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OLD SECOND BANCORP INC - Quarter Report: 2018 June (Form 10-Q)

Table of Contents

I  

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

 

 

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

 

THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2018

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 August 3, 2018, the Registrant had 29,747,078 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

 

 

Cautionary Note Regarding Forward Looking Statements 

 

 

 

 

PART I

 

 

 

Page Number

Item 1. 

Financial Statements

4

Item 2. 

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

38

Item 3. 

Quantitative and Qualitative Disclosures about Market Risk

55

Item 4. 

Controls and Procedures

56

 

PART II

 

 

 

 

Item 1. 

Legal Proceedings

56

Item 1.A. 

Risk Factors

56

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

56

Item 3. 

Defaults Upon Senior Securities

56

Item 4. 

Mine Safety Disclosure

57

Item 5. 

Other Information

57

Item 6. 

Exhibits

57

 

 

 

 

Signatures

58

 

2

 


 

Table of Contents

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This report and other publicly available documents of the Company, including the documents incorporated herein by reference, contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act, including, but not limited to, statements regarding management’s belief that we are positioned for future growth, expectations regarding future plans, strategies and financial performance, regulatory developments, industry and economic trends, and other matters.  Forward-looking statements, which may be based upon beliefs, expectations and assumptions of the Company's management and on information currently available to management, can be identified by the inclusion of such qualifications as “expects,” “intends,” “believes,” “may,” “will,” “would,” “could,” “should,” “plan,” “anticipate,” “estimate,” “seeks,” “possible,” “likely” or other indications that the particular statements are not historical facts and refer to future periods.  Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and may be outside of the Company’s control.  Actual events and results may differ significantly from those described in such forward-looking statements, due to numerous factors, including:

 

·

negative economic conditions that adversely affect the economy, real estate values, the job market and other factors nationally and in our market area, in each case that may affect our liquidity and the performance of our loan portfolio;

·

defaults and losses on our loan portfolio;

·

the anticipated benefits of the Company’s recent merger with Greater Chicago Financial Corp., including estimated cost savings and anticipated strategic gains, may be significantly harder or take longer to achieve than expected or may not be achieved in their entirety as a result of unexpected factors or events;

·

the integration of Greater Chicago Financial Corp.’s business and operations into the Company, which included conversion of Greater Chicago Financial Corp.’s operating systems and procedures, may have unanticipated adverse results relating to the Company’s existing businesses;

·

the Company’s ability to achieve anticipated results from the Greater Chicago Financial Corp. transaction is dependent on the state of the economic and financial markets going forward. Specifically, the Company may incur more credit losses than expected, cost savings may be less than expected and customer attrition may be greater than expected;

·

the financial success and viability of the borrowers of our commercial loans;

·

market conditions in the commercial and residential real estate markets in our market area;

·

changes in U.S. monetary policy, the level and volatility of interest rates, the capital markets and other market conditions that may affect, among other things, our liquidity and the value of our assets and liabilities;

·

competitive pressures in the financial services business;

·

any negative perception of our reputation or financial strength;

·

ability to raise additional capital on acceptable terms when needed;

·

ability to use technology to provide products and services that will satisfy customer demands and create efficiencies in operations;

·

adverse effects on our information technology systems resulting from failures, human error or cyberattacks;

·

adverse effects of failures by our vendors to provide agreed upon services in the manner and at the cost agreed, particularly our information technology vendors;

·

the impact of any claims or legal actions, including any effect on our reputation;

·

losses incurred in connection with repurchases and indemnification payments related to mortgages;

·

the soundness of other financial institutions;

·

changes in accounting standards, rules and interpretations and the impact on our financial statements;

·

our ability to receive dividends from our subsidiaries;

·

a decrease in our regulatory capital ratios;

·

legislative or regulatory changes, particularly changes in regulation of financial services companies;

·

increased costs of compliance, heightened regulatory capital requirements and other risks associated with changes in regulation and the current regulatory environment, including the Dodd-Frank Act;

·

the impact of heightened capital requirements; and

·

each of the factors and risks under the heading  “Risk Factors” in our 2017 Form 10-K and Form 10-Qs filed with the SEC.

 

Because the Company’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain, there can be no assurances that future actual results will correspond to any forward-looking statements and you should not rely on any forward-looking statements.  Additionally, all statements in this Form 10-Q, 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.

3

 


 

Table of Contents

PART I - FINANCIAL INFORMATION

Item 1.  Financial Statements

 

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Balance Sheets

(In thousands, except share data)

 

 

 

 

 

 

 

 

 

(unaudited)

 

 

 

 

 

June 30, 

 

December 31, 

 

    

2018

    

2017

Assets

 

 

 

 

 

 

Cash and due from banks

 

$

34,161

 

$

37,444

Interest bearing deposits with financial institutions

 

 

31,147

 

 

18,389

Cash and cash equivalents

 

 

65,308

 

 

55,833

Securities available-for-sale, at fair value

 

 

543,644

 

 

541,439

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

 

 

9,093

 

 

10,168

Loans held-for-sale

 

 

5,206

 

 

4,067

Loans

 

 

1,849,162

 

 

1,617,622

Less: allowance for loan and lease losses

 

 

19,321

 

 

17,461

Net loans

 

 

1,829,841

 

 

1,600,161

Premises and equipment, net

 

 

42,532

 

 

37,628

Other real estate owned

 

 

8,912

 

 

8,371

Mortgage servicing rights, net

 

 

7,812

 

 

6,944

Goodwill and core deposit intangible

 

 

22,074

 

 

8,922

Bank-owned life insurance ("BOLI")

 

 

61,159

 

 

61,764

Deferred tax assets, net

 

 

27,812

 

 

25,356

Other assets

 

 

26,355

 

 

22,776

Total assets

 

$

2,649,748

 

$

2,383,429

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

Noninterest bearing demand

 

$

620,807

 

$

572,404

Interest bearing:

 

 

 

 

 

 

Savings, NOW, and money market

 

 

1,058,295

 

 

967,750

Time

 

 

482,749

 

 

382,771

Total deposits

 

 

2,161,851

 

 

1,922,925

Securities sold under repurchase agreements

 

 

54,038

 

 

29,918

Other short-term borrowings

 

 

76,625

 

 

115,000

Junior subordinated debentures

 

 

57,662

 

 

57,639

Senior notes

 

 

44,108

 

 

44,058

Notes payable and other borrowings

 

 

23,496

 

 

 -

Other liabilities

 

 

22,154

 

 

13,539

Total liabilities

 

 

2,439,934

 

 

2,183,079

 

 

 

 

 

 

 

Stockholders’ Equity

 

 

 

 

 

 

Common stock

 

 

34,717

 

 

34,626

Additional paid-in capital

 

 

118,082

 

 

117,742

Retained earnings

 

 

157,796

 

 

142,959

Accumulated other comprehensive (loss) income

 

 

(4,487)

 

 

1,479

Treasury stock

 

 

(96,294)

 

 

(96,456)

Total stockholders’ equity

 

 

209,814

 

 

200,350

Total liabilities and stockholders’ equity

 

$

2,649,748

 

$

2,383,429

 

 

 

 

 

 

 

 

 

June 30, 2018

 

December 31, 2017

 

Common

 

Common

 

Stock

    

Stock

Par value

$

1.00

 

$

1.00

Shares authorized

 

60,000,000

 

 

60,000,000

Shares issued

 

34,716,589

 

 

34,625,734

Shares outstanding

 

29,747,078

 

 

29,627,086

Treasury shares

 

4,969,511

 

 

4,998,648

 

See accompanying notes to consolidated financial statements.

4

 


 

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Income

(In thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(unaudited)

 

(unaudited)

 

 

 

Three Months Ended  June 30, 

 

Six Months Ended  June 30, 

 

 

    

2018

    

2017

    

2018

    

2017

    

Interest and dividend income

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans, including fees

 

$

22,512

 

$

17,385

 

$

41,248

 

$

33,994

 

Loans held-for-sale

 

 

35

 

 

37

 

 

55

 

 

61

 

Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

 

2,392

 

 

2,607

 

 

4,562

 

 

5,570

 

Tax exempt

 

 

2,114

 

 

1,648

 

 

4,175

 

 

2,560

 

Dividends from FHLBC and FRBC stock

 

 

111

 

 

92

 

 

217

 

 

177

 

Interest bearing deposits with financial institutions

 

 

97

 

 

31

 

 

146

 

 

54

 

Total interest and dividend income

 

 

27,261

 

 

21,800

 

 

50,403

 

 

42,416

 

Interest expense

 

 

 

 

 

 

 

 

 

 

 

 

 

Savings, NOW, and money market deposits

 

 

501

 

 

233

 

 

845

 

 

456

 

Time deposits

 

 

1,444

 

 

1,025

 

 

2,619

 

 

2,004

 

Securities sold under repurchase agreements

 

 

104

 

 

 4

 

 

183

 

 

 6

 

Other short-term borrowings

 

 

276

 

 

146

 

 

605

 

 

252

 

Junior subordinated debentures

 

 

927

 

 

1,059

 

 

1,854

 

 

2,143

 

Senior notes

 

 

672

 

 

672

 

 

1,344

 

 

1,345

 

Notes payable and other borrowings

 

 

95

 

 

 -

 

 

95

 

 

 -

 

Total interest expense

 

 

4,019

 

 

3,139

 

 

7,545

 

 

6,206

 

Net interest and dividend income

 

 

23,242

 

 

18,661

 

 

42,858

 

 

36,210

 

Provision for loan and lease losses

 

 

