000 

 

 

18,829,734 

Shares outstanding

 

 

47,331 

 

 

29,442,508 

 

 

73,000 

 

 

13,917,108 

Treasury shares

 

 

 

 

4,922,226 

 

 

 

 

4,912,626 

 

See accompanying notes to consolidated financial statements.

3

 


 

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Operations

(In thousands, except share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(unaudited)

 

(unaudited)

 

 

Three Months Ended

 

Six Months Ended

 

 

June 30,

 

June 30,

 

    

2014

    

2013

    

2014

    

2013

Interest and dividend income

 

 

 

 

 

 

 

 

 

 

 

 

Loans, including fees

 

$

13,046 

 

$

13,912 

 

$

25,984 

 

$

28,826 

Loans held-for-sale

 

 

29 

 

 

45 

 

 

54 

 

 

86 

Securities:

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

 

3,352 

 

 

2,698 

 

 

6,854 

 

 

4,996 

Tax exempt

 

 

118 

 

 

174 

 

 

266 

 

 

293 

Dividends from Federal Reserve Bank and Federal Home Loan Bank stock

 

 

78 

 

 

76 

 

 

154 

 

 

152 

Interest bearing deposits with financial institutions

 

 

20 

 

 

27 

 

 

35 

 

 

69 

Total interest and dividend income

 

 

16,643 

 

 

16,932 

 

 

33,347 

 

 

34,422 

Interest expense

 

 

 

 

 

 

 

 

 

 

 

 

Savings, NOW, and money market deposits

 

 

188 

 

 

221 

 

 

387 

 

 

449 

Time deposits

 

 

1,210 

 

 

1,800 

 

 

2,531 

 

 

3,653 

Other short-term borrowings

 

 

 

 

 -

 

 

 

 

20 

Junior subordinated debentures

 

 

1,388 

 

 

1,314 

 

 

2,775 

 

 

2,601 

Subordinated debt

 

 

198 

 

 

205 

 

 

394 

 

 

401 

Notes payable and other borrowings

 

 

 

 

 

 

 

 

Total interest expense

 

 

2,991 

 

 

3,544 

 

 

6,100 

 

 

7,132 

Net interest and dividend income

 

 

13,652 

 

 

13,388 

 

 

27,247 

 

 

27,290 

Loan loss reserve release

 

 

(1,000)

 

 

(1,800)

 

 

(2,000)

 

 

(4,300)

Net interest and dividend income after provision for loan losses

 

 

14,652 

 

 

15,188 

 

 

29,247 

 

 

31,590 

Noninterest income

 

 

 

 

 

 

 

 

 

 

 

 

Trust income

 

 

1,677 

 

 

1,681 

 

 

3,136 

 

 

3,172 

Service charges on deposits

 

 

1,796 

 

 

1,799 

 

 

3,516 

 

 

3,475 

Secondary mortgage fees

 

 

155 

 

 

267 

 

 

267 

 

 

497 

Mortgage servicing gain, net of changes in fair value

 

 

64 

 

 

743 

 

 

17 

 

 

987 

Net gain on sales of mortgage loans

 

 

1,038 

 

 

1,811 

 

 

1,700 

 

 

3,787 

Securities gains, net

 

 

295 

 

 

745 

 

 

226 

 

 

2,198 

Increase in cash surrender value of bank-owned life insurance

 

 

366 

 

 

372 

 

 

724 

 

 

779 

Death benefit realized on bank-owned life insurance

 

 

 -

 

 

375 

 

 

 -

 

 

375 

Debit card interchange income

 

 

930 

 

 

900 

 

 

1,760 

 

 

1,692 

Other income

 

 

1,160 

 

 

1,147 

 

 

2,456 

 

 

2,885 

Total noninterest income

 

 

7,481 

 

 

9,840 

 

 

13,802 

 

 

19,847 

Noninterest expense

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

9,183 

 

 

9,177 

 

 

18,284 

 

 

18,209 

Occupancy expense, net

 

 

1,185 

 

 

1,242 

 

 

2,666 

 

 

2,521 

Furniture and equipment expense

 

 

984 

 

 

1,104 

 

 

1,967 

 

 

2,248 

FDIC insurance

 

 

627 

 

 

1,024 

 

 

906 

 

 

2,059 

General bank insurance

 

 

343 

 

 

491 

 

 

832 

 

 

1,340 

Amortization of core deposit

 

 

511 

 

 

525 

 

 

1,023 

 

 

1,050 

Advertising expense

 

 

459 

 

 

328 

 

 

762 

 

 

494 

Debit card interchange expense

 

 

412 

 

 

362 

 

 

790 

 

 

706 

Legal fees

 

 

409 

 

 

486 

 

 

666 

 

 

809 

Other real estate expense, net

 

 

1,650 

 

 

3,302 

 

 

2,658 

 

 

6,399 

Other expense

 

 

3,289 

 

 

3,510 

 

 

6,014 

 

 

6,654 

Total noninterest expense

 

 

19,052 

 

 

21,551 

 

 

36,568 

 

 

42,489 

Income before income taxes

 

 

3,081 

 

 

3,477 

 

 

6,481 

 

 

8,948 

Provision for income taxes

 

 

1,060 

 

 

 -

 

 

2,258 

 

 

 -

Net income

 

$

2,021 

 

$

3,477 

 

$

4,223 

 

$

8,948 

Preferred stock dividends and accretion of discount

 

 

1,348 

 

 

1,305 

 

 

2,920 

 

 

2,594 

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

 

$

7,454 

 

$

2,172 

 

$

8,084 

 

$

6,354 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

$

0.26 

 

$

0.15 

 

$

0.38 

 

$

0.45 

Diluted earnings per share

 

 

0.26 

 

 

0.15 

 

 

0.38 

 

 

0.45 

 

See accompanying notes to consolidated financial statements.

4

 


 

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income (Loss)

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Unaudited)

 

(Unaudited)

 

 

Three Months Ended

 

Six Months Ended

 

 

June 30,

 

June 30,

 

    

2014

    

2013

    

2014

    

2013

Net Income

 

$

2,021 

 

$

3,477 

 

$

4,223 

 

$

8,948 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

3,710 

 

 

(13,334)

 

 

2,621 

 

 

(13,369)

Related tax (expense) benefit

 

 

(1,527)

 

 

5,491 

 

 

(1,079)

 

 

5,508 

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

 

 

2,183 

 

 

(7,843)

 

 

1,542 

 

 

(7,861)

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

Net realized  gains

 

 

295 

 

 

745 

 

 

226 

 

 

2,198 

Income tax expense on net realized gains

 

 

(121)

 

 

(306)

 

 

(93)

 

 

(902)

Net realized gains after tax

 

 

174 

 

 

439 

 

 

133 

 

 

1,296 

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

 

 

2,009 

 

 

(8,282)

 

 

1,409 

 

 

(9,157)

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

247 

 

 

 

 

494 

 

 

Related tax expense

 

 

(102)

 

 

 

 

(204)

 

 

Other comprehensive income on held-to-maturity securities

 

 

145 

 

 

 -

 

 

290 

 

 

 -

Total other comprehensive income (loss)

 

 

2,154 

 

 

(8,282)

 

 

1,699 

 

 

(9,157)

Total comprehensive income (loss)

 

$

4,175 

 

$

(4,805)

 

$

5,922 

 

$

(209)

 

See accompanying notes to consolidated financial statements.

 

5

 


 

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Unaudited)

 

 

Six Months Ended

 

 

June 30,

 

    

2014

    

2013

Cash flows from operating activities

 

 

 

 

 

 

Net income

 

$

4,223 

 

$

8,948 

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

 

 

 

 

 

 

Depreciation and amortization of leasehold improvement

 

 

1,272 

 

 

1,473 

Change in fair value of mortgage servicing rights

 

 

630 

 

 

(239)

Loan loss reserve release

 

 

(2,000)

 

 

(4,300)

Gain on recapture of restricted stock

 

 

 -

 

 

(612)

Provision for deferred tax expense

 

 

2,335 

 

 

-

Originations of loans held-for-sale

 

 

(52,057)

 

 

(112,161)

Proceeds from sales of loans held-for-sale

 

 

52,784 

 

 

119,697 

Net gain on sales of mortgage loans

 

 

(1,700)

 

 

(3,787)

Change in current income taxes payable

 

 

(78)

 

 

(266)

Increase in cash surrender value of bank-owned life insurance

 

 

(724)

 

 

(779)

Death claim on bank owned life insurance

 

 

 -

 

 

396 

Change in accrued interest receivable and other assets

 

 

(4,399)

 

 

1,427 

Change in accrued interest payable and other liabilities

 

 

(21,066)

 

 

2,653 

Net discount (accretion)/premium amortization on securities

 

 

(950)

 

 

162 

Securities gains, net

 

 

(226)

 

 

(2,198)

Amortization of core deposit 

 

 

1,023 

 

 

1,050 

Stock based compensation

 

 

82 

 

 

67 

Net gain on sale of other real estate owned

 

 

(409)

 

 

(567)

Provision for other real estate owned losses

 

 

1,261 

 

 

4,576 

Net gain on disposal of fixed assets

 

 

 -

 

 

(5)

Net cash (used in) provided by operating activities

 

 

(19,999)

 

 

15,535 

Cash flows from investing activities

 

 

 

 

 

 

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

 

 

14,606 

 

 

34,892 

Proceeds from sales of securities available-for-sale

 

 

163,107 

 

 

424,822 

Purchases of securities available-for-sale

 

 

(132,073)

 

 

(472,967)

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

 

 

3,902 

 

 

 -

Purchases of securities held-to-maturity

 

 

(11,212)

 

 

 -

Proceeds from sales of Federal Home Loan Bank stock

 

 

 -

 

 

910 

Net change in loans

 

 

(42,259)

 

 

31,582 

Improvements in other real estate owned

 

 

(131)

 

 

(50)

Proceeds from sales of other real estate owned

 

 

10,927 

 

 

20,032 

Proceeds from disposition of fixed assets

 

 

 -

 

 

Net purchases of premises and equipment

 

 

(509)

 

 

(1,265)

Net cash provided by investing activities

 

 

6,358 

 

 

37,962 

Cash flows from financing activities

 

 

 

 

 

 

Net change in deposits

 

 

18,696 

 

 

(26,596)

Net change in securities sold under repurchase agreements

 

 

15,573 

 

 

12,635 

Net change in other short-term borrowings

 

 

(5,000)

 

 

(100,000)

Redemption of preferred stock

 

 

(24,321)

 

 

 -

Proceeds from issuance of common stock

 

 

64,395 

 

 

 -

Dividends paid

 

 

(10,258)

 

 

 -

Purchase of treasury stock

 

 

(46)

 

 

(185)

Net cash provided by (used in) financing activities

 

 

59,039 

 

 

(114,146)

Net change in cash and cash equivalents

 

 

45,398 

 

 

(60,649)

Cash and cash equivalents at beginning of period

 

 

47,660 

 

 

128,507 

Cash and cash equivalents at end of period

 

$

93,058 

 

$

67,858 

 

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Table of Contents

 

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Cash Flows - Continued

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Unaudited)

 

 

Six Months Ended

 

 

June 30,

Supplemental cash flow information

    

2014

    

2013

Income taxes paid (received)

 

$

 -

 

$

266 

Interest paid for deposits

 

 

3,027 

 

 

4,165 

Interest paid for borrowings

 

 

20,150 

 

 

438 

Non-cash transfer of loans to other real estate owned

 

 

9,343 

 

 

11,181 

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

 

 

 -

 

 

5,329 

Change in dividends accrued and declared but not paid

 

 

(9,123)

 

 

511 

Accretion on preferred stock discount

 

 

58 

 

 

527 

Fair value difference on recapture of restricted stock

 

 

 -

 

 

43 

 

See accompanying notes to consolidated financial statements.

 

 

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Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Changes in

Stockholders’ Equity

(In thousands, except share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

Other

 

 

 

 

Total

 

 

Common

 

Preferred

 

Paid-In

 

Retained

 

Comprehensive

 

Treasury

 

Stockholders’

 

    

Stock

    

Stock

    

Capital

    

Earnings

    

Income (Loss)

    

Stock

    

Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2012

 

$

18,729 

 

$

71,869 

 

$

66,189 

 

$

12,048 

 

$

(1,327)

 

$

(94,956)

 

$

72,552 

Net income

 

 

 

 

 

 

 

 

 

 

 

8,948 

 

 

 

 

 

 

 

 

8,948 

Other comprehensive loss, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(9,157)

 

 

 

 

 

(9,157)

Change in restricted stock

 

 

51 

 

 

 

 

 

(51)

 

 

 

 

 

 

 

 

 

 

 

 -

Recapture of restricted stock

 

 

 

 

 

 

 

 

(43)

 

 

 

 

 

 

 

 

(569)

 

 

(612)

Stock based compensation

 

 

 

 

 

 

 

 

67 

 

 

 

 

 

 

 

 

 

 

 

67 

Purchase of treasury stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(185)

 

 

(185)

Preferred stock accretion and declared dividends

 

 

 

 

 

527 

 

 

 

 

 

(1,038)

 

 

 

 

 

 

 

 

(511)

Balance, June 30, 2013

 

$

18,780 

 

$

72,396 

 

$

66,162 

 

$

19,958 

 

$

(10,484)

 

$

(95,710)

 

$

71,102 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 income, 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 

 

See accompanying notes to consolidated financial statements.

 

 

 

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Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

 

Note 1 – Summary of Significant Accounting Policies

 

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

 

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

 

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

 

Recent Accounting Pronouncements

 

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

 

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

 

In Ma2014, the FASB issued ASU No. 2014-09 "Revenue from Contracts with Customers (Topic 606)."  The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services.  ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period.  The amendments can be applied retrospectively to each prior reporting period or retrospectively with the cumulative effect of initially

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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.

 

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

 

Note 2 – Securities

 

Investment Portfolio Management

 

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

 

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

 

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

 

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

 

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 $5.5 million at June 30, 2014, and December 31, 2013.  Reserve Bank stock was recorded at $4.8 million at June 30, 2014, and December 31, 2013.  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, 2014 and December 31, 2013 and the corresponding amounts of gross unrealized gains and losses (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

Jun30, 2014:

    

Cost

    

Gains

    

Losses

    

Value

Securities Available-for-Sale

 

 

 

 

 

 

 

 

U.S. Treasury

 

$

1,539 

 

$

 -

 

$

(1)

 

$

1,538 

U.S. government agencies

 

 

1,724 

 

 

 -

 

 

(71)

 

 

1,653 

States and political subdivisions

 

 

15,666 

 

 

388 

 

 

(301)

 

 

15,753 

Corporate bonds

 

 

31,598 

 

 

82 

 

 

(330)

 

 

31,350 

Collateralized mortgage obligations

 

 

34,992 

 

 

61 

 

 

(1,970)

 

 

33,083 

Asset-backed securities

 

 

245,994 

 

 

2,581 

 

 

(2,138)

 

 

246,437 

Total Securities Available-for-Sale

 

$

331,513 

 

$

3,112 

 

$

(4,811)

 

$

329,814 

Securities Held-to-Maturity

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agency mortgage-backed

 

$

37,306 

 

$

1,421 

 

$

 -

 

$

38,727 

Collateralized mortgage obligations

 

 

227,377 

 

 

2,618 

 

 

(952)

 

 

229,043 

Total Securities Held-to-Maturity

 

$

264,683 

 

$

4,039 

 

$

(952)

 

$

267,770 

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Gross

 

Gross

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

December 31, 2013:

 

Cost

    

Gains

    

Losses

    

Value

Securities Available-for-Sale

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury

 

$

1,549 

 

$

 -

 

$

(5)

 

$

1,544 

U.S. government agencies

 

 

1,738 

 

 

 -

 

 

(66)

 

 

1,672 

States and political subdivisions

 

 

16,382 

 

 

629 

 

 

(217)

 

 

16,794 

Corporate bonds

 

 

15,733 

 

 

17 

 

 

(648)

 

 

15,102 

Collateralized mortgage obligations

 

 

66,766 

 

 

256 

 

 

(3,146)

 

 

63,876 

Asset-backed securities

 

 

274,118 

 

 

2,168 

 

 

(3,083)

 

 

273,203 

Total Securities Available-for-Sale

 

$

376,286 

 

$

3,070 

 

$

(7,165)

 

$

372,191 

Securities Held-to-Maturity

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agency mortgage-backed

 

$

35,268 

 

$

45 

 

$

(73)

 

$

35,240 

Collateralized mortgage obligations

 

 

221,303 

 

 

643 

 

 

(2,858)

 

 

219,088 

Total Securities Held-to-Maturity

 

$

256,571 

 

$

688 

 

$

(2,931)

 

$

254,328 

 

The fair value, amortized cost and weighted average yield of debt securities at June 30, 2014, by contractual maturity, were as follows in the table below.  Securities not due at a single maturity date, primarily mortgage-backed securities (“MBS”) and asset-backed securities are shown separately.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

Amortized

 

Average

 

Fair

Securities Available-for-Sale

    

Cost

    

Yield

    

Value

Due in one year or less

 

$

709 

 

3.51% 

 

$

726 

Due after one year through five years

 

 

5,817 

 

2.87% 

 

 

6,081 

Due after five years through ten years

 

 

37,361 

 

2.49% 

 

 

37,057 

Due after ten years

 

 

6,640 

 

3.47% 

 

 

6,430 

 

 

 

50,527 

 

2.68% 

 

 

50,294 

Collateralized mortgage obligations

 

 

34,992 

 

2.47% 

 

 

33,083 

Asset-back securities

 

 

245,994 

 

1.20% 

 

 

246,437 

 

 

$

331,513 

 

1.56% 

 

$

329,814 

Securities Held-to-Maturity

 

 

 

 

 

 

 

 

Mortgage-backed and collateralized mortgage obligations

 

$

264,683 

 

3.08% 

 

$

267,770 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less than 12 months

 

