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OLD SECOND BANCORP INC - Quarter Report: 2017 September (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 September 30, 2017

OR

 

 

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

 

SECURITIES EXCHANGE ACT OF 1934

 

For transition period from          to          

 

Commission File Number 0 -10537

 

Picture 2

(Exact name of Registrant as specified in its charter)

 

 

 

 

Delaware

 

36-3143493

(State or other jurisdiction

 

(I.R.S. Employer Identification Number)

of incorporation or organization)

 

 

 

37 South River Street, Aurora, Illinois     60507

(Address of principal executive offices)  (Zip Code)

 

(630) 892-0202

(Registrant’s telephone number, including area code)

 

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

Yes ☒        No ☐

 

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

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of ‘‘large accelerated filer,’’ ‘‘accelerated filer,’’ ‘‘smaller reporting company,’’ and ‘‘emerging growth company’’ in Rule 12b–2 of the Exchange Act.

 

Large accelerated filerAccelerated filer

Non-accelerated filerSmaller reporting companyEmerging growth company

(Do not check if a smaller reporting company)

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

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

Yes ☐        No ☒

 

As of November 3, 2017, the Registrant had 29,627,086 shares of common stock outstanding at $1.00 par value per share.

 

 

 

 

 

 

 


 

Table of Contents

OLD SECOND BANCORP, INC.

 

Form 10-Q Quarterly Report

 

Table of Contents

 

 

 

 

 

PART I

 

 

 

Page Number

Item 1. 

Financial Statements

3

Item 2. 

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

32

Item 3. 

Quantitative and Qualitative Disclosures about Market Risk

44

Item 4. 

Controls and Procedures

45

 

PART II

 

 

 

 

Item 1. 

Legal Proceedings

45

Item 1.A. 

Risk Factors

45

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

45

Item 3. 

Defaults Upon Senior Securities

45

Item 4. 

Mine Safety Disclosure

45

Item 5. 

Other Information

45

Item 6. 

Exhibits

46

 

 

 

 

Signatures

47

 

2

 


 

Table of Contents

 

PART I - FINANCIAL INFORMATION

Item 1.  Financial Statements

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Balance Sheets

(In thousands, except share data)

 

 

 

 

 

 

 

 

 

(unaudited)

 

 

 

 

 

September 30, 

 

December 31, 

 

    

2017

    

2016

Assets

 

 

 

 

 

 

Cash and due from banks

 

$

32,772

 

$

33,805

Interest bearing deposits with financial institutions

 

 

14,730

 

 

13,529

Cash and cash equivalents

 

 

47,502

 

 

47,334

Securities available-for-sale, at fair value

 

 

533,484

 

 

531,838

Federal Home Loan Bank Chicago ("FHLBC") and Federal Reserve Bank Chicago ("FRBC") stock

 

 

10,393

 

 

7,918

Loans held-for-sale

 

 

1,641

 

 

4,918

Loans

 

 

1,594,191

 

 

1,478,809

Less: allowance for loan losses

 

 

16,465

 

 

16,158

Net loans

 

 

1,577,726

 

 

1,462,651

Premises and equipment, net

 

 

37,971

 

 

38,977

Other real estate owned

 

 

9,024

 

 

11,916

Mortgage servicing rights, net

 

 

6,684

 

 

6,489

Goodwill and core deposit intangible

 

 

8,944

 

 

9,018

Bank-owned life insurance ("BOLI")

 

 

61,403

 

 

60,332

Deferred tax assets, net

 

 

42,394

 

 

53,464

Other assets

 

 

23,241

 

 

16,333

Total assets

 

$

2,360,407

 

$

2,251,188

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

Noninterest bearing demand

 

$

556,874

 

$

513,688

Interest bearing:

 

 

 

 

 

 

Savings, NOW, and money market

 

 

947,969

 

 

950,849

Time

 

 

384,272

 

 

402,248

Total deposits

 

 

1,889,115

 

 

1,866,785

Securities sold under repurchase agreements

 

 

26,853

 

 

25,715

Other short-term borrowings

 

 

125,000

 

 

70,000

Junior subordinated debentures

 

 

57,627

 

 

57,591

Senior notes

 

 

44,033

 

 

43,998

Other liabilities

 

 

17,016

 

 

11,889

Total liabilities

 

 

2,159,644

 

 

2,075,978

 

 

 

 

 

 

 

Stockholders’ Equity

 

 

 

 

 

 

Common stock

 

 

34,626

 

 

34,534

Additional paid-in capital

 

 

117,458

 

 

116,653

Retained earnings

 

 

145,767

 

 

129,005

Accumulated other comprehensive loss

 

 

(632)

 

 

(8,762)

Treasury stock

 

 

(96,456)

 

 

(96,220)

Total stockholders’ equity

 

 

200,763

 

 

175,210

Total liabilities and stockholders’ equity

 

$

2,360,407

 

$

2,251,188

 

 

 

 

 

 

 

 

 

September 30, 2017

 

December 31, 2016

 

Common

 

Common

 

Stock

    

Stock

Par value

$

1.00

 

$

1.00

Shares authorized

 

60,000,000

 

 

60,000,000

Shares issued

 

34,625,734

 

 

34,534,234

Shares outstanding

 

29,627,086

 

 

29,556,216

Treasury shares

 

4,998,648

 

 

4,978,018

 

See accompanying notes to consolidated financial statements.

3

 


 

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Income

(In thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(unaudited)

 

(unaudited)

 

 

 

Quarters Ended September 30, 

 

Nine Months Ended  September 30, 

 

    

2017

    

2016

    

2017

    

2016

    

Interest and dividend income

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans, including fees

 

$

18,208

 

$

13,496

 

$

52,202

 

$

39,593

 

Loans held-for-sale

 

 

34

 

 

48

 

 

95

 

 

115

 

Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

 

2,424

 

 

3,954

 

 

7,994

 

 

12,547

 

Tax exempt

 

 

1,628

 

 

180

 

 

4,188

 

 

579

 

Dividends from FHLBC and FRBC stock

 

 

94

 

 

83

 

 

271

 

 

251

 

Interest bearing deposits with financial institutions

 

 

37

 

 

64

 

 

91

 

 

98

 

Total interest and dividend income

 

 

22,425

 

 

17,825

 

 

64,841

 

 

53,183

 

Interest expense

 

 

 

 

 

 

 

 

 

 

 

 

 

Savings, NOW, and money market deposits

 

 

239

 

 

193

 

 

695

 

 

577

 

Time deposits

 

 

1,077

 

 

931

 

 

3,081

 

 

2,622

 

Other short-term borrowings

 

 

224

 

 

23

 

 

482

 

 

69

 

Junior subordinated debentures

 

 

930

 

 

1,084

 

 

3,073

 

 

3,251

 

Senior notes

 

 

672

 

 

 -

 

 

2,017

 

 

 -

 

Subordinated debt

 

 

 -

 

 

245

 

 

 -

 

 

727

 

Notes payable and other borrowings

 

 

 -

 

 

 2

 

 

 -

 

 

 6

 

Total interest expense

 

 

3,142

 

 

2,478

 

 

9,348

 

 

7,252

 

Net interest and dividend income

 

 

19,283

 

 

15,347

 

 

55,493

 

 

45,931

 

Provision for loan losses

 

 

300

 

 

 -

 

 

1,050

 

 

 -

 

Net interest and dividend income after provision for loan losses

 

 

18,983

 

 

15,347

 

 

54,443

 

 

45,931

 

Noninterest income

 

 

 

 

 

 

 

 

 

 

 

 

 

Trust income

 

 

1,468

 

 

1,403

 

 

4,564

 

 

4,274

 

Service charges on deposits

 

 

1,722

 

 

1,756

 

 

4,955

 

 

4,961

 

Secondary mortgage fees

 

 

195

 

 

322

 

 

594

 

 

795

 

Mortgage servicing rights mark to market loss

 

 

(194)

 

 

(147)

 

 

(756)

 

 

(1,921)

 

Mortgage servicing income

 

 

451

 

 

437

 

 

1,330

 

 

1,280

 

Net gain on sales of mortgage loans

 

 

1,095

 

 

2,177

 

 

3,715

 

 

5,031

 

Securities gain (loss), net

 

 

102

 

 

(1,959)

 

 

(165)

 

 

(2,020)

 

Increase in cash surrender value of BOLI

 

 

362

 

 

383

 

 

1,071

 

 

987

 

Debit card interchange income

 

 

1,075

 

 

1,013

 

 

3,131

 

 

3,009

 

Gain (loss) on disposal and transfer of fixed assets, net

 

 

 -

 

 

 -

 

 

10

 

 

(1)

 

Other income

 

 

1,567

 

 

1,209

 

 

3,739

 

 

3,751

 

Total noninterest income

 

 

7,843

 

 

6,594

 

 

22,188

 

 

20,146

 

Noninterest expense

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

10,049

 

 

9,014

 

 

31,167

 

 

26,854

 

Occupancy, furniture and equipment

 

 

1,482

 

 

1,500

 

 

4,510

 

 

4,427

 

Computer and data processing

 

 

1,081

 

 

1,105

 

 

3,283

 

 

3,093

 

FDIC insurance

 

 

199

 

 

228

 

 

512

 

 

793

 

General bank insurance

 

 

246

 

 

269

 

 

780

 

 

839

 

Amortization of core deposit intangible

 

 

24

 

 

 -

 

 

74

 

 

 -

 

Advertising expense

 

 

255

 

 

430

 

 

1,093

 

 

1,212

 

Debit card interchange expense

 

 

285

 

 

363

 

 

1,033

 

 

1,186

 

Legal fees

 

 

162

 

 

242

 

 

450

 

 

594

 

Other real estate expense, net

 

 

680

 

 

426

 

 

1,928

 

 

2,043

 

Other expense

 

 

2,455

 

 

3,005

 

 

8,128

 

 

8,505

 

Total noninterest expense

 

 

16,918

 

 

16,582

 

 

52,958

 

 

49,546

 

Income before income taxes

 

 

9,908

 

 

5,359

 

 

23,673

 

 

16,531

 

Provision for income taxes

 

 

1,831

 

 

1,860

 

 

6,023

 

 

5,865

 

Net income

 

$

8,077

 

$

3,499

 

$

17,650

 

$

10,666

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

$

0.27

 

$

0.12

 

$

0.60

 

$

0.36

 

Diluted earnings per share

 

 

0.27

 

 

0.12

 

 

0.59

 

 

0.36

 

 

See accompanying notes to consolidated financial statements.

4

 


 

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(unaudited)

 

(unaudited)

 

 

Quarters Ended September 30, 

 

Nine Months Ended  September 30, 

 

    

2017

    

2016

    

2017

    

2016

Net Income

 

$

8,077

 

$

3,499

 

$

17,650

 

$

10,666

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

2,971

 

 

(616)

 

 

13,798

 

 

5,151

Related tax (expense) benefit

 

 

(1,191)

 

 

237

 

 

(5,516)

 

 

(2,071)

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

 

 

1,780

 

 

(379)

 

 

8,282

 

 

3,080

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

Net realized gains (losses)

 

 

102

 

 

(1,959)

 

 

(165)

 

 

(2,020)

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

 

 

(42)

 

 

782

 

 

64

 

 

807

Net realized gains (losses) after tax

 

 

60

 

 

(1,177)

 

 

(101)

 

 

(1,213)

Other comprehensive income  on available-for-sale securities

 

 

1,720

 

 

798

 

 

8,383

 

 

4,293

 

 

 

 

 

 

 

 

 

 

 

 

 

Accretion and reversal of net unrealized holding gains on held-to-maturity securities

 

 

 -

 

 

 -

 

 

 -

 

 

5,939

Related tax expense

 

 

 -

 

 

 -

 

 

 -

 

 

(2,446)

Other comprehensive income on held-to-maturity securities

 

 

 -

 

 

 -

 

 

 -

 

 

3,493

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in fair value of derivatives used for cashflow hedges

 

 

19

 

 

(254)

 

 

(445)

 

 

(4,278)

Related tax benefit

 

 

 8

 

 

102

 

 

192

 

 

1,714

Other comprehensive income (loss) on cashflow hedges

 

 

27

 

 

(152)

 

 

(253)

 

 

(2,564)

 

 

 

 

 

 

 

 

 

 

 

 

 

Total other comprehensive income

 

 

1,747

 

 

646

 

 

8,130

 

 

5,222

Total comprehensive income

 

$

9,824

 

$

4,145

 

$

25,780

 

$

15,888

 

See accompanying notes to consolidated financial statements.

 

5

 


 

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

(unaudited)

 

 

Nine Months Ended  September 30, 

 

 

 

2017

    

2016

    

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net income

 

 

$

17,650

 

$

10,666

 

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

 

 

 

 

 

 

 

 

Depreciation of fixed assets and amortization of leasehold improvements

 

 

 

1,760

 

 

1,682

 

Change in fair value of mortgage servicing rights

 

 

 

756

 

 

1,921

 

Loan loss reserve

 

 

 

1,050

 

 

 -

 

Provision for deferred tax expense

 

 

 

5,682

 

 

5,476

 

Originations of loans held-for-sale

 

 

 

(113,077)

 

 

(147,187)

 

Proceeds from sales of loans held-for-sale

 

 

 

119,059

 

 

150,247

 

Net gain on sales of mortgage loans

 

 

 

(3,715)

 

 

(5,031)

 

Net discount accretion of purchase accounting adjustment on loans

 

 

 

(1,115)

 

 

 -

 

Change in current income taxes receivable

 

 

 

111

 

 

300

 

Increase in cash surrender value of BOLI

 

 

 

(1,071)

 

 

(987)

 

Change in accrued interest receivable and other assets

 

 

 

(6,849)

 

 

(2,659)

 

Change in accrued interest payable and other liabilities

 

 

 

4,571

 

 

(246)

 

Net premium amortization/discount (accretion) on securities

 

 

 

1,320

 

 

(517)

 

Securities losses, net

 

 

 

165

 

 

2,020

 

Amortization of core deposit

 

 

 

74

 

 

 -

 

Amortization of junior subordinated debentures issuance costs

 

 

 

36

 

 

36

 

Amortization of senior notes issuance costs

 

 

 

77

 

 

 -

 

Stock based compensation

 

 

 

897

 

 

482

 

Net gain on sale of other real estate owned

 

 

 

(454)

 

 

(316)

 

Provision for other real estate owned losses

 

 

 

1,630

 

 

1,305

 

Net (gain) loss on disposal  and transfer of fixed assets

 

 

 

(10)

 

 

 1

 

Net cash provided by operating activities

 

 

 

28,547

 

 

17,193

 

Cash flows from investing activities

 

 

 

 

 

 

 

 

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

 

 

 

105,327

 

 

62,868

 

Proceeds from sales of securities available-for-sale

 

 

 

152,476

 

 

271,374

 

Purchases of securities available-for-sale

 

 

 

(246,971)

 

 

(153,252)

 

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

 

 

 

 -

 

 

3,372

 

Net disbursements/proceeds from (purchases) sales of FHLBC stock

 

 

 

(2,475)

 

 

600

 

Net change in loans

 

 

 

(118,711)

 

 

(71,600)

 

Improvements in other real estate owned

 

 

 

 -

 

 

(16)

 

Proceeds from sales of other real estate owned, net of participation purchase

 

 

 

5,512

 

 

5,247

 

Proceeds from disposition of premises and equipment

 

 

 

13

 

 

 -

 

Net purchases of premises and equipment

 

 

 

(852)

 

 

(1,163)

 

Net cash used in (provided by) investing activities

 

 

 

(105,681)

 

 

117,430

 

Cash flows from financing activities

 

 

 

 

 

 

 

 

Net change in deposits

 

 

 

22,330

 

 

18,296

 

Net change in securities sold under repurchase agreements

 

 

 

1,138

 

 

12,536

 

Net change in other short-term borrowings

 

 

 

55,000

 

 

(15,000)

 

Payment of senior note issuance costs

 

 

 

(42)

 

 

 -

 

Dividends paid on common stock

 

 

 

(888)

 

 

(592)

 

Purchase of treasury stock

 

 

 

(236)

 

 

(254)

 

Net cash provided by financing activities

 

 

 

77,302

 

 

14,986

 

Net change in cash and cash equivalents

 

 

 

168

 

 

149,609

 

Cash and cash equivalents at beginning of period

 

 

 

47,334

 

 

40,338

 

Cash and cash equivalents at end of period

 

 

$

47,502

 

$

189,947

 

 

6

 


 

Table of Contents

 

 

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Cash Flows - Continued

(In thousands)

 

 

 

 

 

 

 

 

 

 

(unaudited)

 

 

Nine Months Ended  September 30, 

Supplemental cash flow information

    

2017

    

2016

Income taxes paid, net

 

$

230

 

$

160

Interest paid for deposits

 

 

3,802

 

 

3,142

Interest paid for borrowings

 

 

4,890

 

 

4,021

Non-cash transfer of loans to other real estate owned

 

 

3,701

 

 

1,223

Non-cash transfer of premises to other real estate owned

 

 

95

 

 

 -

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

 

 

 -

 

 

244,823

 

See accompanying notes to consolidated financial statements.

 

 

7

 


 

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Changes in

Stockholders’ Equity

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

Other

 

 

 

 

Total

 

 

Common

 

Paid-In

 

Retained

 

Comprehensive

 

Treasury

 

Stockholders’

 

    

Stock

    

Capital

    

Earnings

    

Loss

    

Stock

    

Equity

Balance, December 31, 2015

 

$

34,427

 

$

115,918

 

$

114,209

 

$

(12,659)

 

$

(95,966)

 

$

155,929

Net income

 

 

 

 

 

 

 

 

10,666

 

 

 

 

 

 

 

 

10,666

Other comprehensive income, net of tax

 

 

 

 

 

 

 

 

 

 

 

5,222

 

 

 

 

 

5,222

Dividends declared and paid

 

 

 

 

 

 

 

 

(592)

 

 

 

 

 

 

 

 

(592)

Vesting of restricted stock

 

 

106

 

 

(106)

 

 

 

 

 

 

 

 

 

 

 

 -

Tax effect from vesting of restricted stock

 

 

 

 

 

174

 

 

 

 

 

 

 

 

 

 

 

174

Stock based compensation

 

 

 

 

 

482

 

 

 

 

 

 

 

 

 

 

 

482

Purchase of treasury stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(254)

 

 

(254)

Balance, September 30, 2016

 

$

34,533

 

$

116,468

 

$

124,283

 

$

(7,437)

 

$

(96,220)

 

$

171,627

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2016

 

$

34,534

 

$

116,653

 

$

129,005

 

$

(8,762)

 

$

(96,220)

 

$

175,210

Net income

 

 

 

 

 

 

 

 

17,650

 

 

 

 

 

 

 

 

17,650

Other comprehensive income, net of tax

 

 

 

 

 

 

 

 

 

 

 

8,130

 

 

 

 

 

8,130

Dividends declared and paid

 

 

 

 

 

 

 

 

(888)

 

 

 

 

 

 

 

 

(888)

Vesting of restricted stock

 

 

92

 

 

(92)

 

 

 

 

 

 

 

 

 

 

 

 -

Stock based compensation

 

 

 

 

 

897

 

 

 

 

 

 

 

 

 

 

 

897

Purchase of treasury stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(236)

 

 

(236)

Balance, September 30, 2017

 

$

34,626

 

$

117,458

 

$

145,767

 

$

(632)

 

$

(96,456)

 

$

200,763

 

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 that are necessary, in the opinion of management, for a fair statement of results for the interim period presented.  Results for the period ended September 30, 2017, are not necessarily indicative of the results that may be expected for the year ending December 31, 2017.  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, 2016.  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, 2016.  These policies, along with the disclosures presented in the other financial statement notes and in this discussion, provide information on how significant assets and liabilities are valued in the consolidated financial statements and how those values are determined.