1,450

 

 

750

 

 

728

 

 

750

 

Net interest and dividend income after provision for loan and lease losses

 

 

21,792

 

 

17,911

 

 

42,130

 

 

35,460

 

Noninterest income

 

 

 

 

 

 

 

 

 

 

 

 

 

Trust income

 

 

1,645

 

 

1,638

 

 

3,140

 

 

3,096

 

Service charges on deposits

 

 

1,769

 

 

1,615

 

 

3,361

 

 

3,233

 

Secondary mortgage fees

 

 

195

 

 

223

 

 

357

 

 

399

 

Mortgage servicing rights mark to market (loss) gain

 

 

(105)

 

 

(429)

 

 

200

 

 

(562)

 

Mortgage servicing income

 

 

627

 

 

444

 

 

1,079

 

 

879

 

Net gain on sales of mortgage loans

 

 

1,240

 

 

1,473

 

 

2,157

 

 

2,620

 

Securities gains (losses), net

 

 

312

 

 

(131)

 

 

347

 

 

(267)

 

Increase in cash surrender value of BOLI

 

 

351

 

 

350

 

 

599

 

 

709

 

Death benefit realized on bank-owned life insurance

 

 

 -

 

 

 -

 

 

1,026

 

 

 -

 

Debit card interchange income

 

 

1,132

 

 

1,081

 

 

2,144

 

 

2,056

 

Gain on disposal and transfer of fixed assets, net

 

 

 -

 

 

12

 

 

 -

 

 

10

 

Other income

 

 

1,366

 

 

1,041

 

 

2,627

 

 

2,172

 

Total noninterest income

 

 

8,532

 

 

7,317

 

 

17,037

 

 

14,345

 

Noninterest expense

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

12,355

 

 

10,545

 

 

22,562

 

 

21,118

 

Occupancy, furniture and equipment

 

 

1,652

 

 

1,462

 

 

3,210

 

 

3,028

 

Computer and data processing

 

 

2,741

 

 

1,112

 

 

4,085

 

 

2,202

 

FDIC insurance

 

 

165

 

 

165

 

 

321

 

 

313

 

General bank insurance

 

 

299

 

 

264

 

 

550

 

 

534

 

Amortization of core deposit intangible

 

 

97

 

 

25

 

 

118

 

 

50

 

Advertising expense

 

 

492

 

 

452

 

 

833

 

 

838

 

Debit card interchange expense

 

 

301

 

 

399

 

 

582

 

 

748

 

Legal fees

 

 

286

 

 

184

 

 

445

 

 

288

 

Other real estate expense, net

 

 

429

 

 

539

 

 

602

 

 

1,248

 

Other expense

 

 

3,469

 

 

2,839

 

 

6,332

 

 

5,673

 

Total noninterest expense

 

 

22,286

 

 

17,986

 

 

39,640

 

 

36,040

 

Income before income taxes

 

 

8,038

 

 

7,242

 

 

19,527

 

 

13,765

 

Provision for income taxes

 

 

1,777

 

 

2,096

 

 

3,777

 

 

4,192

 

Net income available to common stockholders

 

$

6,261

 

$

5,146

 

$

15,750

 

$

9,573

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

$

0.21

 

$

0.17

 

$

0.53

 

$

0.32

 

Diluted earnings per share

 

 

0.21

 

 

0.17

 

 

0.52

 

 

0.32

 

 

See accompanying notes to consolidated financial statements.

5

 


 

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(unaudited)

 

(unaudited)

 

 

Three Months Ended  June 30, 

 

Six Months Ended  June 30, 

 

    

2018

    

2017

    

2018

    

2017

Net Income

 

$

6,261

 

$

5,146

 

$

15,750

 

$

9,573

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

(1,391)

 

 

6,596

 

 

(10,199)

 

 

10,827

Related tax benefit (expense)

 

 

392

 

 

(2,650)

 

 

2,876

 

 

(4,325)

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

 

 

(999)

 

 

3,946

 

 

(7,323)

 

 

6,502

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

Net realized gains (losses)

 

 

312

 

 

(131)

 

 

347

 

 

(267)

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

 

 

(88)

 

 

52

 

 

(98)

 

 

106

Net realized gains (losses) after tax

 

 

224

 

 

(79)

 

 

249

 

 

(161)

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

 

 

(1,223)

 

 

4,025

 

 

(7,572)

 

 

6,663

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in fair value of derivatives used for cash flow hedges

 

 

515

 

 

(613)

 

 

1,794

 

 

(464)

Related tax (expense) benefit

 

 

(145)

 

 

245

 

 

(507)

 

 

184

Other comprehensive income on cash flow hedges

 

 

370

 

 

(368)

 

 

1,287

 

 

(280)

 

 

 

 

 

 

 

 

 

 

 

 

 

Total other comprehensive (loss) income

 

 

(853)

 

 

3,657

 

 

(6,285)

 

 

6,383

Total comprehensive income

 

$

5,408

 

$

8,803

 

$

9,465

 

$

15,956

 

See accompanying notes to consolidated financial statements.

 

6

 


 

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(In thousands)

 

 

 

 

 

 

 

 

 

(Unaudited)

 

Six Months Ended  June 30, 

 

 

2018

    

2017

    

Cash flows from operating activities

 

 

 

 

 

 

Net income

$

15,750

 

$

9,573

 

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

 

 

 

 

 

 

Depreciation of fixed assets and amortization of leasehold improvements

 

1,142

 

 

1,193

 

Change in fair value of mortgage servicing rights

 

(200)

 

 

562

 

Provision for loan and lease losses

 

728

 

 

750

 

Provision for deferred tax expense

 

3,468

 

 

4,052

 

Originations of loans held-for-sale

 

(72,820)

 

 

(75,079)

 

Proceeds from sales of loans held-for-sale

 

73,187

 

 

76,649

 

Net gains on sales of mortgage loans

 

(2,157)

 

 

(2,620)

 

Net premium amortization/discount (accretion) of purchase accounting adjustment on loans

 

(776)

 

 

(680)

 

Change in current income taxes receivable

 

197

 

 

(89)

 

Increase in cash surrender value of BOLI

 

(599)

 

 

(709)

 

Change in accrued interest receivable and other assets

 

(1,075)

 

 

1,665

 

Change in accrued interest payable and other liabilities

 

8,195

 

 

16,894

 

Net premium amortization/discount (accretion) on securities

 

1,388

 

 

773

 

Securities (gains) losses, net

 

(347)

 

 

267

 

Amortization of core deposit intangible

 

118

 

 

50

 

Amortization of junior subordinated debentures issuance costs

 

23

 

 

24

 

Amortization of senior notes issuance costs

 

50

 

 

52

 

Stock based compensation

 

1,098

 

 

625

 

Net gains on sale of other real estate owned

 

(104)

 

 

(178)

 

Provision for other real estate owned valuation losses

 

366

 

 

710

 

Net losses on disposal  and transfer of fixed assets

 

 -

 

 

(11)

 

Loss on transfer of premises to other real estate owned

 

 -

 

 

 1

 

Net cash provided by operating activities

 

27,632

 

 

34,474

 

Cash flows from investing activities

 

 

 

 

 

 

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

 

20,136

 

 

78,564

 

Proceeds from sales of securities available-for-sale

 

92,746

 

 

100,856

 

Purchases of securities available-for-sale

 

(54,550)

 

 

(205,755)

 

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

 

2,624

 

 

(675)

 

Net change in loans

 

(4,418)

 

 

(64,755)

 

Proceeds from claims on BOLI, net of premiums paid

 

1,204

 

 

 -

 

Improvements in other real estate owned

 

(59)

 

 

 -

 

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

 

2,068

 

 

3,280

 

Proceeds from disposition of premises and equipment

 

 -

 

 

13

 

Net purchases of premises and equipment

 

(710)

 

 

(375)

 

Cash paid for acquisition, net of cash and cash equivalents retained

 

(35,711)

 

 

 -

 

Net cash provided by (used in) investing activities

 

23,330

 

 

(88,847)

 

Cash flows from financing activities

 

 

 

 

 

 

Net change in deposits

 

(9,587)

 

 

43,360

 

Net change in securities sold under repurchase agreements

 

18,497

 

 

10,646

 

Net change in other short-term borrowings

 

(49,298)

 

 

5,000

 

Payment of senior note issuance costs

 

 -

 

 

(42)

 

Dividends paid on common stock

 

(594)

 

 

(592)

 

Purchase of treasury stock

 

(505)

 

 

(236)

 

Net cash (used in) provided by financing activities

 

(41,487)

 

 

58,136

 

Net change in cash and cash equivalents

 

9,475

 

 

3,763

 

Cash and cash equivalents at beginning of period

 

55,833

 

 

47,334

 

Cash and cash equivalents at end of period

$

65,308

 

$

51,097

 

 

7

 


 

Table of Contents

 

 

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Cash Flows - Continued

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended  June 30, 

Supplemental cash flow information

    

2018

    

2017

Income taxes paid, net

 

$

100

 

$

230

Interest paid for deposits

 

 

3,295

 

 

2,448

Interest paid for borrowings

 

 

3,960

 

 

3,787

Non-cash transfer of loans to other real estate owned

 

 

2,380

 

 

3,525

Non-cash transfer of premises to other real estate owned

 

 

 -

 

 

95

 

See accompanying notes to consolidated financial statements.