Greater than 12 months

 

 

 

 

 

 

 

 

June 30, 2014

 

in an unrealized loss position

 

in an unrealized loss position

 

Total

 

 

Number of

 

Unrealized

 

Fair

 

Number of

 

Unrealized

 

Fair

 

Number of

 

Unrealized

 

Fair

Securities Available-for-Sale

    

Securities

    

Losses

    

Value

    

Securities

    

Losses

    

Value

    

Securities

    

Losses

    

Value

U.S. Treasury

 

 

$

 

$

1,538 

 

 -

 

$

 

$

 

 

$

 

 

1,538 

U.S. government agencies

 

 

 

 

 

 -

 

 

 

71 

 

 

1,653 

 

 

 

71 

 

 

1,653 

States and political subdivisions

 

 

 

281 

 

 

3,214 

 

 

 

20 

 

 

3,055 

 

 

 

301 

 

 

6,269 

Corporate bonds

 

 

 

256 

 

 

15,982 

 

 

 

74 

 

 

1,928 

 

 

 

330 

 

 

17,910 

Collateralized mortgage obligations

 

 -

 

 

 -

 

 

 -

 

 

 

1,970 

 

 

26,288 

 

 

 

1,970 

 

 

26,288 

Asset-backed securities

 

12 

 

 

1,512 

 

 

106,222 

 

 

 

626 

 

 

26,081 

 

13 

 

 

2,138 

 

 

132,303 

 

 

20 

 

$

2,050 

 

$

126,956 

 

 

$

2,761 

 

$

59,005 

 

29 

 

$

4,811 

 

$

185,961 

Securities Held-to-Maturity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Collateralized mortgage obligations

 

13 

 

 

952 

 

 

107,145 

 

 

 

 

 

 

13 

 

 

952 

 

 

107,145 

 

 

13 

 

$

952 

 

$

107,145 

 

 

$

 

$

 

13 

 

$

952 

 

$

107,145 

 

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Table of Contents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less than 12 months

 

Greater than 12 months

 

 

 

 

 

 

 

 

December 31, 2013

 

in an unrealized loss position

 

in an unrealized loss position

 

Total

 

 

Number of

 

Unrealized

 

 

Fair

 

Number of

 

Unrealized

 

 

Fair

 

Number of

 

Unrealized

 

 

Fair

Securities Available-for-Sale

    

Securities

    

Losses

    

 

Value

    

Securities

    

Losses

    

 

Value

    

Securities

    

Losses

    

 

Value

U.S. Treasury

 

 

$

 

$

1,544 

 

 

$

 

$

 

 

$

 

$

1,544 

U.S. government agencies

 

 

 

 

 

 

 

 

66 

 

 

1,672 

 

 

 

66 

 

 

1,672 

States and political subdivisions

 

 

 

217 

 

 

4,625 

 

 

 

 

 

 

 

 

217 

 

 

4,625 

Corporate bonds

 

 

 

429 

 

 

10,493 

 

 

 

219 

 

 

2,796 

 

 

 

648 

 

 

13,289 

Collateralized mortgage obligations

 

 

 

3,146 

 

 

54,021 

 

 

 

 

 

 

 

 

3,146 

 

 

54,021 

Asset-backed securities

 

11 

 

 

2,836 

 

 

99,466 

 

 

 

247 

 

 

6,368 

 

13 

 

 

3,083 

 

 

105,834 

 

 

27 

 

$

6,633 

 

$

170,149 

 

 

$

532 

 

$

10,836 

 

32 

 

$

7,165 

 

$

180,985 

Securities Held-to-Maturity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agency mortgage-backed

 

 

 

73 

 

 

19,134 

 

 

 

 

 

 

 

 

73 

 

 

19,134 

Collateralized mortgage obligations

 

19 

 

 

2,858 

 

 

156,632 

 

 

 

 

 

 

19 

 

 

2,858 

 

 

156,632 

 

 

25 

 

$

2,931 

 

$

175,766 

 

 

$

 

$

 

25 

 

$

2,931 

 

$

175,766 

 

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

 

Note 3 – Loans

 

Major classifications of loans were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

June 30, 2014

    

December 31, 2013

Commercial

 

$

106,752 

 

$

94,736 

Real estate - commercial

 

 

599,796 

 

 

560,233 

Real estate - construction

 

 

32,265 

 

 

29,351 

Real estate - residential

 

 

368,592 

 

 

390,201 

Consumer

 

 

3,064 

 

 

2,760 

Overdraft

 

 

381 

 

 

628 

Lease financing receivables

 

 

8,722 

 

 

10,069 

Other

 

 

12,700 

 

 

12,793 

 

 

 

1,132,272 

 

 

1,100,771 

Net deferred loan costs

 

 

475 

 

 

485 

 

 

$

1,132,747 

 

$

1,101,256 

 

It is the policy of the Company to review each prospective credit in order to determine if an adequate level of security or collateral was obtained prior to making a loan.  The type of collateral, when required, will vary from liquid assets to real estate.  The Company’s access to collateral, in the event of borrower default, is assured through adherence to lending laws, the Company’s lending standards and credit monitoring procedures.  The Bank generally makes loans solely within its market area.  There are no significant concentrations of loans where the customers’ ability to honor loan terms is dependent upon a single economic sector although the real estate related categories listed above represent 88.3% and 89.0% of the portfolio at June 30, 2014, and December 31, 2013, respectively. 

 

12

 


 

Table of Contents

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recorded

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

90 days or

 

 

 

 

 

 

 

 

90 Days or

 

 

 

 

 

 

 

 

 

 

 

 

 

Greater Past

 

 

30-59 Days

 

60-89 Days

 

Greater Past

 

Total Past

 

 

 

 

 

 

 

 

 

 

Due and

June 30, 2014

    

      Past      

    

   Past Due   

    

Due

    

Due

    

Current

    

Nonaccrual

    

Total Loans

    

Accruing

Commercial

 

$

 -

 

$

 

$

35 

 

$

35 

 

$

115,418 

 

$

21 

 

$

115,474 

 

$

35 

Real estate - commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied general purpose

 

 

708 

 

 

 

 

 

 

708 

 

 

126,728 

 

 

2,911 

 

 

130,347 

 

 

Owner occupied special purpose

 

 

 -

 

 

246 

 

 

 -

 

 

246 

 

 

165,709 

 

 

3,530 

 

 

169,485 

 

 

 -

Non-owner occupied general purpose

 

 

462 

 

 

 

 

 

 

462 

 

 

149,077 

 

 

6,397 

 

 

155,936 

 

 

Non-owner occupied special purpose

 

 

 

 

 

 

 

 

 

 

87,810 

 

 

540 

 

 

88,350 

 

 

Retail properties

 

 

 

 

 

 

 

 

 

 

36,616 

 

 

3,012 

 

 

39,628 

 

 

Farm

 

 

 

 

 

 

 

 

 

 

16,050 

 

 

 

 

16,050 

 

 

Real estate - construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Homebuilder

 

 

 

 

 

 

 

 

 

 

3,408 

 

 

 -

 

 

3,408 

 

 

Land

 

 

 

 

 

 

 

 

 

 

2,210 

 

 

209 

 

 

2,419 

 

 

Commercial speculative

 

 

 

 

 

 

 

 

 

 

17,150 

 

 

 -

 

 

17,150 

 

 

All other

 

 

 -

 

 

 

 

 

 

 -

 

 

8,690 

 

 

598 

 

 

9,288 

 

 

Real estate - residential

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investor

 

 

886 

 

 

73 

 

 

144 

 

 

1,103 

 

 

127,840 

 

 

3,788 

 

 

132,731 

 

 

144 

Owner occupied

 

 

35 

 

 

618 

 

 

 -

 

 

653 

 

 

110,230 

 

 

5,293 

 

 

116,176 

 

 

 -

Revolving and junior liens

 

 

452 

 

 

13 

 

 

 

 

465 

 

 

117,021 

 

 

2,199 

 

 

119,685 

 

 

Consumer

 

 

 

 

 

 

 

 

 

 

3,064 

 

 

 

 

3,064 

 

 

All other1

 

 

 

 

 

 

 

 

 

 

13,556 

 

 

 

 

13,556 

 

 

 

 

$

2,543 

 

$

950 

 

$

179 

 

$

3,672 

 

$

1,100,577 

 

$

28,498 

 

$

1,132,747 

 

$

179 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recorded

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

90 days or

 

 

 

 

 

 

 

 

90 Days or

 

 

 

 

 

 

 

 

 

 

 

 

 

Greater Past

 

 

30-59 Days

 

60-89 Days

 

Greater Past

 

Total Past

 

 

 

 

 

 

 

 

 

 

Due and

December 31, 2013

    

      Past      

    

   Past Due   

    

Due

    

Due

    

Current

    

Nonaccrual

    

Total Loans

    

Accruing

Commercial

 

$

 

$

 

$

 

$

 

$

104,778 

 

$

27 

 

$

104,805 

 

$

Real estate - commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied general purpose

 

 

290 

 

 

526 

 

 

 

 

816 

 

 

117,938 

 

 

3,180 

 

 

121,934 

 

 

Owner occupied special purpose

 

 

511 

 

 

 

 

 

 

511 

 

 

164,277 

 

 

7,671 

 

 

172,459 

 

 

Non-owner occupied general purpose

 

 

218 

 

 

 

 

 

 

218 

 

 

132,331 

 

 

5,708 

 

 

138,257 

 

 

Non-owner occupied special purpose

 

 

 

 

 

 

 

 

 

 

73,325 

 

 

661 

 

 

73,986 

 

 

Retail properties

 

 

 

 

 

 

 

 

 

 

34,034 

 

 

3,144 

 

 

37,178 

 

 

Farm

 

 

 

 

 

 

 

 

 

 

16,419 

 

 

 

 

16,419 

 

 

Real estate - construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Homebuilder

 

 

 

 

 

 

 

 

 

 

3,515 

 

 

168 

 

 

3,683 

 

 

Land

 

 

 

 

 

 

 

 

 

 

4,436 

 

 

209 

 

 

4,645 

 

 

Commercial speculative

 

 

 

 

 

 

 

 

 

 

11,235 

 

 

1,913 

 

 

13,148 

 

 

All other

 

 

32 

 

 

 

 

 

 

32 

 

 

7,404 

 

 

439 

 

 

7,875 

 

 

 -

Real estate - residential

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investor

 

 

581 

 

 

171 

 

 

 

 

752 

 

 

140,926 

 

 

6,615 

 

 

148,293 

 

 

Owner occupied

 

 

4,414 

 

 

308 

 

 

87 

 

 

4,809 

 

 

106,184 

 

 

5,967 

 

 

116,960 

 

 

87 

Revolving and junior liens

 

 

650 

 

 

76 

 

 

 

 

726 

 

 

121,013 

 

 

3,209 

 

 

124,948 

 

 

Consumer

 

 

 

 

 

 

 

 

 

 

2,755 

 

 

 

 

2,760 

 

 

All other1

 

 

 

 

 

 

 

 

 

 

13,906 

 

 

 

 

13,906 

 

 

 

 

$

6,701 

 

$

1,081 

 

$

87 

 

$

7,869 

 

$

1,054,476 

 

$

38,911 

 

$

1,101,256 

 

$

87 

 

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

 

Credit Quality Indicators:

 

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

 

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

 

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

13

 


 

Table of Contents

the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

 

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

 

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

 

Credit Quality Indicators by class of loans were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2014

 

 

 

 

Special

 

 

 

 

 

 

 

 

 

 

    

Pass

    

Mention

    

Substandard 1

    

Doubtful

    

Total

Commercial

 

$

106,100 

 

$

9,062 

 

$

312 

 

$

-

 

$

115,474 

Real estate - commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied general purpose

 

 

121,431 

 

 

5,632 

 

 

3,284 

 

 

-

 

 

130,347 

Owner occupied special purpose

 

 

162,233 

 

 

3,270 

 

 

3,982 

 

 

-

 

 

169,485 

Non-owner occupied general purpose

 

 

145,381 

 

 

1,739 

 

 

8,816 

 

 

-

 

 

155,936 

Non-owner occupied special purpose

 

 

78,080 

 

 

9,730 

 

 

540 

 

 

-

 

 

88,350 

Retail Properties

 

 

35,221 

 

 

1,395 

 

 

3,012 

 

 

-

 

 

39,628 

Farm

 

 

16,050 

 

 

 -

 

 

-

 

 

-

 

 

16,050 

Real estate - construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Homebuilder

 

 

3,408 

 

 

 -

 

 

 -

 

 

-

 

 

3,408 

Land

 

 

2,210 

 

 

-

 

 

209 

 

 

-

 

 

2,419 

Commercial speculative

 

 

13,627 

 

 

 -

 

 

3,523 

 

 

-

 

 

17,150 

All other

 

 

8,690 

 

 

 -

 

 

598 

 

 

-

 

 

9,288 

Real estate - residential

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investor

 

 

127,109 

 

 

310 

 

 

5,312 

 

 

-

 

 

132,731 

Owner occupied

 

 

110,335 

 

 

 -

 

 

5,841 

 

 

-

 

 

116,176 

Revolving and junior liens

 

 

116,199 

 

 

389 

 

 

3,097 

 

 

-

 

 

119,685 

Consumer

 

 

3,063 

 

 

-

 

 

 

 

-

 

 

3,064 

All other

 

 

13,556 

 

 

-

 

 

-

 

 

-

 

 

13,556 

Total

 

$

1,062,693 

 

$

31,527 

 

$

38,527 

 

$

 -

 

$

1,132,747 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2013

 

 

 

 

Special

 

 

 

 

 

 

 

 

 

 

    

Pass

    

Mention

    

Substandard 1

    

Doubtful

    

Total

Commercial

 

$

96,371 

 

$

7,953 

 

$

481 

 

$

-

 

$

104,805 

Real estate - commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied general purpose

 

 

105,683 

 

 

9,048 

 

 

7,203 

 

 

-

 

 

121,934 

Owner occupied special purpose

 

 

162,586 

 

 

1,968 

 

 

7,905 

 

 

-

 

 

172,459 

Non-owner occupied general purpose

 

 

122,844 

 

 

1,826 

 

 

13,587 

 

 

-

 

 

138,257 

Non-owner occupied special purpose

 

 

59,674 

 

 

9,840 

 

 

4,472 

 

 

-

 

 

73,986 

Retail Properties

 

 

30,059 

 

 

2,989 

 

 

4,130 

 

 

-

 

 

37,178 

Farm

 

 

16,419 

 

 

 -

 

 

 -

 

 

-

 

 

16,419 

Real estate - construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Homebuilder

 

 

1,745 

 

 

1,770 

 

 

168 

 

 

-

 

 

3,683 

Land

 

 

4,436 

 

 

 -

 

 

209 

 

 

-

 

 

4,645 

Commercial speculative

 

 

7,674 

 

 

3,561 

 

 

1,913 

 

 

-

 

 

13,148 

All other

 

 

7,109 

 

 

32 

 

 

734 

 

 

-

 

 

7,875 

Real estate - residential

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investor

 

 

135,136 

 

 

3,407 

 

 

9,750 

 

 

-

 

 

148,293 

Owner occupied

 

 

109,261 

 

 

 -

 

 

7,699 

 

 

-

 

 

116,960 

Revolving and junior liens

 

 

120,589 

 

 

388 

 

 

3,971 

 

 

-

 

 

124,948 

Consumer

 

 

2,759 

 

 

 -

 

 

 

 

-

 

 

2,760 

All other

 

 

13,906 

 

 

 -

 

 

 -

 

 

-

 

 

13,906 

Total

 

$

996,251 

 

$

42,782 

 

$

62,223 

 

$

 -

 

$

1,101,256 

 

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

 

14

 


 

Table of Contents

Impaired loans by class of loan were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

As of June 30, 2014

 

June 30, 2014

 

 

 

 

 

Unpaid

 

 

 

 

Average

 

Interest

 

 

Recorded

 

Principal

 

Related

 

Recorded

 

Income

 

    

Investment

    

Balance

    

Allowance

    

Investment

    

Recognized

With no related allowance recorded

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

21 

 

$

29 

 

$

 -

 

$

24 

 

$

 -

Commercial real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied general purpose

 

 

2,511 

 

 

3,025 

 

 

 -

 

 

2,527 

 

 

Owner occupied special purpose

 

 

2,930 

 

 

3,966 

 

 

 -

 

 

3,151 

 

 

 -

Non-owner occupied general purpose

 

 

6,500 

 

 

7,138 

 

 

 -

 

 

5,964 

 

 

30 

Non-owner occupied special purpose

 

 

540 

 

 

829 

 

 

 -

 

 

600 

 

 

 -

Retail properties

 

 

3,012 

 

 

3,679 

 

 

 -

 

 

3,078 

 

 

 -

Farm

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Homebuilder

 

 

1,791 

 

 

1,791 

 

 

 -

 

 

1,904 

 

 

47 

Land

 

 

209 

 

 

311 

 

 

 -

 

 

209 

 

 

 -

Commercial speculative

 

 

 -

 

 

 -

 

 

 -

 

 

369 

 

 

 -

All other

 

 

309 

 

 

349 

 

 

 -

 

 

156 

 

 

 -

Residential

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investor

 

 

2,605 

 

 

3,651 

 

 

 -

 

 

4,294 

 

 

Owner occupied

 

 

9,788 

 

 

11,131 

 

 

 -

 

 

9,483 

 

 

88 

Revolving and junior liens

 

 

1,929 

 

 

2,743 

 

 

 -

 

 

1,851 

 

 

Consumer

 

 

 -

 

 

 -

 

 

 

 

 

 -

 

 

 -

Total impaired loans with no recorded allowance

 

 

32,145 

 

 

38,642 

 

 

 -

 

 

33,610 

 

 

171 

With an allowance recorded

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Commercial real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied general purpose

 

 

487 

 

 

522 

 