 

Recent Accounting Pronouncements

 

In May 2014, the FASB issued ASU No. 2014-09 "Revenue from Contracts with Customers (Topic 606)."  The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services.  In August 2015, the FASB issued ASU 2015-14 “Revenue from Contracts with Customers (Topic 606) Deferral of the Effective Date.”  This accounting standards update defers the effective date of ASU 2014-09 for an additional year.  ASU 2015-14 will be effective for annual reporting periods beginning after December 15, 2017.  The amendments can be applied retrospectively to each prior reporting period or retrospectively with the cumulative effect of initially applying this update recognized at the date of initial application.  Early application is not permitted.  In March 2016, the FASB issued ASU 2016-08 “Revenue from Contracts with Customers (TOPIC 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)” and in April 2016, the FASB issued ASU 2016-10 “Revenue from Contracts with Customers (TOPIC 606): Identifying Performance Obligations and Licensing.”  ASU 2016-08 requires the entity to determine if it is acting as a principal with control over the goods or services it is contractually obligated to provide, or an agent with no control over specified goods or services provided by another party to a customer.  ASU 2016-10 was issued to further clarify ASU 2014-09 implementation regarding identifying performance obligation materiality, identification of key contract components, and scope.  The Company is assessing the impact of ASU 2014-09 and other related ASUs as noted above on its accounting and disclosures within noninterest income, as any interest income impact was not included in the scope of this final ASU pronouncement.  Adoption of this ASU is expected to affect the methodology used to record certain recurring revenue streams within trust and asset management fees, but this impact is not anticipated to be significant to the Company’s financial statements.  The Company will adopt ASU 2015-14 and related issuances on January 1, 2018, with a cumulative effect adjustment to opening retained earnings, if an adjustment is deemed to be material.

 

In February 2016, the FASB issued ASU No. 2016-02 “Leases (Topic 842).”  This ASU was issued to increase transparency and comparability among organizations by recognizing lease assets and liabilities on the balance sheet and disclosing key information about leasing arrangements.  One key revision from prior guidance was to include operating leases within assets and liabilities recorded; another revision was included which created a new model to follow for sale-leaseback transactions.  The impact of this pronouncement will affect lessees primarily, as virtually all of their assets will be recognized on the balance sheet, by recording a right of use asset and lease liability.  This pronouncement is effective for fiscal years beginning after December 15, 2018.  The Company is assessing the impact of ASU 2016-02 on its accounting and disclosures. 

 

In March 2016, the FASB issued ASU No. 2016-09 “Stock Compensation - Improvements to Employee Share-Based Payment Accounting (Topic 718).”  FASB issued this ASU as part of the Simplification Initiative.  This ASU involves several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or

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liability, and classification on the statement of cash flows.  ASU 2016-09 is effective for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years.  This standard was adopted by the Company effective January 2017; the adoption of this standard did not have a material effect on the Company’s operating results or financial condition.

 

In June 2016, the FASB issued ASU No. 2016-13 “Measurement of Credit Losses on Financial Instruments (Topic 326).”  ASU 2016-13 was issued to provide financial statement users with more useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date to enhance the decision making process.  The new methodology to be used should reflect expected credit losses based on relevant vintage historical information, supported by reasonable forecasts of projected loss given defaults, which will affect the collectability of the reported amounts.  This new methodology will also require available-for-sale debt securities to have a credit loss recorded through an allowance rather than write-downs.  ASU 2016-13 is effective for financial statements issued for fiscal years beginning after December 15, 2019.  The Company is assessing the impact of ASU 2016-13 on its accounting and disclosures, and is in the process of accumulating data and evaluating model options to support future risk assessments.

 

In March 2017, the FASB issued ASU No. 2017-08 “Receivables-Nonrefundable Fees and Other Costs – Premium Amortization on Purchased Callable Debt Securities (Subtopic 310-20).”  This ASU was issued to shorten the amortization period for the premium to the earliest call date on debt securities.  This premium is required to be recorded as a reduction to net interest margin during the shorter yield to call period, as compared to prior practice of amortizing the premium as a reduction to net interest margin over the contractual life of the instrument.  This ASU does not change the current method of amortizing any discount over the contractual life of the debt security, and this pronouncement is effective for fiscal years beginning after December 15, 2018, with earlier adoption permitted.  The Company adopted ASU 2017-08 as a change in accounting principle in the third quarter of 2017 on a modified retrospective basis, which required the Company to reflect its adoption effective January 1, 2017.  The effect of amortizing the premium over a shorter period negatively impacted the net interest margin for the first nine months of 2017, and will continue to decrease future quarterly net interest income by approximately 10 basis points a quarter until the premium, which is $25.0 million as of September 30, 2017, is fully amortized. As a result of management’s analysis, the impact of the change in accounting principle as a result of ASU 2017-08 to adjust beginning of year retained earnings was considered insignificant and, accordingly, the impact was adjusted through current period earnings.

 

In August 2017, the FASB issued ASU 2017-12, “Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities”. The purpose of this updated guidance is to better align a company’s financial reporting for hedging activities with the economic objectives of those activities. ASU 2017-12 is effective for public business entities for fiscal years beginning after December 15, 2018, with early adoption, including adoption in an interim period, permitted.  The Company plans to adopt ASU 2017-12 on January 1, 2018.   ASU 2017-12 requires a modified retrospective transition method in which the Company will recognize the cumulative effect of the change on the opening balance of each affected component of equity in the statement of financial position as of the date of adoption.  While the Company continues to assess all potential impacts of the standard, we currently expect adoption to have an immaterial impact on our consolidated financial statements.

 

Subsequent Events

 

On October 17, 2017, the Company’s Board of Directors declared a cash dividend of $0.01 per share payable on November 6, 2017, to stockholders of record as of October 27, 2017; dividends of $296,000 were paid to stockholders on November 6, 2017.

 

Note 2 – Acquisitions

 

On October 28, 2016, the Bank acquired the Chicago branch of Talmer Bank and Trust, the banking subsidiary of Talmer Bancorp, Inc. (“Talmer”).  As a result of this transaction, the Bank recorded assets with a fair value of approximately $230.9 million, including approximately $221.0 million of loans, and assumed deposits with a fair value of approximately $48.9 million.  Goodwill of $8.4 million was included within the total assets recorded upon acquisition; net cash of $181.5 million was paid for the purchase. 

 

Note 3 – Securities

 

Investment Portfolio Management

 

Our investment portfolio serves the liquidity needs and income objectives of the Company.  While the portfolio serves as an important component of the overall liquidity management at the Bank, portions of the portfolio 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.

 

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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. 

 

FHLBC and FRBC stock are considered nonmarketable equity investments.  FHLBC stock was recorded at $5.6 million at September 30, 2017, and $3.1 million at December 31, 2016, and is necessary to maintain access to FHLBC advances, which are utilized as a component to meet the Bank’s daily funding needs.  FRBC stock was recorded at $4.8 million at September 30, 2017, and December 31, 2016. 

 

The following table summarizes the amortized cost and fair value of the securities portfolio at September 30, 2017, and December 31, 2016, and the corresponding amounts of gross unrealized gains and losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

September 30, 2017

    

Cost

    

Gains

    

Losses

    

Value

Securities available-for-sale

 

 

 

 

 

 

 

 

U.S. Treasuries

 

$

4,001

 

$

 -

 

$

(11)

 

$

3,990

U.S. government agencies

 

 

13,475

 

 

15

 

 

(39)

 

 

13,451

U.S. government agencies mortgage-backed

 

 

11,131

 

 

18

 

 

(119)

 

 

11,030

States and political subdivisions

 

 

224,648

 

 

5,173

 

 

(789)

 

 

229,032

Corporate bonds

 

 

10,823

 

 

20

 

 

(266)

 

 

10,577

Collateralized mortgage obligations

 

 

81,693

 

 

228

 

 

(1,535)

 

 

80,386

Asset-backed securities

 

 

134,542

 

 

865

 

 

(3,648)

 

 

131,759

Collateralized loan obligations

 

 

52,803

 

 

505

 

 

(49)

 

 

53,259

Total securities available-for-sale

 

$

533,116

 

$

6,824

 

$

(6,456)

 

$

533,484

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

December 31, 2016

    

Cost

    

Gains

    

Losses

    

Value

Securities available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agencies mortgage-backed

 

$

42,511

 

$

 -

 

$

(977)

 

$

41,534

States and political subdivisions

 

 

68,718

 

 

258

 

 

(273)

 

 

68,703

Corporate bonds

 

 

10,957

 

 

 9

 

 

(336)

 

 

10,630

Collateralized mortgage obligations

 

 

174,352

 

 

374

 

 

(3,799)

 

 

170,927

Asset-backed securities

 

 

146,391

 

 

341

 

 

(8,325)

 

 

138,407

Collateralized loan obligations

 

 

102,504

 

 

29

 

 

(896)

 

 

101,637

Total securities available-for-sale

 

$

545,433

 

$

1,011

 

$

(14,606)

 

$

531,838

 

The fair value, amortized cost and weighted average yield of debt securities at September 30, 2017, by contractual maturity, were as follows in the table below.  Securities not due at a single maturity date are shown separately.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

Amortized

 

Average

 

 

Fair

 

Securities available-for-sale

    

Cost

    

Yield

 

    

Value

  

Due in one year or less

 

$

3,400

 

2.60

%

 

$

3,405

 

Due after one year through five years

 

 

5,846

 

2.74

 

 

 

5,831

 

Due after five years through ten years

 

 

16,105

 

2.52

 

 

 

16,057

 

Due after ten years

 

 

227,596

 

2.98

 

 

 

231,757

 

 

 

 

252,947

 

2.94

 

 

 

257,050

 

Mortgage-backed and collateralized mortgage obligations

 

 

92,824

 

2.72

 

 

 

91,416

 

Asset-backed securities

 

 

134,542

 

2.41

 

 

 

131,759

 

Collateralized loan obligations

 

 

52,803

 

4.38

 

 

 

53,259

 

Total securities available-for-sale

 

$

533,116

 

2.91

%

 

$

533,484

 

 

At September 30, 2017, the Company’s investments include $110.6 million of asset-backed securities that are backed by student loans originated under the Federal Family Education Loan program (“FFEL”).  Under the FFEL, private lenders made federally guaranteed student loans to parents and students. While the program was modified several times before elimination in 2010, FFEL securities are generally guaranteed by the U.S Department of Education “DOE”) at not less than 97% of the outstanding principal amount of the loans.    The guarantee will reduce to 85% if the DOE receives reimbursement requests in excess of 5% of insured loans; reimbursement

11

 


 

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will drop to 75% if reimbursement requests exceed 9% of insured loans.  In addition to the U.S. Department of Education guarantee, total added credit enhancement in the form of overcollateralization and/or subordination amounted to $12.3 million, or 10.42%, of outstanding principal.

 

The Company has invested in securities issued from three originators that individually amount to over 10% of the Company’s stockholders equity.  Information regarding these three issuers and the value of the securities issued follows:

 

 

 

 

 

 

 

 

 

 

 

September 30, 2017

 

 

    

Amortized

    

Fair

 

Issuer

 

Cost

 

Value

 

GCO Education Loan Funding Corp

 

$

27,555

 

$

26,505

 

Towd  Point Mortgage Trust

 

 

29,544

 

 

29,445

 

Student Loan Marketing Assocation

 

 

25,654

 

 

25,803

 

 

Securities with unrealized losses at September 30, 2017, and December 31, 2016, 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

 

12 months or more

 

 

 

 

 

 

 

 

September 30, 2017

 

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. Treasuries

 

 1

 

$

11

 

$

3,990

 

 -

 

$

 -

 

$

 -

 

 1

 

$

11

 

$

3,990

U.S. government agencies

 

 2

 

 

39

 

 

6,701

 

 -

 

 

 -

 

 

 -

 

 2

 

 

39

 

 

6,701

U.S. government agencies mortgage-backed

 

 2

 

 

13

 

 

2,089

 

 4

 

 

106

 

 

4,096

 

 6

 

 

119

 

 

6,185

States and political subdivisions

 

 7

 

 

789

 

 

24,843

 

 -

 

 

 -

 

 

 -

 

 7

 

 

789

 

 

24,843

Corporate bonds

 

 -

 

 

 -

 

 

 -

 

 3

 

 

266

 

 

10,078

 

 3

 

 

266

 

 

10,078

Collateralized mortgage obligations

 

 4

 

 

238

 

 

21,281

 

 8

 

 

1,297

 

 

43,684

 

12

 

 

1,535

 

 

64,965

Asset-backed securities

 

 1

 

 

265

 

 

4,293

 

 9

 

 

3,383

 

 

76,725

 

10

 

 

3,648

 

 

81,018

Collateralized loan obligations

 

 1

 

 

49

 

 

7,948

 

 -

 

 

 -

 

 

 -

 

 1

 

 

49

 

 

7,948

Total securities available-for-sale

 

18

 

$

1,404

 

$

71,145

 

24

 

$

5,052

 

$

134,583

 

42

 

$

6,456

 

$

205,728

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less than 12 months

 

12 months or more

 

 

 

 

 

 

 

 

December 31, 2016

 

in an unrealized loss position

 

in an unrealized loss position

 

Total

 

 

Number of

 

Unrealized

 

 

Fair

 

Number of

 

Unrealized

 

 

Fair

 

Number of

 

Unrealized

 

 

Fair

Securities available-for-sale

    

Securities

   

Losses

   

 

Value

   

Securities

   

Losses

   

 

Value

   

Securities

   

Losses

   

 

Value

U.S. government agencies mortgage-backed

 

11

 

$

957

 

$

40,636

 

 1

 

$

20

 

$

898

 

12

 

$

977

 

$

41,534

States and political subdivisions

 

12

 

 

273

 

 

35,241

 

 -

 

 

 -

 

 

 -

 

12

 

 

273

 

 

35,241

Corporate bonds

 

 1

 

 

183

 

 

4,817

 

 2

 

 

153

 

 

5,328

 

 3

 

 

336

 

 

10,145

Collateralized mortgage obligations

 

16

 

 

3,402

 

 

117,752

 

 7

 

 

397

 

 

18,109

 

23

 

 

3,799

 

 

135,861

Asset-backed securities

 

 4

 

 

328

 

 

17,604

 

12

 

 

7,997

 

 

107,112

 

16

 

 

8,325

 

 

124,716

Collateralized loan obligations

 

 -

 

 

 -

 

 

 -

 

12

 

 

896

 

 

81,613

 

12

 

 

896

 

 

81,613

Total securities available-for-sale

 

44

 

$

5,143

 

$

216,050

 

34

 

$

9,463

 

$

213,060

 

78

 

$

14,606

 

$

429,110

 

Recognition of other-than-temporary impairment was not necessary in the three and nine months ended September 30, 2017 or 2016.  The changes in fair value related primarily to interest rate fluctuations.  Our review of other-than-temporary impairment determined that there was no credit quality deterioration.

 

The following table presents net realized gains (losses) on securities available-for-sale for the quarters and nine months ended September 30, 2017 and 2016. 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter Ended

 

 

Nine Months Ended

 

 

 

 

September 30, 

 

 

September 30, 

 

Securities available-for-sale

    

2017

    

2016

    

2017

    

2016

    

Gross realized gains on securities

 

$

474

 

$

1,380

 

$

911

 

$

1,518

 

Gross realized losses on securities

 

 

(371)

 

 

(3,339)

 

 

(1,076)

 

 

(3,538)

 

Securities realized gains (losses), net

 

$

103

 

$

(1,959)

 

$

(165)

 

$

(2,020)

 

 

The majority of the net realized losses in the prior year were incurred to meet the funding needs related to the Talmer branch acquisition in late 2016.

 

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Note 4 – Loans

 

Major classifications of loans were as follows:

 

 

 

 

 

 

 

 

 

 

    

September 30, 2017

    

December 31, 2016

 

Commercial

 

$

257,356

 

$

228,113

 

Leases

 

 

69,305

 

 

55,451

 

Real estate - commercial

 

 

739,136

 

 

736,247

 

Real estate - construction

 

 

94,868

 

 

64,720

 

Real estate - residential

 

 

419,583

 

 

377,851

 

Consumer

 

 

2,770

 

 

3,237

 

Other1

 

 

10,550

 

 

11,973

 

 

 

 

1,593,568

 

 

1,477,592

 

Net deferred loan costs

 

 

623

 

 

1,217

 

Total loans

 

$

1,594,191

 

$

1,478,809

 

 

1 The “Other” class includes overdrafts.

 

It is the policy of the Company to review each prospective credit prior to making a loan in order to determine if an adequate level of security or collateral has been obtained.  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.  With selected exceptions, the Bank 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 78.6% and 79.7% of the portfolio at September 30, 2017, and December 31, 2016, respectively.