 

 

8

 


 

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

    

Income (Loss)

    

Stock

    

Equity

Balance, December 31, 2016

 

$

34,534

 

$

116,653

 

$

129,005

 

$

(8,762)

 

$

(96,220)

 

$

175,210

Net income

 

 

 

 

 

 

 

 

9,573

 

 

 

 

 

 

 

 

9,573

Other comprehensive income, net of tax

 

 

 

 

 

 

 

 

 

 

 

6,383

 

 

 

 

 

6,383

Dividends declared and paid

 

 

 

 

 

 

 

 

(592)

 

 

 

 

 

 

 

 

(592)

Vesting of restricted stock

 

 

92

 

 

(92)

 

 

 

 

 

 

 

 

 

 

 

 -

Stock based compensation

 

 

 

 

 

625

 

 

 

 

 

 

 

 

 

 

 

625

Purchase of treasury stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(236)

 

 

(236)

Balance, June 30, 2017

 

$

34,626

 

$

117,186

 

$

137,986

 

$

(2,379)

 

$

(96,456)

 

$

190,963

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2017

 

$

34,626

 

$

117,742

 

$

142,959

 

$

1,479

 

$

(96,456)

 

$

200,350

Net income

 

 

 

 

 

 

 

 

15,750

 

 

 

 

 

 

 

 

15,750

Other comprehensive loss, net of tax

 

 

 

 

 

 

 

 

 

 

 

(6,285)

 

 

 

 

 

(6,285)

Dividends declared and paid

 

 

 

 

 

 

 

 

(594)

 

 

 

 

 

 

 

 

(594)

Vesting of restricted stock

 

 

91

 

 

(758)

 

 

 

 

 

 

 

 

667

 

 

 -

Reclassification of stranded tax effects

 

 

 

 

 

 

 

 

(319)

 

 

319

 

 

 

 

 

 -

Stock based compensation

 

 

 

 

 

1,098

 

 

 

 

 

 

 

 

 

 

 

1,098

Purchase of treasury stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(505)

 

 

(505)

Balance, June 30, 2018

 

$

34,717

 

$

118,082

 

$

157,796

 

$

(4,487)

 

$

(96,294)

 

$

209,814

 

See accompanying notes to consolidated financial statements.

 

 

 

9

 


 

Table of Contents

 

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

 

Note 1 – Summary of Significant Accounting Policies

 

The accounting policies followed in the preparation of the interim consolidated financial statements are consistent with those used in the preparation of the annual financial information.  The interim consolidated financial statements reflect all normal and recurring adjustments that are necessary, in the opinion of management, for a fair statement of results for the interim period presented.  Results for the period ended June 30, 2018, are not necessarily indicative of the results that may be expected for the year ending December 31, 2018.  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, 2017.  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.

 

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, 2017.  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.

 

In addition to the significant accounting policies presented in our Form 10-K, as noted above, as a result of our acquisition of Greater Chicago Financial Corp. (“(GCFC”), and its wholly-owned subsidiary, ABC Bank, that closed in the second quarter of 2018, the Company has implemented accounting policies regarding purchased loans.   Loans purchased as a result of a business combination are recorded at estimated fair value on the acquisition date, with no carryover of the related allowance for loan and lease losses recorded by the acquiree at the time of purchase.  These loans are segregated into two classifications upon purchase:

 

1)

purchased non-credit impaired (“non-PCI”) loans, accounted for in accordance with FASB ASC Subtopic 310-20 “Nonrefundable Fees and Costs” (“ASC 310-20”), which have a discount attributable in part to credit quality.   Premiums and discounts created when ASC 310-20 loans are recorded at their fair values at acquisition are amortized over the remaining terms of the loans as an adjustment to the related loan’s yield; and

2)

purchased credit impaired (“PCI”) loans, accounted for under FASB ASC Subtopic 310-30, “Loans and Debt Securities Acquired with Deteriorated Credit Quality” (“ASC 310-30”) as they display signs of credit deterioration.  Interest income, through accretion of the difference between the carrying value of the loans and the expected cash flows, is recognized on the acquired loans accounted for under ASC 310-30.

 

Recent Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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,” which deferred the effective date of ASU 2014-09 for an additional year.  ASU 2015-14 was effective for annual reporting periods beginning after December 15, 2017.  The amendments could 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 was 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. 

 

10

 


 

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

The Company performed an analysis of the impact of adoption of this ASU, reviewing revenue recorded from service charges on deposit accounts, asset management fees, gains (losses) on other real estate owned, and debit card interchange fees.  Certain revenue received, such as service charges on deposit accounts and interchange fees, is recorded immediately or as the service is performed.  Asset management fees recorded by the Company take the form of wealth management income and brokerage income, and both types of fees are recorded after services are rendered, with no contractual requirement of refund to a customer based on non-achievement of fund performance objectives.  Finally, the methodology used to record revenue from gains (losses) due to the sale of other real estate owned is not anticipated to change, as the Company currently records income or expense only upon consummation of the sale, and any revenue recorded stemming from seller financed transactions is reviewed for deferral, as appropriate.  The Company adopted ASU 2014-09 and related issuances on January 1, 2018, with no cumulative effect adjustment to opening retained earnings required upon implementation of this standard.

 

In January 2016, the FASB issued ASU No. 2016-01 “Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.”  The objective of the issuance is to provide users of financial statements with more decision–useful information, by making targeted improvements to GAAP.  These targeted improvements included revisions to the methodology of accounting for equity investments, eliminating certain disclosures on fair value assumptions for financial instruments measured at amortized cost, and requiring public business entities to use the exit price notion, as defined in ASC 820, for the measurement of the fair value of financial instruments.  This standard was effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years.  The Company adopted this standard as of January 1, 2018.  Adoption of this standard resulted in the Company’s use of an exit price rather than an entrance price to determine the fair value of loans and deposits not already measured at fair value on a non-recurring basis in the consolidated balance sheet disclosures; see Note 14–Fair Value of Financial Instruments  for further information regarding the valuation processes.

 

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 in the process of identifying all lease arrangements, methodology of tracking, and practical expedients that may be applied, such as the cumulative effect adjustment in equity upon adoption as of January 1, 2019, compared to a retroactive adoption.  We will continue to assess the impact of ASU 2016-02 on our accounting and disclosures. 

 

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 historical data by loan pools and collateral classifications, and completing model option evaluations 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 will continue to decrease future quarterly net interest income over the call period until the premium 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 2017 earnings.  Net interest income, net income and diluted earnings per share (“EPS”) were previously reported as $22.1 million, $5.5 million, and $0.18 for the quarter ended June 30, 2017, and $42.9 million, $10.0 million, and $0.33 for the six months ended June 30, 2017.  The effect of the adoption of ASU 2017-08 resulted in the currently reported totals of net interest income, net income and diluted EPS of $21.8 million, $5.1 million, and $0.17 for the quarter ended June 30, 2017, and $42.4 million, $9.6 million, and $0.32 for the six months ended June 30, 2017.

11

 


 

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

In August 2017, the FASB issued ASU No. 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 adopted ASU 2017-12 on January 1, 2018, on a modified retrospective basis.  FASB ASC 815, Derivatives and Hedging (“ASC 815”), provides the disclosure requirements for derivatives and hedging activities with the intent to provide users of financial statements with an enhanced understanding of: (a) how and why an entity uses derivative instruments, (b) how the entity accounts for derivative instruments and related hedged items, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. Further, qualitative disclosures are required that explain the Company’s objectives and strategies for using derivatives, as well as quantitative disclosures about the fair value of and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative instruments.

 

As required by ASC 815, the Company records all derivatives on the balance sheet at fair value.  The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Derivatives may also be designated as hedges of the foreign currency exposure of a net investment in a foreign operation. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge.  The Company may enter into derivative contracts that are intended to economically hedge certain of its risk, even though hedge accounting does not apply or the Company elects not to apply hedge accounting.

 

In accordance with the FASB’s fair value measurement guidance in ASU 2011-04, the Company made an accounting policy election to measure the credit risk of its derivative financial instruments that are subject to master netting agreements on a net basis by counterparty portfolio.  As the Company does not currently have any derivative financial instruments subject to master netting agreements, there was no impact to the balance sheet. 

 

In February 2018, the FASB issued ASU No. 2018-02, “Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.”  This ASU was issued in response to the enactment of tax bill H.R.1 “Tax Cuts and Jobs Act”, which resulted in “stranding” the tax effects of items within accumulated other comprehensive income related to the adjustment of deferred taxes due to the reduction of the federal corporate income tax rate.  The amendments proposed allow the reclassification of these stranded tax effects to retained earnings, and were effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years.  Early adoption is permitted, and should be applied either in the period of adoption or retrospectively to each period in which the effect of the change in the U.S. federal corporate tax rate is recognized.  The Company adopted ASU 2018-02 as of January 1, 2018, and a reclassification of $319,000, net, was recorded, which increased accumulated other comprehensive income and reduced retained earnings with the adoption of the accounting standard.

 

Subsequent Events

 

On July 17, 2018, the Company’s Board of Directors declared a cash dividend of $0.01 per share payable on August 6, 2018, to stockholders of record as of July 27, 2018; dividends of $297,000 were paid to stockholders on August 6, 2018.