 

207 

 

 

609 

 

 

 -

Owner occupied special purpose

 

 

600 

 

 

679 

 

 

182 

 

 

2,450 

 

 

 -

Non-owner occupied general purpose

 

 

551 

 

 

838 

 

 

414 

 

 

745 

 

 

 -

Non-owner occupied special purpose

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Retail properties

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Farm

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Homebuilder

 

 

 -

 

 

 -

 

 

 -

 

 

84 

 

 

 -

Land

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Commercial speculative

 

 

 -

 

 

 -

 

 

 -

 

 

587 

 

 

 -

All other

 

 

289 

 

 

318 

 

 

135 

 

 

363 

 

 

 -

Residential

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investor

 

 

1,236 

 

 

1,594 

 

 

230 

 

 

960 

 

 

 -

Owner occupied

 

 

492 

 

 

596 

 

 

105 

 

 

1,028 

 

 

Revolving and junior liens

 

 

329 

 

 

359 

 

 

167 

 

 

914 

 

 

 -

Consumer

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Total impaired loans with a recorded allowance

 

 

3,984 

 

 

4,906 

 

 

1,440 

 

 

7,740 

 

 

Total impaired loans

 

$

36,129 

 

$

43,548 

 

$

1,440 

 

$

41,350 

 

$

178 

 

15

 


 

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Impaired loans by class of loans were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

As of December 31, 2013

 

June 30, 2013

 

 

 

 

Unpaid 

 

 

 

Average 

 

Interest 

 

 

Recorded

 

Principal 

 

Related 

 

Recorded 

 

Income 

 

    

 Investment

    

Balance

    

Allowance

    

Investment

    

Recognized

With no related allowance recorded

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

27 

 

$

34 

 

$

-

 

$

124 

 

$

-

Commercial real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied general purpose

 

 

2,543 

 

 

3,006 

 

 

-

 

 

3,681 

 

 

Owner occupied special purpose

 

 

3,371 

 

 

4,117 

 

 

-

 

 

6,335 

 

 

-

Non-owner occupied general purpose

 

 

5,428 

 

 

6,709 

 

 

-

 

 

12,215 

 

 

104 

Non-owner occupied special purpose

 

 

661 

 

 

919 

 

 

-

 

 

464 

 

 

-

Retail properties

 

 

3,144 

 

 

3,811 

 

 

-

 

 

7,880 

 

 

-

Farm

 

 

 -

 

 

 -

 

 

-

 

 

1,259 

 

 

-

Construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Homebuilder

 

 

2,016 

 

 

2,016 

 

 

-

 

 

3,736 

 

 

69 

Land

 

 

209 

 

 

308 

 

 

-

 

 

127 

 

 

-

Commercial speculative

 

 

738 

 

 

742 

 

 

-

 

 

2,739 

 

 

-

All other

 

 

 

 

35 

 

 

-

 

 

190 

 

 

-

Residential

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investor

 

 

5,984 

 

 

8,338 

 

 

-

 

 

7,948 

 

 

Owner occupied

 

 

9,179 

 

 

10,451 

 

 

-

 

 

8,968 

 

 

98 

Revolving and junior liens

 

 

1,771 

 

 

2,313 

 

 

-

 

 

1,378 

 

 

Consumer

 

 

 -

 

 

 -

 

 

 

 

 

11 

 

 

-

Total impaired loans with no recorded allowance

 

 

35,075 

 

 

42,799 

 

 

 -

 

 

57,055 

 

 

281 

With an allowance recorded

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

 -

 

 

 -

 

 

 -

 

 

309 

 

 

-

Commercial real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied general purpose

 

 

730 

 

 

792 

 

 

264 

 

 

1,166 

 

 

-

Owner occupied special purpose

 

 

4,300 

 

 

4,702 

 

 

759 

 

 

2,811 

 

 

-

Non-owner occupied general purpose

 

 

939 

 

 

1,030 

 

 

129 

 

 

1,993 

 

 

-

Non-owner occupied special purpose

 

 

 -

 

 

 -

 

 

 -

 

 

492 

 

 

-

Retail properties

 

 

 -

 

 

 -

 

 

 -

 

 

1,685 

 

 

-

Farm

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

Construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Homebuilder

 

 

168 

 

 

604 

 

 

76 

 

 

97 

 

 

-

Land

 

 

-

 

 

 -

 

 

 -

 

 

127 

 

 

-

Commercial speculative

 

 

1,175 

 

 

1,808 

 

 

17 

 

 

2,323 

 

 

-

All other

 

 

436 

 

 

468 

 

 

262 

 

 

487 

 

 

-

Residential

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investor

 

 

684 

 

 

913 

 

 

160 

 

 

3,894 

 

 

-

Owner occupied

 

 

1,565 

 

 

1,831 

 

 

170 

 

 

4,960 

 

 

12 

Revolving and junior liens

 

 

1,498 

 

 

1,848 

 

 

558 

 

 

2,284 

 

 

-

Consumer

 

 

 -

 

 

-

 

 

-

 

 

-

 

 

-

Total impaired loans with a recorded allowance

 

 

11,495 

 

 

13,996 

 

 

2,395 

 

 

22,628 

 

 

12 

Total impaired loans

 

$

46,570 

 

$

56,795 

 

$

2,395 

 

$

79,683 

 

$

293 

 

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

 

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

16

 


 

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TDRs that were modified during the period are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

TDR Modifications

 

TDR Modifications

 

 

Three months ending June 30, 2014

 

Six months ending 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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other1

 

 -

 

$

 -

 

$

 -

 

 

$

1,320 

 

$

1,159 

Real estate - residential

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

HAMP2

 

 -

 

 

 -

 

 

 -

 

 

 

102 

 

 

75 

Deferral3

 

 

 

107 

 

 

107 

 

 

 

344 

 

 

231 

 

 

 

$

107 

 

$

107 

 

 

$

1,766 

 

$

1,465 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

TDR Modifications

 

TDR Modifications

 

 

Three months ending June 30, 2013

 

Six months ending June 30, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

# of 

 

Pre-modification 

 

Post-modification 

 

# of 

 

Pre-modification 

 

Post-modification 

 

    

contracts

    

recorded investment

    

recorded investment

    

contracts

    

recorded investment

    

recorded investment

Troubled debt restructurings

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate - commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferral3

 

 

$

610 

 

$

472 

 

 

$

610 

 

$

472 

Real estate - residential

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferral3

 

 -

 

 

 -

 

 

 -

 

 

 

137 

 

 

137 

Revolving and junior liens

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other1

 

 

 

30 

 

 

29 

 

 

 

30 

 

 

29 

 

 

 

$

640 

 

$

501 

 

 

$

777 

 

$

638 

 

1  Other: Change of terms from bankruptcy court

2 HAMP: Home Affordable Modification Program

3 Deferral: Refers to the deferral of principal

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

TDR Default Activity

 

TDR Default Activity

 

 

Three months ending June 30, 2013

 

Six months ending June 30, 2013

Troubled debt restructurings that

 

# of 

 

 

Pre-modification outstanding

 

# of 

 

 

Pre-modification outstanding

Subsequently Defaulted

    

contracts

    

 

        recorded investment        

    

contracts

    

 

        recorded investment        

Real estate - residential

 

 

 

 

 

 

 

 

 

 

Investor

 

 -

 

$

 -

 

 

$

155 

 

 

 -

 

$

 -

 

 

$

155 

 

 

 

17

 


 

Table of Contents

Note 4 – Allowance for Loan Losses

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses:

 

 

 

Real Estate

 

Real Estate

 

Real Estate

 

 

 

 

 

 

 

    

Commercial

    

Commercial 1

    

Construction

    

Residential

    

Consumer

    

Unallocated

    

Total

Three months ended  June 30, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

2,326 

 

$

14,066 

 

$

1,998 

 

$

2,268 

 

$

1,495 

 

$

3,323 

 

$

25,476 

Charge-offs

 

 

 

 

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

 

 

 

 

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 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financing receivables:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 

 

1 As of June 30, 2014, this segment consisted of performing loans that included a higher risk pool of loans rated as substandard that totaled $3.2 million.  The amount of general allocation that was estimated for that portion of these performing substandard rated loans was $78,000 at June 30, 2014.

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses:

 

 

 

Real Estate

 

Real Estate

 

Real Estate

 

 

 

 

 

 

 

    

Commercial

    

Commercial 1

    

Construction

    

Residential

    

Consumer

    

Unallocated

    

Total

Three Months Ended

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

3,773 

 

$

19,265 

 

$

3,729 

 

$

3,971 

 

$

1,214 

 

$

6,682 

 

$

38,634 

Charge-offs

 

 

25 

 

 

1,018 

 

 

894 

 

 

1,014 

 

 

134 

 

 

 

 

3,085 

Recoveries

 

 

25 

 

 

505 

 

 

480 

 

 

179 

 

 

104 

 

 

 

 

1,293 

(Release) provision

 

 

(441)

 

 

(655)

 

 

(625)

 

 

1,885 

 

 

188 

 

 

(2,152)

 

 

(1,800)

Ending balance

 

$

3,332 

 

$

18,097 

 

$

2,690 

 

$

5,021 

 

$

1,372 

 

$

4,530 

 

$

35,042 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of year

 

$

4,517 

 

$

20,100 

 

$

3,837 

 

$

4,535 

 

$

1,178 

 

$

4,430 

 

$

38,597 

Charge-offs

 

 

279 

 

 

1,526 

 

 

898 

 

 

1,599 

 

 

306 

 

 

 

 

4,608 

Recoveries

 

 

44 

 

 

3,229 

 

 

1,250 

 

 

583 

 

 

247 

 

 

 

 

5,353 

(Release) provision

 

 

(950)

 

 

(3,706)

 

 

(1,499)

 

 

1,502 

 

 

253 

 

 

100 

 

 

(4,300)

Ending balance

 

$

3,332 

 

$

18,097 

 

$

2,690 

 

$

5,021 

 

$

1,372 

 

$

4,530 

 

$

35,042 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance: Individually evaluated for impairment

 

$

52 

 

$

1,649 

 

$

324 

 

$

3,011 

 

$

 

$

 

$

5,036 

Ending balance: Collectively evaluated for impairment

 

$

3,280 

 

$

16,448 

 

$

2,366 

 

$

2,010 

 

$

1,372 

 

$

4,530 

 

$

30,006 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financing receivables:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance

 

$

98,036 

 

$

563,061 

 

$

34,964 

 

$

386,504 

 

$

2,793 

 

$

17,345 

 

$

1,102,703 

Ending balance: Individually evaluated for impairment

 

$

104 

 

$

32,381 

 

$

8,073 

 

$

29,822 

 

$

 

$

 

$

70,380 

Ending balance: Collectively evaluated for impairment

 

$

97,932 

 

$

530,680 

 

$

26,891 

 

$

356,682 

 

$

2,793 

 

$

17,345 

 

$

1,032,323 

 

1 As of June 30, 2013, this segment consisted of performing loans that included a higher risk pool of loans rated as substandard that totaled $11.1 million.  The amount of general allocation that was estimated for that portion of these performing substandard rated loans was $2.9 million at June 30, 2013.

                           

18

 


 

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Note 5 – Other Real Estate Owned

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

    

June 30,

    

June 30,

Other real estate owned

    

2014

    

2013

    

2014

    

2013

Balance at beginning of period

 

$

40,220 

 

$

65,663 

 

$

41,537 

 

$

72,423 

Property additions

 

 

4,655 

 

 

4,196 

 

 

9,343 

 

 

11,181 

Development improvements

 

 

131 

 

 

 -

 

 

131 

 

 

50 

Less:

 

 

 

 

 

 

 

 

 

 

 

 

Property disposals, net of gains/losses

 

 

4,949 

 

 

7,804 

 

 

10,518 

 

 

19,465 

Period valuation adjustments

 

 

825 

 

 

2,590 

 

 

1,261 

 

 

4,724 

Balance at end of period

 

$

39,232 

 

$

59,465 

 

$

39,232 

 

$

59,465 

 

Activity in the valuation allowance was as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

June 30,

 

June 30,

 

    

2014

    

2013

    

2014

    

2013

Balance at beginning of period

 

$

19,484 

 

$

30,966 

 

$

22,284 

 

$

31,454 

Provision for unrealized losses

 

 

825 

 

 

2,589 

 

 

1,261 

 

 

4,576 

Reductions taken on sales

 

 

(2,436)

 

 

(3,112)

 

 

(5,083)

 

 

(5,734)

Other adjustments

 

 

 -

 

 

44 

 

 

(589)

 

 

191 

Balance at end of period

 

$

17,873 

 

$

30,487 

 

$

17,873 

 

$

30,487 

 

Expenses related to foreclosed assets, net of lease revenue includes:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

June 30,

 

June 30,

 

    

2014

    

2013

    

2014

    

2013

Gain on sales, net

 

$

(23)

 

$

(386)

 

$

(409)

 

$

(567)

Provision for unrealized losses

 

 

825 

 

 

2,589 

 

 

1,261 

 

 

4,576 

Operating expenses

 

 

1,011 

 

 

1,356 

 

 

2,248 

 

 

3,055 

Less:

 

 

 

 

 

 

 

 

 

 

 

 

Lease revenue

 

 

163 

 

 

257 

 

 

442 

 

 

665 

 

 

$

1,650 

 

$

3,302 

 

$

2,658 

 

$

6,399 

 

 

Note 6 – Deposits

 

Major classifications of deposits were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

June 30, 2014

    

December 31, 2013

Noninterest bearing demand

 

$

393,964 

 

$

373,389 

Savings

 

 

238,167 

 

 

228,589 

NOW accounts

 

 

310,721 

 

 

297,852 

Money market accounts

 

 

304,766 

 

 

309,859 

Certificates of deposit of less than $100,000

 

 

274,971 

 

 

288,345 

Certificates of deposit of $100,000 or more

 

 

178,235 

 

 

184,094 

 

 

$

1,700,824 

 

$

1,682,128 

 

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Note 7 – Borrowings

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

June 30, 2014

    

December 31, 2013

Securities sold under repurchase agreements

 

$

38,133 

 

$

22,560 

FHLBC advances

 

 

 -

 

 

5,000 

Junior subordinated debentures

 

 

58,378 

 

 

58,378 

Subordinated debt

 

 

45,000 

 

 

45,000 

Notes payable and other borrowings

 

 

500 

 

 

500 

 

 

$

142,011 

 

$

131,438 

 

The Company enters into deposit sweep transactions where the transaction amounts are secured by pledged securities.  These transactions consistently mature within 1 to 90 days from the transaction date and are governed by sweep repurchase agreements.  All sweep repurchase agreements are treated as financings secured by U.S. government agencies and collateralized mortgage-backed securities and had a carrying amount of $38.1 million at June 30, 2014, and $22.6 million at December 31, 2013. The fair value of the pledged collateral was $44.1 million and $39.2 million at June 30, 2014 and December 31, 2013, respectively. At June 30, 2014, there was one customer 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 and total borrowings are generally limited to the lower of 35% of total assets or 60% of the book value of certain mortgage loans and the fair value of investment securities.  As of June 30, 2014, there were no advances.  The Bank has FHLBC stock valued at $5.5 million, collateralized securities with a fair value of $82.6 million and loans with a principal balance of $54.1 million, which carry a combined collateral value of $115.8 million.  The Company has excess collateral of $114.5 million available to secure borrowings.

 

One of the Company’s most significant borrowing relationships continued to be the $45.5 million credit facility with a correspondent bank. That credit began in January 2008 and was originally composed of a $30.5 million senior debt facility, which included $500,000 in term debt, and $45.0 million of subordinated debt.  The subordinated debt and the term debt portion of the senior debt facility mature on March 31, 2018.  The interest rate on the senior debt facility resets quarterly and at the Company’s option, is based on, either the lender’s prime rate or three-month LIBOR plus 90 basis points.  The interest rate on the subordinated debt resets quarterly, and is equal to three-month LIBOR plus 150 basis points.  The Company had no principal outstanding balance on the senior line of credit when it matured.  The Company terminated the senior line of credit.  The Company had $500,000 in principal outstanding in term debt and $45.0 million in principal outstanding in subordinated debt at June 30, 2014, and December 31, 2013.  The term debt is secured by all of the outstanding capital stock of the Bank.  Pursuant to the Written Agreement (the “Written Agreement”) the Company entered into with the Reserve Bank, the Company was required to receive the Reserve Bank’s approval prior to making any interest payments on the subordinated debt.  In January 2014, the Reserve Bank notified the Company that the Written Agreement was terminated.

 

The agreement governing the credit facility contains usual and customary provisions regarding acceleration of the senior debt upon the occurrence of an event of default by the Company.  The term debt agreement also contains certain customary representations and warranties and financial and negative covenants.  At June 30, 2014, the Company was out of compliance with one of the financial covenants contained within the credit agreement.  Prior to 2013, the Company had been out of compliance with two of the financial covenants.  The agreement provides that noncompliance is an event of default and as the result of the Company’s failure to comply with a financial covenant, the lender may (i) terminate all commitments to extend further credit, (ii) increase the interest rate on the revolving line of the term debt by 200 basis points, (iii) declare the senior debt immediately due and payable and (iv) exercise all of its rights and remedies at law, in equity and/or pursuant to any or all collateral documents, including foreclosing on the collateral.  The total outstanding principal amount of the senior debt is the $500,000 in term debt, and because the subordinated debt is treated as Tier 2 capital, the agreement does not provide the lender with any additional rights of acceleration or other remedies upon an event of default caused by the Company’s failure to comply with a financial covenant.

 

Note 8 Junior Subordinated Debentures

 

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

 

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

 

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

 

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, 2014, 210,500 shares remained available for issuance under the 2014 Plan.

Total compensation cost that has been charged for the plans was $82,000 in the first half of 2014 and $67,000 in the first half of 2013. 