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recorded

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

90 days or

 

 

 

 

 

 

 

 

90 Days or

 

 

 

 

 

 

 

 

 

 

 

 

 

Greater Past

 

 

30-59 Days

 

60-89 Days

 

Greater Past

 

Total Past

 

 

 

 

 

 

 

 

 

 

Due and

September 30, 2017

    

Past Due

    

Past Due

    

Due

    

Due

    

Current

    

Nonaccrual

    

Total Loans

    

Accruing

Commercial

 

$

 -

 

$

89

 

$

 -

 

$

89

 

$

257,060

 

$

207

 

$

257,356

 

$

 -

Leases

 

 

 -

 

 

685

 

 

149

 

 

834

 

 

68,275

 

 

196

 

 

69,305

 

 

156

Real estate - commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied general purpose

 

 

253

 

 

 -

 

 

537

 

 

790

 

 

154,429

 

 

457

 

 

155,676

 

 

561

Owner occupied special purpose

 

 

513

 

 

 -

 

 

 -

 

 

513

 

 

172,866

 

 

359

 

 

173,738

 

 

 -

Non-owner occupied general purpose

 

 

649

 

 

 -

 

 

 -

 

 

649

 

 

251,933

 

 

1,165

 

 

253,747

 

 

 -

Non-owner occupied special purpose

 

 

 -

 

 

248

 

 

 -

 

 

248

 

 

93,498

 

 

 -

 

 

93,746

 

 

 -

Retail properties

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

45,149

 

 

1,113

 

 

46,262

 

 

 -

Farm

 

 

 -

 

 

 -

 

 

383

 

 

383

 

 

15,584

 

 

 -

 

 

15,967

 

 

387

Real estate - construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Homebuilder

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

2,644

 

 

 -

 

 

2,644

 

 

 -

Land

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

3,235

 

 

 -

 

 

3,235

 

 

 -

Commercial speculative

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

34,817

 

 

 -

 

 

34,817

 

 

 -

All other

 

 

63

 

 

 -

 

 

 -

 

 

63

 

 

53,904

 

 

205

 

 

54,172

 

 

 -

Real estate - residential

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investor

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

52,361

 

 

492

 

 

52,853

 

 

 -

Multifamily

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

117,544

 

 

4,757

 

 

122,301

 

 

 -

Owner occupied

 

 

40

 

 

 -

 

 

 -

 

 

40

 

 

124,414

 

 

4,127

 

 

128,581

 

 

 -

Revolving and junior liens

 

 

732

 

 

22

 

 

100

 

 

854

 

 

113,956

 

 

1,038

 

 

115,848

 

 

103

Consumer

 

 

 2

 

 

 -

 

 

 -

 

 

 2

 

 

2,760

 

 

 8

 

 

2,770

 

 

 -

Other1

 

 

 1

 

 

 -

 

 

 -

 

 

 1

 

 

11,172

 

 

 -

 

 

11,173

 

 

 -

Total

 

$

2,253

 

$

1,044

 

$

1,169

 

$

4,466

 

$

1,575,601

 

$

14,124

 

$

1,594,191

 

$

1,207

 

 

13

 


 

Table of Contents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recorded

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

90 days or

 

 

 

 

 

 

 

 

90 Days or

 

 

 

 

 

 

 

 

 

 

 

 

 

Greater Past

 

 

30-59 Days

 

60-89 Days

 

Greater Past

 

Total Past

 

 

 

 

 

 

 

 

 

 

Due and

December 31, 2016

    

Past Due

    

Past Due

    

Due

    

Due

    

Current

    

Nonaccrual

    

Total Loans

    

Accruing

Commercial

 

$

57

 

$

74

 

$

 -

 

$

131

 

$

227,742

 

$

240

 

$

228,113

 

$

 -

Leases

 

 

 -

 

 

286

 

 

 

 

 

286

 

 

54,799

 

 

366

 

 

55,451

 

 

 

Real estate - commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied general purpose

 

 

758

 

 

 -

 

 

 -

 

 

758

 

 

135,599

 

 

879

 

 

137,236

 

 

 -

Owner occupied special purpose

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

177,755

 

 

385

 

 

178,140

 

 

 -

Non-owner occupied general purpose

 

 

667

 

 

379

 

 

 -

 

 

1,046

 

 

229,315

 

 

1,930

 

 

232,291

 

 

 -

Non-owner occupied special purpose

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

118,052

 

 

1,013

 

 

119,065

 

 

 -

Retail properties

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

53,474

 

 

1,179

 

 

54,653

 

 

 -

Farm

 

 

1,353

 

 

 -

 

 

 -

 

 

1,353

 

 

13,509

 

 

 -

 

 

14,862

 

 

 -

Real estate - construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Homebuilder

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

3,883

 

 

 -

 

 

3,883

 

 

 -

Land

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

3,029

 

 

 -

 

 

3,029

 

 

 -

Commercial speculative

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

22,654

 

 

74

 

 

22,728

 

 

 -

All other

 

 

364

 

 

 -

 

 

 -

 

 

364

 

 

34,509

 

 

207

 

 

35,080

 

 

 -

Real estate - residential

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investor

 

 

237

 

 

 -

 

 

 -

 

 

237

 

 

54,924

 

 

936

 

 

56,097

 

 

 -

Multifamily

 

 

 -

 

 

 -

 

 

 

 

 

 -

 

 

96,502

 

 

 -

 

 

96,502

 

 

 

Owner occupied

 

 

274

 

 

 -

 

 

 -

 

 

274

 

 

116,900

 

 

6,452

 

 

123,626

 

 

 -

Revolving and junior liens

 

 

225

 

 

405

 

 

 -

 

 

630

 

 

99,374

 

 

1,622

 

 

101,626

 

 

 -

Consumer

 

 

10

 

 

36

 

 

 -

 

 

46

 

 

3,191

 

 

 -

 

 

3,237

 

 

 -

Other1

 

 

14

 

 

 -

 

 

 -

 

 

14

 

 

13,176

 

 

 -

 

 

13,190

 

 

 -

Total

 

$

3,959

 

$

1,180

 

$

 -

 

$

5,139

 

$

1,458,387

 

$

15,283

 

$

1,478,809

 

$

 -

 

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

 

Credit Quality Indicators

 

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

 

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

 

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

 

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

 

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

 

14

 


 

Table of Contents

Credit Quality Indicators by class of loans were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2017

 

 

 

 

Special

 

 

 

 

 

 

 

 

 

 

    

Pass

    

Mention

    

Substandard 1

    

Doubtful

    

Total

Commercial

 

$

245,603

 

$

11,371

 

$

382

 

$

-

 

$

257,356

Leases

 

 

68,274

 

 

 -

 

 

1,031

 

 

 -

 

 

69,305

Real estate - commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied general purpose

 

 

153,039

 

 

1,274

 

 

1,363

 

 

-

 

 

155,676

Owner occupied special purpose

 

 

172,216

 

 

1,163

 

 

359

 

 

-

 

 

173,738

Non-owner occupied general purpose

 

 

250,497

 

 

2,085

 

 

1,165

 

 

-

 

 

253,747

Non-owner occupied special purpose

 

 

90,113

 

 

 -

 

 

3,633

 

 

-

 

 

93,746

Retail Properties

 

 

43,922

 

 

1,227

 

 

1,113

 

 

-

 

 

46,262

Farm

 

 

13,472

 

 

 -

 

 

2,495

 

 

-

 

 

15,967

Real estate - construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Homebuilder

 

 

2,644

 

 

 -

 

 

 -

 

 

-

 

 

2,644

Land

 

 

3,235

 

 

 -

 

 

 -

 

 

-

 

 

3,235

Commercial speculative

 

 

34,817

 

 

 -

 

 

 -

 

 

-

 

 

34,817

All other

 

 

52,898

 

 

894

 

 

380

 

 

-

 

 

54,172

Real estate - residential

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investor

 

 

52,205

 

 

 -

 

 

648

 

 

-

 

 

52,853

Multifamily

 

 

117,544

 

 

 -

 

 

4,757

 

 

 -

 

 

122,301

Owner occupied

 

 

123,600

 

 

563

 

 

4,418

 

 

-

 

 

128,581

Revolving and junior liens

 

 

113,871

 

 

 -

 

 

1,977

 

 

-

 

 

115,848

Consumer

 

 

2,762

 

 

 -

 

 

 8

 

 

-

 

 

2,770

Other

 

 

11,173

 

 

 -

 

 

 -

 

 

-

 

 

11,173

Total

 

$

1,551,885

 

$

18,577

 

$

23,729

 

$

 -

 

$

1,594,191

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2016

 

 

 

 

Special

 

 

 

 

 

 

 

 

 

 

    

Pass

    

Mention

    

Substandard 1

    

Doubtful

    

Total

Commercial

 

$

214,028

 

$

11,558

 

$

2,527

 

$

-

 

$

228,113

Leases

 

 

53,366

 

 

976

 

 

1,109

 

 

 

 

 

55,451

Real estate - commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied general purpose

 

 

135,503

 

 

53

 

 

1,680

 

 

-

 

 

137,236

Owner occupied special purpose

 

 

172,353

 

 

5,402

 

 

385

 

 

-

 

 

178,140

Non-owner occupied general purpose

 

 

229,448

 

 

913

 

 

1,930

 

 

-

 

 

232,291

Non-owner occupied special purpose

 

 

114,293

 

 

 -

 

 

4,772

 

 

-

 

 

119,065

Retail Properties

 

 

52,207

 

 

1,267

 

 

1,179

 

 

-

 

 

54,653

Farm

 

 

11,840

 

 

1,240

 

 

1,782

 

 

-

 

 

14,862

Real estate - construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Homebuilder

 

 

3,883

 

 

 -

 

 

 -

 

 

-

 

 

3,883

Land

 

 

3,029

 

 

 -

 

 

 -

 

 

-

 

 

3,029

Commercial speculative

 

 

22,654

 

 

 -

 

 

74

 

 

-

 

 

22,728

All other

 

 

34,696

 

 

 -

 

 

384

 

 

-

 

 

35,080

Real estate - residential

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investor

 

 

55,001

 

 

 -

 

 

1,096

 

 

-

 

 

56,097

Multifamily

 

 

96,502

 

 

 -

 

 

 -

 

 

 -

 

 

96,502

Owner occupied

 

 

115,831

 

 

570

 

 

7,225

 

 

-

 

 

123,626

Revolving and junior liens

 

 

99,286

 

 

 -

 

 

2,340

 

 

-

 

 

101,626

Consumer

 

 

3,236

 

 

 -

 

 

 1

 

 

-

 

 

3,237

Other

 

 

13,165

 

 

25

 

 

 -

 

 

-

 

 

13,190

Total

 

$

1,430,321

 

$

22,004

 

$

26,484

 

$

 -

 

$

1,478,809

 

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

 

The Company had $1.2 million and $1.8 million in residential real estate loans in the process of foreclosure as of September 30, 2017, and December 31, 2016, respectively.  The Company also had $937,000 and $225,000 in residential real estate included in OREO as of September 30, 2017, and December 31, 2016, respectively.

 

15

 


 

Table of Contents

Impaired loans, which include nonaccrual loans and accruing troubled debt restructurings, by class of loans for the September 30, 2017 periods listed were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

As of September 30, 2017

 

September 30, 2017

 

 

 

 

 

Unpaid

 

 

 

 

Average

 

Interest

 

 

Recorded

 

Principal

 

Related

 

Recorded

 

Income

 

    

Investment

    

Balance

    

Allowance

    

Investment

    

Recognized

With no related allowance recorded

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

207

 

$

360

 

$

 -

 

$

123

 

$

 -

Leases

 

 

196

 

 

227

 

 

 -

 

 

281

 

 

 -

Commercial real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied general purpose

 

 

457

 

 

495

 

 

 -

 

 

1,169

 

 

 -

Owner occupied special purpose

 

 

359

 

 

509

 

 

 -

 

 

372

 

 

 -

Non-owner occupied general purpose

 

 

1,218

 

 

1,592

 

 

 -

 

 

1,481

 

 

 2

Non-owner occupied special purpose

 

 

 -

 

 

 -

 

 

 -

 

 

507

 

 

 -

Retail properties

 

 

1,113

 

 

1,199

 

 

 -

 

 

1,146

 

 

 -

Farm

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Homebuilder

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Land

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Commercial speculative

 

 

 -

 

 

 -

 

 

 -

 

 

37

 

 

 -

All other

 

 

205

 

 

231

 

 

 -

 

 

206

 

 

 -

Residential

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investor

 

 

1,374

 

 

1,627

 

 

 -

 

 

1,607

 

 

36

Multifamily

 

 

4,757

 

 

4,965

 

 

 -

 

 

2,379

 

 

 -

Owner occupied

 

 

8,150

 

 

9,524

 

 

 -

 

 

8,987

 

 

119

Revolving and junior liens

 

 

1,991

 

 

2,173

 

 

 -

 

 

2,237

 

 

27

Consumer

 

 

 8

 

 

 8

 

 

 -

 

 

104

 

 

 -

Total impaired loans with no recorded allowance

 

 

20,035

 

 

22,910

 

 

 -

 

 

20,636

 

 

184

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

With an allowance recorded

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Leases

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Commercial real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied general purpose

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Owner occupied special purpose

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Non-owner occupied general purpose

 

 

 -

 

 

 -

 

 

 -

 

 

123

 

 

 -

Non-owner occupied special purpose

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Retail properties

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Farm

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Homebuilder

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Land

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Commercial speculative

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

All other

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Residential

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investor

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Multifamily

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Owner occupied

 

 

 -

 

 

 -

 

 

 -

 

 

402

 

 

 -

Revolving and junior liens

 

 

51

 

 

51

 

 

 6

 

 

26

 

 

 2

Consumer

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Total impaired loans with a recorded allowance

 

 

51

 

 

51

 

 

 6

 

 

551

 

 

 2

Total impaired loans

 

$

20,086

 

$

22,961

 

$

 6

 

$

21,187

 

$

186

 

16

 


 

Table of Contents

Impaired loans by class of loans as of December 31, 2016, and for the nine months ended September 30, 2016, were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

As of December 31, 2016

 

September 30, 2016

 

 

 

 

Unpaid 

 

 

 

Average 

 

Interest 

 

 

Recorded

 

Principal 

 

Related 

 

Recorded 

 

Income 

 

    

 Investment

    

Balance

    

Allowance

    

Investment

    

Recognized

With no related allowance recorded

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

240

 

$

388

 

$

 -

 

$

326

 

$

 -

Leases

 

 

366

 

 

371

 

 

 -

 

 

 -

 

 

 -

Commercial real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied general purpose

 

 

1,881

 

 

2,131

 

 

 -

 

 

2,412

 

 

66

Owner occupied special purpose

 

 

385

 

 

518

 

 

 -

 

 

580

 

 

 -

Non-owner occupied general purpose

 

 

1,744

 

 

2,010

 

 

 -

 

 

1,655

 

 

 2

Non-owner occupied special purpose

 

 

1,013

 

 

1,649

 

 

 -

 

 

506

 

 

 -

Retail properties

 

 

1,179

 

 

1,235

 

 

 -

 

 

990

 

 

 -

Farm

 

 

 -

 

 

 -

 

 

 -

 

 

636

 

 

 -

Construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Homebuilder

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Land

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Commercial speculative

 

 

74

 

 

81

 

 

 -

 

 

80

 

 

 -

All other

 

 

207

 

 

221

 

 

 -

 

 

 -

 

 

 -

Residential

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investor

 

 

1,841

 

 

2,308

 

 

 -

 

 

1,864

 

 

35

Multifamily

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Owner occupied

 

 

9,824

 

 

11,391

 

 

 -

 

 

9,916

 

 

120

Revolving and junior liens

 

 

2,484

 

 

3,018

 

 

 -

 

 

2,527

 

 

 9

Consumer

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Total impaired loans with no recorded allowance

 

 

21,238

 

 

25,321

 

 

 -

 

 

21,492

 

 

232

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

With an allowance recorded

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

 -

 

 

 -

 

 

 -

 

 

 2

 

 

 -

Leases

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Commercial real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied general purpose

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Owner occupied special purpose

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Non-owner occupied general purpose

 

 

246

 

 

595

 

 

246

 

 

132

 

 

31

Non-owner occupied special purpose

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Retail properties

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Farm

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Homebuilder

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Land

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Commercial speculative

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

All other

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Residential

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investor

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Multifamily

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Owner occupied

 

 

803

 

 

853

 

 

803

 

 

356

 

 

 -

Revolving and junior liens

 

 

 -

 

 

 -

 

 

 -

 

 

23

 

 

 -

Consumer

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Total impaired loans with a recorded allowance

 

 

1,049

 

 

1,448

 

 

1,049

 

 

513

 

 

31

Total impaired loans

 

$

22,287

 

$

26,769

 

$

1,049

 

$

22,005

 

$

263

 

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.

 

17

 


 

Table of Contents

The specific allocation of the allowance for loan losses for TDRs is determined by calculating the present value of the TDR cash flows by discounting the original payment less an assumption for probability of default at the original note’s issue rate, and adding this amount to the present value of collateral less selling costs.  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.

 

TDRs that were modified during the period are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

TDR Modifications

 

TDR Modifications

 

 

 

Quarter Ended September 30, 2017

 

Nine Months Ended September 30, 2017

 

 

 

# 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 - residential

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

HAMP1

 

 1

 

$

36

 

$

33

 

 1

 

$

36

 

$

33

 

Other2

 

 1

 

 

42

 

 

42

 

 1

 

 

42

 

 

42

 

Revolving and junior liens

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

HAMP1

 

 1

 

 

49

 

 

49

 

 1

 

 

49

 

 

49

 

Other2

 

 1

 

 

49

 

 

33

 

 7

 

 

448

 

 

418

 

Total

 

 4

 

$

176

 

$

157

 

10

 

$

575

 

$

542

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

TDR Modifications

 

TDR Modifications

 

 

 

Quarter Ended September 30, 2016

 

Nine Months Ended September 30, 2016

 

 

 

# of 

 

Pre-modification 

 

Post-modification 

 

# of 

 

Pre-modification 

 

Post-modification 

 

 

    

contracts

    

recorded investment

    

recorded investment

    

contracts

    

recorded investment

    

recorded investment

  

Troubled debt restructurings

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate - commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other2

 

 -

 

$

 -

 

$

 -

 

 2

 

$

312

 

$

211

 

Real estate - residential

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

HAMP1

 

 -

 

 

 -

 

 

 -

 

 1

 

 

239

 

 

235

 

Revolving and junior liens

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

HAMP1

 

 -

 

 

 -

 

 

 

 

 4

 

 

469

 

 

433

 

Other2

 

 1

 

 

70

 

 

70

 

 1

 

 

70

 

 

70

 

Total

 

 1

 

$

70

 

$

70

 

 8

 

$

1,090

 

$

949

 

 

1 HAMP: Home Affordable Modification Program 

2 Other: Change of terms from bankruptcy court

 

TDRs are classified as being in default on a case-by-case basis when they fail to be in compliance with the modified terms.  There was no TDR default activity for the nine months ended September 30, 2017, and September 30, 2016, for loans that were restructured within the 12 month period prior to default.

 

 

18

 


 

Table of Contents

Note 5 – Allowance for Loan Losses

 

Changes in the allowance for loan losses by segment of loans based on method of impairment for three and nine months ended September 30, 2017, were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real Estate

 

Real Estate

 

Real Estate

 

 

 

 

 

 

Allowance for loan losses:

   

Commercial

   

Leases

   

Commercial

   

Construction

   

Residential

   

Consumer

   

Other

   

Total

Three months ended September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

2,150

 

$

791

 

$

8,107

 

$

857

 

$

2,576

 

$

848

 

$

507

 

$

15,836

Charge-offs

 

 

13

 

 

98

 

 

22

 

 

19

 

 

 7

 

 

82

 

 

 -

 

 

241

Recoveries

 

 

 6

 

 

 -

 

 

43

 

 

11

 

 

459

 

 

45

 

 

 6

 

 

570

(Release) Provision

 

 

(104)

 

 

77

 

 

505

 

 

165

 

 

(607)

 

 

(1)

 

 

265

 

 

300

Ending balance

 

$

2,039

 

$

770

 

$

8,633

 

$

1,014

 

$

2,421

 

$

810

 

$

778

 

$

16,465

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

1,629

 

$

633

 

$

9,547

 

$

389

 

$

2,692

 

$

833

 

$

435

 

$

16,158

Charge-offs

 

 

20

 

 

215

 

 

300

 

 

23

 

 

1,178

 

 

262

 

 

 -

 

 

1,998

Recoveries

 

 

13

 

 

 -

 

 

124

 

 

89

 

 

850

 

 

166

 

 

13

 

 

1,255

Provision (Release)

 

 

417

 

 

352

 

 

(738)

 

 

559

 

 

57

 

 

73

 

 

330

 

 

1,050

Ending balance

 

$

2,039

 

$

770

 

$

8,633

 

$

1,014

 

$

2,421

 

$

810

 

$

778

 

$

16,465

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance: Individually evaluated for impairment

 

$

 -

 

$

 -

 

$

 -

 

$

 -

 

$

 6

 

$

 -

 

$

 -

 

$

 6

Ending balance: Collectively evaluated for impairment

 

$

2,039

 

$

770

 

$

8,633

 

$

1,014

 

$

2,415

 

$

810

 

$

778

 

$

16,459

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance

 

$

257,356

 

$

69,305

 

$

739,136

 

$

94,868

 

$

419,583

 

$

2,770

 

$

11,173

 

$

1,594,191

Ending balance: Individually evaluated for impairment

 

$

207

 

$

196

 

$

3,147

 

$

205

 

$

16,323

 

$

 8

 

$

 -

 

$

20,086

Ending balance: Collectively evaluated for impairment

 

$

257,149

 

$

69,109

 

$

735,989

 

$

94,663

 

$

403,260

 

$

2,762

 

$

11,173

 

$

1,574,105

 

 

Changes in the allowance for loan losses by segment of loans based on method of impairment for three and nine months ended September 30, 2016, were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real Estate

 