 

Note 2 – Acquisitions

 

On April 20, 2018, the Company acquired Greater Chicago Financial Corp. (“GCFC”), and its wholly owned subsidiary, ABC Bank, which operates four branches in the Chicago metro area.  In addition to the acquisition price of $41.1 million, the Company retired the convertible and nonconvertible debentures held by GCFC upon acquisition, which totaled $6.6 million, including interest due.  The purchase and the debentures’ retirement were funded with the Company’s cash on hand, and all GCFC common stock was retired and cancelled simultaneous with the close of the transaction. The Company acquired $227.6 million of loans, net of purchase accounting adjustments, and $248.5 million of deposits, net of purchase accounting adjustments for time deposits. Purchase accounting adjustments recorded in the second quarter of 2018 include a loan valuation mark of $11.2 million, a core deposit intangible of $3.1 million, a fixed asset valuation adjustment of $1.5 million, and goodwill of $9.9 million.  In addition, a deferred tax asset of $3.5 million was recorded as of the date of acquisition based on analysis of the fair value of assets acquired, less liabilities assumed.  None of the $9.9 million recorded as goodwill is expected to be deductible for tax purposes.  Acquisition related costs incurred by the

12

 


 

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

Company for the six months ended June 30, 2018, totaled $3.4 million, pretax, and included $1.2 million of salaries and employee benefits related expenses, and $1.8 million of data processing, computer and ATM related conversion costs.

 

The assets and liabilities associated with the acquisition of GCFC were recorded in the Consolidated Balance Sheets at estimated fair value as of the acquisition date. In many cases the determination of these fair values required management to make estimates about discount rates, future expected cash flows, market conditions and other future events that are highly subjective in nature and subject to change, as noted below.  The following allocation is based on the information that was available to make preliminary estimates of the fair value and may change as additional information becomes available and additional analyses are completed. While the Company believes that information provided a reasonable basis for estimating the fair values, it expects that it could obtain additional information and evidence during the measurement period that may result in changes to the estimated fair value amounts. This measurement period ends on the earlier of one year after the acquisition date or the date we receive the information about the facts and circumstances that existed at the acquisition date. Subsequent adjustments are, and if necessary, will be  prospectively reflected in future filings, and may impact loans, other assets, notes payable and other borrowings, deferred tax assets, net, and goodwill.

 

The below table summarizes the assets acquired, less the liabilities assumed, related to the GCFC/ABC Bank acquisition.  All amounts are listed at their estimated fair values as of date of acquisition, and have been accounted for under the acquisition method of accounting.

 

 

 

 

 

GCFC/ABC Bank Acquisition Summary

 

 

 

As of Date of Acquisition

 

 

 

 

 

 

April 20, 2018

Assets

 

 

 

Cash and due from banks

 

$

6,669

Interest bearing deposits with financial institutions

 

 

500

Securities available-for-sale, at fair value

 

 

72,091

Federal funds sold

 

 

4,300

FHLBC stock

 

 

1,549

Loans

 

 

227,594

Premises and equipment

 

 

5,339

Other real estate owned

 

 

432

Goodwill and core deposit intangible

 

 

12,957

Deferred tax assets, net

 

 

3,456

Other assets

 

 

2,083

Total assets

 

$

336,970

 

 

 

 

Liabilities

 

 

 

Noninterest bearing demand

 

$

58,005

Savings, NOW and money market

 

 

91,494

Time

 

 

98,999

Total deposits

 

 

248,498

Securities sold under repurchase agreements

 

 

5,624

Other short-term borrowings

 

 

10,875

Notes payable and other borrowings

 

 

23,544

Other liabilities

 

 

1,249

Total liabilities

 

 

289,790

 

 

 

 

Cash consideration paid

 

 

47,180

Total Liabilities Assumed and Cash Consideration Paid for Acquisition

 

$

336,970

 

Loans acquired in the GCFC acquisition were initially recorded at fair value with no separate allowance for loan losses.  The Company reviewed the loans at acquisition to determine which should be considered PCI loans, defining impaired loans as those that were either not accruing interest or exhibited credit risk factors consistent with nonperforming loans at the acquisition date, or non-PCI loans, as addressed in the Company’s significant accounting policies.

13

 


 

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

The following table represents the acquired loans as of date of acquisition and as of June 30, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

April 20, 2018

 

June 30, 2018

ABC Bank Acquired Loans

    

PCI

    

Non-PCI

    

PCI

    

Non-PCI

Fair Value

 

$

11,360

 

$

216,306

 

$

11,214

 

$

208,929

Contractually required principal and interest payment

 

 

19,447

 

 

219,488

 

 

18,989

 

 

211,341

Best estimate of contractual cash flows not expected to be collected

 

 

6,537

 

 

2,511

 

 

6,402

 

 

2,119

Best estimate of contractual cash flows expected to be collected

 

 

12,910

 

 

216,977

 

 

12,587

 

 

209,222

 

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.

 

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 $4.3 million at June 30, 2018, and $5.4 million at December 31, 2017. FRBC stock was recorded at $4.8 million at both June 30, 2018, and December 31, 2017. 

 

14

 


 

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

The following table summarizes the amortized cost and fair value of the securities portfolio at June 30, 2018, and December 31, 2017, and the corresponding amounts of gross unrealized gains and losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

June 30, 2018

    

Cost

    

Gains

    

Losses

    

Value

Securities available-for-sale

 

 

 

 

 

 

 

 

U.S. Treasuries

 

$

4,004

 

$

 -

 

$

(128)

 

$

3,876

U.S. government agencies

 

 

12,369

 

 

 -

 

 

(153)

 

 

12,216

U.S. government agencies mortgage-backed

 

 

14,011

 

 

 -

 

 

(604)

 

 

13,407

States and political subdivisions

 

 

279,007

 

 

1,640

 

 

(4,535)

 

 

276,112

Corporate bonds

 

 

685

 

 

21

 

 

(6)

 

 

700

Collateralized mortgage obligations

 

 

63,778

 

 

60

 

 

(2,406)

 

 

61,432

Asset-backed securities

 

 

110,053

 

 

1,011

 

 

(1,801)

 

 

109,263

Collateralized loan obligations

 

 

66,489

 

 

223

 

 

(74)

 

 

66,638

Total securities available-for-sale

 

$

550,396

 

$

2,955

 

$

(9,707)

 

$

543,644

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

December 31, 2017

    

Cost

    

Gains

    

Losses

    

Value

Securities available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury

 

$

4,002

 

$

 -

 

$

(55)

 

$

3,947

U.S. government agencies

 

 

13,062

 

 

 8

 

 

(9)

 

 

13,061

U.S. government agencies mortgage-backed

 

 

12,372

 

 

 7

 

 

(165)

 

 

12,214

States and political subdivisions

 

 

272,240

 

 

7,116

 

 

(1,264)

 

 

278,092

Corporate bonds

 

 

823

 

 

21

 

 

(11)

 

 

833

Collateralized mortgage obligations

 

 

66,892

 

 

202

 

 

(1,155)

 

 

65,939

Asset-backed securities

 

 

113,983

 

 

862

 

 

(1,913)

 

 

112,932

Collateralized loan obligations

 

 

54,271

 

 

251

 

 

(101)

 

 

54,421

Total securities available-for-sale

 

$

537,645

 

$

8,467

 

$

(4,673)

 

$

541,439

 

The fair value, amortized cost and weighted average yield of debt securities at June 30, 2018, 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

 

$

10,550

 

2.10

%

 

$

10,540

 

Due after one year through five years

 

 

4,689

 

2.20

 

 

 

4,576

 

Due after five years through ten years

 

 

5,343

 

3.27

 

 

 

5,413

 

Due after ten years

 

 

275,483

 

2.98

 

 

 

272,375

 

 

 

 

296,065

 

2.94

 

 

 

292,904

 

Mortgage-backed and collateralized mortgage obligations

 

 

77,789

 

3.11

 

 

 

74,839

 

Asset-backed securities

 

 

110,053

 

3.23

 

 

 

109,263

 

Collateralized loan obligations

 

 

66,489

 

4.34

 

 

 

66,638

 

Total securities available-for-sale

 

$

550,396

 

3.19

%

 

$

543,644

 

 

At June 30, 2018, the Company’s investments included $92.5 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 will drop to 75% if reimbursement requests exceed 9% of insured loans.  In addition to the DOE guarantee, total added credit enhancement in the form of overcollateralization and/or subordination amounted to $10.9 million, or 11.44%, of outstanding principal.

 

15

 


 

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

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:

 

 

 

 

 

 

 

 

 

 

June 30, 2018

 

    

Amortized

    

Fair

Issuer

 

Cost

 

Value

GCO Education Loan Funding Corp

 

$

27,685

 

$

26,754

Towd  Point Mortgage Trust

 

 

28,966

 

 

28,080

Student Loan Marketing Association

 

 

25,780

 

 

26,176

 

Securities with unrealized losses at June 30, 2018, and December 31, 2017, 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

 

 

 

 

 

 

 

 

June 30, 2018

 

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

 

$

128

 

$

3,876

 

 -

 

$

 -

 

$

 -

 

 1

 

$

128

 

$

3,876

U.S. government agencies

 

 4

 

 

153

 

 

12,216

 

 -

 

 

 -

 

 

 -

 

 4

 

 

153

 

 

12,216

U.S. government agencies mortgage-backed

 

 7

 

 

356

 

 

8,968

 

 5

 

 

248

 

 

4,439

 

12

 

 

604

 

 

13,407

States and political subdivisions

 

43

 

 

3,264

 

 

141,455

 

 2

 

 

1,271

 

 

3,849

 

45

 

 

4,535

 

 

145,304

Corporate bonds

 

 -

 

 

 -

 

 

 -

 

 1

 

 

 6

 

 

198

 

 1

 

 

 6

 

 

198

Collateralized mortgage obligations

 

 3

 

 

399

 

 

20,353

 

 9

 

 

2,007

 

 

37,782

 

12

 

 

2,406

 

 