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

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

Weighted

 

Average

 

 

 

 

 

 

 

Average

 

Remaining

 

 

 

 

 

 

 

Exercise

 

Contractual

 

Aggregate

 

    

Shares

    

Price

    

Term (years)

    

Intrinsic Value

 

 

 

 

 

 

 

 

 

 

 

Beginning outstanding

 

325,500 

 

$

29.56 

 

 

 

 

 

Canceled

 

 -

 

 

 -

 

 

 

 

 

Ending outstanding

 

325,500 

 

$

29.56 

 

2.0 

 

$

-

 

 

 

 

 

 

 

 

 

 

 

Exercisable at end of period

 

325,500 

 

$

29.56 

 

2.0 

 

$

-

 

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, (i) stock options and stock appreciation rights generally will become fully vested, (ii) restricted stock awards and restricted stock units generally will become fully vested if the 2014 Plan is not an obligation of the successor entity following the change in control or the 2014 Plan is an obligation of the successor entity following the change in control or the 2014 Plan is an obligation of the successor entity following the change in control and the participant incurs an involuntary termination, and (iii) performance-based awards generally will vest based upon the level of achievement of the applicable performance measures through the change in control.

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

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

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2014

 

 

 

 

Weighted

 

 

Restricted

 

Average

 

 

Stock Shares

 

Grant Date

 

    

and Units

    

Fair Value

Unvested at January 1

 

185,500 

 

$

2.95 

Granted

 

184,500 

 

 

4.82 

Vested

 

(25,000)

 

 

2.06 

Forfeited

 

(20,000)

 

 

1.74 

Unvested at June 30

 

325,000 

 

$

4.15 

 

 

 

 

 

 

 

Total unrecognized compensation cost of restricted awards was $1.1 million as of June 30, 2014, which is expected to be recognized over a weighted-average period of 2.71 years.  Total unrecognized compensation cost of restricted awards was $462,000 as of June 30, 2013, which was expected to be recognized over a weighted-average period of 2.66 years.

 

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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

 

Six Months Ended

 

 

June 30,

 

June 30,

 

    

2014

    

2013

    

2014

    

2013

Basic earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average common shares outstanding

 

 

28,181,519 

 

 

13,882,910 

 

 

21,090,665 

 

 

13,978,979 

Weighted-average common shares less stock based awards

 

 

28,181,519 

 

 

13,867,910 

 

 

21,086,438 

 

 

13,907,463 

Weighted-average common shares stock based awards

 

 

179,874 

 

 

209,868 

 

 

174,522 

 

 

209,968 

Net income from operations

 

$

2,021 

 

$

3,477 

 

$

4,223 

 

$

8,948 

Gain on preferred stock redemption

 

 

(1,348)

 

 

 -

 

 

(1,348)

 

 

 -

Dividends waived, net of dividends and accretion on preferred stock

 

 

(4,085)

 

 

1,305 

 

 

(2,513)

 

 

2,594 

Net earnings available to common stockholders

 

 

7,454 

 

 

2,172 

 

 

8,084 

 

 

6,354 

Undistributed earnings

 

 

7,454 

 

 

2,172 

 

 

8,084 

 

 

6,354 

Basic earnings per share common undistributed earnings

 

 

0.26 

 

 

0.15 

 

 

0.38 

 

 

0.45 

Basic earnings per share

 

$

0.26 

 

$

0.15 

 

$

0.38 

 

$

0.45 

Diluted earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average common shares outstanding

 

 

28,181,519 

 

 

13,882,910 

 

 

21,090,665 

 

 

13,978,979 

Dilutive effect of nonvested restricted awards1

 

 

179,874 

 

 

194,868 

 

 

170,295 

 

 

138,452 

Diluted average common shares outstanding

 

 

28,361,393 

 

 

14,077,778 

 

 

21,260,960 

 

 

14,117,431 

Net earnings available to common stockholders

 

$

7,454 

 

$

2,172 

 

$

8,084 

 

$

6,354 

Diluted earnings per share

 

$

0.26 

 

$

0.15 

 

$

0.38 

 

$

0.45 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

1,140,839 

 

 

1,224,839 

 

 

1,140,839 

 

 

1,224,839 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

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

 

Note 11 Regulatory & Capital Matters

 

The Bank is subject to the risk-based capital regulatory guidelines, which include the methodology for calculating the risk-weighted Bank assets, developed by the Office of the Comptroller of the Currency (the “OCC”) and the other bank regulatory agencies.  In connection with the current economic environment, the Bank’s current level of nonperforming assets and the risk-based capital guidelines, the Bank’s board of directors has determined that the Bank should maintain a Tier 1 leverage capital ratio at or above eight percent (8%) and a total risk-based capital ratio at or above twelve percent (12%).  The Bank currently exceeds those thresholds.  On May 16, 2011, the Bank, the wholly-owned banking subsidiary of the Company, entered into a Consent Order with the Office of the Comptroller of the Currency (the “OCC”).  Pursuant to the Consent Order, the Bank agreed to take certain actions and operate in compliance with the Consent Order’s provisions during its terms.  On October 17, 2013, the OCC terminated the Consent Order.

 

The Bank exceeded both board of directors’ capital ratio objectives.  At June 30, 2014, the Bank’s Tier 1 capital leverage ratio was 11.28%, up 31 basis points from December 31, 2013, and well above the 8.00% objective.  The Bank’s total capital ratio was 18.29%, up 25 basis points from December 31, 2013, and also well above the objective of 12.00%.

 

On July 22, 2011, the Company entered into a Written Agreement with the Reserve Bank designed to maintain the financial soundness of the Company. Pursuant to the Written Agreement, the Company took certain actions and operated in compliance with the Written Agreement’s provisions during its term.  On January 17, 2014, the Reserve Bank terminated the Written Agreement.  Although

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the Written Agreement has been terminated, the Company expects that it will continue to seek approval from the Reserve Bank prior to paying any dividends on its capital stock and incurring any additional indebtedness.

 

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

 

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

 

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

 

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, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total capital to risk weighted assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

$

233,167 

 

17.66 

%

 

$

105,625 

 

8.00 

%

 

 

N/A

 

N/A

Old Second Bank

 

 

241,394 

 

18.29 

 

 

 

105,585 

 

8.00 

 

 

 

131,981 

 

10.00 

Tier 1 capital to risk weighted assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

 

189,576 

 

14.36 

 

 

 

52,807 

 

4.00 

 

 

 

N/A

 

N/A

Old Second Bank

 

 

224,812 

 

17.03 

 

 

 

52,804 

 

4.00 

 

 

 

79,206 

 

6.00 

Tier 1 capital to average assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

 

189,576 

 

9.51 

 

 

 

79,738 

 

4.00 

 

 

 

N/A

 

N/A

Old Second Bank

 

 

224,812 

 

11.28 

 

 

 

79,721 

 

4.00 

 

 

 

99,651 

 

5.00 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total capital to risk weighted assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

$

191,139 

 

15.16 

%

 

$

100,865 

 

8.00 

%

 

 

N/A

 

N/A

Old Second Bank

 

 

227,467 

 

18.04 

 

 

 

100,872 

 

8.00 

 

 

 

126,090 

 

10.00 

Tier 1 capital to risk weighted assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

 

134,199 

 

10.65 

 

 

 

50,403 

 

4.00 

 

 

 

N/A

 

N/A

Old Second Bank

 

 

211,568 

 

16.78 

 

 

 

50,433 

 

4.00 

 

 

 

75,650 

 

6.00 

Tier 1 capital to average assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

 

134,199 

 

6.96 

 

 

 

77,126 

 

4.00 

 

 

 

N/A

 

N/A

Old Second Bank

 

 

211,568 

 

10.97 

 

 

 

77,144 

 

4.00 

 

 

 

96,430 

 

5.00 

 

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

 

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

 

24

 


 

Table of Contents

Dividend Restrictions and Deferrals

 

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

 

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

 

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

 

On April 15, 2014, the Company declared a dividend of approximately $15.8 million on its Series B Stock to stockholders of record on May 1, 2014.  SerieB Stock dividends of $10.3 million were paid on May 15, 2014.

 

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

 

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

 

Note 12 Fair Value Option and Fair Value Measurements

 

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

 

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

 

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

 

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

 

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

 

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

 

·

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

·

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

·

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

·

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

 

26

 


 

Table of Contents

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

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2014

 

    

Level 1

    

Level 2

    

Level 3

    

Total

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Investment securities available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury

 

$

1,538 

 

$

-

 

$

-

 

$

1,538 

U.S. government agencies

 

 

-

 

 

1,653 

 

 

-

 

 

1,653 

States and political subdivisions

 

 

-

 

 

15,628 

 

 

125 

 

 

15,753 

Corporate Bonds

 

 

-

 

 

31,350 

 

 

-

 

 

31,350 

Collateralized mortgage obligations

 

 

-

 

 

33,083 

 

 

-

 

 

33,083 

Asset-backed securities

 

 

 -

 

 

109,351 

 

 

137,086 

 

 

246,437 

Loans held-for-sale

 

 

-

 

 

4,559 

 

 

 -

 

 

4,559 

Mortgage servicing rights

 

 

-

 

 

-

 

 

5,501 

 

 

5,501 

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

 

 

-

 

 

110 

 

 

 -

 

 

110 

Other assets (Mortgage banking derivatives)

 

 

-

 

 

276 

 

 

-

 

 

276 

Total

 

$

1,538 

 

$

196,010 

 

$

142,712 

 

$

340,260 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Other liabilities (Interest rate swap agreements)

 

$

-

 

$

110 

 

$

-

 

$

110 

Total

 

$

 -

 

$

110 

 

$

 -

 

$

110 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2013

 

    

Level 1

    

Level 2

    

Level 3

    

Total

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Investment securities available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury

 

$

1,544 

 

$

 -

 

$

-

 

$

1,544 

U.S. government agencies

 

 

-

 

 

1,672 

 

 

-

 

 

1,672 

States and political subdivisions

 

 

-

 

 

16,669 

 

 

125 

 

 

16,794 

Corporate bonds

 

 

-

 

 

15,102 

 

 

-

 

 

15,102 

Collateralized mortgage obligations

 

 

-

 

 

63,876 

 

 

-

 

 

63,876 

Asset-backed securities

 

 

 -

 

 

119,066 

 

 

154,137 

 

 

273,203 

Loans held-for-sale

 

 

-

 

 

3,822 

 

 

 -

 

 

3,822 

Mortgage servicing rights

 

 

-

 

 

 -

 

 

5,807 

 

 

5,807 

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

 

 

-

 

 

229 

 

 

(6)

 

 

223 

Other assets (Mortgage banking derivatives)

 

 

-

 

 

315 

 

 

-

 

 

315 

Total

 

$

1,544 

 

$

220,751 

 

$

160,063 

 

$

382,358 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Other liabilities (Interest rate swap agreements)

 

$

-

 

$

229 

 

$

-

 

$

229 

Total

 

$

 -

 

$

229 

 

$

 -

 

$

229 

 

27

 


 

Table of Contents

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six months ended June 30, 2014

 

 

Securities available-for- sale

 

 

 

 

 

 

 

 

 

 

 

 

States and

 

Mortgage

 

Interest Rate

 

 

 

 

 

 

Political

 

Servicing

 

Swap

 

    

 

Asset-backed

    

Subdivisons

    

Rights

    

Valuation

Beginning balance January 1, 2014

 

 

$

154,137 

 

$

125 

 

$

5,807 

 

$

Transfers into Level 3

 

 

 

 -

 

 

 -

 

 

 -

 

 

 -

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 

 

 

 -

Sales

 

 

 

(77,282)

 

 

-

 

 

-

 

 

-

Ending balance June 30, 2014

 

 

$

137,086 

 

$

125 

 

$

5,501 

 

$

 -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six months ended June 30, 2013

 

 

Securities available-for- sale

 

 

 

 

 

 

 

 

 

 

 

 

 

States and

 

Mortgage

 

Interest Rate

 

 

Collateralized Debt

 

Asset-

 

Political

 

Servicing

 

Swap

 

    

Obligations

    

backed

    

Subdivisons

    

Rights

    

Valuation

Beginning balance January 1, 2013

 

$

9,957 

 

$

 -

 

$

132 

 

$

4,116 

 

$

(47)

Transfers into Level 3

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

Transfers out of Level 3

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

Total gains or losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Included in earnings (or changes in net assets)

 

 

115 

 

 

276 

 

 

-

 

 

239 

 

 

24 

Included in other comprehensive income

 

 

1,182 

 

 

(1,450)

 

 

-

 

 

-

 

 

-

Purchases, issuances, sales, and settlements

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Purchases

 

 

-

 

 

164,533 

 

 

-

 

 

-

 

 

-

Issuances

 

 

-

 

 

-

 

 

-

 

 

946 

 

 

-

Settlements

 

 

(910)

 

 

-

 

 

-

 

 

-

 

 

-

Sales

 

 

-

 

 

(11,591)

 

 

-

 

 

-

 

 

-

Ending balance June 30, 2013

 

$

10,344 

 

$

151,768 

 

$

132 

 

$

5,301 

 

$

(23)

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted

Measured at fair value

 

 

 

 

 

 

 

 

 

 

Average

on a recurring basis:

    

Fair Value

    

Valuation Methodology

    

Unobservable Inputs

    

Range of Input

    

of Inputs

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage Servicing rights

 

 

5,501 

 

Discounted Cash Flow

 

Discount Rate

 

10.0-14.0%

 

10.2 

%

 

 

 

 

 

 

 

Prepayment Speed

 

3.7-33.2%

 

9.7 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset-backed securities

 

 

137,086 

 

Discounted Cash Flow

 

Credit Risk Premium

 

0.5-0.8%

 

0.7 

%

 

 

 

 

 

with comparable transaction yields

 

Liquidity Discount

 

4.0-4.4%

 

4.2 

%

 

28

 


 

Table of Contents

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted

Measured at fair value

 

 

 

 

 

 

Unobservable

 

 

 

Average

on a recurring basis:

    

Fair Value

    

Valuation Methodology

    

Inputs

    

Range of Input

    

of Inputs

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage Servicing rights

 

 

5,807 

 

Discounted Cash Flow

 

Discount Rate

 

10.2%

 

10.2 

%

 

 

 

 

 

 

 

Prepayment Speed

 

9.7%

 

9.7 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Rate Swap Valuation

 

 

(6)

 

Management estimate of

 

Probability of Default

 

5.0-20.0%

 

12.5 

%

 

 

 

 

 

 credit risk exposure

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset-backed securities

 

 

154,137 

 

Discounted Cash Flow

 

Credit Risk Premium

 

1.1-1.5%

 

1.2 

%

 

 

 

 

 

with comparable transaction yields

 

Liquidity Discount

 

4.5-5.1%

 

4.9 

%

 

 

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

 

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

 

The Company may be required, from time to time, to measure certain other assets at fair value on a nonrecurring basis in accordance with GAAP.  These assets consist of impaired loans and OREO.  For assets measured at fair value on a nonrecurring basis at June 30, 2014, 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, 2014

 

    

Level 1

 

Level 2

    

Level 3

    

Total

Impaired loans1

 

$

-

 

$

-

 

$

2,366 

 

$

2,366 

Other real estate owned, net2

 

 

-

 

 

-

 

 

39,232 

 

 

39,232 

Total

 

$

 -

 

$

 -

 

$

41,598 

 

$

41,598 

 

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 $3.8 million, with a valuation allowance of $1.4 million, resulting in a decrease of specific allocations within the allowance for loan losses of $955,000 for the six months ending June 30, 2014.

 

2   OREO is measured at the lower of carrying or fair value less costs to sell, and had a net carrying amount of $39.2 million, which is made up of the outstanding balance of $58.9 million, net of a valuation allowance of $17.9 million and participations of $1.8 million, at June 30, 2014.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2013

 

    

Level 1

    

Level 2

    

Level 3

    

Total

Impaired loans1

 

$

-

 

$

-

 

$

9,103 

 

$

9,103 

Other real estate owned, net2

 

 

-

 

 

-

 

 

41,537 

 

 

41,537 

Total

 

$

 -

 

$

 -

 

$

50,640 

 

$

50,640 

 

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

 

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

 

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

29

 


 

Table of Contents

 

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

 

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

 

Interest Rate Swaps

 

The Bank also has interest rate derivative positions to assist with risk management that are not designated as hedging instruments.  These derivative positions relate to transactions in which the Bank enters an interest rate swap with a client while at the same time entering into an offsetting interest rate swap with another financial institution.  Due to financial covenant violations relating to nonperforming loans, the Bank had $3.2 million in investment securities pledged to support interest rate swap activity with three correspondent financial institutions at June 30, 2014.  The Bank had $3.1  million in investment securities pledged to support interest rate swap activity with three correspondent financial institutions at December 31, 2013.  In connection with each transaction, the Bank agreed to pay interest to the client on a notional amount at a variable interest rate and receive interest from the client on the same notional amount at a fixed interest rate.

 

At the same time, the Bank agreed to pay another financial institution the same fixed interest rate on the same notional amount and receive the same variable interest rate on the same notional amount.  The transaction allows the client to convert a variable rate loan to a fixed rate loan and is part of the Company’s interest rate risk management strategy.  Because the Bank acts as an intermediary for the client, changes in the fair value of the underlying derivative contracts offset each other and do not generally affect the results of operations.  Fair value measurements include an assessment of credit risk related to the client’s ability to perform on their contract position, however, and valuation estimates related to that exposure are discussed in Note 12 above.  At June 30, 2014, the notional amount of non-hedging interest rate swaps was $21.3 million with a weighted average maturity of 2.6 years.  At December 31, 2013, the notional amount of non-hedging interest rate swaps was $51.9 million with a weighted average maturity of 1.5 years.  The Bank offsets derivative assets and liabilities that are subject to a master netting arrangement.