Real Estate

 

Real Estate

 

 

 

 

 

 

Allowance for loan losses:

   

Commercial

   

Leases

   

Commercial

   

Construction

   

Residential

   

Consumer

   

Other

   

Total

Three months ended September 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

1,420

 

$

275

 

$

8,954

 

$

380

 

$

2,933

 

$

862

 

$

998

 

$

15,822

Charge-offs

 

 

76

 

 

 -

 

 

792

 

 

 9

 

 

220

 

 

100

 

 

 -

 

 

1,197

Recoveries

 

 

10

 

 

 -

 

 

27

 

 

60

 

 

199

 

 

57

 

 

 5

 

 

358

Provision (Release)

 

 

141

 

 

71

 

 

753

 

 

39

 

 

(577)

 

 

118

 

 

(545)

 

 

 -

Ending balance

 

$

1,495

 

$

346

 

$

8,942

 

$

470

 

$

2,335

 

$

937

 

$

458

 

$

14,983

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

2,041

 

$

55

 

$

9,013

 

$

265

 

$

1,694

 

$

1,190

 

$

1,965

 

$

16,223

Charge-offs

 

 

95

 

 

13

 

 

1,484

 

 

 9

 

 

657

 

 

250

 

 

 -

 

 

2,508

Recoveries

 

 

22

 

 

 -

 

 

255

 

 

71

 

 

718

 

 

184

 

 

18

 

 

1,268

(Release) Provision

 

 

(473)

 

 

304

 

 

1,158

 

 

143

 

 

580

 

 

(187)

 

 

(1,525)

 

 

 -

Ending balance

 

$

1,495

 

$

346

 

$

8,942

 

$

470

 

$

2,335

 

$

937

 

$

458

 

$

14,983

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance: Individually evaluated for impairment

 

$

 -

 

$

 -

 

$

264

 

$

 -

 

$

250

 

$

 -

 

$

 -

 

$

514

Ending balance: Collectively evaluated for impairment

 

$

1,495

 

$

346

 

$

8,678

 

$

470

 

$

2,085

 

$

937

 

$

458

 

$

14,469

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance

 

$

136,819

 

$

47,215

 

$

617,280

 

$

28,786

 

$

357,846

 

$

3,325

 

$

11,581

 

$

1,202,852

Ending balance: Individually evaluated for impairment

 

$

583

 

$

 -

 

$

8,426

 

$

76

 

$

14,038

 

$

 -

 

$

 -

 

$

23,123

Ending balance: Collectively evaluated for impairment

 

$

136,236

 

$

47,215

 

$

608,854

 

$

28,710

 

$

343,808

 

$

3,325

 

$

11,581

 

$

1,179,729

 

 

 

19

 


 

Table of Contents

Note 6 – 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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarters Ended

 

Nine Months Ended

 

 

    

September 30, 

    

September 30, 

  

Other real estate owned

    

2017

    

2016

    

2017

    

2016

 

Balance at beginning of period

 

$

11,724

 

$

16,252

 

$

11,916

 

$

19,141

 

Property additions

 

 

176

 

 

255

 

 

3,796

 

 

1,223

 

Property improvements

 

 

 -

 

 

 4

 

 

 -

 

 

16

 

Less:

 

 

 

 

 

 

 

 

 

 

 

 

 

Proceeds from property disposals, net of participation purchase and of gains/losses

 

 

1,956

 

 

2,002

 

 

5,058

 

 

4,931

 

Period valuation adjustments

 

 

920

 

 

365

 

 

1,630

 

 

1,305

 

Balance at end of period

 

$

9,024

 

$

14,144

 

$

9,024

 

$

14,144

 

 

Activity in the valuation allowance was as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Quarters Ended

 

Nine Months Ended

  

 

    

September 30, 

    

September 30, 

  

 

    

2017

    

2016

    

2017

    

2016

  

Balance at beginning of period

 

$

8,304

 

$

13,377

 

$

9,982

 

$

14,127

 

Provision for unrealized losses

 

 

920

 

 

365

 

 

1,630

 

 

1,305

 

Reductions taken on sales

 

 

(421)

 

 

(488)

 

 

(2,809)

 

 

(2,178)

 

Balance at end of period

 

$

8,803

 

$

13,254

 

$

8,803

 

$

13,254

 

 

Expenses related to OREO, net of lease revenue includes:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarters Ended

 

Nine Months Ended

 

 

 

September 30, 

    

September 30, 

 

 

    

2017

    

2016

    

2017

    

2016

 

Gain on sales, net

 

$

(276)

 

$

(249)

 

$

(454)

 

$

(316)

 

Provision for unrealized losses

 

 

920

 

 

365

 

 

1,630

 

 

1,305

 

Operating expenses

 

 

221

 

 

361

 

 

1,037

 

 

1,217

 

Less:

 

 

 

 

 

 

 

 

 

 

 

 

 

Lease revenue

 

 

185

 

 

51

 

 

285

 

 

163

 

Net OREO expense

 

$

680

 

$

426

 

$

1,928

 

$

2,043

 

 

 

 

 

Note 7 – Deposits

 

Major classifications of deposits were as follows:

 

 

 

 

 

 

 

 

 

 

    

September 30, 2017

    

December 31, 2016

  

Noninterest bearing demand

 

$

556,874

 

$

513,688

 

Savings

 

 

260,268

 

 

256,159

 

NOW accounts

 

 

417,054

 

 

419,417

 

Money market accounts

 

 

270,647

 

 

275,273

 

Certificates of deposit of less than $100,000

 

 

219,152

 

 

228,993

 

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

 

 

114,373

 

 

110,992

 

Certificates of deposit of more than $250,000

 

 

50,747

 

 

62,263

 

Total deposits

 

$

1,889,115

 

$

1,866,785

 

 

 

 

 

 

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Note 8 – Borrowings

 

The following table is a summary of borrowings as of September 30, 2017, and December 31, 2016.  Junior subordinated debentures are discussed in detail in Note 9:

 

 

 

 

 

 

 

 

 

 

    

September 30, 2017

    

December 31, 2016

  

Securities sold under repurchase agreements

 

$

26,853

 

$

25,715

 

FHLBC advances1

 

 

125,000

 

 

70,000

 

Junior subordinated debentures

 

 

57,627

 

 

57,591

 

Senior notes

 

 

44,033

 

 

43,998

 

Total borrowings

 

$

253,513

 

$

197,304

 

 

1 Included in other short-term borrowings on the balance sheet.

 

The Company enters into deposit sweep transactions where the transaction amounts are secured by pledged securities.  These transactions consistently mature overnight from the transaction date and are governed by sweep repurchase agreements.  All sweep repurchase agreements are treated as financings secured by U.S. government agencies and collateralized mortgage-backed securities and had a carrying amount of $26.9 million at September 30, 2017, and $25.7 million at December 31, 2016.  The fair value of the pledged collateral was $41.5 million at September 30, 2017 and $43.0 million at December 31, 2016.  At September 30, 2017, there were no customers with secured balances exceeding 10% of stockholders’ equity.

 

The Company’s borrowings at the FHLBC require the Bank to be a member and invest in the stock of the FHLBC.  Total borrowings are generally limited to the lower of 35% of total assets or 60% of the book value of certain mortgage loans.  As of September 30, 2017, the Bank had $125.0 million in advances outstanding under the FHLBC as compared to $70.0 million outstanding as of December 31, 2016. As of September 30, 2017, FHLBC stock held was valued at $5.6 million, and any potential FHLBC advances were collateralized by securities with a fair value of $87.4 million and loans with a principal balance of $251.3 million, which carried a FHLBC calculated combined collateral value of $273.8 million.  The Company had excess collateral of $74.5 million available to secure borrowings at September 30, 2017.

 

The Company completed a debt retirement and simultaneous senior debt offering in the fourth quarter of 2016.  Subordinated debt of $45.0 million and $500,000 of senior notes outstanding were paid off with the proceeds of a $45.0 million senior notes issuance and cash on hand.  The senior notes mature in ten years, and terms include interest payable semiannually at 5.75% for five years.  Beginning December 2021, the senior debt will pay interest at a floating rate, with interest payable quarterly at three month LIBOR plus 385 basis points.  The notes are redeemable, in whole or in part, at the option of the Company, beginning with the interest payment date on December 31, 2021, and on any floating rate interest payment date thereafter, at a redemption price equal to 100% of the principal amount of the notes plus accrued and unpaid interest.  Debt issuance costs incurred for the senior notes issuance totaled $1.0 million, and are being deferred and recorded to expense over the ten year term of the notes.  The unamortized costs are included as a reduction to the balance of the senior notes on the Consolidated Balance Sheet.

 

Note 9 – Junior Subordinated Debentures

 

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

 

The Company issued an additional $25.0 million of cumulative trust preferred securities through a private placement completed by an additional, unconsolidated subsidiary, Old Second Capital Trust II, in April 2007.  These trust preferred securities also mature in 30 years, but subject to the aforementioned regulatory approval, can be called in whole or in part on a quarterly basis commencing June 15, 2017.  The quarterly cash distributions on the securities were fixed at 6.77% through June 15, 2017, and float at 150 basis points over three-month LIBOR thereafter. The Trust II issuance converted from fixed to floating rate at three month LIBOR plus 150 basis points on June 15, 2017.  Upon conversion to a floating rate, a cash flow hedge was initiated which resulted in the total interest rate paid on the debt of 4.30% as of September 30, 2017, compared to the rate paid prior to June 15, 2017 of 6.77%. The Company issued a new $25.8 million subordinated debenture to Old Second Capital Trust II in return for the aggregate net proceeds of this trust preferred offering.  The interest rate and payment frequency on the debenture are equivalent to the cash distribution basis on the trust preferred securities.  Both of the debentures issued by the Company are disclosed on the Consolidated Balance Sheet as junior subordinated debentures and the related interest expense for each issuance is included in the Consolidated Statements of Income.  As of September 30, 2017, and December 31, 2016, unamortized debt issuance costs related to the junior subordinated debentures were 

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$752,000 and $787,000 respectively, and are included as a reduction to the balance of the junior subordinated debentures on the Consolidated Balance Sheet.

 

Note 10 – Equity Compensation Plans

 

Stock-based awards are 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; a maximum of 375,000 shares were authorized to be issued under this plan.  Following approval of the 2014 Plan, no further awards will be granted under the 2008 Plan or any other Company equity compensation plan.  At the May 2016 annual stockholders meeting, an amendment to the 2014 Plan authorized an additional 600,000 shares to be issued, which resulted in a total of 975,000 shares authorized for issuance under this plan.  The 2014 Plan authorizes the granting of qualified stock options, non-qualified stock options, restricted stock, restricted stock units, and stock appreciation rights.  Awards may be granted to selected directors and officers or employees under the 2014 Plan at the discretion of the Compensation Committee of the Company’s Board of Directors.  As of September 30, 2017, 453,209 shares remained available for issuance under the 2014 Plan.

 

There were no stock options granted or exercised in the third quarter of 2017 and 2016.  All stock options are granted for a term of ten years.  There is no unrecognized compensation cost related to unvested stock options as all stock options of the Company’s common stock have fully vested.

 

A summary of stock option activity in the Plans for the nine months ended September 30, 2017, is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-

 

 

 

 

 

 

 

Weighted

 

Average

 

 

 

 

 

 

 

Average

 

Remaining

 

 

 

 

 

 

 

Exercise

 

Contractual

 

Aggregate

 

    

Shares

    

Price

    

Term (years)

    

Intrinsic Value

 

 

 

 

 

 

 

 

 

 

 

Beginning outstanding

 

94,500

 

$

25.82

 

 -

 

 

 -

Canceled

 

 -

 

 

 -

 

 -

 

 

 -

Expired

 

 -

 

 

 -

 

 -

 

 

 -

Exercised

 

 -

 

 

 -

 

 -

 

 

 -

Ending outstanding

 

94,500

 

$

25.82

 

0.3

 

$

 -

 

 

 

 

 

 

 

 

 

 

 

Exercisable at end of period

 

94,500

 

$

25.82

 

0.3

 

$

 -

 

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

 

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

 

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

 

There were 161,500 restricted awards issued under the 2014 Plan during the nine months ended September 30, 2017.  There were 130,000 restricted awards issued during the nine months ended September 30, 2016.  Compensation expense is recognized over the vesting period of the restricted award based on the market value of the award on the issue date.  Total compensation cost that has been recorded for the 2014 Plan was $925,100 and $485,000 in the first nine months of 2017 and 2016, respectively.

 

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A summary of changes in the Company’s unvested restricted awards for the nine months ended September 30, 2017, is as follows:

 

 

 

 

 

 

 

 

 

September 30, 2017

 

 

 

 

Weighted

 

 

Restricted

 

Average

 

 

Stock Shares

 

Grant Date

 

    

and Units

    

Fair Value

Nonvested at January 1

 

409,000

 

$

5.89

Granted

 

161,500

 

 

11.04

Vested

 

(91,500)

 

 

5.07

Forfeited

 

(14,000)

 

 

7.53

Nonvested at September 30

 

465,000

 

$

7.79

 

Total unrecognized compensation cost of restricted awards was $2.0 million as of September 30, 2017, which is expected to be recognized over a weighted-average period of 2.11 years.  Total unrecognized compensation cost of restricted awards was $1.1 million as of September 30, 2016, which was expected to be recognized over a weighted-average period of 1.99 years.

 

Note 11 – Earnings Per Share

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarters Ended September 30, 

 

Nine Months Ended September 30, 

 

 

    

2017

    

2016

    

2017

    

2016

    

Basic earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average common shares outstanding

 

 

29,627,086

 

 

29,554,716

 

 

29,591,811

 

 

29,524,796

 

Net income

 

$

8,077

 

$

3,499

 

$

17,650

 

$

10,666

 

Basic earnings per share

 

$

0.27

 

$

0.12

 

$

0.60

 

$

0.36

 

Diluted earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average common shares outstanding

 

 

29,627,086

 

 

29,554,716

 

 

29,591,811

 

 

29,524,796

 

Dilutive effect of nonvested restricted awards1

 

 

473,967

 

 

282,228

 

 

425,081

 

 

303,221

 

Dilutive effect of stock options

 

 

2,556

 

 

1,238

 

 

2,473

 

 

413

 

Diluted average common shares outstanding

 

 

30,103,609

 

 

29,838,182

 

 

30,019,365

 

 

29,828,430

 

Net Income

 

$

8,077

 

$

3,499

 

$

17,650

 

$

10,666

 

Diluted earnings per share

 

$

0.27

 

$

0.12

 

$

0.59

 

$

0.36

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

900,839

 

 

967,339

 

 

900,839

 

 

977,426

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

The above earnings per share calculation did not include a warrant for 815,339 shares of common stock, at an exercise price of $13.43 per share, that was outstanding as of September 30, 2017, and September 30, 2016, because the warrant was anti-dilutive.  Of note, the ten year warrant was issued in 2009, and was sold at auction by the Treasury in June 2013 to a third party investor.

 

Note 12 Regulatory & Capital Matters

 

The Bank is subject to the risk-based capital regulatory guidelines, which include the methodology for calculating the risk-weighted Bank assets, developed by the Office of the Comptroller of the Currency (the “OCC”) and the other bank regulatory agencies.  In connection with the current economic environment, the Bank’s current level of nonperforming assets and the risk-based capital guidelines, the Bank’s Board of Directors has determined that the Bank should maintain a Tier 1 leverage capital ratio at or above eight percent (8%) and a total risk-based capital ratio at or above twelve percent (12%).  At September 30, 2017, the Bank exceeded those thresholds.

 

At September 30, 2017, the Bank’s Tier 1 capital leverage ratio was 10.63%, an increase of 39 basis point from December 31, 2016, and is well above the 8.00% objective.  The Bank’s total capital ratio was 13.52%, an increase of 7 basis points from December 31, 2016, and also modestly above the objective of 12.00%.

 

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Bank holding companies are required to maintain minimum levels of capital in accordance with capital guidelines implemented by the Board of Governors of the Federal Reserve System.  The general bank and holding company capital adequacy guidelines are shown in the accompanying table, as are the capital ratios of the Company and the Bank, as of September 30, 2017, and December 31, 2016.

 

In July 2013, the U.S. federal banking authorities issued final rules (the “Basel III Rules”) establishing more stringent regulatory capital requirements for U.S. banking institutions, which went into effect on January 1, 2015.  A detailed discussion of the Basel III Rules is included in Part I, Item 1 of the Company’s Form 10-K for the year ended December 31, 2016, under the heading “Supervision and Regulation.”

 

At September 30, 2017, and December 31, 2016, the Company, on a consolidated basis, exceeded the minimum thresholds to be considered “well capitalized” under current regulatory defined capital ratios.

 

Capital levels and industry defined regulatory minimum required levels are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Minimum Capital

 

To Be Well Capitalized Under

 

 

 

 

 

 

 

 

 

Adequacy with Capital

 

Prompt Corrective

 

 

 

Actual

 

Conservation Buffer if applicable1

 

Action Provisions2

 

 

    

Amount

    

Ratio

    

Amount

    

Ratio

    

Amount

    

Ratio

 

September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common equity tier 1 capital to risk weighted assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

$

170,622

 

8.88

%

 

$

110,482

 

5.750

%

 

 

N/A

 

N/A

 

Old Second Bank

 

 

243,109

 

12.67

 

 

 

110,330

 

5.750

 

 

$

124,720

 

6.50

%

Total capital to risk weighted assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

 

239,269

 

12.46

 

 

 

177,627

 

9.250

 

 

 

N/A

 

N/A

 

Old Second Bank

 

 

259,569

 

13.52

 

 

 

177,590

 

9.250

 

 

 

191,989

 

10.00

 

Tier 1 capital to risk weighted assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

 

221,579

 

11.54

 

 

 

139,207

 

7.250

 

 

 

N/A

 

N/A

 

Old Second Bank

 

 

243,109

 

12.67

 

 

 

139,111

 

7.250

 

 

 

153,502

 

8.00

 

Tier 1 capital to average assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

 

221,579

 

9.69

 

 

 

91,467

 

4.00

 

 

 

N/A

 

N/A

 

Old Second Bank

 

 

243,109

 

10.63

 

 

 

91,480

 

4.00

 

 

 

114,350

 

5.00

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common equity tier 1 capital to risk weighted assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

$

154,537

 

8.76

%

 

$

90,411

 

5.125

%

 

 

N/A

 

N/A

 

Old Second Bank

 

 

221,153

 

12.53

 

 

 

90,456

 

5.125

 

 

$

114,724

 

6.50

%

Total capital to risk weighted assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

 

216,769

 

12.29

 

 

 

152,126

 

8.625

 

 

 

N/A

 

N/A

 

Old Second Bank

 

 

237,306

 

13.45

 

 

 

152,176

 

8.625

 

 

 

176,436

 

10.00

 

Tier 1 capital to risk weighted assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

 

191,988

 

10.88

 

 

 

116,904

 

6.625

 

 

 

N/A

 

N/A

 

Old Second Bank

 

 

221,153

 

12.53

 

 

 

116,930

 

6.625

 

 

 

141,199

 

8.00

 

Tier 1 capital to average assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

 

191,988

 

8.90

 

 

 

86,287

 

4.00

 

 

 

N/A

 

N/A

 

Old Second Bank

 

 

221,153

 

10.24

 

 

 

86,388

 

4.00

 

 

 

107,985

 

5.00

 

 

1  As of September 30, 2017, amounts are shown inclusive of a capital conservation buffer of 1.25%; as compared to December 31, 2016, of 0.625%.