58,135

Asset-backed securities

 

 3

 

 

65

 

 

8,451

 

 6

 

 

1,736

 

 

56,539

 

 9

 

 

1,801

 

 

64,990

Collateralized loan obligations

 

 3

 

 

60

 

 

17,364

 

 1

 

 

14

 

 

7,986

 

 4

 

 

74

 

 

25,350

Total securities available-for-sale

 

64

 

$

4,425

 

$

212,683

 

24

 

$

5,282

 

$

110,793

 

88

 

$

9,707

 

$

323,476

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less than 12 months

 

12 months or more

 

 

 

 

 

 

 

 

December 31, 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

 

$

55

 

$

3,947

 

 -

 

$

 -

 

$

 -

 

 1

 

$

55

 

$

3,947

U.S. government agencies

 

 2

 

 

 9

 

 

6,550

 

 -

 

 

 -

 

 

 -

 

 2

 

 

 9

 

 

6,550

U.S. government agencies mortgage-backed

 

 4

 

 

24

 

 

5,501

 

 5

 

 

141

 

 

4,843

 

 9

 

 

165

 

 

10,344

States and political subdivisions

 

13

 

 

1,237

 

 

45,985

 

 1

 

 

27

 

 

1,512

 

14

 

 

1,264

 

 

47,497

Corporate bonds

 

 -

 

 

 -

 

 

 -

 

 1

 

 

11

 

 

332

 

 1

 

 

11

 

 

332

Collateralized mortgage obligations

 

 3

 

 

31

 

 

11,534

 

 8

 

 

1,124

 

 

40,219

 

11

 

 

1,155

 

 

51,753

Asset-backed securities

 

 -

 

 

 -

 

 

 -

 

 7

 

 

1,913

 

 

61,745

 

 7

 

 

1,913

 

 

61,745

Collateralized loan obligations

 

 3

 

 

101

 

 

29,313

 

 -

 

 

 -

 

 

 -

 

 3

 

 

101

 

 

29,313

Total securities available-for-sale

 

26

 

$

1,457

 

$

102,830

 

22

 

$

3,216

 

$

108,651

 

48

 

$

4,673

 

$

211,481

 

Recognition of other-than-temporary impairment was not necessary as of the three and six months ended June 30, 2018.  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 three and six months ended June 30, 2018 and 2017. 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

 

June 30, 

 

 

June 30, 

 

Securities available-for-sale

    

2018

    

2017

    

2018

    

2017

    

Proceeds from sales of securities

 

$

90,224

 

$

36,468

 

$

92,746

 

$

100,856

 

Gross realized gains on securities

 

 

312

 

 

71

 

 

347

 

 

437

 

Gross realized losses on securities

 

 

 -

 

 

(202)

 

 

 -

 

 

(704)

 

Securities realized gains (losses), net

 

$

312

 

$

(131)

 

$

347

 

$

(267)

 

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

 

 

(88)

 

 

52

 

 

(98)

 

 

106

 

 

The majority of the net realized losses in the prior year were incurred as the portfolio was repositioned during 2017 to invest in higher yielding tax exempt municipal securities.

 

Securities valued at $311.4 million as of June 30, 2018, an increase from $301.0 million at year-end 2017, were pledged to secure deposits and borrowings, and for other purposes.

16

 


 

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

Note 4 – Loans

 

Major classifications of loans were as follows:

 

 

 

 

 

 

 

 

 

 

    

June 30, 2018

    

December 31, 2017

 

Commercial

 

$

299,536

 

$

272,851

 

Leases

 

 

66,687

 

 

68,325

 

Real estate - commercial

 

 

808,264

 

 

750,991

 

Real estate - construction

 

 

115,486

 

 

85,162

 

Real estate - residential

 

 

404,908

 

 

313,397

 

Home equity lines of credit "HELOC"

 

 

127,986

 

 

112,833

 

Other 1

 

 

13,969

 

 

13,384

 

Total loans, excluding deferred loan costs and PCI loans

 

 

1,836,836

 

 

1,616,942

 

Net deferred loan costs

 

 

1,112

 

 

680

 

Total loans, excluding PCI loans

 

 

1,837,948

 

 

1,617,622

 

PCI loans, net of purchase accounting adjustments

 

 

11,214

 

 

 -

 

Total loans

 

$

1,849,162

 

$

1,617,622

 

 

1 The “Other” class includes consumer and 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 78.8% and 78.0% of the portfolio at June 30, 2018, and December 31, 2017, respectively.  The PCI loans, net of purchase accounting adjustments, reflect purchase credit impaired loans as of June 30, 2018, related to the Company’s second quarter acquisition of ABC Bank.

 

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

June 30, 2018

    

Past Due

    

Past Due

    

Due

    

Due

    

Current

    

Nonaccrual

    

Total Loans

    

Accruing

Commercial

 

$

210

 

$

 -

 

$

 -

 

$

210

 

$

299,326

 

$

 -

 

$

299,536

 

$

 -

Leases

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

66,687

 

 

 -

 

 

66,687

 

 

 -

Real estate - commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied general purpose

 

 

903

 

 

 -

 

 

450

 

 

1,353

 

 

172,922

 

 

823

 

 

175,098

 

 

477

Owner occupied special purpose

 

 

1,981

 

 

 -

 

 

 -

 

 

1,981

 

 

194,604

 

 

426

 

 

197,011

 

 

 -

Non-owner occupied general purpose

 

 

3,282

 

 

 -

 

 

174

 

 

3,456

 

 

279,599

 

 

39

 

 

283,094

 

 

178

Non-owner occupied special purpose

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

87,704

 

 

3,099

 

 

90,803

 

 

 -

Retail properties

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

47,582

 

 

 -

 

 

47,582

 

 

 -

Farm

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

14,676

 

 

 -

 

 

14,676

 

 

 -

Real estate - construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Homebuilder

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

7,649

 

 

 -

 

 

7,649

 

 

 -

Land

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

9,168

 

 

 -

 

 

9,168

 

 

 -

Commercial speculative

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

39,730

 

 

 -

 

 

39,730

 

 

 -

All other

 

 

59

 

 

 -

 

 

442

 

 

501

 

 

58,245

 

 

193

 

 

58,939

 

 

475

Real estate - residential

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investor

 

 

466

 

 

108

 

 

38

 

 

612

 

 

72,896

 

 

371

 

 

73,879

 

 

40

Multifamily

 

 

232

 

 

 -

 

 

 -

 

 

232

 

 

191,883

 

 

 -

 

 

192,115

 

 

 -

Owner occupied

 

 

710

 

 

208

 

 

 -

 

 

918

 

 

134,265

 

 

3,731

 

 

138,914

 

 

 -

HELOC

 

 

599

 

 

172

 

 

49

 

 

820

 

 

126,443

 

 

723

 

 

127,986

 

 

50

Other 1

 

 

39

 

 

 -

 

 

 -

 

 

39

 

 

15,026

 

 

16

 

 

15,081

 

 

 -

Total, excluding PCI loans

 

$

8,481

 

$

488

 

$

1,153

 

$

10,122

 

$

1,818,405

 

$

9,421

 

$

1,837,948

 

$

1,220

PCI loans, net of purchase accounting adjustments

 

 

387

 

 

 -

 

 

 -

 

 

387

 

 

7,850

 

 

2,977

 

 

11,214

 

 

 

Total

 

$

8,868

 

$

488

 

$

1,153

 

$

10,509

 

$

1,826,255

 

$

12,398

 

$

1,849,162

 

$

1,220

 

 

17

 


 

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recorded

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

90 days or

 

 

 

 

 

 

 

 

90 Days or

 

 

 

 

 

 

 

 

 

 

 

 

 

Greater Past

 

 

30-59 Days

 

60-89 Days

 

Greater Past

 

Total Past

 

 

 

 

 

 

 

 

 

 

Due and

December 31, 2017

    

Past Due

    

Past Due

    

Due

    

Due

    

Current

    

Nonaccrual

    

Total Loans

    

Accruing

Commercial

 

$

995

 

$

275

 

$

 -

 

$

1,270

 

$

271,581

 

$

 -

 

$

272,851

 

$

 -

Leases

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

68,147

 

 

178

 

 

68,325

 

 

 -

Real estate - commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied general purpose

 

 

1,136

 

 

 -

 

 

 -

 

 

1,136

 

 

144,267

 

 

455

 

 

145,858

 

 

 -

Owner occupied special purpose

 

 

226

 

 

 -

 

 

 -

 

 

226

 

 

170,546

 

 

342

 

 

171,114

 

 

 -

Non-owner occupied general purpose

 

 

 -

 

 

593

 

 

 -

 

 

593

 

 

273,203

 

 

1,163

 

 

274,959

 

 

 -

Non-owner occupied special purpose

 

 

 -

 

 

 -

 

 

248

 

 

248

 

 

92,923

 

 

 -

 

 

93,171

 

 

254

Retail properties

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

49,538

 

 

1,081

 

 

50,619

 

 

 -

Farm

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

15,270

 

 

 -

 

 

15,270

 

 

 -

Real estate - construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Homebuilder

 

 

129

 

 

 -

 

 

 -

 

 

129

 

 

2,221

 

 

 -

 

 

2,350

 

 

 -

Land

 

 

1,124

 

 

 -

 

 

 -

 

 

1,124

 

 

1,319

 

 

 -

 

 

2,443

 

 

 -

Commercial speculative

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

32,028

 

 

 -

 

 

32,028

 

 

 -

All other

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

48,140

 

 

201

 

 

48,341

 

 

 -

Real estate - residential

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investor

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

55,248

 

 

372

 

 

55,620

 

 

 -

Multifamily

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

125,049

 

 

4,723

 

 

129,772

 

 

 -

Owner occupied

 

 

74

 

 

 -

 

 

 -

 

 

74

 

 

123,257

 

 

4,674

 

 

128,005

 

 

 -

HELOC

 

 

491

 

 

278

 

 

 -

 

 

769

 

 

110,872

 

 

1,192

 

 

112,833

 

 

 -

Other 1

 

 

37

 

 

 -

 

 

 -

 

 

37

 

 

14,019

 

 

 7

 

 

14,063

 

 

 -

Total

 

$

4,212

 

$

1,146

 

$

248

 

$

5,606

 

$

1,597,628

 

$

14,388

 

$

1,617,622

 

$

254

 

1 The “Other” class includes consumer, 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 Bank 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.