 

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

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset Derivatives

 

Liability Derivatives

 

 

Notional or

 

 

 

 

 

 

 

 

 

 

Contractual

 

Balance Sheet

 

 

 

 

Balance Sheet

 

 

 

 

    

Amount

    

Location

    

Fair Value

    

Location

    

Fair Value

Interest rate swap contracts net of credit valuation

 

$

21,261 

 

Other Assets

 

$

110 

 

Other Liabilities

 

$

110 

Commitments1

 

 

215,696 

 

Other Assets

 

 

276 

 

N/A

 

 

-

Forward contracts2

 

 

15,500 

 

N/A

 

 

-

 

Other Liabilities

 

 

 -

Total

 

 

 

 

 

 

$

386 

 

 

 

$

110 

 

1Includes unused loan commitments and interest rate lock commitments.

2Includes forward MBS contracts and forward loan contracts.

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset Derivatives

 

Liability Derivatives

 

 

Notional or

 

 

 

 

 

 

 

 

 

 

Contractual

 

Balance Sheet

 

 

 

 

Balance Sheet

 

 

 

 

    

Amount

    

Location

    

Fair Value

    

Location

    

Fair Value

Interest rate swap contracts net of credit valuation

 

$

51,877 

 

Other Assets

 

$

223 

 

Other Liabilities

 

$

229 

Commitments1

 

 

206,965 

 

Other Assets

 

 

315 

 

N/A

 

 

 -

Forward contracts2

 

 

11,500 

 

N/A

 

 

-

 

Other Liabilities

 

 

 -

Total

 

 

 

 

 

 

$

538 

 

 

 

$

229 

 

1Includes unused loan commitments and interest rate lock commitments.

2Includes forward MBS contracts.

 

The Bank also issues letters of credit, which are conditional commitments that guarantee the performance of a customer to a third party.  The credit risk involved and collateral obtained in issuing letters of credit are essentially the same as that involved in extending loan commitments to our customers.

 

In addition to customer related commitments, the Company is responsible for letters of credit commitments that relate to properties held in OREO.  The following table represents the Company’s contractual commitments due to letters of credit as of June 30, 2014, and December 31, 2013.

 

The following table is a summary of financial instrument commitments (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2014

 

December 31, 2013

 

    

Fixed

    

Variable

    

Total

    

Fixed

    

Variable

    

Total

Letters of credit:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Borrower:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial standby

 

$

55 

 

$

4,462 

 

$

4,517 

 

$

10 

 

$

3,886 

 

$

3,896 

Commercial standby

 

 

-

 

 

49 

 

 

49 

 

 

-

 

 

51 

 

 

51 

Performance standby

 

 

416 

 

 

6,152 

 

 

6,568 

 

 

1,580 

 

 

2,723 

 

 

4,303 

 

 

 

471 

 

 

10,663 

 

 

11,134 

 

 

1,590 

 

 

6,660 

 

 

8,250 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-borrower:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performance standby

 

 

 -

 

 

621 

 

 

621 

 

 

 -

 

 

867 

 

 

867 

 

 

 

 -

 

 

621 

 

 

621 

 

 

 -

 

 

867 

 

 

867 

Total letters of credit

 

$

471 

 

$

11,284 

 

$

11,755 

 

$

1,590 

 

$

7,527 

 

$

9,117 

 

 

 

Note 14 – Fair Values of Financial Instruments

 

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

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2014

 

 

Carrying

 

Fair

 

 

 

 

 

 

 

 

 

 

    

Amount

    

Value

    

Level 1

    

Level 2

    

Level 3

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

73,646 

 

$

73,646 

 

$

73,646 

 

$

 -

 

$

 -

Interest bearing deposits with financial institutions

 

 

19,412 

 

 

19,412 

 

 

19,412 

 

 

 -

 

 

 -

Securities available-for-sale

 

 

329,814 

 

 

329,814 

 

 

1,538 

 

 

191,065 

 

 

137,211 

Securities held-to-maturity

 

 

264,683 

 

 

267,770 

 

 

 -

 

 

267,770 

 

 

 -

FHLBC and Reserve Bank Stock

 

 

10,292 

 

 

10,292 

 

 

 -

 

 

10,292 

 

 

 -

Bank-owned life insurance

 

 

56,134 

 

 

56,134 

 

 

 -

 

 

56,134 

 

 

 -

Loans held for sale

 

 

4,559 

 

 

4,559 

 

 

 -

 

 

4,559 

 

 

 -

Loans, net

 

 

1,108,891 

 

 

1,111,883 

 

 

 -

 

 

 -

 

 

1,111,883 

Accrued interest receivable

 

 

3,874 

 

 

3,874 

 

 

 -

 

 

3,874 

 

 

 -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest bearing deposits

 

$

393,964 

 

$

393,964 

 

$

393,964 

 

$

 -

 

$

 -

Interest bearing deposits

 

 

1,306,860 

 

 

1,307,846 

 

 

 -

 

 

1,307,846 

 

 

 -

Securities sold under repurchase agreements

 

 

38,133 

 

 

38,133 

 

 

 -

 

 

38,133 

 

 

 -

Junior subordinated debentures

 

 

58,378 

 

 

73,913 

 

 

43,846 

 

 

30,067 

 

 

 -

Subordinated debenture

 

 

45,000 

 

 

40,856 

 

 

 -

 

 

40,856 

 

 

 -

Note payable and other borrowings

 

 

500 

 

 

439 

 

 

 -

 

 

439 

 

 

 -

Borrowing interest payable

 

 

68 

 

 

68 

 

 

 -

 

 

68 

 

 

 -

Deposit interest payable

 

 

655 

 

 

655 

 

 

 -

 

 

655 

 

 

 -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2013

 

 

Carrying

 

Fair

 

 

 

 

 

 

 

    

Amount

    

Value

    

Level 1

    

Level 2

    

Level 3

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

33,210 

 

$

33,210 

 

$

33,210 

 

$

 -

 

$

 -

Interest bearing deposits with financial institutions

 

 

14,450 

 

 

14,450 

 

 

14,450 

 

 

 -

 

 

 -

Securities available-for-sale

 

 

372,191 

 

 

372,191 

 

 

1,544 

 

 

216,385 

 

 

154,262 

Securities held-to-maturity

 

 

256,571 

 

 

254,328 

 

 

 -

 

 

254,328 

 

 

 -

FHLBC and Reserve Bank Stock

 

 

10,292 

 

 

10,292 

 

 

 -

 

 

10,292 

 

 

 -

Bank-owned life insurance

 

 

55,410 

 

 

55,410 

 

 

 -

 

 

55,410 

 

 

 -

Loans held-for-sale

 

 

3,822 

 

 

3,822 

 

 

 -

 

 

3,822 

 

 

 -

Loans, net

 

 

1,073,975 

 

 

1,072,837 

 

 

 -

 

 

 -

 

 

1,072,837 

Accrued interest receivable

 

 

4,248 

 

 

4,248 

 

 

 -

 

 

4,248 

 

 

 -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest bearing deposits

 

$

373,389 

 

$

373,389 

 

$

373,389 

 

$

 -

 

$

 -

Interest bearing deposits

 

 

1,308,739 

 

 

1,312,476 

 

 

 -

 

 

1,312,476 

 

 

 -

Securities sold under repurchase agreements

 

 

22,560 

 

 

22,560 

 

 

 -

 

 

22,560 

 

 

 -

Other short-term borrowings

 

 

5,000 

 

 

5,000 

 

 

 -

 

 

5,000 

 

 

 -

Junior subordinated debentures

 

 

58,378 

 

 

67,053 

 

 

39,777 

 

 

27,276 

 

 

 -

Subordinated debenture

 

 

45,000 

 

 

39,896 

 

 

 -

 

 

39,896 

 

 

 -

Note payable and other borrowings

 

 

500 

 

 

423 

 

 

 -

 

 

423 

 

 

 -

Borrowing interest payable

 

 

17,037 

 

 

17,037 

 

 

10,122 

 

 

6,915 

 

 

 -

Deposit interest payable

 

 

762 

 

 

762 

 

 

 -

 

 

762 

 

 

 -

 

 

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

 

The Series B Stock was issued as part of the Treasury’s Troubled Asset Relief Program and Capital Purchase Program ( the “CPP”). as implemented by the Treasury.  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 received 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

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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 warrants as part of the allocation process in the amounts of $68.2 million and $4.8 million, respectively.

 

As discussed in Note 11, on August 31, 2010, the Company announced that it would begin deferring quarterly cash dividends on its outstanding Series B Stock.  Further, as discussed in Note 8 and Note 11, 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 fails to pay dividends for an aggregate of six quarters on the Series B Stock, whether or not consecutive, the holders have the right to appoint representatives to the Company’s board of directors.  As the Company elected to defer dividends for more than six quarters, a new director was appointed by the Treasury to join the board during the fourth quarter of 2012.  The terms of the Series B Stock also prevent the Company from paying cash dividends or generally repurchasing its common stock while Series B Stock dividends are in arrears.

 

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

 

As a result of the completed 2013 auctions, the Company’s Board elected to stop accruing the dividend on the Series B Stock in first quarter 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.  In the second quarter 2014, the Company completed redemption of 25,669 shares of its Series B Stock at a price equal to 94.75% of liquidation value provided that the holders of shares entered into agreements to forebear payment of dividends due and to waive any rights to such dividends upon redemption.  While the Company did not fully accrue the dividend on the Series B Stock in the 2013 first quarter and did not accrue for it in subsequent quarters, the Company continued to evaluate whether accruing dividends on the Series B Stock was appropriate.  The Company resumed accrual in second quarter 2014.  The Company currently intends to declare and pay future dividends on these shares.  Payments of $24.3 million resulted in redemption of 25,669 shares of Series B Stock.  At June 30, 2014, the Company carried $47.3 million of Series B Stock in total stockholders’ equity.  At December 31, 2013, the Company carried $72.9 million of Series B Stock in total stockholders’ equity.

 

Note 16 Income Taxes

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

June 30, 2014

    

June 30, 2013

Current federal

 

$

(61)

 

$

 -

Current state

 

 

(16)

 

 

 -

Deferred federal

 

 

1,707 

 

 

2,360 

Deferred state

 

 

628 

 

 

609 

Change in valuation allowance

 

 

 -

 

 

(2,969)

 

 

$

2,258 

 

$

 -

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

June 30, 2014

    

December 31, 2013

Allowance for loan losses

 

$

10,857 

 

$

12,725 

Deferred compensation

 

 

794 

 

 

788 

Amortization of core deposit

 

 

1,985 

 

 

1,656 

Goodwill amortization/impairment

 

 

14,434 

 

 

15,252 

Stock option expense

 

 

595 

 

 

583 

OREO write downs

 

 

8,330 

 

 

10,041 

Federal net operating loss (“NOL”) carryforward

 

 

29,483 

 

 

28,023 

State net operating loss (“NOL”) carryforward

 

 

12,210 

 

 

11,847 

Deferred tax credit

 

 

1,444 

 

 

1,444 

Other assets

 

 

844 

 

 

1,166 

Total deferred tax assets

 

 

80,976 

 

 

83,525 

 

 

 

 

 

 

 

Accumulated depreciation on premises and equipment

 

 

(904)

 

 

(1,035)

Accretion on securities

 

 

(9)

 

 

(8)

Mortgage servicing rights

 

 

(2,430)

 

 

(2,571)

State tax benefits

 

 

(6,813)

 

 

(6,994)

Other liabilities

 

 

(416)

 

 

(178)

Total deferred tax liabilities

 

 

(10,572)

 

 

(10,786)

Net deferred tax asset before valuation allowance

 

 

70,404 

 

 

72,739 

Tax effect on net unrealized losses on securities

 

 

3,737 

 

 

4,927 

Valuation allowance

 

 

(2,363)

 

 

(2,363)

Net deferred tax asset

 

$

71,778 

 

$

75,303 

 

At June 30, 2014, the Company had $84.2 million federal net operating loss carryforward of which, $25.3 million expires in 2030, $31.4 million expires in 2031, $8.6 million expires in 2032, $15.3 million expires in 2033, and $3.6 million expires in 2034.  The Company had $128.5 million state net operating loss carryforward of which, $29.4 million expires in 2021, $95.7 million expires in 2025, and $3.4 million expires in 2026.  In addition, the Company had $1.4 million alternative minimum tax credit subject to indefinite carryforward.

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

June 30, 2014

    

June 30, 2013

Allowance for loan losses

 

$

1,868 

 

$

2,178 

Deferred Compensation

 

 

(6)

 

 

(27)

Amortization of core-deposit

 

 

(329)

 

 

(346)

Stock option expense

 

 

(12)

 

 

202 

OREO write-downs

 

 

1,711 

 

 

3,082 

Federal net operating loss carryforward

 

 

(1,460)

 

 

(2,522)

State net operating loss carryforward

 

 

(363)

 

 

(644)

Depreciation

 

 

(131)

 

 

(59)

Net premiums and discounts on securities

 

 

 

 

25 

Mortgage servicing rights

 

 

(141)

 

 

527 

Goodwill amortization/impairment

 

 

818 

 

 

759 

State tax benefits

 

 

(181)

 

 

(186)

Change in valuation allowance

 

 

 -

 

 

(2,969)

Other, net

 

 

560 

 

 

(20)

Total deferred tax expense

 

$

2,335 

 

$

 -

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

June 30, 2014

    

June 30, 2013

Tax at statutory federal income tax rate

 

$

2,268 

 

$

3,132 

Nontaxable interest income, net of disallowed interest deduction

 

 

(125)

 

 

(121)

BOLI income

 

 

(254)

 

 

(404)

State income taxes, net of federal benefit

 

 

347 

 

 

457 

Change in valuation allowance

 

 

 -

 

 

(2,969)

Deficiency from restricted stock

 

 

 -

 

 

76 

Other, net

 

 

22 

 

 

(171)

Tax at effective tax rate

 

$

2,258 

 

$

 -

 

 

 

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

 

Overview

 

The Company is a financial services company with its main headquarters located in Aurora, Illinois.  The Company is the holding company of Old Second National Bank (the “Bank”), a national banking organization headquartered in Aurora, Illinois and 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, 2014, as compared to December 31, 2013, and the results of operations for the six months and three months ended June 30, 2014, and 2013.  This discussion and analysis is best read in conjunction with our consolidated financial statements as well as the financial and statistical data appearing elsewhere in this report and our 2013 Form 10-K.

 

In the markets where the Company operates, economies continued to recover at a modest and incremental but fitful pace.  The economies in these markets continued to show gradual improvement in the second quarter of 2014 along with similar moderate improvements in the national consumer and business spending.  Commercial Real Estate in our market areas has stabilized with only vacant land continuing to reflect little or no growth.  Residential mortgage demand has increased but is still below levels seen in 2013.  Management continues to focus on growing commercial business with smaller customers as well as customers in a variety of industries approaching middle market levels. 

The Company remains vigilant in analyzing loan portfolio quality and making decisions to charge-off loans.  To that end, the Company recognized improved asset quality by recording a $1.0 million loan loss reserve release in the quarter with net income of $2.0 million.  This compared to a $1.8 million loan loss reserve release and a net income of $3.5 million for the same period in 2013.  The $1.0 million loan loss reserve release for the period was appropriate in light of ongoing improvements in loan portfolio quality. 

Net income of $3.1 million (before taxes) in the second quarter of 2014 compares to $3.5 million for the second quarter of 2013.  In addition to the larger loan loss reserve release in second quarter 2013, last year’s quarter included stronger residential mortgage banking revenue as well as $745,000 in securities gains compared to a lower level of securities gains of $295,000 in 2014 second quarter. 

In April 2014, the Company concluded a successful capital raise issuing 15,525,000 common shares with net proceeds in excess of $64.0 million.  Proceeds have been used to pay accrued but previously deferred and unpaid interest on trust preferred securities, to repurchase certain shares of Series B Stock and to pay the accrued as well as otherwise accumulated but unpaid dividends on Series B Stock.  The remaining proceeds will be used for general corporate purposes including payment for various services required during the offering. 

 

On April 28, 2014, the Company repurchased Series B Stock at an agreed upon price reached in private negotiations.  Payments of $22.9 million were made to a large private investor with other payments totaling $1.4 million made to directors of the Company.  On May 15, 2014, the Company paid $10.3 million on accumulated but unpaid dividends related to the Series B Stock.

 

Results of Operations

 

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

 

The Company completed the redemption of 25,669 shares of its Series B Stock in the quarter.  As previously disclosed, the Company completed a public offering of common stock in April.  Net proceeds of over $64.0 million were used to pay the accrued but unpaid interest on trust preferred junior subordinated debentures, the accumulated but unpaid dividends on the Series B Stock and to complete this redemption.  The redemption price for such Series B Stock was 94.75% of the liquidation value of the Series B Stock provided that the holders of shares entered into agreements to forbear payment of dividends due and to waive any rights to such dividend upon redemption.  The Company also redeemed all shares of Series B Stock held by directors of the Company on the same terms. 

These redemptions at below liquidation value resulted in a benefit of $1.3 million to net income available to common stockholders in the quarter.  An additional benefit of $5.4 million reflecting both reversal of dividends previously accrued as well as dividends accumulated but not accrued by the Company and waived by holders upon redemption, is reflected in net income available to common stockholders.  Absent these benefits, the Company realized $0.02 per diluted share in the quarter.

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Net Interest Income

 

Net interest and dividend income increased $264,000 from $13.4 million for the quarter ended June 30, 2013, to $13.7 million for the quarter ended June 30, 2014.  Average earning assets increased $49.7 million, or 2.8%, from a total of $1.76 billion in the second quarter of 2013.  Loan production in 2014 drove average loans, including loans held for sale, to a nominal improvement of $2.0 million reversing the trend of declining average loan volume seen in recent periods.  On a sequential quarter basis, average loan volume, including loans held for sale, increased $14.5 million also reversing a 2013 trend of declining volume in this metric.