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

 

Dividend Restrictions

 

In addition to the above requirements, banking regulations and capital guidelines generally limit the amount of dividends that may be paid by a bank without prior regulatory approval.  Under these regulations, the amount of dividends that may be paid in any calendar year is limited to the current year’s profits, combined with the retained profit of the previous two years, subject to the capital requirements described above.  Pursuant to the Basel III rules that came into effect January 1, 2015, the Bank must keep a buffer of 0.625% for 2016, 1.25% for 2017, 1.875% for 2018, and 2.5% for 2019 and thereafter of minimum capital requirements in order to avoid additional limitations on capital distributions and certain other payments.

 

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Note 13 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.

 

The majority of securities available-for-sale 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 spreads, market valuations of like securities, like securities 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.

·

Auction rate securities are priced using market spreads, cash flows, prepayment speeds, and loss analytics.  Therefore, the valuations of auction rate asset-backed securities are considered Level 2 valuations.

·

Asset-backed collateralized loan obligations were priced using data from a pricing matrix supported by our bond accounting service provider and are therefore considered Level 2 valuations.

·

Annually every security holding is priced by a pricing service independent of the regular and recurring pricing services used.  The independent service provides a measurement to indicate if the price assigned by the regular service is within or outside of a reasonable range.  Management reviews this report and applies judgment in adjusting calculations at year end related to securities pricing.

·

Residential mortgage loans available 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.

·

The fair value of impaired loans with specific allocations of the allowance for loan losses is essentially based on recent real estate appraisals or the fair value of the collateralized asset.  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,

25

 


 

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resulting in a Level 3 classification.  In cases where the carrying amount exceeds the fair value, less costs to sell, an impairment loss is recognized.

 

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

 

The tables below present the balance of assets and liabilities at September 30, 2017, and December 31, 2016, respectively, measured by the Company at fair value on a recurring basis:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2017

 

    

Level 1

    

Level 2

    

Level 3

    

Total

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Securities available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury

 

$

3,990

 

$

 -

 

$

 -

 

$

3,990

U.S. government agencies

 

 

 -

 

 

13,451

 

 

 -

 

 

13,451

U.S. government agencies mortgage-backed

 

 

 -

 

 

11,030

 

 

 -

 

 

11,030

States and political subdivisions

 

 

 -

 

 

216,672

 

 

12,360

 

 

229,032

Corporate bonds

 

 

 -

 

 

10,577

 

 

 -

 

 

10,577

Collateralized mortgage obligations

 

 

 -

 

 

77,894

 

 

2,492

 

 

80,386

Asset-backed securities

 

 

 -

 

 

131,759

 

 

 -

 

 

131,759

Collateralized loan obligations

 

 

 -

 

 

53,259

 

 

 -

 

 

53,259

Loans held-for-sale

 

 

 -

 

 

1,641

 

 

 -

 

 

1,641

Mortgage servicing rights

 

 

 -

 

 

 -

 

 

6,684

 

 

6,684

Interest rate swap agreements

 

 

 -

 

 

128

 

 

 -

 

 

128

Mortgage banking derivatives

 

 

 -

 

 

289

 

 

 -

 

 

289

Total

 

$

3,990

 

$

516,700

 

$

21,536

 

$

542,226

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swap agreements, including risk participation agreements

 

$

 -

 

$

1,566

 

$

 -

 

$

1,566

Total

 

$

 -

 

$

1,566

 

$

 -

 

$

1,566

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2016

 

    

Level 1

    

Level 2

    

Level 3

    

Total

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Securities available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agencies mortgage-backed

 

$

 -

 

$

41,534

 

$

 -

 

$

41,534

States and political subdivisions

 

 

 -

 

 

46,477

 

 

22,226

 

 

68,703

Corporate bonds

 

 

 -

 

 

10,630

 

 

 -

 

 

10,630

Collateralized mortgage obligations

 

 

 -

 

 

167,808

 

 

3,119

 

 

170,927

Asset-backed securities

 

 

 -

 

 

138,407

 

 

 -

 

 

138,407

Collateralized loan obligations

 

 

 -

 

 

101,637

 

 

 -

 

 

101,637

Loans held-for-sale

 

 

 -

 

 

4,918

 

 

 -

 

 

4,918

Mortgage servicing rights

 

 

 -

 

 

 -

 

 

6,489

 

 

6,489

Interest rate swap agreements

 

 

 -

 

 

673

 

 

 -

 

 

673

Mortgage banking derivatives

 

 

 -

 

 

287

 

 

 -

 

 

287

Total

 

$

 -

 

$

512,371

 

$

31,834

 

$

544,205

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swap agreements, including risk participation agreements

 

$

 -

 

$

1,667

 

$

 -

 

$

1,667

Total

 

$

 -

 

$

1,667

 

$

 -

 

$

1,667

 

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Table of Contents

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2017

 

 

Securities available-for-sale

 

 

 

 

 

Collateralized

 

States and

 

Mortgage

 

 

Mortgage

 

Political

 

Servicing

 

   

Obligation

   

Subdivisions

   

Rights

Beginning balance January 1, 2017

 

$

3,119

 

$

22,226

 

$

6,489

Total gains or losses

 

 

 

 

 

 

 

 

 

Included in earnings (or changes in net assets)

 

 

32

 

 

 -

 

 

(354)

Included in other comprehensive income

 

 

 7

 

 

(501)

 

 

 -

Purchases, issuances, sales, and settlements

 

 

 

 

 

 

 

 

 

Purchases

 

 

 -

 

 

10,994

 

 

 -

Issuances

 

 

 -

 

 

 -

 

 

951

Settlements

 

 

(666)

 

 

(20,359)

 

 

(402)

Ending balance September 30, 2017

 

$

2,492

 

$

12,360

 

$

6,684

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2016

 

 

Securities available-for-sale

 

 

 

 

 

States and

 

Mortgage

 

 

Political

 

Servicing

 

    

Subdivisions

    

Rights

Beginning balance January 1, 2016

 

$

111

 

$

5,847

Transfers out of Level 3

 

 

(42)

 

 

 -

Total gains or losses

 

 

 

 

 

 

Included in earnings (or changes in net assets)

 

 

 -

 

 

(1,394)

Included in other comprehensive income

 

 

 9

 

 

 -

Purchases, issuances, sales, and settlements

 

 

 

 

 

 

Issuances

 

 

 -

 

 

1,148

Settlements

 

 

(78)

 

 

(526)

Ending balance September 30, 2016

 

$

 -

 

$

5,075

 

The following table and commentary presents quantitative and qualitative information about Level 3 fair value measurements as of September 30, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted

Measured at fair value

 

 

 

 

 

 

Unobservable

 

 

 

Average

on a recurring basis:

   

Fair Value

   

Valuation Methodology

   

Inputs

   

Range of Input

   

of Inputs

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage servicing rights

 

$

6,684

 

Discounted Cash Flow

 

Discount Rate

 

10.0 - 1576.2%

 

10.2

%

 

 

 

 

 

 

 

Prepayment Speed

 

7.0 - 68.3%

 

10.0

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The following table and commentary presents quantitative and qualitative information about Level 3 fair value measurements as of December 31, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted

Measured at fair value

 

 

 

 

 

 

Unobservable

 

 

 

Average

on a recurring basis:

   

Fair Value

   

Valuation Methodology

   

Inputs

   

Range of Input

   

of Inputs

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage servicing rights

 

$

6,489

 

Discounted Cash Flow

 

Discount Rate

 

10.0 - 17.0%

 

10.2

%

 

 

 

 

 

 

 

Prepayment Speed

 

6.5 - 77.8%

 

9.6

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

27

 


 

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In addition to the above, Level 3 fair value measurement included $12.4 million for state and political subdivisions representing various local municipality securities and $2.5 million of collateralized mortgage obligations at September 30, 2017.  Both of these were classified as securities available-for-sale, and were valued using a discount based on market spreads of similar assets, but the liquidity premium was an unobservable input.  The state and political subdivisions securities balance in Level 3 fair value at September 30, 2016, was zero; the securities were transferred to Level 3 in the fourth quarter of 2016.  Given the small dollar amount and size of the municipality involved, this is categorized as Level 3 based on the payment stream received by the Company from the municipality.  That payment stream is otherwise an unobservable input.

 

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

 

The Company may be required, from time to time, to measure certain other assets at fair value on a nonrecurring basis in accordance with GAAP.  These assets consist of impaired loans and OREO.  For assets measured at fair value on a nonrecurring basis at September 30, 2017, and December 31, 2016, respectively, the following tables provide the level of valuation assumptions used to determine each valuation and the carrying value of the related assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2017

 

    

Level 1

    

Level 2

    

Level 3

    

Total

Impaired loans1

 

$

 -

 

$

 -

 

$

45

 

$

45

Other real estate owned, net2

 

 

 -

 

 

 -

 

 

9,024

 

 

9,024

Total

 

$

 -

 

$

 -

 

$

9,069

 

$

9,069

 

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 $51,000 and a valuation allowance of $6,000 resulting in a decrease of specific allocations within the allowance for loan losses of $92,000 for the nine months ended September 30, 2017.

2 OREO is measured at the lower of carrying or fair value less costs to sell, and had a net carrying amount of $9.0 million, which is made up of the outstanding balance of $18.7 million, net of a valuation allowance of $8.8 million and participations of $900,000 at September 30, 2017.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2016

 

    

Level 1

    

Level 2

    

Level 3

    

Total

Impaired loans1

 

$

 -

 

$

 -

 

$

 -

 

$

 -

Other real estate owned, net2

 

 

 -

 

 

 -

 

 

11,916

 

 

11,916

Total

 

$

 -

 

$

 -

 

$

11,916

 

$

11,916

 

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 and a valuation allowance of $1.0 million, resulting in an increase of specific allocations within the allowance for loan losses of $1.0 million for the year December 31, 2016.

2 OREO is measured at the lower of carrying or fair value less costs to sell, and had a net carrying amount of $11.9 million, which is made up of the outstanding balance of $23.5 million, net of a valuation allowance of $10.0 million and participations of $1.6 million, at December 31, 2016.

 

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 ranges of unobservable inputs for these valuation assumptions are not meaningful.

 

Note 14 – Fair Values of Financial Instruments

 

The estimated fair values approximate carrying amount for all items except those described in the following table.  Securities available-for-sale 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.  FHLBC stock is carried at cost and considered a Level 2 fair value.  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.

 

28

 


 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2017

 

 

Carrying

 

Fair

 

 

 

 

 

 

 

 

 

 

    

Amount

    

Value

    

Level 1

    

Level 2

    

Level 3

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

32,772

 

$

32,772

 

$

32,772

 

$

 -

 

$

 -

Interest bearing deposits with financial institutions

 

 

14,730

 

 

14,730

 

 

14,730

 

 

 -

 

 

 -

Securities available-for-sale

 

 

533,484

 

 

533,484

 

 

3,990

 

 

514,642

 

 

14,852

FHLBC and FRBC Stock

 

 

10,393

 

 

10,393

 

 

 -

 

 

10,393

 

 

 -

Loans held-for-sale

 

 

1,641

 

 

1,641

 

 

 -

 

 

1,641

 

 

 -

Loans, net

 

 

1,577,726

 

 

1,568,457

 

 

 -

 

 

 -

 

 

1,568,457

Accrued interest receivable

 

 

8,669

 

 

8,669

 

 

 -

 

 

8,669

 

 

 -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest bearing deposits

 

$

556,874

 

$

556,874

 

$

556,874

 

$

 -

 

$

 -

Interest bearing deposits

 

 

1,332,241

 

 

1,329,668

 

 

 -

 

 

1,329,668

 

 

 -

Securities sold under repurchase agreements

 

 

26,853

 

 

26,853

 

 

 -

 

 

26,853

 

 

 -

Other short-term borrowings

 

 

125,000

 

 

125,000

 

 

 -

 

 

125,000

 

 

 -

Junior subordinated debentures

 

 

57,627

 

 

59,524

 

 

33,320

 

 

26,204

 

 

 -

Senior notes

 

 

44,033

 

 

46,958

 

 

 -

 

 

46,958

 

 

 -

Interest rate swap agreements

 

 

1,439

 

 

1,439

 

 

 -

 

 

1,439

 

 

 -

Borrowing interest payable

 

 

773

 

 

773

 

 

 -

 

 

773

 

 

 -

Deposit interest payable

 

 

573

 

 

573

 

 

 -

 

 

573

 

 

 -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2016

 

 

Carrying

 

Fair

 

 

 

 

 

 

 

    

Amount

    

Value

    

Level 1

    

Level 2

    

Level 3

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

33,805

 

$

33,805

 

$

33,805

 

$

 -

 

$

 -

Interest bearing deposits with financial institutions

 

 

13,529

 

 

13,529

 

 

13,529

 

 

 -

 

 

 -

Securities available-for-sale

 

 

531,838

 

 

531,838

 

 

 -

 

 

506,493

 

 

25,345

FHLBC and FRBC Stock

 

 

7,918

 

 

7,918

 

 

 -

 

 

7,918

 

 

 -

Loans held-for-sale

 

 

4,918

 

 

4,918

 

 

 -

 

 

4,918

 

 

 -

Loans, net

 

 

1,462,651

 

 

1,453,429

 

 

 -

 

 

 -

 

 

1,453,429

Accrued interest receivable

 

 

5,928

 

 

5,928

 

 

 -

 

 

5,928

 

 

 -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest bearing deposits

 

$

513,688

 

$

513,688

 

$

513,688

 

$

 -

 

$

 -

Interest bearing deposits

 

 

1,353,097

 

 

1,351,000

 

 

 -

 

 

1,351,000

 

 

 -

Securities sold under repurchase agreements

 

 

25,715

 

 

25,715

 

 

 -

 

 

25,715

 

 

 -

Other short-term borrowings

 

 

70,000

 

 

70,000

 

 

 -

 

 

70,000

 

 

 -

Junior subordinated debentures

 

 

57,591

 

 

55,163

 

 

32,404

 

 

22,759

 

 

 -

Subordinated debenture

 

 

43,998

 

 

43,998

 

 

 -

 

 

43,998

 

 

 -

Interest rate swap agreements

 

 

994

 

 

994

 

 

 -

 

 

994

 

 

 -

Borrowing interest payable

 

 

202

 

 

202

 

 

 -

 

 

202

 

 

 -

Deposit interest payable

 

 

599

 

 

599

 

 

 -

 

 

599

 

 

 -

 

 

 

Note 15 – 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.

 

 

 

29

 


 

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Interest Rate Swap Designated as a Cash Flow Hedge

 

The Company entered into a forward starting interest rate swap on August 18, 2015, with an effective date of June 15, 2017.  This transaction had a notional amount totaling $25.8 million as of September 30, 2017, was designated as a cash flow hedge of certain junior subordinated debentures and was determined to be fully effective during the period presented.  As such, no amount of ineffectiveness has been included in net income.  Therefore, the aggregate fair value of the swap is recorded in other assets with changes in fair value recorded in other comprehensive income.  The amount included in other comprehensive income would be reclassified to current earnings should all or a portion of the hedge no longer be considered effective.  The Company expects the hedge to remain fully effective during the remaining term of the swap.  The Bank will pay the counterparty a fixed rate and receive a floating rate based on three month LIBOR.  Management concluded that it would be advantageous to enter this transaction given that the Company has trust preferred securities that changed from fixed rate to floating rate on June 15, 2017.  The cash flow hedge has a maturity date of June 15, 2037.

 

Summary information about the interest rate swap designated as a cash flow hedge is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

As of

 

 

September 30, 2017

 

December 31, 2016

Notional amount

 

$

25,774

 

 

$

25,774

 

Unrealized loss

 

 

(1,439)

 

 

 

(994)

 

 

Other Interest Rate Swaps

 

The Bank also has interest rate derivative positions to assist with risk management that are not designated as hedging instruments.  These derivative positions relate to transactions in which the Bank enters an interest rate swap with a client while at the same time entering into an offsetting interest rate swap with another financial institution.  Per contractual requirements with the correspondent financial institution, the Bank had $4.2 million in securities available-for-sale pledged to support interest rate swap activity with one correspondent financial institution at September 30, 2017.  The Bank had $6.2 million in securities pledged to support interest rate swap activity with one correspondent financial institution at December 31, 2016.

 

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 13 above.  At September 30, 2017, the notional amount of non-hedging interest rate swaps was $349.4 million with a weighted average maturity of 6.7 years.  At December 31, 2016, the notional amount of non-hedging interest rate swaps was $85.8 million with a weighted average maturity of 7.3 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.

 

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The following table presents derivatives not designated as hedging instruments as of September 30, 2017, 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

 

$

349,367

 

Other Assets

 

$

128

 

Other Liabilities

 

$

128

Interest rate lock commitments and forward contracts

 

 

28,591

 

Other Assets

 

 

289

 

N/A

 

 

 -

Total

 

 

 

 

 

 

$

417

 

 

 

$

128

 

 

The following table presents derivatives not designated as hedging instruments as of December 31, 2016.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

85,807

 

Other Assets

 

$

673

 

Other Liabilities

 

$

673

Interest rate lock commitments and forward contracts

 

 

31,980

 

Other Assets

 

 

287

 

N/A

 

 

 -

Total

 

 

 

 

 

 

$

960

 

 

 

$

673

 

 

The Bank also issues letters of credit, which are conditional commitments that guarantee the performance of a customer to a third party.  The credit risk involved and collateral obtained in issuing letters of credit are essentially the same as that involved in extending loan commitments to our customers.  In addition to customer related commitments, the Company is responsible for letters of credit commitments that relate to properties held in OREO.  The following table represents the Company’s contractual commitments due to letters of credit as of September 30, 2017, and December 31, 2016.

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2017

 

December 31, 2016

 

 

    

Fixed

    

Variable

    

Total

    

Fixed

    

Variable

    

Total

  

Letters of credit:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Borrower:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial standby

 

$

177

 

$

3,748

 

$

3,925

 

$

137

 

$

4,047

 

$

4,184

 

Commercial standby

 

 

 -

 

 

122

 

 

122

 

 

 -

 

 

126

 

 

126

 

Performance standby

 

 

66

 

 

7,912

 

 

7,978

 

 

83

 

 

8,498

 

 

8,581

 

 

 

 

243

 

 

11,782

 

 

12,025

 

 

220

 

 

12,671

 

 

12,891

 

Non-borrower:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performance standby

 

 

 -

 

 

422

 

 

422

 

 

95

 

 

525

 

 

620

 

Total letters of credit

 

$

243

 

$

12,204

 

$

12,447

 

$

315

 

$

13,196

 

$

13,511

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

Overview

 

The Company is a financial services company with its main headquarters located in Aurora, Illinois.  The Company is the holding company of Old Second National Bank (the “Bank”), a national banking organization headquartered in Aurora, Illinois, that provides commercial and retail banking services, as well as a full complement of trust and wealth management services.  The Company has offices located in Cook, Kane, Kendall, DeKalb, DuPage, LaSalle and Will counties in Illinois.  The following management’s discussion and analysis presents information concerning our financial condition as of September 30, 2017, as compared to December 31, 2016, and the results of operations for the three and nine months September 30, 2017, and September 30, 2016.  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 Form 10-K for the year ended December 31, 2016.  The results of operations for the quarter September 30, 2017, are not necessarily indicative of future results.