 

18

 


 

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

Credit Quality Indicators by class of loans were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2018

 

 

 

 

Special

 

 

 

 

 

 

 

 

 

 

    

Pass

    

Mention

    

Substandard 2

    

Doubtful

    

Total

Commercial

 

$

298,512

 

$

631

 

$

393

 

$

-

 

$

299,536

Leases

 

 

66,148

 

 

 -

 

 

539

 

 

 -

 

 

66,687

Real estate - commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied general purpose

 

 

166,962

 

 

4,915

 

 

3,221

 

 

-

 

 

175,098

Owner occupied special purpose

 

 

195,009

 

 

254

 

 

1,748

 

 

-

 

 

197,011

Non-owner occupied general purpose

 

 

275,728

 

 

4,899

 

 

2,467

 

 

-

 

 

283,094

Non-owner occupied special purpose

 

 

87,704

 

 

 -

 

 

3,099

 

 

-

 

 

90,803

Retail Properties

 

 

45,755

 

 

 -

 

 

1,827

 

 

-

 

 

47,582

Farm

 

 

13,428

 

 

 -

 

 

1,248

 

 

-

 

 

14,676

Real estate - construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Homebuilder

 

 

7,649

 

 

 -

 

 

 -

 

 

-

 

 

7,649

Land

 

 

9,168

 

 

 -

 

 

 -

 

 

-

 

 

9,168

Commercial speculative

 

 

39,730

 

 

 -

 

 

 -

 

 

-

 

 

39,730

All other

 

 

56,443

 

 

2,130

 

 

366

 

 

-

 

 

58,939

Real estate - residential

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investor

 

 

72,759

 

 

91

 

 

1,029

 

 

-

 

 

73,879

Multifamily

 

 

188,813

 

 

 -

 

 

3,302

 

 

 -

 

 

192,115

Owner occupied

 

 

133,485

 

 

 1

 

 

5,428

 

 

-

 

 

138,914

HELOC

 

 

126,353

 

 

 -

 

 

1,633

 

 

-

 

 

127,986

Other 1

 

 

15,063

 

 

 -

 

 

18

 

 

-

 

 

15,081

Total, excluding PCI loans

 

$

1,798,709

 

$

12,921

 

$

26,318

 

$

 -

 

$

1,837,948

PCI loans, net of purchase accounting adjustments

 

 

 -

 

 

 -

 

 

11,214

 

 

 -

 

 

11,214

Total

 

$

1,798,709

 

$

12,921

 

$

37,532

 

$

 -

 

$

1,849,162

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

 

 

 

Special

 

 

 

 

 

 

 

 

 

 

    

Pass

    

Mention

    

Substandard 2

    

Doubtful

    

Total

Commercial

 

$

270,889

 

$

1,962

 

$

 -

 

$

-

 

$

272,851

Leases

 

 

67,500

 

 

 -

 

 

825

 

 

 -

 

 

68,325

Real estate - commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied general purpose

 

 

142,843

 

 

1,927

 

 

1,088

 

 

-

 

 

145,858

Owner occupied special purpose

 

 

169,621

 

 

1,152

 

 

341

 

 

-

 

 

171,114

Non-owner occupied general purpose

 

 

271,731

 

 

2,065

 

 

1,163

 

 

-

 

 

274,959

Non-owner occupied special purpose

 

 

89,582

 

 

 -

 

 

3,589

 

 

-

 

 

93,171

Retail Properties

 

 

48,321

 

 

1,217

 

 

1,081

 

 

-

 

 

50,619

Farm

 

 

11,755

 

 

1,029

 

 

2,486

 

 

-

 

 

15,270

Real estate - construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Homebuilder

 

 

2,350

 

 

 -

 

 

 -

 

 

-

 

 

2,350

Land

 

 

2,443

 

 

 -

 

 

 -

 

 

-

 

 

2,443

Commercial speculative

 

 

32,028

 

 

 -

 

 

 -

 

 

-

 

 

32,028

All other

 

 

46,913

 

 

1,052

 

 

376

 

 

-

 

 

48,341

Real estate - residential

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investor

 

 

55,172

 

 

 -

 

 

448

 

 

-

 

 

55,620

Multifamily

 

 

125,049

 

 

 -

 

 

4,723

 

 

 -

 

 

129,772

Owner occupied

 

 

122,178

 

 

561

 

 

5,266

 

 

-

 

 

128,005

HELOC

 

 

110,934

 

 

 -

 

 

1,899

 

 

-

 

 

112,833

Other 1

 

 

14,043

 

 

 -

 

 

20

 

 

-

 

 

14,063

Total

 

$

1,583,352

 

$

10,965

 

$

23,305

 

$

 -

 

$

1,617,622

 

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

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

 

The Company had $942,000 and $1.3 million in residential real estate loans in the process of foreclosure as of June 30, 2018, and December 31, 2017, respectively. 

19

 


 

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

The following tables set forth the recorded investments, unpaid principal balance and related allowance, excluding purchased credit-impaired loans, by class of loans for the June 30, 2018, periods:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

As of June 30, 2018

 

June 30, 2018

 

 

 

 

 

Unpaid

 

 

 

 

Average

 

Interest

 

 

Recorded

 

Principal

 

Related

 

Recorded

 

Income

 

    

Investment

    

Balance

    

Allowance

    

Investment

    

Recognized

With no related allowance recorded

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

 -

 

$

 -

 

$

 -

 

$

 -

 

$

 -

Leases

 

 

 -

 

 

 -

 

 

 -

 

 

89

 

 

 -

Commercial real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied general purpose

 

 

911

 

 

985

 

 

 -

 

 

683

 

 

 3

Owner occupied special purpose

 

 

426

 

 

546

 

 

 -

 

 

384

 

 

 -

Non-owner occupied general purpose

 

 

39

 

 

81

 

 

 -

 

 

601

 

 

 -

Non-owner occupied special purpose

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Retail properties

 

 

 -

 

 

 -

 

 

 -

 

 

541

 

 

 -

Farm

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Homebuilder

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Land

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Commercial speculative

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

All other

 

 

193

 

 

226

 

 

 -

 

 

197

 

 

 -

Residential

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investor

 

 

371

 

 

468

 

 

 -

 

 

371

 

 

 -

Multifamily

 

 

 -

 

 

 -

 

 

 -

 

 

2,362

 

 

 -

Owner occupied

 

 

4,244

 

 

5,769

 

 

 -

 

 

4,726

 

 

18

HELOC

 

 

741

 

 

860

 

 

 -

 

 

933

 

 

 1

Other 1

 

 

16

 

 

16

 

 

 -

 

 

11

 

 

 -

Total impaired loans with no recorded allowance

 

 

6,941

 

 

8,951

 

 

 -

 

 

10,898

 

 

22

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

With an allowance recorded

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Leases

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Commercial real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied general purpose

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Owner occupied special purpose

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Non-owner occupied general purpose

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Non-owner occupied special purpose

 

 

3,099

 

 

3,575

 

 

419

 

 

1,550

 

 

 -

Retail properties

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Farm

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Homebuilder

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Land

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Commercial speculative

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

All other

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Residential

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investor

 

 

815

 

 

815

 

 

10

 

 

822

 

 

22

Multifamily

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Owner occupied

 

 

3,646

 

 

3,646

 

 

45

 

 

3,544

 

 

73

HELOC

 

 

1,321

 

 

1,321

 

 

24

 

 

1,153

 

 

24

Other 1

 

 

 3

 

 

 3

 

 

 -

 

 

 2

 

 

 -

Total impaired loans with a recorded allowance

 

 

8,884

 

 

9,360

 

 

498

 

 

7,071

 

 

119

Total impaired loans

 

$

15,825

 

$

18,311

 

$

498

 

$

17,969

 

$

141

 

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

20

 


 

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

Impaired loans by class of loans as of December 31, 2017, and for the six months ended June 30, 2017, were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

As of December 31, 2017

 

June 30, 2017

 

 

 

 

Unpaid 

 

 

 

Average 

 

Interest 

 

 

Recorded

 

Principal 

 

Related 

 

Recorded 

 

Income 

 

    

 Investment

    

Balance

    

Allowance

    

Investment

    

Recognized

With no related allowance recorded

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

 -

 

$

 -

 

$

 -

 

$

128

 

$

 -

Leases

 

 

178

 

 

213

 

 

 -

 

 

293

 

 

 -

Commercial real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied general purpose

 

 

455

 

 

495

 

 

 -

 

 

1,170

 

 

 -

Owner occupied special purpose

 

 

342

 

 

498

 

 

 -

 

 

376

 

 

 -

Non-owner occupied general purpose

 

 

1,163

 

 