 

Repeating comments from previous reports, management continues to develop loan pipelines and expects that pipeline volume will generate future loan growth.  As loan volume continues measured but slow paced growth, management decreased total securities in the second quarter of 2014 to 29.0% of total assets down from 31.4% at the end of 2013.

 

The net interest margin (tax-equivalent basis), expressed as a percentage of average earning assets, decreased from 3.07% in the second quarter of 2013 to 3.04% in the second quarter of 2014.  The average tax-equivalent yield on earning assets decreased from 3.83% in the second quarter of 2013 to 3.66% in the second quarter of 2014.  For the same comparative period, the cost of funds on interest bearing liabilities decreased from 0.96% to 0.82% providing some offset to the decrease in earning asset yield.

 

The growth of lower yielding securities (average balance up again in the sixth month period year over year continuing a 2013 trend of increasing volume of this metric) and reductions in higher yielding loans were the main causes of decreased net interest income. Period loan yields are reflective of competitive pressures on new loan yield.  Additionally, management continued to see pressure to reduce interest rates on loans retained at renewal and found it necessary to accept rate concessions to keep the business.

 

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

 

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

 

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ANALYSIS OF AVERAGE BALANCES,

TAX EQUIVALENT INTEREST AND RATES

Three Months ended June 30, 2014, and 2013

(Dollar amounts in thousands - unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2014

 

2013

 

Average

 

 

 

 

 

 

 

Average

 

 

 

 

 

 

 

Balance

 

Interest

 

Rate

 

Balance

 

 

Interest

 

Rate

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest bearing deposits

$

30,333 

 

 

$

20 

 

0.26 

%

 

$

43,933 

 

 

$

27 

 

0.24 

%

Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

628,766 

 

 

 

3,352 

 

2.13 

 

 

 

569,877 

 

 

 

2,698 

 

1.89 

 

  Non-taxable (TE)

 

23,613 

 

 

 

182 

 

3.08 

 

 

 

20,752 

 

 

 

268 

 

5.17 

 

Total securities

 

652,379 

 

 

 

3,534 

 

2.17 

 

 

 

590,629 

 

 

 

2,966 

 

2.01 

 

Dividends from Reserve Bank and FHLBC stock

 

10,292 

 

 

 

78 

 

3.03 

 

 

 

10,742 

 

 

 

76 

 

2.83 

 

Loans and loans held-for-sale (1)

 

1,120,918 

 

 

 

13,104 

 

4.62 

 

 

 

1,118,892 

 

 

 

13,974 

 

4.94 

 

Total interest earning assets

 

1,813,922 

 

 

 

16,736 

 

3.66 

 

 

 

1,764,196 

 

 

 

17,043 

 

3.83 

 

Cash and due from banks

 

36,827 

 

 

 

 -

 

 -

 

 

 

22,948 

 

 

 

 -

 

 -

 

Allowance for loan losses

 

(25,146)

 

 

 

 -

 

 -

 

 

 

(38,228)

 

 

 

 -

 

 -

 

Other noninterest bearing assets

 

233,369 

 

 

 

 -

 

 -

 

 

 

194,782 

 

 

 

 -

 

 -

 

Total assets

$

2,058,972 

 

 

 

 

 

 

 

 

$

1,943,698 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NOW accounts

$

309,380 

 

 

$

65 

 

0.08 

%

 

$

297,918 

 

 

$

65 

 

0.09 

%

Money market accounts

 

309,843 

 

 

 

83 

 

0.11 

 

 

 

319,236 

 

 

 

115 

 

0.14 

 

Savings accounts

 

242,512 

 

 

 

40 

 

0.07 

 

 

 

230,822 

 

 

 

41 

 

0.07 

 

Time deposits

 

457,818 

 

 

 

1,210 

 

1.06 

 

 

 

497,262 

 

 

 

1,800 

 

1.45 

 

Interest bearing deposits

 

1,319,553 

 

 

 

1,398 

 

0.42 

 

 

 

1,345,238 

 

 

 

2,021 

 

0.60 

 

Securities sold under repurchase agreements

 

25,224 

 

 

 

 -

 

 -

 

 

 

24,692 

 

 

 

 -

 

 -

 

Other short-term borrowings

 

8,681 

 

 

 

 

0.14 

 

 

 

769 

 

 

 

 -

 

 -

 

Junior subordinated debentures

 

58,378 

 

 

 

1,388 

 

9.51 

 

 

 

58,378 

 

 

 

1,314 

 

9.00 

 

Subordinated debt

 

45,000 

 

 

 

198 

 

1.74 

 

 

 

45,000 

 

 

 

205 

 

1.80 

 

Notes payable and other borrowings

 

500 

 

 

 

 

3.16 

 

 

 

500 

 

 

 

 

3.16 

 

Total interest bearing liabilities

 

1,457,336 

 

 

 

2,991 

 

0.82 

 

 

 

1,474,577 

 

 

 

3,544 

 

0.96 

 

Noninterest bearing deposits

 

389,926 

 

 

 

 -

 

 -

 

 

 

357,802 

 

 

 

 -

 

 -

 

Other liabilities

 

19,210 

 

 

 

 -

 

 -

 

 

 

35,202 

 

 

 

 -

 

 -

 

Stockholders' equity

 

192,500 

 

 

 

 -

 

 -

 

 

 

76,117 

 

 

 

 -

 

 -

 

Total liabilities and stockholders' equity

$

2,058,972 

 

 

 

 

 

 

 

 

$

1,943,698 

 

 

 

 

 

 

 

Net interest income (TE)

 

 

 

 

$

13,745 

 

 

 

 

 

 

 

 

$

13,499 

 

 

 

Net interest income (TE)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

to total earning assets

 

 

 

 

 

 

 

3.04 

%

 

 

 

 

 

 

 

 

3.07 

%

Interest bearing liabilities to earning assets

 

80.34 

%

 

 

 

 

 

 

 

 

83.58 

%

 

 

 

 

 

 

 

(1).Interest income from loans is shown on a TE basis as discussed below and includes fees of $563,000 and $551,000 for the second quarter of 2014 and 2013, respectively.  Nonaccrual loans are included in the above-stated average balances.

 

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ANALYSIS OF AVERAGE BALANCES,

TAX EQUIVALENT INTEREST AND RATES

Six Months ended June 30, 2014, and 2013

(Dollar amounts in thousands - unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2014

 

2013

 

 

Average

 

 

 

 

 

 

 

 

 

Average

 

 

 

 

 

 

 

 

 

Balance

 

 

Interest

 

Rate

 

 

Balance

 

 

 

Interest

 

Rate

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest bearing deposits

$

27,072 

 

 

$

35 

 

0.26 

%

 

$

56,395 

 

 

$

69 

 

0.24 

%

Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

622,634 

 

 

 

6,854 

 

2.20 

 

 

 

559,114 

 

 

 

4,996 

 

1.79 

 

  Non-taxable (TE)

 

21,101 

 

 

 

410 

 

3.89 

 

 

 

15,407 

 

 

 

451 

 

5.85 

 

Total securities

 

643,735 

 

 

 

7,264 

 

2.26 

 

 

 

574,521 

 

 

 

5,447 

 

1.90 

 

Dividends from Reserve Bank and FHLBC stock

 

10,292 

 

 

 

154 

 

2.99 

 

 

 

10,971 

 

 

 

152 

 

2.77 

 

Loans and loans held-for-sale 1

 

1,113,704 

 

 

 

26,092 

 

4.66 

 

 

 

1,131,210 

 

 

 

28,945 

 

5.09 

 

Total interest earning assets

 

1,794,803 

 

 

 

33,545 

 

3.72 

 

 

 

1,773,097 

 

 

 -

34,613 

 

3.89 

 

Cash and due from banks

 

33,383 

 

 

 

 -

 

 -

 

 

 

26,411 

 

 

 

 -

 

 -

 

Allowance for loan losses

 

(26,118)

 

 

 

 -

 

 -

 

 

 

(38,609)

 

 

 

 -

 

 -

 

Other noninterest bearing assets

 

234,760 

 

 

 

 -

 

 -

 

 

 

199,076 

 

 

 

 -

 

 -

 

Total assets

$

2,036,828 

 

 

 

 

 

 

 

 

$

1,959,975 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NOW accounts

$

306,483 

 

 

$

129 

 

0.08 

%

 

$

294,504 

 

 

$

129 

 

0.09 

%

Money market accounts

 

312,309 

 

 

 

177 

 

0.11 

 

 

 

324,279 

 

 

 

238 

 

0.15 

 

Savings accounts

 

238,455 

 

 

 

81 

 

0.07 

 

 

 

226,380 

 

 

 

82 

 

0.07 

 

Time deposits

 

462,950 

 

 

 

2,531 

 

1.10 

 

 

 

501,450 

 

 

 

3,653 

 

1.47 

 

Interest bearing deposits

 

1,320,197 

 

 

 

2,918 

 

0.45 

 

 

 

1,346,613 

 

 

 

4,102 

 

0.61 

 

Securities sold under repurchase agreements

 

24,884 

 

 

 

 

0.01 

 

 

 

22,490 

 

 

 

 

0.01 

 

Other short-term borrowings

 

6,409 

 

 

 

 

0.12 

 

 

 

22,182 

 

 

 

19 

 

0.17 

 

Junior subordinated debentures

 

58,378 

 

 

 

2,775 

 

9.51 

 

 

 

58,378 

 

 

 

2,601 

 

8.91 

 

Subordinated debt

 

45,000 

 

 

 

394 

 

1.74 

 

 

 

45,000 

 

 

 

401 

 

1.77 

 

Notes payable and other borrowings

 

500 

 

 

 

 

3.18 

 

 

 

500 

 

 

 

 

3.18 

 

Total interest bearing liabilities

 

1,455,368 

 

 

 

6,100 

 

0.84 

 

 

 

1,495,163 

 

 

 

7,132 

 

0.96 

 

Noninterest bearing deposits

 

381,863 

 

 

 

 -

 

 -

 

 

 

355,651 

 

 

 

 -

 

 -

 

Other liabilities

 

28,940 

 

 

 

 -

 

 -

 

 

 

34,398 

 

 

 

 -

 

 -

 

Stockholders' equity

 

170,657 

 

 

 

 -

 

 -

 

 

 

74,763 

 

 

 

 -

 

 -

 

Total liabilities and stockholders' equity

$

2,036,828 

 

 

 

 

 

 

 

 

$

1,959,975 

 

 

 

 

 

 

 

Net interest income (TE)

 

 

 

 

$

27,445 

 

 

 

 

 

 

 

 

$

27,481 

 

 

 

Net interest income (TE)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

to total earning assets

 

 

 

 

 

 

 

3.08 

%

 

 

 

 

 

 

 

 

3.13 

%

Interest bearing liabilities to earning assets

 

81.09 

%

 

 

 

 

 

 

 

 

84.32 

%

 

 

 

 

 

 

 

1    Interest income from loans is shown on a TE basis as discussed below and includes fees of $1.1 million and $1.2 million for the first six months of 2014 and 2013, respectively.  Nonaccrual loans are included in the above stated average balances.

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

June 30,

 

June 30,

 

2014

 

2013

 

2014

 

2013

Net Interest Margin

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income (GAAP)

$

16,643 

 

$

16,932 

 

 

$

33,347 

 

 

$

34,422 

 

Taxable-equivalent adjustment:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Loans

 

29 

 

 

17 

 

 

 

54 

 

 

 

33 

 

 Securities

 

64 

 

 

94 

 

 

 

144 

 

 

 

158 

 

  Interest income - TE

 

16,736 

 

 

17,043 

 

 

 

33,545 

 

 

 

34,613 

 

Interest expense (GAAP)

 

2,991 

 

 

3,544 

 

 

 

6,100 

 

 

 

7,132 

 

  Net interest income -TE

$

13,745 

 

$

13,499 

 

 

$

27,445 

 

 

$

27,481 

 

Net interest income  (GAAP)

$

13,652 

 

$

13,388 

 

 

$

27,247 

 

 

$

27,290 

 

Average interest earning assets

$

1,813,922 

 

$

1,764,196 

 

 

$

1,794,803 

 

 

$

1,773,097 

 

  Net interest margin (GAAP)

 

3.02 

%

 

3.04 

%

 

 

3.06 

%

 

 

3.10 

%

  Net interest margin - TE

 

3.04 

%

 

3.07 

%

 

 

3.08 

%

 

 

3.13 

%

 

 

Asset Quality

 

The Company’s $1.0 million loan loss reserve release in the second quarter of 2014 compares to a $1.8 million reserve release in the second quarter of 2013.  The provision for loan loss creates a reserve for probable and estimable losses inherent in the loan portfolio.  Reserve releases reflect management’s measured decision that probable and estimable losses have been reduced.  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.  The $1.0 million loan loss reserve release in the second quarter of 2014 continues a trend of quarterly reserve releases seen in 2013 and in first quarter 2014.  In each of the five prior quarters, management concluded that quarterly releases were justified with quarterly amounts ranging from $1.0 million to $2.5 million.

Nonperforming loans decreased to $28.9 million at June 30, 2014 from $38.6 million at March 31, 2014.  Net charge-offs totaled $620,000 in second quarter 2014 while net charge-offs totaled $1.8 million for the second quarter of 2013.  The distribution of the Company’s remaining nonperforming loans are included in the following table.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2014

 

 

Nonperforming Loans as of

 

Dollar Change From

 

(in thousands)

June 30,

 

March 31,

 

December 31,

 

March 31,

 

December 31,

 

 

2014

 

2014

 

2013

 

2014

 

2013

 

Real estate-construction

$

807 

 

$

2,888 

 

$

2,729 

 

$

(2,081)

 

$

(1,922)

 

Real estate-residential:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investor

 

3,932 

 

 

3,876 

 

 

6,615 

 

 

56 

 

 

(2,683)

 

Owner occupied

 

5,535 

 

 

5,901 

 

 

6,190 

 

 

(366)

 

 

(655)

 

Revolving and junior liens

 

2,199 

 

 

2,726 

 

 

3,209 

 

 

(527)

 

 

(1,010)

 

Real estate-commercial, nonfarm

 

16,390 

 

 

23,172 

 

 

21,024 

 

 

(6,782)

 

 

(4,634)

 

Real estate-commercial, farm

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

Commercial

 

56 

 

 

24 

 

 

27 

 

 

32 

 

 

29 

 

Other

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

$

28,919 

 

$

38,587 

 

$

39,794 

 

$

(9,668)

 

$

(10,875)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nonperforming loans consist of nonaccrual loans, nonperforming restructured accruing loans and loans 90 days or greater past due.  Remediation work continues in all segments.  Importantly, new migration to nonaccrual continues to be minimal.

 

40

 


 

Table of Contents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loan Charge-offs, net of recoveries

Three Months Ended

 

(in thousands)

June 30,

 

March 31,

 

December 31,

 

 

2014

 

2014

 

2013

 

Real estate-construction

 

 

 

 

 

 

 

 

 

Homebuilder

$

(130)

 

$

(35)

 

$

 -

 

Land

 

 -

 

 

 

 

(1)

 

Commercial speculative

 

(226)

 

 

 -

 

 

62 

 

All other

 

(6)

 

 

65 

 

 

 

Total real estate-construction

 

(362)

 

 

31 

 

 

62 

 

Real estate-residential

 

 

 

 

 

 

 

 

 

Investor

 

(13)

 

 

92 

 

 

547 

 

Owner occupied

 

96 

 

 

 

 

(15)

 

Revolving and junior liens

 

206 

 

 

499 

 

 

139 

 

Total real estate-residential

 

289 

 

 

599 

 

 

671 

 

Real estate-commercial, nonfarm

 

 

 

 

 

 

 

 

 

Owner general purpose

 

182 

 

 

 -

 

 

 -

 

Owner special purpose

 

347 

 

 

259 

 

 

(3)

 

Non-owner general purpose

 

145 

 

 

18 

 

 

(1,258)

 

Non-owner special purpose

 

 -

 

 

 -

 

 

 -

 

Retail properties

 

(1)

 

 

(89)

 

 

296 

 

Total real estate-commercial, nonfarm

 

673 

 

 

188 

 

 

(965)

 

Real estate-commercial, farm

 

 -

 

 

 -

 

 

 -

 

Commercial

 

(32)

 

 

(11)

 

 

(7)

 

Other

 

52 

 

 

(2)

 

 

 

 

$

620 

 

$

805 

 

$

(234)

 

 

 

 

 

 

 

 

 

 

 

 

Charge-offs for the second quarter 2014 were, in many instances, from previously established specific reserves on nonaccrual loans deemed uncollectible.  Gross charge-offs for the second quarter of 2014 were $2.0 million compared to $3.1 million for the second quarter of  2013 reflecting our efforts to improve loan quality in better but still challenging markets.  Recoveries were $1.4 million and $1.3 million for the same time periods, respectively.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2014

 

 

Classified loans as of

 

Dollar Change From

 

(in thousands)

June 30,

 

March 31,

 

December 31,

 

March 31,

 

December 31,

 

 

2014

 

2014

 

2013

 

2014

 

2013

 

Real estate-construction

$

4,330 

 

$

6,430 

 

$

3,024 

 

$

(2,100)

 

$

1,306 

 

Real estate-residential:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investor

 

5,312 

 

 

7,674 

 

 

9,750 

 

 

(2,362)

 

 

(4,438)

 

Owner occupied

 

5,841 

 

 

6,847 

 

 

7,699 

 

 

(1,006)

 

 

(1,858)

 

Revolving and junior liens

 

3,097 

 

 

3,645 

 

 

3,971 

 

 

(548)

 

 

(874)

 

Real estate-commercial, nonfarm

 

19,634 

 

 

27,633 

 

 

37,297 

 

 

(7,999)

 

 

(17,663)

 

Real estate-commercial, farm

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

Commercial

 

312 

 

 

455 

 

 

481 

 

 

(143)

 

 

(169)

 

Other

 

 

 

 -

 

 

 

 

 

 

 -

 

 

$

38,527 

 

$

52,684 

 

$

62,223 

 

$

(14,157)

 

$

(23,696)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 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. 