 

Our community-focused banking franchise has experienced growth in the past year, and is positioned for further success as we continue to serve our customers’ needs in a competitive economic environment.  Industry and regulatory developments in the past few years have made it challenging to attain the levels of profitability and growth reflected a decade ago.  As we look to provide value to our customers and the communities in which we operate, growth opportunities identified in our local markets are being developed into new banking relationships.  We are encouraged by sustained quality in our credit performance as nonperforming loan totals remain at low levels and strong sales efforts have driven loan growth and portfolio diversity.  The Company generated increased net interest income in the three month period ended September 30, 2017, as compared to the like period ended September 30, 2016.  The Company’s noninterest income growth also contributed to the overall increase in earnings for the third quarter and nine months ended September 30, 2017  as compared to like periods in the prior year.  However, the positive earnings impact of the growth in net interest income and noninterest income for the third quarter and nine months of 2017 was partially offset by an increase in noninterest expense.  Noninterest expenses were negatively impacted primarily by an increase in employee costs in the year over year periods.  Finally, an income tax benefit was recorded in the third quarter of 2017 due to a State of Illinois tax rate increase; this credit had a significantly favorable impact which contributed to the increase in net income in the year over year periods for the quarter and nine months.

 

Results of Operations

 

Net income before taxes of $9.9 million in the third quarter of 2017 compares to $5.4 million in the third quarter of 2016.  When compared to the third quarter of 2016, the third quarter of 2017 reflected higher levels of net interest and dividend income, a provision for loan loss of $300,000, and increased levels of noninterest income and noninterest expense.  Noninterest income in the 2017 period was favorably impacted by net gains recorded on securities portfolio sales as compared to net losses in the like prior year period, as well as an increase in trust revenue due to growth in our customer base.  Noninterest expense increased in the third quarter of 2017 when compared to the third quarter of 2016 primarily due to an increase in salaries and employee benefits due to higher insurance costs, as well as an increase in OREO related valuation costs.  An income tax benefit of $1.6 million was recorded in the third quarter of 2017 due to a State of Illinois tax rate change; this nonrecurring item increased the Company’s deferred tax asset by a like amount.

Net income before taxes of $23.7 million for the nine months ended September 30, 2017 was favorable as compared to the $16.5 million pretax income for the nine months ended September 30, 2016.  Net interest margin was the largest contributor to this favorable variance, as loan growth and securities repositioning have resulted in increased volumes and more favorable yields for the year to date period.

Management has remained diligent with loan portfolio review to analyze loan quality and decide whether charge-offs are required.  In the third quarter of 2017, management’s review of the loan portfolio concluded that an additional provision for loan losses should be recorded of $300,000, stemming from third quarter 2017 loan growth and collateral shortfalls on a few credits as a result of updated appraisals.  The allowance for loan losses was adequate and appropriate for estimated incurred losses at September 30, 2016; neither a loan loss reserve release nor an additional loan loss provision was deemed necessary for the like 2016 quarter.

Earnings for the third quarter of 2017 were $0.27 per diluted share on $8.1 million of net income as compared to $0.12 per diluted share on net income of $3.5 million for the third quarter of 2016.  For the nine month period ended September 30, 2017, earnings were $0.59 per diluted share on $17.7 million of net income, as compared to $0.36 per diluted share on $10.7 million of income for the prior year like period.  Earnings growth in the 2017 period, as compared to the like 2016 period, stems from the acquisition of the Chicago branch of Talmer Bank and Trust, which was completed on October 28, 2016.  This acquisition resulted in a cash payment of $181.5 million for loans, net of purchased loan discount totaling $221.0 million, deposits of $48.9 million, goodwill of $8.4 million, core deposit intangible of $659,000, and other immaterial assets and liabilities.  The performance of the acquired loan portfolio, security portfolio restructuring to higher yielding instruments, and robust organic loan growth in the year over year period were the primary factors driving the earnings increase for the 2017 third quarter and year to date periods. 

 

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Net Interest Income

 

Net interest and dividend income increased by $3.9 million from $15.3 million for the quarter ended September 30, 2016, to $19.3 million for the quarter ended September 30, 2017.  Total average loans, including loans held-for-sale, increased by $44.3 million in the third quarter of 2017 as compared to the second quarter of 2017, and $361.9 million as compared to the third quarter of 2016.  Average earning assets were $2.12 billion for the third quarter of 2017, which reflected an increase of $6.4 million compared to the second quarter of 2017, and an increase of $212.5 million as compared to the third quarter of 2016.  The significant increase in interest and dividend income of $3.9 million, or 25.6%, in the three months ended September 30, 2017 as compared to the like 2016 period, was driven by growth in the loan portfolio primarily due to the Talmer branch acquisition.  In addition, the average yield on the securities portfolio increased by 103 basis points in the year over year period due to portfolio repositioning to higher yielding tax exempt securities; the average tax exempt securities portfolio increased by $185.5 million, and earned 138 basis points more in the third quarter of 2017 as compared to the third quarter of 2016. 

 

Quarterly average interest bearing liabilities as of September 30, 2017, decreased $11.9 million, or 0.8%, compared to June 30, 2017, but increased $87.8 million, or 6.0%, when compared to September 30, 2016.  Growth from the prior year like period was due to the Talmer branch purchase of $48.9 million of commercial deposits, as well as organic commercial deposit growth.  As the deposit growth in the year over year period was driven by commercial demand accounts, the cost of funds did not materially increase from this volume change.  However, each quarter presented reflects an increase in the FHLBC borrowing, which is within other short-term borrowings, as this facility was used to fund loan growth.  The cost of interest bearing liabilities in the third quarter of 2017 increased to 80 basis points from 67 basis points in the third quarter of 2016, primarily due to the senior note issuance in late 2016.  The $45.0 million senior debt issuance, at an average cost of 6.11% in the third quarter of 2017 net of issuance costs, replaced the prior subordinated notes outstanding, which had an average cost of 2.13% in the third quarter of 2016.  This issuance resulted in a $430,000 increase to interest expense, which drove the overall higher cost of funds in 2017.

 

The net interest margin (on a tax-equivalent basis), expressed as a percentage of average earning assets, was 3.77% in the third quarter of 2017, reflecting an increase of 6 basis points from the second quarter of 2017, and growth of 55 basis points from the third quarter of 2016.  The average tax-equivalent yield on earning assets increased to 4.32% for the third quarter of 2017, as compared to 3.70% for the third quarter of 2016.  Increases in net interest margin and yield on average earning assets for the third quarter of 2017 as compared to prior periods presented was attributable to growth in loan volumes and rates, as well as the securities portfolio repositioning to higher yielding tax exempt holdings, as discussed above.  The cost of funds on interest bearing liabilities was 0.80% for the third quarter of 2017 and 0.67% for the third quarter of 2016. 

 

Tax equivalent net interest and dividend income increased by $11.5 million from $46.3 million for the nine months ended September 30, 2016, to $57.8 million for the nine months ended September 30, 2017.  Average earning assets for the nine months ended September 30, 2017 increased $188.4 million as compared to the like average period in 2016, and the yield on average earning assets for the nine months of 2017 was 4.22% as compared to 3.69% for the like 2016 period.  Average interest bearing liabilities for the nine months ended September 30, 2017, increased $74.5 million, or 5.0%, when compared to like prior year period.  Net interest margin for the nine months ended September 30, 2017, was 3.68%, as compared to 3.23% for the nine months ended September 30, 2016, for an increase of 45 basis points.

 

Management continued to observe competitive pressure to maintain reduced interest rates on loans retained at renewal.  While the Bank prices loans to achieve certain return on equity targets, significant competition for both commercial and industrial as well as commercial real estate loans has put pressure on loan yields, and our stringent underwriting standards limit our ability to make higher-yielding loans.

 

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 interest bearing liabilities for the periods indicated.  These yields reflect the related interest, on an annualized basis, divided by the average balance of assets or liabilities over the applicable period.  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

(In thousands - unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarters Ended

 

September 30, 2017

 

June 30, 2017

 

September 30, 2016

 

Average

 

 

 

 

Rate

 

Average

 

 

 

 

Rate

 

Average

 

 

 

 

Rate

 

Balance

 

Interest

 

%

 

Balance

 

Interest

 

%

 

Balance

 

Interest

 

%

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest bearing deposits with financial institutions

$

11,685

 

$

37

 

1.24

 

$

11,938

 

$

31

 

1.03

 

$

50,054

 

$

64

 

0.50

Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

327,892

 

 

2,424

 

2.96

 

 

361,504

 

 

2,607

 

2.88

 

 

624,844

 

 

3,954

 

2.53

Non-taxable (TE)

 

220,540

 

 

2,504

 

4.54

 

 

225,182

 

 

2,536

 

4.50

 

 

35,046

 

 

277

 

3.16

Total securities

 

548,432

 

 

4,928

 

3.59

 

 

586,686

 

 

5,143

 

3.51

 

 

659,890

 

 

4,231

 

2.56

Dividends from FHLBC and FRBC

 

8,339

 

 

94

 

4.51

 

 

7,699

 

 

92

 

4.78

 

 

7,918

 

 

83

 

4.19

Loans and loans held-for-sale1

 

1,553,473

 

 

18,265

 

4.60

 

 

1,509,188

 

 

17,445

 

4.57

 

 

1,191,574

 

 

13,567

 

4.46

Total interest earning assets

 

2,121,929

 

 

23,324

 

4.32

 

 

2,115,511

 

 

22,711

 

4.26

 

 

1,909,436

 

 

17,945

 

3.70

Cash and due from banks

 

31,028

 

 

 -

 

 -

 

 

39,425

 

 

 -

 

 -

 

 

41,344

 

 

 -

 

 -

Allowance for loan losses

 

(16,478)

 

 

 -

 

 -

 

 

(15,779)

 

 

 -

 

 -

 

 

(15,767)

 

 

 -

 

 -

Other noninterest bearing assets

 

185,906

 

 

 -

 

 -

 

 

189,928

 

 

 -

 

 -

 

 

190,213

 

 

 -

 

 -

Total assets

$

2,322,385

 

 

 

 

 

 

$

2,329,085

 

 

 

 

 

 

$

2,125,226

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NOW accounts

$

422,913

 

$

108

 

0.10

 

$

432,248

 

$

107

 

0.10

 

$

384,588

 

$

89

 

0.09

Money market accounts

 

273,440

 

 

85

 

0.12

 

 

280,482

 

 

86

 

0.12

 

 

265,135

 

 

64

 

0.10

Savings accounts

 

262,573

 

 

46

 

0.07

 

 

265,066

 

 

40

 

0.06

 

 

257,808

 

 

40

 

0.06

Time deposits

 

389,037

 

 

1,077

 

1.10

 

 

392,779

 

 

1,025

 

1.05

 

 

401,999

 

 

931

 

0.92

Interest bearing deposits

 

1,347,963

 

 

1,316

 

0.39

 

 

1,370,575

 

 

1,258

 

0.37

 

 

1,309,530

 

 

1,124

 

0.34

Securities sold under repurchase agreements

 

32,800

 

 

 4

 

0.05

 

 

35,652

 

 

 4

 

0.05

 

 

31,892

 

 

 1

 

0.01

Other short-term borrowings

 

72,065

 

 

220

 

1.19

 

 

58,572

 

 

146

 

0.99

 

 

22,174

 

 

22

 

0.39

Junior subordinated debentures

 

57,621

 

 

930

 

6.46

 

 

57,609

 

 

1,059

 

7.35

 

 

57,573

 

 

1,084

 

7.53

Senior notes

 

44,021

 

 

672

 

6.11

 

 

43,995

 

 

672

 

6.11

 

 

 -

 

 

 -

 

 -

Subordinated debt

 

 -

 

 

 -

 

 -

 

 

 -

 

 

 -

 

 -

 

 

45,000

 

 

245

 

2.13

Notes payable and other borrowings

 

 -

 

 

 -

 

 -

 

 

 -

 

 

 -

 

 -

 

 

500

 

 

 2

 

1.57

Total interest bearing liabilities

 

1,554,470

 

 

3,142

 

0.80

 

 

1,566,403

 

 

3,139

 

0.80

 

 

1,466,669

 

 

2,478

 

0.67

Noninterest bearing deposits

 

551,768

 

 

 -

 

 -

 

 

557,265

 

 

 -

 

 -

 

 

472,599

 

 

 -

 

 -

Other liabilities

 

19,395

 

 

 -

 

 -

 

 

18,047

 

 

 -

 

 -

 

 

15,539

 

 

 -

 

 -

Stockholders' equity

 

196,752

 

 

 -

 

 -

 

 

187,370

 

 

 -

 

 -

 

 

170,419

 

 

 -

 

 -

Total liabilities and stockholders' equity

$

2,322,385

 

 

 

 

 

 

$

2,329,085

 

 

 

 

 

 

$

2,125,226

 

 

 

 

 

Net interest income (TE)

 

 

 

$

20,182

 

 

 

 

 

 

$

19,572

 

 

 

 

 

 

$

15,467

 

 

Net interest income (TE)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

to total earning assets

 

 

 

 

 

 

3.77

 

 

 

 

 

 

 

3.71

 

 

 

 

 

 

 

3.22

Interest bearing liabilities to earning assets

 

73.26

%

 

 

 

 

 

 

74.04

%

 

 

 

 

 

 

76.81

%

 

 

 

 

 

1 Interest income from loans is shown on a TE basis as discussed below and includes fees of $722,000, $573,000 and $700,000 for the third quarter of 2017, the fourth quarter of 2016 and the third quarter of 2016, respectively.  Nonaccrual loans are included in the above-stated average balances.

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Table of Contents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Analysis of Average Balances,

Tax Equivalent Interest and Rates

Nine Months Ended September 30, 2017, and 2016

(In thousands - unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2017

 

2016

 

Average

 

 

 

 

Rate

 

Average

 

 

 

 

Rate

 

Balance

 

Interest

 

%

 

Balance

 

Interest

 

%

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest bearing deposits with financial institutions

$

11,913

 

$

91

 

1.01

 

$

25,960

 

$

98

 

0.50

Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

370,161

 

 

7,994

 

2.88

 

 

682,997

 

 

12,547

 

2.45

Non-taxable (TE)

 

196,120

 

 

6,443

 

4.38

 

 

36,340

 

 

891

 

3.27

Total securities

 

566,281

 

 

14,437

 

3.40

 

 

719,337

 

 

13,438

 

2.49

Dividends from FHLBC and FRBC

 

7,886

 

 

271

 

4.58

 

 

7,955

 

 

251

 

4.21

Loans and loans held-for-sale1

 

1,516,872

 

 

52,365

 

4.55

 

 

1,161,312

 

 

39,778

 

4.50

Total interest earning assets

 

2,102,952

 

 

67,164

 

4.22

 

 

1,914,564

 

 

53,565

 

3.69

Cash and due from banks

 

34,670

 

 

 -

 

 -

 

 

32,617

 

 

 -

 

 -

Allowance for loan losses

 

(16,184)

 

 

 -

 

 -

 

 

(16,145)

 

 

 -

 

 -

Other noninterest bearing assets

 

189,533

 

 

 -

 

 -

 

 

193,443

 

 

 -

 

 -

Total assets

$

2,310,971

 

 

 

 

 

 

$

2,124,479

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NOW accounts

$

427,242

 

$

316

 

0.10

 

$

383,870

 

$

261

 

0.09

Money market accounts

 

279,143

 

 

254

 

0.12

 

 

272,657

 

 

198

 

0.10

Savings accounts

 

262,352

 

 

125

 

0.06

 

 

258,062

 

 

118

 

0.06

Time deposits

 

392,049

 

 

3,081

 

1.05

 

 

404,210

 

 

2,622

 

0.87

Interest bearing deposits

 

1,360,786

 

 

3,776

 

0.37

 

 

1,318,799

 

 

3,199

 

0.32

Securities sold under repurchase agreements

 

32,764

 

 

10

 

0.04

 

 

35,022

 

 

 3

 

0.01

Other short-term borrowings

 

62,308

 

 

472

 

1.00

 

 

26,040

 

 

66

 

0.33

Junior subordinated debentures

 

57,609

 

 

3,073

 

7.11

 

 

57,561

 

 

3,251

 

7.53

Senior notes

 

43,998

 

 

2,017

 

6.11

 

 

 -

 

 

 -

 

 -

Subordinated debt

 

 -

 

 

 -

 

 -

 

 

45,000

 

 

727

 

2.12

Notes payable and other borrowings

 

 -

 

 

 -

 

 -

 

 

500

 

 

 6

 

1.58

Total interest bearing liabilities

 

1,557,465

 

 

9,348

 

0.80

 

 

1,482,922

 

 

7,252

 

0.65

Noninterest bearing deposits

 

544,925

 

 

 -

 

 -

 

 

465,094

 

 

 -

 

 -

Other liabilities

 

20,814

 

 

 -

 

 -

 

 

13,037

 

 

 -

 

 -

Stockholders' equity

 

187,767

 

 

 -

 

 -

 

 

163,426

 

 

 -

 

 -

Total liabilities and stockholders' equity

$

2,310,971

 

 

 

 

 

 

$

2,124,479

 

 

 

 

 

Net interest income (TE)

 

 

 

$

57,816

 

 

 

 

 

 

$

46,313

 

 

Net interest income (TE) to total earning assets

 

 

 

 

 

 

3.68

 

 

 

 

 

 

 

3.23

Interest bearing liabilities to earning assets

 

74.06

%

 

 

 

 

 

 

77.45

%

 

 

 

 

 

1 Interest income from loans is shown on a TE basis as discussed below and includes fees of $1.8 million for the first nine months of 2017 and 2016.  Nonaccrual loans are included in the above-stated average balances.

 

35

 


 

Table of Contents

Non-GAAP Financial Measures

 

Management, in order to evaluate and measure performance, uses certain non-GAAP performance measures and ratios.  This includes tax-equivalent net interest income (including its individual components) and net interest margin (including its individual components) to total average interest earning assets.  Management believes that these measures and ratios provide users of the financial information with a more accurate view of the performance of the interest earning assets and interest bearing liabilities and of the Company’s operating efficiency for comparison purposes.  Other financial holding companies may define or calculate these measures and ratios differently.  See the tables and notes below for supplemental data and the corresponding reconciliations to GAAP financial measures for the three month periods ended September 30, 2017, June 30, 2017, and September 30, 2016, and the nine month periods ended September 30, 2017 and 2016.

 

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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarters Ended

 

 

Nine Months Ended

 

 

 

September 30, 

 

June 30, 

 

September 30, 

 

 

September 30, 

 

 

    

2017

    

2017

 

2016

 

    

2017

 

2016

 

Net Interest Margin

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income (GAAP)

 

$

22,425

 

$

21,800

 

$

17,825

 

 

$

64,841

 

$

53,183

 

Taxable-equivalent adjustment:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans

 

 

23

 

 

23

 

 

23

 

 

 

68

 

 

70

 

Securities

 

 

876

 

 

888

 

 

97

 

 

 

2,255

 

 

312

 

Interest income (TE)

 

 

23,324

 

 

22,711

 

 

17,945

 

 

 

67,164

 

 

53,565

 

Interest expense (GAAP)

 

 

3,142

 

 

3,139

 

 

2,478

 

 

 

9,348

 

 

7,252

 

Net interest income (TE)

 

$

20,182

 

$

19,572

 

$

15,467

 

 

$

57,816

 

$

46,313

 

Net interest income  (GAAP)

 

$

19,283

 

$

18,661

 

$

15,347

 

 

$

55,493

 

$

45,931

 

Average interest earning assets

 

$

2,121,929

 

$

2,115,511

 

$

1,909,436

 

 

$

2,102,952

 

$

1,914,564

 

Net interest margin (GAAP)

 

 

3.61

%

 

3.54

%

 

3.20

%

 

 

3.53

%

 

3.20

%

Net interest margin  (TE)

 

 

3.77

%

 

3.71

%

 

3.22

%

 

 

3.68

%

 

3.23

%

 

 

 

 

Asset Quality

 

The Company recorded a provision for loan losses expense of $300,000 in the third quarter of 2017.  On a quarterly basis, management estimates the amount required and records the appropriate provision or release to maintain an adequate reserve for all potential and estimated loan losses.