1,538

 

 

 -

 

 

1,443

 

 

 1

Non-owner occupied special purpose

 

 

 -

 

 

 -

 

 

 -

 

 

507

 

 

 -

Retail properties

 

 

1,081

 

 

1,177

 

 

 -

 

 

1,161

 

 

 -

Farm

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Homebuilder

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Land

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Commercial speculative

 

 

 -

 

 

 -

 

 

 -

 

 

72

 

 

 -

All other

 

 

201

 

 

229

 

 

 -

 

 

180

 

 

 -

Residential

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investor

 

 

372

 

 

676

 

 

 -

 

 

1,708

 

 

20

Multifamily

 

 

4,723

 

 

4,965

 

 

 -

 

 

2,412

 

 

 -

Owner occupied

 

 

5,208

 

 

6,680

 

 

 -

 

 

9,016

 

 

65

HELOC

 

 

1,125

 

 

1,313

 

 

 -

 

 

2,227

 

 

15

Other 1

 

 

 7

 

 

 8

 

 

 -

 

 

105

 

 

 -

Total impaired loans with no recorded allowance

 

 

14,855

 

 

17,792

 

 

 -

 

 

20,798

 

 

101

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

With an allowance recorded

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Leases

 

 

 -

 

 

 -

 

 

 -

 

 

120

 

 

 -

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

 

 

829

 

 

829

 

 

10

 

 

 -

 

 

 -

Multifamily

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Owner occupied

 

 

3,443

 

 

3,443

 

 

43

 

 

402

 

 

 -

HELOC

 

 

985

 

 

985

 

 

91

 

 

 -

 

 

 -

Other 1

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Total impaired loans with a recorded allowance

 

 

5,257

 

 

5,257

 

 

144

 

 

645

 

 

 -

Total impaired loans

 

$

20,112

 

$

23,049

 

$

144

 

$

21,443

 

$

101

 

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

 

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-

21

 


 

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

by-case basis during the loan collection process with modifications generally initiated at the request of the borrower.  These modifications may include reduction in interest rates, extension of term, deferrals of principal, and other modifications.  The Bank participates in the U.S. Department of the Treasury’s (the “Treasury”) Home Affordable Modification Program (“HAMP”) which gives qualifying homeowners an opportunity to refinance into more affordable monthly payments.

 

The specific allocation of the allowance for loan and lease 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 and lease 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 and lease losses also includes an allowance based on a loss migration analysis for each loan category on loans and leases that are not individually evaluated for specific impairment.  All loans charged-off, including TDRs charged-off, are factored into this calculation by portfolio segment.

 

TDRs that were modified during the period are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

TDR Modifications

 

TDR Modifications

 

 

 

Three Months Ended  June 30, 2018

 

Six Months Ended  June 30, 2018

 

 

 

# 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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied special purpose

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other1

 

 1

 

$

110

 

$

56

 

 1

 

$

110

 

$

56

 

Real estate - residential

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

HAMP2

 

 1

 

 

49

 

 

39

 

 1

 

 

49

 

 

39

 

Other1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

HELOC

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rate3

 

 

 

 

 

 

 

 

 

 1

 

 

24

 

 

24

 

Other1

 

 3

 

 

305

 

 

287

 

 7

 

 

523

 

 

503

 

Total

 

 5

 

$

464

 

$

382

 

10

 

$

706

 

$

622

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

TDR Modifications

 

TDR Modifications

 

 

 

Three Months Ended  June 30, 2017

 

Six Months Ended June 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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

HELOC

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other1

 

 2

 

$

155

 

$

147

 

 6

 

$

399

 

$

388

 

Total

 

 2

 

$

155

 

$

147

 

 6

 

$

399

 

$

388

 

 

1 Other:  Change of terms from bankruptcy court.

2 HAMP:  Home Affordable Modification Program. 

Rate:  Refers to interest rate reduction.

 

22

 


 

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

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 June 30, 2018, and June 30, 2017, for loans that were restructured within the 12 month period prior to default.

 

The following table details the accretable discount on all of the Company’s purchased loans, both non-PCI loans and PCI loans as of June 30, 2018.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accretable Discount - Non-PCI Loans

 

Accretable Discount - PCI Loans

 

Non-Accretable Discount - PCI Loans

 

Total

Beginning balance, April 1, 2018

 

$

694

 

$

 -

 

$

 -

 

$

694

Purchases

 

 

3,182

 

 

1,551

 

 

6,536

 

 

11,269

Accretion

 

 

(881)

 

 

(176)

 

 

 -

 

 

(1,057)

Transfer1

 

 

 -

 

 

(2)

 

 

(133)

 

 

(135)

Ending balance, June 30, 2018

 

$

2,995

 

$

1,373

 

$

6,403

 

$

10,771

 

 

 

 

 

 

 

 

 

 

 

 

 

1 Transfer was due to loans moved to OREO.

 

Note 5 – Allowance for Loan and Lease Losses

 

Changes in the allowance for loan and lease losses by segment of loans based on method of impairment for the three and six months ended June 30, 2018, were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real Estate

 

Real Estate

 

Real Estate

 

 

 

 

 

 

Allowance for loan and lease losses:

   

Commercial

   

Leases

   

Commercial

   

Construction

   

Residential

   

HELOC

   

Other1

   

Total

Three months ended June 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

2,604

 

$

617

 

$

9,565

 

$

1,143

 

$

1,854

 

$

1,535

 

$

870

 

$

18,188

Charge-offs

 

 

15

 

 

 8

 

 

504

 

 

 -

 

 

 5

 

 

65

 

 

102

 

 

699

Recoveries

 

 

92

 

 

 -

 

 

21

 

 

 -

 

 

105

 

 

91

 

 

73

 

 

382

(Release) Provision

 

 

(5)

 

 

25

 

 

1,455

 

 

255

 

 

(136)

 

 

(171)

 

 

27

 

 

1,450

Ending balance

 

$

2,676

 

$

634

 

$

10,537

 

$

1,398

 

$

1,818

 

$

1,390

 

$

868

 

$

19,321

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six months ended June 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

2,453

 

$

692

 

$

9,522

 

$

923

 

$

1,846

 

$

1,446

 

$

579

 

$

17,461

Charge-offs

 

 

31

 

 

13

 

 

408

 

 

(16)

 

 

(55)

 

 

92

 

 

201

 

 

674

Recoveries

 

 

109

 

 

 -

 

 

388

 

 

 3

 

 

1,016

 

 

138

 

 

152

 

 

1,806

Provision (Release)

 

 

145

 

 

(45)

 

 

1,035

 

 

456

 

 

(1,099)

 

 

(102)

 

 

338

 

 

728

Ending balance

 

$

2,676

 

$

634

 

$

10,537

 

$

1,398

 

$

1,818

 

$

1,390

 

$

868

 

$

19,321

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance: Individually evaluated for impairment

 

$

 -

 

$

 -

 

$

419

 

$

 -

 

$

55

 

$

24

 

$

 -

 

$

498

Ending balance: Collectively evaluated for impairment

 

 

2,676

 

 

634

 

 

10,118

 

 

1,398

 

 

1,763

 

 

1,366

 

 

868

 

 

18,823

Ending balance: Acquired and accounted for ASC 310-30

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Total ending allowance balance

 

$

2,676

 

$

634

 

$

10,537

 

$

1,398

 

$

1,818

 

$

1,390

 

$

868

 

$

19,321

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance: Individually evaluated for Impairment

 

$

 -

 

$

 -

 

$

4,475

 

$

193

 

$

11,138

 

$

 -

 

$

19

 

$

15,825

Ending balance: Collectively evaluated for impairment

 

 

299,536

 

 

66,687

 

 

803,789

 

 

115,293

 

 

393,770

 

 

127,986

 

 

15,062

 

 

1,822,123

Ending balance: Acquired and accounted for ASC 310-30

 

 

 2

 

 

 -

 

 

4,146

 

 

1,556

 

 

5,509

 

 

 -

 

 

 1

 

 

11,214

Total ending loans balance

 

$

299,538

 

$

66,687

 

$

812,410

 

$

117,042

 

$

410,417

 

$

127,986

 

$

15,082

 

$

1,849,162

 

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

 

23

 


 

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan and lease losses:

   

Commercial

   

Leases

   

Commercial

   

Construction

   

Residential

   

HELOC

   

Other1

   

Total

Three months ended June 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

1,672

 

$

603

 

$

7,831

 

$

978

 

$

2,438

 

$

1,340

 

$

879

 

$

15,741

Charge-offs

 

 

 6

 

 

 -

 

 

 4

 

 

 -

 

 

946

 

 

30

 

 

80

 

 

1,066

Recoveries

 

 

 5

 

 

 -

 

 

46

 

 

60

 

 

110

 

 

139

 

 

51

 

 

411

Provision (Release)

 

 

479

 

 

188

 

 

234

 

 

(181)

 

 

270

 

 

64

 

 

(304)

 

 

750

Ending balance

 

$

2,150

 

$

791

 

$

8,107

 

$

857

 

$

1,872

 

$

1,513

 

$

546

 

$

15,836

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six months ended June 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

1,629

 

$

633

 

$

9,547

 

$

389

 

$

2,178

 

$

1,331

 

$

451

 

$

16,158

Charge-offs

 

 

 7

 

 

117

 

 

278

 

 

 4

 

 

977

 

 

194

 

 

180

 

 

1,757

Recoveries

 

 

 7

 

 

 -

 

 

81

 

 

78

 

 

153

 

 

238

 

 

128

 

 

685

Provision (Release)