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With the decline in both classified loans and OREO in the second quarter of 2014, this ratio improved to 31.27% at June 30, 2014 from 38.44% at March 31, 2014 and down from 43.44% at December 31, 2013.

 

Allowance for Loan and Lease Losses

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ending

 

 

 

June 30,

 

March 31,

 

December 31,

 

 

2014

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance at beginning of quarter

$

25,476 

 

 

$

27,281 

 

 

$

29,547 

 

 

Charge-offs:

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

 

 

 

 

 

 

 

Real estate - commercial

 

760 

 

 

 

329 

 

 

 

608 

 

 

Real estate - construction

 

105 

 

 

 

68 

 

 

 

63 

 

 

Real estate - residential

 

978 

 

 

 

849 

 

 

 

1,100 

 

 

Consumer and other loans

 

139 

 

 

 

110 

 

 

 

123 

 

 

Total charge-offs

 

1,985 

 

 

 

1,360 

 

 

 

1,902 

 

 

Recoveries:

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

35 

 

 

 

15 

 

 

 

15 

 

 

Real estate - commercial

 

87 

 

 

 

141 

 

 

 

1,573 

 

 

Real estate - construction

 

467 

 

 

 

37 

 

 

 

 

 

Real estate - residential

 

689 

 

 

 

250 

 

 

 

429 

 

 

Consumer and other loans

 

87 

 

 

 

112 

 

 

 

118 

 

 

Total recoveries

 

1,365 

 

 

 

555 

 

 

 

2,136 

 

 

Net charge-offs (recoveries)

 

620 

 

 

 

805 

 

 

 

(234)

 

 

Loan loss reserve release

 

(1,000)

 

 

 

(1,000)

 

 

 

(2,500)

 

 

Allowance at end of period

$

23,856 

 

 

$

25,476 

 

 

$

27,281 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

1,118,089 

 

 

 

1,104,065 

 

 

 

1,072,320 

 

 

Net charge-offs to average loans

 

0.06 

%

 

 

0.07 

%

 

 

(0.02)

%

 

Allowance at period end to average loans

 

2.13 

%

 

 

2.31 

%

 

 

2.54 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance: Individually evaluated for impairment

$

1,440 

 

 

$

1,247 

 

 

$

2,395 

 

 

Ending balance: Collectively evaluated for impairment

$

22,416 

 

 

$

24,229 

 

 

$

24,886 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The coverage ratio of the allowance for loan losses to nonperforming loans was 82.5% at June 30, 2014 up from 66.0% as of March 31, 2014 and 68.6% as of December 31, 2013.  Management updated the estimated specific allocations in the second quarter after receiving more recent appraisals of collateral or information on cash flow trends related to the impaired credits.  This update resulted in a sharply lower amount required in the reserve for estimable losses on these credits at the end of the second quarter 2014 compared to year end 2013.  The estimated general allocation was also lower but essentially unchanged from December 31, 2013, as the overall credit condition of our loan portfolio adjusted for environmental factors remained relatively stable during the quarter.  The third component of the Company’s loan loss reserve analysis showed lower required reserves, most notably in the pooled commercial real estate category.  Management determined that the dollar amount of loans in this component was less than $3.3 million or markedly lower at period end second quarter 2014 compared to $17.2 million at year end 2013.    In summary, after careful and detailed review, management determined an appropriate amount to release from the allowance for loan losses.  Factors considered include loan growth or contraction, the quality and composition of the loan portfolio and loan loss experience.

The above changes in estimates were made by management to be consistent with observable trends within loan portfolio segments and in conjunction with market conditions and credit review administration activities.  Management also reviewed and evaluated several environmental factors.  These factors are evaluated on an ongoing basis and are included in the assessment of the adequacy of the allowance for loan losses.

After a review of the adequacy of the loan loss reserve at June 30, 2014, management concluded that a $1.0 million reserve release was justified.  When measured as a percentage of loans outstanding, the total allowance for loan losses decreased slightly from 2.5% of total loans as of December 31, 2013 to 2.1% of total loans at June 30, 2014.  In management’s judgment, an adequate,  

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measured and entirely appropriate allowance for estimated losses has been established for inherent losses at June 30, 2014; however, there can be no assurance that actual losses will not exceed the estimated amounts in the future.

 

Other Real Estate Owned

 

OREO decreased modestly to $39.2 million at June 30, 2014, from $40.2 million at March 31, 2014 and $41.5 million at December 31, 2013.  Disposition activity and valuation writedowns in the second quarter exceeded additions to OREO as shown below. 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

(in thousands)

June 30,

 

March 31,

 

December 31,

 

2014

 

2014

 

2013

Beginning balance

$

40,220 

 

$

41,537 

 

$

49,066 

Property additions

 

4,655 

 

 

4,688 

 

 

4,998 

Development improvements

 

131 

 

 

 -

 

 

13 

Less:

 

 

 

 

 

 

 

 

Property disposals

 

4,949 

 

 

5,569 

 

 

10,784 

Period valuation adjustments

 

825 

 

 

436 

 

 

1,756 

Other real estate owned

$

39,232 

 

$

40,220 

 

$

41,537 

 

 

 

 

 

 

 

 

 

 

The OREO valuation reserve decreased to $17.9 million, which is 31.3% of gross OREO at June 30, 2014.  The valuation reserve represented 33.9% and 34.9% of gross OREO at June 30, 2013, and December 31, 2013, respectively.  In management’s judgment, the property valuation allowance as established presents OREO at current estimates of fair value less estimated costs to sell; however, there can be no assurance that additional losses will not be incurred on disposition or upon update to valuation in the future.  Of note, one commercial property of five lots valued in total at $1.0 million has been in OREO for over five years.

 

OREO Properties by Type

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

June 30, 2014

 

 

March 31, 2014

 

 

December 31, 2013

 

 

 

Amount

 

% of Total

 

 

Amount

 

% of Total

 

 

Amount

 

% of Total

Single family residence

$

3,485 

 

%

 

$

4,730 

 

12 

%

 

$

4,658 

 

11 

%

Lots (single family and commercial)

 

15,002 

 

38 

%

 

 

14,298 

 

36 

%

 

 

15,020 

 

36 

%

Vacant land

 

2,595 

 

%

 

 

3,135 

 

%

 

 

3,135 

 

%

Multi-family

 

5,175 

 

13 

%

 

 

5,045 

 

12 

%

 

 

1,783 

 

%

Commercial property

 

12,975 

 

33 

%

 

 

13,012 

 

32 

%

 

 

16,941 

 

41 

%

Total OREO properties

$

39,232 

 

100 

%

 

$

40,220 

 

100 

%

 

$

41,537 

 

100 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2nd Qtr 2014

 

Three Months Ended

 

Dollar Change From

(in thousands)

2nd Qtr

 

1st Qtr

 

2nd Qtr

 

1st Qtr

 

2nd Qtr

 

2014

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trust income

$

1,677 

 

$

1,459 

 

$

1,681 

 

$

218 

 

$

(4)

Service charges on deposits

 

1,796 

 

 

1,720 

 

 

1,799 

 

 

76 

 

 

(3)

Residential mortgage banking revenue

 

1,257 

 

 

727 

 

 

2,821 

 

 

530 

 

 

(1,564)

Securities (loss) gains, net

 

295 

 

 

(69)

 

 

745 

 

 

364 

 

 

(450)

Increase in cash surrender value of bank-owned life insurance

 

366 

 

 

358 

 

 

372 

 

 

 

 

(6)

Death benefit realized on bank-owned life insurance

 

 -

 

 

 -

 

 

375 

 

 

 -

 

 

(375)

Debit card interchange income

 

930 

 

 

830 

 

 

900 

 

 

100 

 

 

30 

Other income

 

1,160 

 

 

1,296 

 

 

1,147 

 

 

(136)

 

 

13 

Total noninterest income

$

7,481 

 

$

6,321 

 

$

9,840 

 

$

1,160 

 

$

(2,359)

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On a sequential quarter basis residential mortgage banking revenue results showed an encouraging increase but remains well below levels seen in 2013.  Trust income improved from first quarter and returned to the level seen in second quarter 2013.  Other categories of Company noninterest income were essentially flat or down quarter over quarter with the exception of gains on securities sales.

Similar results are found when comparing second quarter 2014 to second quarter 2013 with two noteworthy exceptions.  Last year, the Company recorded sizable gains on securities sales.  Second quarter 2013 also included a death benefit realized on bank owned life insurance.

 

Noninterest Expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2nd Qtr 2014

 

Three Months Ended

 

Dollar Change From

(in thousands)

2nd Qtr

 

1st Qtr

 

2nd Qtr

 

1st Qtr

 

2nd Qtr

 

2014

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries

$

7,128 

 

$

6,872 

 

$

6,987 

 

$

256 

 

$

141 

Bonus

 

592 

 

 

709 

 

 

621 

 

 

(117)

 

 

(29)

Benefits and other

 

1,463 

 

 

1,520 

 

 

1,569 

 

 

(57)

 

 

(106)

   Total salaries and employee benefits

 

9,183 

 

 

9,101 

 

 

9,177 

 

 

82 

 

 

Occupancy expense, net

 

1,185 

 

 

1,481 

 

 

1,242 

 

 

(296)

 

 

(57)

Furniture and equipment expense

 

984 

 

 

983 

 

 

1,104 

 

 

 

 

(120)

FDIC insurance

 

627 

 

 

279 

 

 

1,024 

 

 

348 

 

 

(397)

General bank insurance

 

343 

 

 

489 

 

 

491 

 

 

(146)

 

 

(148)

Amortization of core deposit intangible assets

 

511 

 

 

512 

 

 

525 

 

 

(1)

 

 

(14)

Advertising expense

 

459 

 

 

303 

 

 

328 

 

 

156 

 

 

131 

Debit card interchange expense

 

412 

 

 

378 

 

 

362 

 

 

34 

 

 

50 

Legal fees

 

409 

 

 

257 

 

 

486 

 

 

152 

 

 

(77)

Other real estate owned expense, net

 

1,650 

 

 

1,008 

 

 

3,302 

 

 

642 

 

 

(1,652)

Other expense

 

3,289 

 

 

2,725 

 

 

3,510 

 

 

564 

 

 

(221)

Total noninterest expense

$

19,052 

 

$

17,516 

 

$

21,551 

 

$

1,536 

 

$

(2,499)

 

Expenses increased in second quarter from first quarter largely on higher expenses related to OREO valuation adjustments and reduced gain on sale of OREO properties.  Second quarter expenses for consulting, web site development, printing, franchise tax and a debit card fraud loss also contributed to the sequential quarter noninterest expense increase.

Total noninterest expense for second quarter declined 11.6% compared to second quarter 2013. Sharply lower expense related to OREO and FDIC insurance were the main sources of the expense decline.

 

Income Taxes

 

The Company recorded a tax expense of $1.1 million on $3.1 million pre-tax income for the second quarter of 2014.  For the six months ended June 30, 2014, tax expense was composed of $77,000 in current income tax benefit and $2.3 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, 2014.  As such, the Company has not changed the valuation reserve on the deferred tax assets in 2014.

On September 12, 2012, the Company and the Bank, as rights agent, entered into the Amended and Restated Rights Agreement and Tax Benefits Preservation Plan (the “Tax Benefits Plan”).  The Tax Benefits Plan amended and restated the Rights Agreement, dated September 17, 2002.  The purpose of the Tax Benefits Plan is to protect the Company’s deferred tax asset against an unsolicited ownership change, which could significantly limit the Company’s ability to utilize its deferred tax assets.  The Tax Benefits Plan was ratified by the Company’s stockholders at the Company’s 2013 annual meeting.  In connection with the public offering, the Company amended the Tax Benefits Plan on April 3, 2014, to allow two investors to purchase more than 5% of the Company’s common stock.  A copy of the amended plan document is attached as Exhibit 10.1.

 

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Financial Condition

 

Total assets increased $42.8 million, or 2.1%, from December 31, 2013, to $2.05 billion as of June 30, 2014.  Loans increased by $31.5 million, or 2.9%, as management continued to emphasize credit quality under an overarching relationship lending program.  At the same time, loan charge-off activity reduced balances and collateral that previously secured loans moved to OREO.  OREO decreased $2.3 million, or 5.5% at June 30, 2014, compared to year end 2013.  Available-for-sale securities decreased by $42.4 million while held-to-maturity securities increased $8.1 million in the six months ended June 30, 2014. 

The core deposit intangible asset related to the Heritage Bank acquisition in February 2008 decreased from $1.2 million at December 31, 2013, to $154,000 as of June 30, 2014.  Management performed an annual review of the core deposit intangible assets as of November 30, 2013.  Based upon that review and ongoing quarterly monitoring, management determined there was no impairment of the core deposit intangible asset as of June 30, 2014.

 

Loans

 

Total loans were $1.13 billion as of June 30, 2014, an increase of $31.5 million from $1.10 billion as of December 31, 2013.  The increase in loans reflects successful loan production work in the period after extensive work in previous periods to build a robust loan pipeline.  An overriding effort to develop relationship based loan clients also resulted in current loan clients more closely reflecting our core clientele.  Our existing commercial clients continue to be reluctant in utilizing existing lines of credit to the extent we would prefer.  Challenging economic headwinds and an intensely competitive environment served to temper overall loan growth.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2014

 

Major Classification of Loans as of

 

Dollar Change From

(in thousands)

June 30,

 

March 31,

 

December 31,

 

March 31,

 

December 31,

 

2014

 

2014

 

2013

 

2014

 

2013

Commercial

$

106,752 

 

$

98,321 

 

$

94,736 

 

$

8,431 

 

$

12,016 

Real estate - commercial

 

599,796 

 

 

579,297 

 

 

560,233 

 

 

20,499 

 

 

39,563 

Real estate - construction

 

32,265 

 

 

32,016 

 

 

29,351 

 

 

249 

 

 

2,914 

Real estate - residential

 

368,592 

 

 

375,781 

 

 

390,201 

 

 

(7,189)

 

 

(21,609)

Consumer

 

3,064 

 

 

2,837 

 

 

2,760 

 

 

227 

 

 

304 

Overdraft

 

381 

 

 

301 

 

 

628 

 

 

80 

 

 

(247)

Lease financing receivables

 

8,722 

 

 

9,227 

 

 

10,069 

 

 

(505)

 

 

(1,347)

Other

 

12,700 

 

 

13,019 

 

 

12,793 

 

 

(319)

 

 

(93)

 

 

1,132,272 

 

 

1,110,799 

 

 

1,100,771 

 

 

21,473 

 

 

31,501 

Net deferred loan costs

 

475 

 

 

438 

 

 

485 

 

 

37 

 

 

(10)

 

$

1,132,747 

 

$

1,111,237 

 

$

1,101,256 

 

$

21,510 

 

$

31,491 

 

The quality of the loan portfolio incorporates not only Company credit decisions but also the economic health of the communities in which the Company operates.  The local economies are still subject to the economic headwinds that have been experienced nationwide.  The uneven and occasionally adverse economic conditions continue to affect the midwest region in particular and financial markets generally.   As the Company is located in a corridor with significant open space and undeveloped real estate, real estate lending (including commercial, residential, and construction) has been and continues to be a sizeable portion of the portfolio.  These categories comprised 88.3% of the portfolio as of June 30, 2014, compared to 89.0% of the portfolio as of December 31, 2013.  The Company continues to oversee and manage its loan portfolio in accordance with interagency guidance on risk management. 

 

45

 


 

Table of Contents

Securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2014

(in thousands)

Securities Portfolio As of

 

Dollar Change From

 

June 30,

 

March 31,

 

December 31,

 

March 31,

 

December 31,

Securities available-for-sale, at fair value

2014

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury

$

1,538 

 

$

1,540 

 

$

1,544 

 

$

(2)

 

$

(6)

U.S. government agencies

 

1,653 

 

 

1,665 

 

 

1,672 

 

 

(12)

 

 

(19)

States and political subdivisions

 

15,753 

 

 

26,459 

 

 

16,794 

 

 

(10,706)

 

 

(1,041)

Corporate bonds

 

31,350 

 

 

31,272 

 

 

15,102 

 

 

78 

 

 

16,248 

Collateralized mortgage obligations

 

33,083 

 

 

51,124 

 

 

63,876 

 

 

(18,041)

 

 

(30,793)

Asset-backed securities

 

246,437 

 

 

288,152 

 

 

273,203 

 

 

(41,715)

 

 

(26,766)

Collateralized debt obligations

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Total securities available-for-sale

$

329,814 

 

$

400,212 

 

$

372,191 

 

$

(70,398)

 

$

(42,377)

Securities held-to-maturity, at amortized cost

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agency mortgage-backed

$

37,306 

 

$

35,292 

 

$

35,268 

 

$

2,014 

 

$

2,038 

Collateralized mortgage obligations

 

227,377 

 

 

229,006 

 

 

221,303 

 

 

(1,629)

 

 

6,074 

Total securities held-to-maturity

$

264,683 

 

$

264,298 

 

$

256,571 

 

$

385 

 

$

8,112 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total securities

$

594,497 

 

$

664,510 

 

$

628,762 

 

$

(70,013)

 

$

(34,265)

 

Total securities decreased from $664.5 million at March 31, 2014, to $594.5 million at June 30, 2014.  Held-to-maturity securities of $264.7 million at June 30, 2014, were essentially unchanged from the end of the first quarter.  Available-for-sale securities were $400.2 million at March 31, 2014, and declined to $329.8 million at the end of the second quarter

Purchases during the quarter ended June 30, 2014, were $71.1 million, most of these in the asset-backed category student loan guaranteed investments.  Second quarter sales were $131.3 million, also primarily asset-backed securities.  These securities were sold to raise cash for potential reinvestment in either other student loan guaranteed securities or other higher yielding investments.