Nonperforming loans increased by $270,000 at September 30, 2017, from $16.0 million at December 31, 2016.  Credit metrics continue to be relatively stable regarding nonperforming loan levels, and management is carefully monitoring loans considered to be in a classified status.  Nonperforming loans as a percent of total loans decreased to 1.0% as of September 30, 2017, from 1.1% as of December 31, 2016, and 1.4% as of September 30, 2016.  The distribution of the Company’s nonperforming loans is included in the following table.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2017

 

Nonperforming Loans

As of

 

Percent Change From

 

(in thousands)

September 30, 

 

December 31, 

 

September 30, 

 

December 31, 

 

September 30, 

 

 

2017

 

2016

 

2016

 

2016

 

2016

 

Real estate-construction

$

205

 

$

281

 

$

76

 

(27.0)

 

 

169.7

 

 

Real estate-residential:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investor

 

492

 

 

936

 

 

1,364

 

(47.4)

 

 

(63.9)

 

 

Multifamily

 

4,757

 

 

 -

 

 

 -

 

N/M

 

 

N/M

 

 

Owner occupied

 

4,266

 

 

6,552

 

 

5,755

 

(34.9)

 

 

(25.9)

 

 

Revolving and junior liens

 

1,977

 

 

2,240

 

 

2,257

 

(11.7)

 

 

(12.4)

 

 

Real estate-commercial, nonfarm

 

3,631

 

 

5,386

 

 

7,345

 

(32.6)

 

 

(50.6)

 

 

Real estate-commercial, farm

 

383

 

 

 -

 

 

 -

 

N/M

 

 

N/M

 

 

Commercial

 

207

 

 

240

 

 

583

 

(13.8)

 

 

(64.5)

 

 

Leases

 

345

 

 

366

 

 

 -

 

(5.7)

 

 

N/M

 

 

Other

 

 8

 

 

 -

 

 

 -

 

N/M

 

 

N/M

 

 

Total nonperforming loans

$

16,271

 

$

16,001

 

$

17,380

 

1.7

 

 

(6.4)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

36

 


 

Table of Contents

N/M - Not Meaningful

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loan Charge-offs, net of recoveries

Quarters Ended

(in thousands)

September 30, 

 

% of

 

June 30, 

 

% of

 

September 30, 

 

% of

 

2017

 

Total1

 

2017

 

Total1

 

2016

 

Total1

Real estate-construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Homebuilder

$

 -

 

 -

 

$

(1)

 

(0.2)

 

$

(7)

 

(0.8)

Land

 

 -

 

 -

 

 

(48)

 

(7.3)

 

 

(2)

 

(0.2)

All other

 

 8

 

(2.4)

 

 

(11)

 

(1.7)

 

 

(42)

 

(5.0)

Total real estate-construction

 

 8

 

(2.4)

 

 

(60)

 

(9.2)

 

 

(51)

 

(6.0)

Real estate-residential

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investor

 

(28)

 

8.5

 

 

(16)

 

(2.4)

 

 

(3)

 

(0.4)

Multifamily

 

(17)

 

5.2

 

 

129

 

19.7

 

 

(13)

 

(1.5)

Owner occupied

 

(40)

 

12.2

 

 

723

 

110.4

 

 

(75)

 

(8.9)

Revolving and junior liens

 

(367)

 

111.5

 

 

(109)

 

(16.6)

 

 

112

 

13.3

Total real estate-residential

 

(452)

 

137.4

 

 

727

 

111.1

 

 

21

 

2.5

Real estate-commercial, nonfarm

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner general purpose

 

 -

 

 -

 

 

(1)

 

(0.2)

 

 

 -

 

 -

Owner special purpose

 

 -

 

 -

 

 

(6)

 

(0.9)

 

 

(3)

 

(0.4)

Non-owner general purpose

 

(43)

 

13.1

 

 

(39)

 

(6.0)

 

 

132

 

15.7

Non-owner special purpose

 

 -

 

 -

 

 

 -

 

 -

 

 

636

 

75.8

Retail properties

 

22

 

(6.80)

 

 

 4

 

0.6

 

 

 -

 

 -

Total real estate-commercial, nonfarm

 

(21)

 

6.3

 

 

(42)

 

(6.5)

 

 

765

 

91.1

Real estate-commercial, farm

 

 -

 

 -

 

 

 -

 

 -

 

 

 -

 

 -

Commercial

 

 7

 

(2.1)

 

 

 1

 

0.2

 

 

66

 

7.9

Leases

 

98

 

(29.8)

 

 

 -

 

 -

 

 

 -

 

 -

Consumer

 

37

 

(11.2)

 

 

34

 

5.2

 

 

43

 

5.1

Other

 

(6)

 

1.8

 

 

(5)

 

(0.8)

 

 

(5)

 

(0.6)

Net (recoveries) / charge-offs

$

(329)

 

100.0

 

$

655

 

100.0

 

$

839

 

100.0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1 Represents the percentage of net charge-offs attributable to each category of loans.

 

Net recoveries for the third quarter of 2017 reflected continuing management attention to credit quality.  Gross charge-offs for the quarter ended September 30, 2017 were $241,000 compared to $1.2 million for the quarter ended September 30, 2016.  Gross recoveries for the quarter ended September 30, 2017 were $570,000 compared to $358,000 for the quarter ended September 30, 2016.  In comparison to the linked quarter, the third quarter of 2017 continued to reflect conservative loan valuations and aggressive recovery efforts on prior charge-offs.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2017

 

Classified Loans

As of

 

Percent Change From

 

(in thousands)

September 30, 

 

December 31, 

 

September 30, 

 

December 31, 

 

September 30, 

 

 

2017

 

2016

 

2016

 

2016

 

2016

 

Real estate-construction

$

380

 

$

458

 

$

254

 

(17.0)

 

 

49.6

 

 

Real estate-residential:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investor

 

648

 

 

1,096

 

 

1,171

 

(40.9)

 

 

(44.7)

 

 

Multifamily

 

4,757

 

 

 -

 

 

 -

 

N/M

 

 

N/M

 

 

Owner occupied

 

4,418

 

 

7,225

 

 

6,432

 

(38.9)

 

 

(31.3)

 

 

Revolving and junior liens

 

1,977

 

 

2,340

 

 

3,078

 

(15.5)

 

 

(35.8)

 

 

Real estate-commercial, nonfarm

 

7,633

 

 

9,946

 

 

13,220

 

(23.3)

 

 

(42.3)

 

 

Real estate-commercial, farm

 

2,495

 

 

1,782

 

 

1,801

 

40.0

 

 

N/M

 

 

Commercial

 

382

 

 

2,527

 

 

1,519

 

(84.9)

 

 

(74.9)

 

 

Leases

 

1,031

 

 

1,109

 

 

783

 

(7.0)

 

 

31.7

 

 

Consumer

 

 8

 

 

 1

 

 

 1

 

N/M

 

 

N/M

 

 

Total classified loans

$

23,729

 

$

26,484

 

$

28,259

 

(10.4)

 

 

(16.0)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

N/M - Not Meaningful

 

37

 


 

Table of Contents

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 ability to meet payment obligations 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 losses as another measure of overall change in loan related asset quality.  This ratio ended at 12.62% for the period ended September 30, 2017.

 

Allowance for Loan Losses

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarters Ended

 

 

Nine Months Ended

 

 

September 30, 

 

June 30, 

 

September 30, 

 

September 30, 

 

September 30, 

 

 

2017

 

2017

 

2016

 

2017

 

2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance at beginning of period

$

15,836

 

 

$

15,741

 

 

$

15,822

 

 

$

16,158

 

 

$

16,223

 

 

Charge-offs:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

13

 

 

 

 6

 

 

 

76

 

 

 

20

 

 

 

95

 

 

Leases

 

98

 

 

 

 -

 

 

 

 -

 

 

 

215

 

 

 

13

 

 

Real estate - commercial

 

22

 

 

 

 4

 

 

 

792

 

 

 

300

 

 

 

1,484

 

 

Real estate - construction

 

19

 

 

 

 -

 

 

 

 9

 

 

 

23

 

 

 

 9

 

 

Real estate - residential

 

 7

 

 

 

976

 

 

 

220

 

 

 

1,178

 

 

 

657

 

 

Consumer

 

82

 

 

 

80

 

 

 

100

 

 

 

262

 

 

 

250

 

 

Other

 

 -

 

 

 

 -

 

 

 

 -

 

 

 

 -

 

 

 

 -

 

 

Total charge-offs

 

241

 

 

 

1,066

 

 

 

1,197

 

 

 

1,998

 

 

 

2,508

 

 

Recoveries:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 6

 

 

 

 5

 

 

 

10

 

 

 

13

 

 

 

22

 

 

Leases

 

 -

 

 

 

 -

 

 

 

 -

 

 

 

 -

 

 

 

 -

 

 

Real estate - commercial

 

43

 

 

 

46

 

 

 

27

 

 

 

124

 

 

 

255

 

 

Real estate - construction

 

11

 

 

 

60

 

 

 

60

 

 

 

89

 

 

 

71

 

 

Real estate - residential

 

459

 

 

 

249

 

 

 

199

 

 

 

850

 

 

 

718

 

 

Consumer

 

45

 

 

 

46

 

 

 

57

 

 

 

166

 

 

 

184

 

 

Other

 

 6

 

 

 

 5

 

 

 

 5

 

 

 

13

 

 

 

18

 

 

Total recoveries

 

570

 

 

 

411

 

 

 

358

 

 

 

1,255

 

 

 

1,268

 

 

Net (recoveries) / charge-offs

 

(329)

 

 

 

655

 

 

 

839

 

 

 

743

 

 

 

1,240

 

 

Loan loss reserve provision

 

300

 

 

 

750

 

 

 

 -

 

 

 

1,050

 

 

 

 -

 

 

Allowance at end of period

$

16,465

 

 

$

15,836

 

 

$

14,983

 

 

$

16,465

 

 

$

14,983

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

$

1,550,229

 

 

$

1,505,572

 

 

$

1,186,279

 

 

$

1,513,693

 

 

$

1,157,159

 

 

Net (recoveries) / charge-offs to average loans

 

(0.02)

%

 

 

0.04

%

 

 

0.07

%

 

 

0.05

%

 

 

0.11

%

 

Allowance at period end to average loans

 

1.06

%

 

 

1.05

%

 

 

1.26

%

 

 

1.09

%

 

 

1.29

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance: Individually evaluated for impairment

$

 6

 

 

$

98

 

 

$

514

 

 

$

 6

 

 

$

514

 

 

Ending balance: Collectively evaluated for impairment

$

16,459

 

 

$

15,738

 

 

$

14,469

 

 

$

16,459

 

 

$

14,469

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The coverage ratio of the allowance for loan losses to nonperforming loans was 101.2% as of September 30, 2017, which was a minimal reduction from the coverage of 101.4% as of June 30, 2017,  but greater than the 86.2% coverage ratio as of September 30, 2016.  When measured as a percentage of average loans as of September 30, 2017, total allowance for loan and lease losses increased to 1.06% of total loans from 1.05% as of June 30, 2017, and decreased from 1.26% of average loans at September 30, 2016.  The total allowance for loan and lease losses as a percent of total period end loans was 1.15% as of September 30, 2017, excluding the loans acquired from the Talmer branch acquisition, which are effectively “reserved” for potential future losses in the remaining $667,000 credit mark component of the purchase accounting discount recorded.  In management’s judgment, an adequate allowance for estimated losses has been established for inherent losses at September 30, 2017, and general changes in lending policy, procedures and staffing, as well as other external factors.  However, there can be no assurance that actual losses will not exceed the estimated amounts in the future, based on unforeseen economic events, changes in business climates and the condition of collateral at the time of default and repossession.  Loan loss provision for the quarter ended September 30, 2017, increased $300,000 as compared to like quarter of 2016 and decreased $450,000 as compared to second quarter of 2017.

 

38

 


 

Table of Contents

Other Real Estate Owned

 

As of September 30, 2017, OREO ended at $9.0 million.  This compares to $11.7 million at June 30, 2017, and $14.1 million at September 30, 2016.  New additions to the OREO portfolio of $176,000 in the third quarter of 2017 were minimal.  Valuation write-downs continued with an expense of $920,000 in the third quarter of 2017, the majority of which was recorded on three properties, compared to $392,000 in the second quarter of 2017 and $365,000 in the third quarter of 2016.  The OREO net book value decreased in the first nine months of 2017 due to 24 property sales, net of a participation purchase.  These sales provided $5.5 million in total proceeds, including net gains on OREO sales of $454,000.  In addition, net valuation reserve write-downs of $1.6 million on 35 OREO properties were recorded in the first nine months of 2017; both of these reductions were partially offset by 13 property transfers into OREO from nonaccrual or fixed asset status totaling $3.8 million.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2017

OREO

Quarters Ended

 

Percent Change From

(in thousands)

September 30, 

 

June 30, 

 

September 30, 

 

June 30, 

 

September 30, 

 

2017

 

2017

 

2016

 

2017

 

2016

Beginning balance

$

11,724

 

$

13,481

 

$

16,252

 

(13.0)

 

 

(27.9)

 

Property additions

 

176

 

 

204

 

 

255

 

(13.7)

 

 

(31.0)

 

Property improvements

 

 -

 

 

 -

 

 

 4

 

N/M

 

 

N/M

 

Less:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property disposals

 

1,956

 

 

1,569

 

 

2,002

 

24.7

 

 

(2.3)

 

Period valuation adjustments

 

920

 

 

392

 

 

365

 

134.7

 

 

152.1

 

Total other real estate owned

$

9,024

 

$

11,724

 

$

14,144

 

(23.0)

 

 

(36.2)

 

 

N/M - Not Meaningful

 

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 disposals or upon updates to valuations in the future.  Of note, properties valued in total at $5.2 million, or approximately 57.5% of total OREO at September 30, 2017, have been in OREO for five years or more.  The appropriate regulatory approval has been obtained for any OREO properties held in excess of five years.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

OREO Properties by Type

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

September 30, 2017

 

December 31, 2016

 

September 30, 2016

 

 

Amount

 

% of Total

 

 

Amount

 

% of Total

 

 

Amount

 

% of Total

Single family residence

$

937

 

11

%

 

$

225

 

2

%

 

$

1,218

 

9

%

Lots (single family and commercial)

 

5,536

 

61

%

 

 

7,322

 

61

%

 

 

8,795

 

62

%

Vacant land

 

628

 

7

%

 

 

636

 

5

%

 

 

636

 

4

%

Multi-family

 

 -

 

0

%

 

 

264

 

2

%

 

 

264

 

2

%

Commercial property

 

1,923

 

21

%

 

 

3,469

 

30

%

 

 

3,231

 

23

%

Total OREO properties

$

9,024

 

100

%

 

$

11,916

 

100

%

 

$

14,144

 

100

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3rd Quarter 2017

 

Noninterest Income

 

Quarters Ended

 

Percent Change From

 

(in thousands)

 

September 30, 

 

June 30, 

 

September 30, 

 

June 30, 

 

September 30, 

 

 

    

2017

    

2017

    

2016

    

2017

    

2016

 

Trust income

 

$

1,468

 

$

1,638

 

$

1,403

 

(10.4)

 

4.6

 

Service charges on deposits

 

 

1,722

 

 

1,615

 

 

1,756

 

6.6

 

(1.9)

 

Residential mortgage banking revenue

 

 

1,547

 

 

1,711

 

 

2,789

 

(9.6)

 

(44.5)

 

Securities gain (loss), net

 

 

102

 

 

(131)

 

 

(1,959)

 

177.9

 

105.2

 

Increase in cash surrender value of BOLI

 

 

362

 

 

350

 

 

383

 

3.4

 

(5.5)

 

Debit card interchange income

 

 

1,075

 

 

1,081

 

 

1,013

 

(0.6)

 

6.1

 

Gain on disposal and transfer of fixed assets

 

 

 -

 

 

12

 

 

 -

 

N/M

 

N/M

 

Other income

 

 

1,567

 

 

1,041

 

 

1,209

 

50.5

 

29.6

 

Total noninterest income

 

$

7,843

 

$

7,317

 

$

6,594

 

7.2

 

18.9

 

 

N/M - Not Meaningful

 

39

 


 

Table of Contents

Of the noninterest income categories, securities gain (loss), net, experienced the largest increases on both a linked quarter and year over year basis, as shown above, primarily due to more favorable investment sales in 2017.  The net security losses incurred in 2016 were necessary for liquidity purposes due to funding needs related to the Talmer branch purchase.  Mortgage banking revenues have decreased over the last year as the rising rate environment has reduced originations and refinancing; mortgage loans held for sale originations are $34.1 million less year to date 2017 than the prior year to date period.  Finally, the favorable variance in other income was driven by growth in commercial loan swap fee income; $547,000 of commercial loan swap fee income was recorded in the third quarter of 2017, as compared to $175,000 in the third quarter of 2016.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3rd Quarter 2017

 

Noninterest Expense

 

Quarters Ended

 

Percent  Change From

 

(in thousands)

 

September 30, 

 

June 30, 

 

September 30, 

 

June 30, 

 

September 30, 

 

 

    

2017

    

2017

    

2016

    

2017

    

2016

 

Salaries

 

$

7,704

 

$

7,972

 

$

7,205

 

(3.4)

 

6.9

 

Bonus

 

 

1,114

 

 

854

 

 

521

 

30.4

 

113.8

 

Benefits and other

 

 

1,231

 

 

1,719

 

 

1,288

 

(28.4)

 

(4.4)

 

Total salaries and employee benefits

 

 

10,049

 

 

10,545

 

 

9,014

 

(4.7)

 

11.5

 

Occupancy, furniture and equipment expense

 

 

1,482

 

 

1,462

 

 

1,500

 

1.4

 

(1.2)

 

Computer and data processing

 

 

1,081

 

 

1,112

 

 

1,105

 

(2.8)

 

(2.2)

 

FDIC insurance

 

 

199

 

 

165

 

 

228

 

20.6

 

(12.7)

 

General bank insurance

 

 

246

 

 

264

 

 

269

 

(6.8)

 

(8.6)

 

Amortization of core deposit intangible asset

 

 

24

 

 

25

 

 

 -

 

(4.0)

 

N/M

 

Advertising expense

 

 

255

 

 

452

 

 

430

 

(43.6)

 

(40.7)

 

Debit card interchange expense

 

 

285

 

 

399

 

 

363

 

(28.6)

 

(21.5)

 

Legal fees

 

 

162

 

 

184

 

 

242

 

(12.0)

 

(33.1)

 

Other real estate owned expense, net

 

 

680

 

 

539

 

 

426

 

26.2

 

59.6

 

Other expense

 

 

2,455

 

 

2,839

 

 

3,005

 

(13.5)

 

(18.3)

 

Total noninterest expense

 

$

16,918

 

$

17,986

 

$

16,582

 

(5.9)

 

2.0

 

Efficiency ratio (defined below)

 

 

57.66

%

 

64.03

%

 

66.21

%

 

 

 

 

 

N/M - Not Meaningful

 

The efficiency ratio shown in the table above is calculated as noninterest expense excluding OREO expenses, amortization of core deposits and acquisition costs, divided by the sum of net interest income on a fully tax equivalent basis, total noninterest income less net gains and losses on securities and includes a tax equivalent adjustment on the increase in cash surrender value of BOLI.

Third quarter 2017 noninterest expense decreased $1.1 million from the second quarter of 2017, and increased $336,000 from the third quarter of 2016.  These variances are primarily due to salary and employee benefit related cost fluctuations due to certain one-time costs recorded in 2017, as well as an increase in employee insurance premiums in 2017.  The second quarter of 2017 included a one-time cost incurred related to executive relocation and recruitment of $294,000, as well as higher levels of employee insurance costs as compared to the prior year.  Although the overall employee count has not significantly increased in the year over year period, the hiring of additional staff in compliance and risk management roles has increased the overall wage base of the Company.  A reduction in debit card interchange expense was recorded in the third quarter of 2017 due to reversal of an accrual related to the debit card rewards program.  Finally, other expense has declined over the last year due to reductions in loan related expenses, including remediation costs as the loan portfolio quality continues to improve.

 

Other expenses have minimal fluctuations, as continued efficiencies with operational processes have contributed to maintaining the majority of noninterest expense components with insignificant variation.

 

Income Taxes

 

The Company recorded a tax expense of $1.8 million on $9.9 million pre-tax income for the third quarter of 2017.  Income tax expense reflected all relevant statutory tax rates and GAAP accounting.  The effective tax rate for the third quarter of 2017 was 18.5%, a decrease from 28.9% in the second quarter of 2017 and 34.7% in the third quarter of 2016.  A nonrecurring income tax benefit of $1.6 million was recorded in the third quarter of 2017, stemming from the State of Illinois tax rate increase effective July 1, 2017, which increased the Company’s net deferred tax asset by a like amount.  In addition, the impact of the tax exempt securities growth in the first and second quarters of 2017 contributed to the tax rate decrease in the third quarter of 2017 as compared to the prior year.

There have been no significant changes in the Company’s ability to utilize the deferred tax assets through September 30, 2017.  The Company has no valuation reserve on the deferred tax assets as of September 30, 2017.

 

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Table of Contents

Financial Condition

 

Total assets increased $109.2 million from $2.25 billion as of December 31, 2016, to $2.36 billion at September 30, 2017, due primarily to organic loan growth. Total loans increased $115.4 million, or 7.8%, when compared to December 31, 2016, which was funded by significant deposit growth and FHLBC advances.  Securities increased a modest $1.6 million in total, but the securities portfolio experienced select significant shifts in type of investments held year to date.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2017

Securities

 

As of

 

Percent Change From

(in thousands)

 

September 30, 

 

December 31, 

 

September 30, 

 

December 31, 

 

September 30, 

 

    

2017

    

2016

    

2016

    

2016

    

2016

Securities available-for-sale, at fair value

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasuries

 

$

3,990

 

$

 -

 

$

 -

 

N/M

 

N/M

U.S. government agencies

 

 

13,451

 

 

 -

 

 

1,503

 

N/M

 

N/M

U.S. government agencies mortgage-backed

 

 

11,030

 

 

41,534

 

 

43,723

 

(73.4)

 

(74.8)

States and political subdivisions

 

 

229,032

 

 

68,703

 

 

22,254

 

233.4

 

929.2

Corporate bonds

 

 

10,577

 

 

10,630

 

 

10,730

 

(0.5)

 

(1.4)

Collateralized mortgage obligations

 

 

80,386

 

 

170,927

 

 

204,390

 

(53.0)

 

(60.7)

Asset-backed securities

 

 

131,759

 

 

138,407

 

 

140,173

 

(4.8)

 

(6.0)

Collateralized loan obligations

 

 

53,259

 

 

101,637

 

 

108,284

 

(47.6)

 

(50.8)

Total securities

 

$

533,484

 

$

531,838

 

$

531,057

 

0.3

 

0.5

 

N/M - Not Meaningful

 

The securities portfolio ended the third quarter of 2017 at $533.5 million, an increase of $1.6 million from $531.8 million at December 31, 2016, and an increase of $2.4 million from September 30, 2016.  Available-for-sale purchases during the third quarter of 2017 and year over year periods were primarily tax exempt state and political subdivisions securities; treasuries and government agencies also increased in the period ending September 30, 2017.  This portfolio repositioning was performed to enhance overall asset yield due to the rising interest rate environment.  During the third quarter of 2017 security sales resulted in net realized gains of $102,000, as compared to net realized losses of $193,000 for the fourth quarter of 2016 and losses of $2.0 million for the third quarter of 2016.

 

Loans

 

Total loans were $1.59 billion as of September 30, 2017, an increase of $115.4 million from the total as of December 31, 2016, driven by growth in the commercial, real estate-construction and leases portfolios.  In addition, a home equity portfolio purchase of $16.7 million from TCF Bank in the second quarter of 2017 contributed to the total residential real estate growth of $41.7 million for the 2017 year to date period.  Loan portfolio repositioning continued to drive reductions in commercial real estate concentrations, and to grow commercial and lease financing to diversify the portfolio.  Total loans increased $391.7 million from September 30, 2016, due to the organic growth previously discussed as well as $221.0 million of loans from the Talmer branch purchase.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2017

Loans

As of

 

Percent Change From

(in thousands)

September 30, 

 

December 31, 

 

September 30, 

 

December 31, 

 

September 30, 

 

2017

 

2016

 

2016

 

2016

    

2016

Commercial

$

257,356

 

$

228,113

 

$

136,819

 

12.8

 

88.1

Leases

 

69,305

 

 

55,451

 

 

47,215

 

25.0

 

46.8

Real estate - commercial

 

739,136

 

 

736,247

 

 

617,280

 

0.4

 

19.7

Real estate - construction

 

94,868

 

 

64,720

 

 

28,786

 

46.6

 

229.6

Real estate - residential

 

419,583

 

 

377,851

 

 

357,846

 

11.0

 

17.3

Consumer

 

2,770

 

 

3,237

 

 

3,325

 

(14.4)

 

(16.7)

Other

 

10,550

 

 

11,973

 

 

10,517

 

(11.9)

 

0.3

 

 

1,593,568

 

 

1,477,592

 

 

1,201,788

 

7.8

 

32.6

Net deferred loan costs

 

623

 

 

1,217

 

 

1,064

 

(48.8)

 

(41.4)

Total loans

$

1,594,191

 

$

1,478,809

 

$

1,202,852

 

7.8

 

32.5

 

The quality of the loan portfolio is impacted by not only Company credit decisions but also the economic health of the communities in which the Company operates.  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 78.6% of the portfolio as of September 30, 2017, compared to 79.7% of the portfolio as of

41

 


 

Table of Contents

December 31, 2016.  The Company continues to oversee and manage its loan portfolio in accordance with interagency guidance on risk management.

 

Deposits and Borrowings

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2017

Deposits

As of

 

Percent Change From

(in thousands)

September 30, 

 

December 31, 

 

September 30, 

 

December 31, 

 

September 30, 

 

2017

 

2016

 

2016

 

2016

    

2016

Noninterest bearing demand

$

556,874

 

$

513,688

 

$

473,477

 

8.4

 

17.6

Savings

 

260,268

 

 

256,159

 

 

253,454

 

1.6

 

2.7

NOW accounts

 

417,054

 

 

419,417

 

 

391,188

 

(0.6)

 

6.6

Money market accounts

 

270,647

 

 

275,273

 

 

259,495

 

(1.7)

 

4.3

Certificates of deposit of less than $100,000

 

219,152

 

 

228,993

 

 

230,748

 

(4.3)

 

(5.0)

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

 

114,373

 

 

110,992

 

 

105,868

 

3.0

 

8.0

Certificates of deposit of more than $250,000

 

50,747

 

 

62,263

 

 

63,152

 

(18.5)

 

(19.6)

Total deposits

$

1,889,115

 

$

1,866,785

 

$

1,777,382

 

1.2

 

6.3

 

Total deposits were $1.89 billion on September 30, 2017, which reflects a $22.3 million increase from total deposits of $1.87 billion as of December 31, 2016, and a $111.7 million increase from $1.78 billion as of September 30, 2016.  Total noninterest bearing demand accounts experienced increases of $43.2 million, or 8.4%, in volumes for the first nine months of 2017, while certificates of deposit reflected a decrease of $18.0 million, or 4.5%, for the same period.  Growth in deposits in the third quarter of 2017 was attributed to seasonal tax refunds, as well as strong commercial demand deposit growth stemming from seasonal and operational funds increases as well as growth in commercial loan clients.  The total deposit growth of 6.3% in the year over year period is also partially attributable to the $48.9 million of deposits acquired with the Talmer branch purchase in 2016.

 

In addition to deposits, the Bank obtained funding from other sources in all periods presented.  Securities sold under repurchase agreements totaled $26.9 million at September 30, 2017, an increase from $25.7 million at December 31, 2016.  The Bank also recorded an advance of $125.0 million from Federal Home Loan Bank of Chicago at September 30, 2017, as compared to $70.0 million at December 31, 2016.

 

The Company is indebted on senior notes totaling $44.0 million, net of deferred issuance costs, which were issued in the fourth quarter of 2016.  These notes mature in December 2026, and include interest payable semiannually at 5.75% for five years.  Beginning December 2021, the interest becomes payable quarterly at three month LIBOR plus 385 basis points.  The Company is also indebted on $57.6 million, net of deferred issuance costs, of junior subordinated debentures, which are related to the trust preferred securities issued by its two statutory trust subsidiaries, Old Second Capital Trust I and Old Second Capital Trust II (“Trust II”).  The Trust II issuance converted from fixed to floating rate at three month LIBOR plus 150 basis points on June 15, 2017.  Upon conversion to a floating rate, a cash flow hedge was initiated which resulted in the total interest rate paid on debt of 4.30% as of September 30, 2017, as compared to 6.77%, which was the rate paid during the period prior to the June 15,  2017, rate reset.

 

Capital

 

As of September 30, 2017, total stockholders’ equity was $200.8 million, which was an increase of $25.6 million from $175.2 million as of December 31, 2016.  This increase is directly attributable to nine months of net income in 2017 and a reduction in the accumulated other comprehensive net loss, offset slightly by $888,000 of dividends paid to common shareholders in 2017.

In 2015, the Company redeemed all outstanding shares of the Company’s Series B preferred stock; as of September 30, 2015, no shares of the Series B Stock remained outstanding.    After this redemption, the Company’s total stockholders’ equity continues to include $4.8 million to reflect the value of a ten year warrant to purchase shares of its common stock, with an exercise price of $13.43 per share, issued in January 2009 as part of the original Series B issuance.  A discussion of the 2009 issuance, including this warrant, is included in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of the Company’s Form 10-K for the year ended December 31, 2016, under the heading “Capital”.

42

 


 

Table of Contents

 

 

 

The Company’s non-GAAP tangible common equity to tangible assets ratio was 8.16% at September 30, 2017, compared to 7.41% as of December 31, 2016, and 8.12% at September 30, 2016.

 

 

 

 

 

 

 

 

 

 

 

 

(unaudited)

 

 

As of September 30, 

 

As of December 31, 

 

As of September 30, 

(in thousands)

    

2017

    

2016

    

2016

 

 

 

 

 

 

 

 

 

 

Tier 1 capital

 

 

 

 

 

 

 

 

 

Total equity

 

$

200,763

 

$

175,210

 

$

171,627

Tier 1 adjustments:

 

 

 

 

 

 

 

 

 

Trust preferred securities allowed

 

 

55,395

 

 

47,997

 

 

48,728

Cumulative other comprehensive loss

 

 

632

 

 

8,762

 

 

7,437

Disallowed intangible assets

 

 

(8,830)

 

 

(8,761)

 

 

 -

Disallowed deferred tax assets

 

 

(26,381)

 

 

(31,220)

 

 

(32,882)

Tier 1 capital

 

$

221,579

 

$

191,988

 

$

194,910

 

 

 

 

 

 

 

 

 

 

Tangible common equity

 

 

 

 

 

 

 

 

 

Total Equity

 

$

200,763

 

$

175,210

 

$

171,627

Less: Intangible assets

 

 

8,830

 

 

8,761

 

 

 -

Tangible common equity

 

$

191,933

 

$

166,449

 

$

171,627

 

 

 

 

 

 

 

 

 

 

Tangible assets

 

 

 

 

 

 

 

 

 

Total assets

 

$

2,360,407

 

$

2,251,188

 

$

2,112,751

Less: Goodwill and intangible assets

 

 

8,830

 

 

8,761

 

 

 -

Tangible assets

 

$

2,351,577

 

$

2,242,427

 

$

2,112,751

 

 

 

 

 

 

 

 

 

 

 

 

 

Liquidity

 

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

 

Net cash inflows from operating activities were $28.5 million during the first nine months of 2017, compared with net cash inflows of $17.2 million in the same period in 2016.  Proceeds from sales of loans held-for-sale, net of funds used to originate loans held-for-sale, were a source of inflows for the first nine months of 2017 and 2016.  Interest paid, net of interest received, combined with changes in other assets and liabilities were a source of outflows for the first nine months of 2017 and 2016.  The management of investing and financing activities, as well as market conditions, determines the level and the stability of net interest cash flows.  Management’s policy is to mitigate the impact of changes in market interest rates to the extent possible, as part of the balance sheet management process.

 

Net cash outflows from investing activities were $105.7 million in the first nine months of 2017, compared to net cash inflows of $117.4 million in the same period in 2016.  In the first nine months of 2017, securities transactions accounted for net inflows of $10.8 million, and net principal disbursed on loans accounted for net outflows of $118.7 million.  In the first nine months of 2016, securities transactions accounted for net inflows of $184.4 million, and net principal disbursed on loans accounted for net outflows of $71.6 million.  Proceeds from sales of OREO accounted for $5.5 million and $5.2 million in investing cash inflows for the first nine months of 2017 and 2016, respectively.

 

Net cash inflows from financing activities in the first nine months of 2017 were $77.3 million, compared with net cash inflows of $15.0 million in the first nine months of 2016.  Net deposit inflows in the first nine months of 2017 were $22.3 million compared to net deposit inflows of $18.3 million in the first nine months of 2016.  Other short-term borrowings had net cash inflows related to FHLBC advances of $55.0 million in the first nine months of 2017 and outflows of $15.0 million in the first nine months of 2016.  Changes in securities sold under repurchase agreements accounted for $1.1 million and $12.5 million in net inflows in the first nine months of 2017 and 2016, respectively.

 

Cash and cash equivalents for the nine months ended September 30, 2017, totaled $47.5 million, as compared to $189.9 million as of September 30, 2016.  The significantly higher balance at the end of the 2016 period was in anticipation of the $181.5 million paid for the Talmer branch purchase in October 2016.

 

 

 

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Item 3.  Quantitative and Qualitative Disclosures about Market Risk

 

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 (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.

 

In June 2017, the Federal Reserve raised short-term interest rates by 0.25%.  There is a general market expectation that the Federal Reserve will move short-term rates higher in December of 2017.  Generally, Federal Reserve actions have not had a significant impact on long-term rates, although Federal Reserve officials have announced a schedule to end reinvestment in their securities portfolio starting October 2017, which could result in increases in long-term rates.  The Company manages interest rate risk within guidelines established by a policy which limits the amount of rate exposure.  In practice, interest rate risk exposure is maintained well within those guidelines. 

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 estimated at September 30, 2017, and December 31, 2016, 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 ALCO 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 include interest rate swap derivatives as discussed in Note 15 of the financial statements included in this quarterly report.  The risk is monitored and managed within approved policy limits.

 

The Company utilizes simulation analysis to quantify the impact of various rate scenarios on net interest income.  Specific cash flows, repricing characteristics, and embedded options of the assets and liabilities held by the Company are incorporated into the simulation model.  Earnings at risk is calculated by comparing the net interest income of a stable interest rate environment to the net interest income of different interest rate environments in order 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 2.0% or more, a situation that continues to date.  As of September 30, 2017 and December 31, 2016, the Company’s analyses reflected earnings gains (in both dollars and percentage) should interest rates rise, and earnings reductions should interest rates fall.  The changes in income across the various interest rate scenarios as of September 30, 2017 were similar to those increases in Federal Home Loan Bank borrowings.  Overall, management considers the current level of interest rate risks to be moderate, but intends to continue closely monitoring changes in that risk in case corrective actions might be needed in the future.  Federal funds rate and the Bank’s prime rate remained unchanged at 1.25% and 4.25%, 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% and 1%, and an increase of 2% assuming no change in the slope of the yield curve. 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Analysis of Net Interest Income Sensitivity

(dollars in thousands)

 

Immediate Changes in Rates

 

    

    

(1.0)

%

    

  

(0.5)

%

    

  

0.5

%

    

  

1.0

%

    

  

2.0

%

September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dollar change

 

$

(4,860)

 

 

$

(2,159)

 

 

$

1,175

 

 

$

2,393

 

 

$

4,630

 

Percent change

 

 

(6.5)

%

 

 

(2.9)

%

 

 

1.6

%

 

 

3.2

%

 

 

6.2

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dollar change

 

$

(4,404)

 

 

$

(2,141)

 

 

$

1,145

 

 

$

2,406

 

 

$

4,866

 

Percent change

 

 

(6.6)

%

 

 

(3.2)

%

 

 

1.7

%

 

 

3.6

%

 

 

7.3

%

 

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.

 

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Table of Contents

Item 4.  Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

The Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures, as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended, as of September 30, 2017.  Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that as of September 30, 2017, 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 controls over financial reporting during the quarter ended September 30, 2017, 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 1.A. of Part I of the Company’s most recent Annual Report in Form 10-K.  These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements.

 

PART II - OTHER INFORMATION

 

Item 1.  Legal Proceedings

 

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

 

Item 1.A.  Risk Factors

 

There have been no material changes from the risk factors set forth in Part I, Item 1.A. “Risk Factors,” of the Company’s Form 10-K for the year ended December 31, 2016 and the risk factors set forth under the heading “Risk Factors” in the Company’s Registration Statement of Form S-3 (File No. 333-219680), which are incorporated herein by reference.  Please refer to those sections of the Company’s Form 10-K and Registration Statement on Form S-3 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.

 

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Table of Contents

Item 6.  Exhibits

 

Exhibits:

 

 

 

10.1

First Amendment of Old Second Bancorp, Inc. Employment Agreement with James Eccher, dated as of September 1, 2017 (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on September 1, 2017).

 

 

10.2

Form of Compensation and Benefits Assurance Agreement (incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K filed on September 1, 2017).

 

 

31.1

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

 

 

31.2

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

 

 

32.1

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

 

 

32.2

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

 

 

101

Interactive data files pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets at September 30, 2017, and December 31, 2016; (ii) Consolidated Statements of Income for the nine months ended September 30, 2017 and 2016; (iii) Consolidated Statements of Stockholders’ Equity for the nine months ended September 30, 2017 and 2016; (iv) Consolidated Statements of Cash Flows for the nine months ended September 30, 2017 and 2016; and (v) Notes to Consolidated Financial Statements, tagged as blocks of text and in detail.*

 

 

 

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

 

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SIGNATURES

 

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

 

 

 

 

 

 

OLD SECOND BANCORP, INC.

 

 

 

 

 

BY:

/s/ James L. Eccher

 

 

James L. Eccher

 

 

President and Chief Executive Officer

 

 

(principal executive officer)

 

 

 

 

 

BY:

/s/ Bradley S. Adams

 

 

Bradley S. Adams

 

 

Executive Vice President and Chief Financial Officer

 

 

(principal financial and accounting officer)

 

 

 

 

DATE: November 7, 2017

 

 

47