The Company’s Board of Directors, at their July 15, 2014, meeting approved changes to the Investment Policy to allow purchases of collateralized loan obligations for the investment portfolio.  Policy guidelines dictate that securities purchased are Volcker Rule compliant, are rated “A-“ or higher, and meet other stringent credit assessments.

Additionally, the Company owned securities from five issuers where each issuer holding exceeded 10% of total stockholders’ equity.  Company investment managers have assessed the quality of the issuers to confirm that underwriting standards meet expectation and the requirements under the Company’s Investment Policy.  Further, all of these securities are guaranteed by the U. S. Department of Education.

The net unrealized losses on available-for-sale securities in the portfolio, net of deferred tax benefit, decreased by $1.4 million from $2.4 million at December 31, 2013, to $1.0 million as of June 30, 2014.  Note 2 of the consolidated financial statements contains additional information related to the investment portfolio.

 

 

Deposits and Borrowings

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30 2014

 

Deposit Detail As of

 

Dollar Change From

(in thousands)

June 30,

 

March 31,

 

December 31,

 

March 31,

 

December 31,

 

2014

 

2014

 

2013

 

2014

 

2013

Noninterest bearing

$

393,964 

 

$

387,090 

 

$

373,389 

 

$

6,874 

 

$

20,575 

Savings

 

238,167 

 

 

244,944 

 

 

228,589 

 

 

(6,777)

 

 

9,578 

NOW accounts

 

310,721 

 

 

309,385 

 

 

297,852 

 

 

1,336 

 

 

12,869 

Money market accounts

 

304,766 

 

 

318,192 

 

 

309,859 

 

 

(13,426)

 

 

(5,093)

Certificates of deposits:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

of less than $100,000

 

274,971 

 

 

282,569 

 

 

288,345 

 

 

(7,598)

 

 

(13,374)

of $100,000 or more

 

178,235 

 

 

182,101 

 

 

184,094 

 

 

(3,866)

 

 

(5,859)

 

$

1,700,824 

 

$

1,724,281 

 

$

1,682,128 

 

$

(23,457)

 

$

18,696 

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Total deposits increased $18.7  million, or 1.1%, during the six month period ended June 30, 2014 to $1.70 billion.  During the same period, savings, NOW and money market deposit volume increased by $17.4 million.  Also during the period, time deposits decreased by $19.2 million while noninterest bearing demand increased $20.6 million.  We continue to be among market share leaders in our home counties of Kane and Kendall in Illinois. 

 

Average balance for interest bearing deposits was $1.32 billion for the six month period reflecting first half of 2014.  Average balance for noninterest bearing deposits was $381.9 million in the same period.  Similar to the trends discussed above, when compared to 2013 first half year information, average balances in 2014 reflect lower interest bearing deposit volumes, especially in time deposits, but increased noninterest bearing deposits.  Management believes that reductions in average time deposits reflect  maturities of deposits from past higher rate environments. 

 

One of the Company’s most significant borrowing relationships continued to be the $45.5 million credit facility with Bank of America.  That credit facility was originally composed of a $30.5 million senior debt facility and $500,000 in term debt, as well as $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 is based on, at the Company’s option, 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 outstanding balance on the senior line of credit when it matured but did have $500,000 in principal outstanding in term debt and $45.0 million in principal outstanding in subordinated debt at the end of both December 31, 2013, and June 30, 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 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.  The senior debt agreement also contains certain customary representations and warranties as well as financial and negative covenants.  At June 30, 2014, the Company was out of compliance with one of the financial covenants contained within the credit agreement.  Previously, the Company had been out of compliance with two of the financial covenants.  The agreement provides that upon an event of default as the result of the Company’s failure to comply with a financial covenant, the lender may (i) terminate all commitments to extend further credit, (ii) increase the interest rate on the revolving line of the term debt  by 200 basis points, (iii) declare the senior debt immediately due and payable and (iv) exercise all of its rights and remedies at law, in equity and/or pursuant to any or all collateral documents, including foreclosing on the collateral.  The total outstanding principal amount of the senior debt is the $500,000 in term debt.  Because the subordinated debt is treated as Tier 2 capital for regulatory capital purposes, the agreement does not provide the lender with any rights of acceleration or other remedies with regard to the subordinated debt upon an event of default caused by the Company’s failure to comply with a financial covenant.

The Company increased its securities sold under repurchase agreements to $38.1 million at June  30, 2014, from $22.6  million at December 31, 2013.  The Company had no other short-term borrowings at June 30, 2014 representing a decrease from $5.0  million at December 31, 2013.

 

The Company is also obligated on $58.4 million of junior subordinated debentures.

 

Capital

 

As of June 30, 2014, total stockholders’ equity was $192.6 million, which was an increase of $44.9 million from $147.7 million as of December 31, 2013.  This increase was primarily attributable to the capital raise conducted in second quarter in which the Company issued 15,525,000 shares of common stock with net proceeds exceeding $64.0 million. Subsequent to the offering, the Company used $19.7 million to pay all outstanding interest on the junior subordinated debentures and repurchase 25,669 shares of Series B Stock.  The Company repurchased the preferred shares for 94.75% of the liquidation value totaling payments of $24.3 million.  Payments of $22.9 million were made to a large private investor with other payments totaling $1.4 million made to directors of the Company. Lastly, the Company used $10.3 million to pay all accumulated and outstanding Series B Stock dividends.  As part of the Series B Stock repurchase agreements, the holders of the Series B Stock agreed to forbear any rights to accumulated, unpaid dividends.  The remaining proceeds from the capital raise are being held for general corporate purposes.  

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

As previously announced in the third quarter of 2010, the Company elected to defer regularly scheduled interest payments on $58.4 million of junior subordinated debentures related to the trust preferred securities issued by its two statutory trust subsidiaries, Old Second Capital Trust I and Old Second Capital Trust II.  Because of the deferral on the subordinated debentures, the trusts deferred regularly scheduled dividends on their trust preferred securities.  On April 21, 2014, the Company paid the accumulated and unpaid interest on the trust preferred securities and terminated the deferral period.  The interest was not immediately paid by the indenture

47

 


 

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trustees to the holders of such trust preferred securities.  Instead, the trustees held the interest payments in irrevocable deposit accounts to pay such amounts on the next applicable payment dates under the indentures to holders of the securities on the record dates set forth in the appropriate indenture.

During the fourth quarter 2012, the U.S. Treasury (“Treasury”) announced the continuation of individual auctions of the Series B Stock that was issued through the Troubled Asset Relief Program and Capital Purchase Program (the “CPP”).  At that time, the Company was informed that the Series B Stock would be auctioned.  Auction transactions were settled in first quarter 2013 reflecting Treasury’s efforts to conclude the CPP.  The auctions were successful for the Treasury as all of the Series B Stock held by Treasury was sold to third parties, including certain of our directors.  At December 31, 2013 and June 30, 2014, Old Second Bancorp carried $72.million and $47.3 million, respectively of Series B Stock in total stockholders’ equity.  Pursuant to the terms of the Series B Stock, the dividends paid on the Series B Stock increased from 5% to 9% in February 2014.

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

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The Company’s non-GAAP tangible common equity to tangible assets and the Tier 1 common equity to risk weighted assets increased to 7.09% and 6.48%, respectively, at June 30, 2014, compared to 3.67% and 0.77%, respectively, at December 31, 2013.  The issuance of 15,525,000 common shares net of repurchasing 25,669 Series B Stock resulted in a positive impact on the regulatory ratios and the non-GAAP ratios noted above in the quarter ending June 30, 2014.  The Company does not anticipate any significant effect to the Bank’s regulatory ratios as the Company does not have any immediate plans to use any of the proceeds to increase Bank capital.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(unaudited)

 

(unaudited)

 

 

As of June 30,

 

As of December 31,

(dollars in thousands)

2014

 

2013

 

2013

 

 

 

 

 

 

 

 

 

Tier 1 capital

 

 

 

 

 

 

 

 

Total equity

$

192,618 

 

$

71,102 

 

$

147,692 

Tier 1 adjustments:

 

 

 

 

 

 

 

 

Trust preferred securities allowed

 

56,625 

 

 

27,195 

 

 

51,577 

Cumulative other comprehensive loss (income)

 

5,339 

 

 

10,484 

 

 

7,038 

Disallowed goodwill and intangible assets

 

(154)

 

 

(2,226)

 

 

(1,177)

Disallowed deferred tax assets

 

(64,302)

 

 

 -

 

 

(70,350)

Other

 

(550)

 

 

(530)

 

 

(581)

Tier 1 capital

$

189,576 

 

$

106,025 

 

$

134,199 

 

 

 

 

 

 

 

 

 

Total capital

 

 

 

 

 

 

 

 

Tier 1 capital

$

189,576 

 

$

106,025 

 

$

134,199 

Tier 2 additions:

 

 

 

 

 

 

 

 

Allowable portion of allowance for loan losses

 

16,597 

 

 

17,016 

 

 

15,898 

Additional trust preferred securities disallowed for Tier 1 capital

 

 -

 

 

29,430 

 

 

5,048 

Subordinated debt

 

27,000 

 

 

36,000 

 

 

36,000 

Tier 2 additions subtotal

 

43,597 

 

 

82,446 

 

 

56,946 

Allowable Tier 2

 

43,597 

 

 

82,446 

 

 

56,946 

Other Tier 2 capital components

 

(6)

 

 

(6)

 

 

(6)

Total capital

$

233,167 

 

$

188,465 

 

$

191,139 

 

 

 

 

 

 

 

 

 

Tangible common equity

 

 

 

 

 

 

 

 

Total equity

$

192,618 

 

$

71,102 

 

$

147,692 

Less:  Preferred equity

 

47,331 

 

 

72,396 

 

 

72,942 

Goodwill and intangible assets

 

154 

 

 

2,226 

 

 

1,177 

Tangible common equity

$

145,133 

 

$

(3,520)

 

$

73,573 

 

 

 

 

 

 

 

 

 

Tier 1 common equity

 

 

 

 

 

 

 

 

Tangible common equity

$

145,133 

 

$

(3,520)

 

$

73,573 

Tier 1 adjustments:

 

 

 

 

 

 

 

 

Cumulative other comprehensive income

 

5,339 

 

 

10,484 

 

 

7,038 

Other

 

(64,852)

 

 

(530)

 

 

(70,931)

Tier 1 common equity

$

85,620 

 

$

6,434 

 

$

9,680 

 

 

 

 

 

 

 

 

 

Tangible assets

 

 

 

 

 

 

 

 

Total assets

$

2,046,864 

 

$

1,932,934 

 

$

2,004,034 

Less: 

 

 

 

 

 

 

 

 

Goodwill and intangible assets

 

154 

 

 

2,226 

 

 

1,177 

Tangible assets

$

2,046,710 

 

$

1,930,708 

 

$

2,002,857 

 

 

 

 

 

 

 

 

 

Total risk-weighted assets

 

 

 

 

 

 

 

 

On balance sheet

$

1,283,134 

 

$

1,308,166 

 

$

1,224,438 

Off balance sheet

 

37,403 

 

 

35,125 

 

 

36,023 

Total risk-weighted assets

$

1,320,537 

 

$

1,343,291 

 

$

1,260,461 

 

 

 

 

 

 

 

 

 

Average assets

 

 

 

 

 

 

 

 

Total average assets for leverage

$

1,993,966 

 

$

1,940,942 

 

$

1,927,217 

 

 

 

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Item 3.  Quantitative and Qualitative Disclosures about Market Risk

 

Liquidity and Market Risk

 

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

Net cash outflows from operating activities were $20.0 million during the first half of 2014, compared with net cash inflows of $15.5 million in the same period in 2013.  Proceeds from sales of loans held-for-sale, net of funds used to originate loans held-for-sale, continued to be a source of inflows for both of the first half of 2014 and 2013.  Interest paid, net of interest received, combined with changes in other assets and liabilities were a source of outflows for the first half of 2014 compared to inflows in the first half of 2013.  The majority of this outflow was the payment of the accumulated and unpaid interest to the trust preferred securities totaling $19.7 million.  Management of investing and financing activities, as well as market conditions, determines the level and the stability of net interest cash flows.  Management’s policy is to mitigate the impact of changes in market interest rates to the extent possible, as part of the balance sheet management process.

Net cash inflows from investing activities were $6.4 million in the first half of 2014, compared to net cash inflows of $38.0 million in the same period in 2013.  In the first half 2014, securities transactions accounted for net inflows of $38.3 million, and net principal received on loans accounted for net outflows of $42.3 million.  In the first half of 2013, securities transactions accounted for net outflows of $12.3 million, and net principal received on loans accounted for net inflows of $31.6 million.  Proceeds from sales of OREO accounted for $10.9 million and $20.0 million in investing cash inflows for the first half of 2014 and 2013, respectively.

Net cash inflows from financing activities in the first half of 2014 were $59.0 million, compared with net cash outflows of $114.1 million in the first half of 2013.  Proceeds from the issuance of common stock provided net cash inflows of $64.4 million, while the redemption of Series B Stock and dividends paid on Series B Stock accounted for net cash outflows of $24.3 million and $10.3 million, respectively, in the first half of 2014.  Net deposit inflows in the first half of 2014 were $18.7 million compared to net deposit outflows of $26.6 million in the first half of 2013.  Other short-term borrowings had net cash outflows of $5.0 million and $100.0 million related to FHLBC advance repayments in the first half of 2014 and 2013, respectively.  Changes in securities sold under repurchase agreements accounted for $15.6 million and $12.6 million in net inflows, respectively, in the first half of 2014 and 2013.

Interest Rate Risk

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

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

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

The Company utilizes simulation analysis to quantify the impact of various rate scenarios on net interest income.  The simulation model incorporates specific cash flows, repricing characteristics, and embedded options of the assets and liabilities held by the Company.  Earnings at risk is calculated by comparing the net interest income of a stable interest rate environment to the net interest income of different interest rate environments to determine the percentage change.  Significant declines in interest rates that occurred during the first half of 2012 have made it impossible to calculate valid interest rate scenarios for rate declines of 1.0% or

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more.  Compared to December 31, 2013 the Company had less earnings gains (in both dollars and percentage) if interest rates should rise.  This decrease in rising-rate benefit reflects continued customer demand for longer term, fixed-rate loans.  Federal Funds rates and the Bank’s prime rate were stable throughout the first quarter of 2014, at 0.25% and 3.25%, respectively.

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Analysis of Net Interest Income Sensitivity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Immediate Changes in Rates

 

-2.0

%

 

-1.0

%

 

 

-0.5

%

 

 

0.5

%

 

 

1.0

%

 

 

2.0

%

June 30, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dollar change

N/A

 

 

N/A

 

 

$

(417)

 

 

$

(329)

 

 

$

(516)

 

 

$

(286)

 

Percent change

N/A

%

 

N/A

%

 

 

(0.7)

%

 

 

(0.6)

%

 

 

(0.9)

%

 

 

(0.5)

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dollar change

N/A

 

 

N/A

 

 

 

N/A

 

 

$

70

 

 

$

249

 

 

$

1,190

 

Percent change

N/A

%

 

N/A

%

 

 

N/A

%

 

 

0.1

%

 

 

0.4

%

 

 

2.1

%

 

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

 

Item 4.  Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

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

 

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

 

Forward-looking Statements

 

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

 

The Company’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain.  The factors, which could have a material adverse effect on the operations and future prospects of the Company and its subsidiaries, are detailed in the “Risk Factors” section included under Item 1A. of Part I of the Company’s Form 10-K.  In addition to the risk factors described in that section, there are other factors that may impact any public company, including ours, which could have a material adverse effect on the operations and future prospects of the Company and its subsidiaries.  These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements.

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Table of Contents

PART II - OTHER INFORMATION

 

Item 1.    Legal Proceedings

 

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

 

Item 1.A.  Risk Factors

 

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

 

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

 

None.

 

Item 3.    Defaults Upon Senior Securities

 

None.

 

Item 4.    Mine Safety Disclosures

 

N/A

 

Item 5.    Other Information

 

None

 

Item 6.  Exhibits

 

Exhibits:

 

 

 

4.1 

Specimen common stock certificate of Old Second Bancorp, Inc. (incorporated by reference to Exhibit 4.1 to the Company’s Form S-1 filed on January 17, 2014)

4.2 

Old Second Bancorp, Inc. 2014 Equity Incentive Plan (incorporated herein by reference to Appendix A to the Company’s definitive proxy statement on Form DEF14A filed on April 21, 2014)

4.3 

Form of Restricted Stock Award Agreement (incorporated by reference to Exhibit 4.3 to the Company’s Form S-8 on June 24, 2014).

4.4 

Form of Restricted Stock Unit Award Agreement (incorporated by reference to Exhibit 4.4 to the Company’s Form S-8 filed on June 24, 2014).

10.1 

First Amendment to Amended and Restated Rights Agreement and Tax Benefits Preservation Plan, dated April 3, 2014.

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, 2014, and December 31, 2013; (ii) Consolidated Statements of Operations for the three and six ended June 30, 2014, and June 30, 2013; (iii) Consolidated Statements of Stockholders’ Equity for the six months ended June 30, 2014, and June 30, 2013; (iv) Consolidated Statements of Cash Flows for the six months ended June 30, 2014, and June 30, 2013; and (v) Notes to Consolidated Financial Statements, tagged as blocks of text and in detail.*

 

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

 

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Table of Contents

SIGNATURES

 

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

 

 

 

 

 

 

OLD SECOND BANCORP, INC.

 

 

 

 

 

BY:

/s/ William B. Skoglund

 

 

William B. Skoglund

 

 

 

 

 

Chairman of the Board, Director

 

 

President and Chief Executive Officer
(principal executive officer)

 

 

 

 

 

BY:

/s/ J. Douglas Cheatham

 

 

J. Douglas Cheatham

 

 

 

 

 

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

 

 

 

 

DATE: August 13, 2014

 

 

53