 

 

521

 

 

275

 

 

(1,243)

 

 

394

 

 

518

 

 

138

 

 

147

 

 

750

Ending balance

 

$

2,150

 

$

791

 

$

8,107

 

$

857

 

$

1,872

 

$

1,513

 

$

546

 

$

15,836

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance: Individually evaluated for impairment

 

$

 -

 

$

98

 

$

 -

 

$

 -

 

$

 -

 

$

 -

 

$

 -

 

$

98

Ending balance: Collectively evaluated for impairment

 

 

2,150

 

 

693

 

 

8,107

 

 

857

 

 

1,872

 

 

1,513

 

 

546

 

 

15,738

Total ending allowance balance

 

$

2,150

 

$

791

 

$

8,107

 

$

857

 

$

1,872

 

$

1,513

 

$

546

 

$

15,836

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance: Individually evaluated for impairment

 

$

216

 

$

460

 

$

3,113

 

$

220

 

$

14,609

 

$

1,971

 

$

 9

 

$

20,598

Ending balance: Collectively evaluated for impairment

 

 

256,544

 

 

69,678

 

 

702,990

 

 

93,441

 

 

267,509

 

 

114,081

 

 

14,806

 

 

1,519,049

Total ending loan balance

 

$

256,760

 

$

70,138

 

$

706,103

 

$

93,661

 

$

282,118

 

$

116,052

 

$

14,815

 

$

1,539,647

 

 

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

 

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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended 

 

Six Months Ended

 

 

    

June 30, 

    

June 30, 

  

Other real estate owned

    

2018

    

2017

    

2018

    

2017

 

Balance at beginning of period

 

$

7,063

 

$

13,481

 

$

8,371

 

$

11,916

 

Property additions

 

 

2,812

 

 

204

 

 

2,812

 

 

3,620

 

Property improvements

 

 

 -

 

 

 -

 

 

59

 

 

 -

 

Less:

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

709

 

 

1,569

 

 

1,964

 

 

3,102

 

Period valuation adjustments

 

 

254

 

 

392

 

 

366

 

 

710

 

Balance at end of period

 

$

8,912

 

$

11,724

 

$

8,912

 

$

11,724

 

 

Activity in the valuation allowance was as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Three Months Ended 

 

Six Months Ended

  

 

    

June 30, 

    

June 30, 

  

 

    

2018

    

2017

    

2018

    

2017

  

Balance at beginning of period

 

$

8,099

 

$

9,659

 

$

8,208

 

$

9,982

 

Provision for unrealized losses

 

 

254

 

 

392

 

 

366

 

 

710

 

Reductions taken on sales

 

 

(5)

 

 

(1,747)

 

 

(226)

 

 

(2,388)

 

Other adjustments

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

Balance at end of period

 

$

8,348

 

$

8,304

 

$

8,348

 

$

8,304

 

 

24

 


 

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

Expenses related to OREO, net of lease revenue includes:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended 

 

Six Months Ended

 

 

 

June 30, 

    

June 30, 

 

 

    

2018

    

2017

    

2018

    

2017

 

Gain on sales, net

 

$

(24)

 

$

(104)

 

$

(104)

 

$

(178)

 

Provision for unrealized losses

 

 

254

 

 

392

 

 

366

 

 

710

 

Operating expenses

 

 

213

 

 

293

 

 

369

 

 

816

 

Less:

 

 

 

 

 

 

 

 

 

 

 

 

 

Lease revenue

 

 

14

 

 

42

 

 

29

 

 

100

 

Net OREO expense

 

$

429

 

$

539

 

$

602

 

$

1,248

 

 

 

 

 

Note 7 – Deposits

 

Major classifications of deposits were as follows:

 

 

 

 

 

 

 

 

 

 

    

June 30, 2018

    

December 31, 2017

  

Noninterest bearing demand

 

$

620,807

 

$

572,404

 

Savings

 

 

301,832

 

 

262,220

 

NOW accounts

 

 

435,514

 

 

429,448

 

Money market accounts

 

 

320,949

 

 

276,082

 

Certificates of deposit of less than $100,000

 

 

249,049

 

 

216,493

 

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

 

 

175,174

 

 

122,489

 

Certificates of deposit of more than $250,000

 

 

58,526

 

 

43,789

 

Total deposits

 

$

2,161,851

 

$

1,922,925

 

 

 

 

Note 8 – Borrowings

 

The following table is a summary of borrowings as of June 30, 2018, and December 31, 2017.  Junior subordinated debentures are discussed in detail in Note 9:

 

 

 

 

 

 

 

 

 

 

    

June 30, 2018

    

December 31, 2017

  

Securities sold under repurchase agreements

 

$

54,038

 

$

29,918

 

Other short-term borrowings 1

 

 

76,625

 

 

115,000

 

Junior subordinated debentures

 

 

57,662

 

 

57,639

 

Senior notes

 

 

44,108

 

 

44,058

 

Notes payable and other borrowings

 

 

23,496

 

 

 -

 

Total borrowings

 

$

255,929

 

$

246,615

 

 

1 Includes short-term FHLBC advances and the outstanding portion of an operating line of credit.

 

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 $54.0 million at June 30, 2018, and $29.9 million at December 31, 2017.  The fair value of the pledged collateral was $73.9 million at June 30, 2018, and $40.0 million at December 31, 2017.  At June 30, 2018, there was one customer with secured balances exceeding 10% of stockholders’ equity.

 

The Company’s borrowings at the FHLBC require the Bank to be a member and invest in the stock of the FHLBC.  Total borrowings are generally limited to the lower of 35% of total assets or 60% of the book value of certain mortgage loans.  As of June 30, 2018, the Bank had $72.6 million in short-term advances outstanding under the FHLBC compared to $115.0 million outstanding as of December 31, 2017; $70.0 million of the June 30, 2018, balance was issued at 2.01%, and $2.6 million was issued at 1.40%.  The additional $4.0 million in other short-term borrowings as of June 30, 2018, was the outstanding portion of a $20.0 million line of credit the Company has with a correspondent bank for short-term funding needs, paying 3.73% as of the current quarter end; advances under the line can be outstanding up to 360 days from date of issuance.  The Bank also assumed $23.5 million of long-term FHLBC advances

25

 


 

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

with the ABC Bank acquisition, with maturities scheduled over the next 7.75 years and paying interest at rates in the range of 1.40% to 2.83 % as of June 30, 2018. 

 

FHLBC stock held was valued at $4.3 million, and any potential FHLBC advances were collateralized by securities with a fair value of $76.7 million and loans with a principal balance of $296.3 million, which carried a FHLBC calculated combined collateral value of $295.5 million.  The Company had excess collateral of $150.1 million available to secure borrowings at June 30, 2018.

 

The Company also has $44.1 million of senior notes outstanding, net of deferred issuance costs, as of June 30, 2018 and December 31, 2017.  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.  As of June 30, 2018 and December 31, 2017, unamortized debt issuance costs related to the senior notes were $892,000 and $942,000, respectively, and are included as a reduction of the balance of the senior notes on the Consolidated Balance Sheet.  These deferred issuance costs will be amortized to interest expense over the ten year term of the notes and are included in the Consolidated Statements of Income.

 

 

 

 

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 4.34% as of June 30, 2018, 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 June 30, 2018, and December 31, 2017, unamortized debt issuance costs related to the junior subordinated debentures were $716,000 and $739,000 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, as amended (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 June 30, 2018, 169,791 shares remained available for issuance under the 2014 Plan.

 

26

 


 

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

There were no stock options granted or exercised in the six months ended June 30, 2018 and 2017.  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 six months ended June 30, 2018, is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-

 

 

 

 

 

 

 

Weighted

 

Average

 

 

 

 

 

 

 

Average

 

Remaining

 

 

 

 

 

 

 

Exercise

 

Contractual

 

Aggregate

 

    

Shares

    

Price

    

Term (years)

    

Intrinsic Value

Beginning outstanding

 

9,000

 

$

7.49

 

 -

 

 

 -

Canceled

 

 -

 

 

 -

 

 -

 

 

 -

Expired

 

 -

 

 

 -

 

 -

 

 

 -

Ending outstanding

 

9,000

 

$

7.49

 

0.6

 

$

64

 

 

 

 

 

 

 

 

 

 

 

Exercisable at end of period

 

9,000

 

$

7.49

 

0.6

 

$

64

 

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 254,281 restricted awards issued under the 2014 Plan during the six months ended June 30, 2018, which included 140,000 shares granted under a new performance restricted stock unit agreement for select officers and all directors.  The performance period covers January 1, 2018 through December 31, 2020, and vesting will be based upon the achievement of certain key Company performance metrics, such as total shareholder return, earnings, and corporate efficiencies.  There were 170,000 restricted awards issued during the six months ended June 30, 2017.  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 $1.1 million and $645,000 in the first six months of 2018 and 2017, respectively.

 

A summary of changes in the Company’s unvested restricted awards for the six months ended June 30, 2018, is as follows:

 

 

 

 

 

 

 

 

 

June 30, 2018

 

 

 

 

Weighted

 

 

Restricted

 

Average

 

 

Stock Shares

 

Grant Date

 

    

and Units

    

Fair Value

Unvested at January 1

 

465,000

 

$

7.79

Granted

 

254,281

 

 

13.98

Vested

 

(155,500)

 

 

5.14

Forfeited

 

 -

 

 

 -

Unvested at June 30

 

563,781

 

$

11.31

 

27

 


 

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

Total unrecognized compensation cost of restricted awards was $4.1 million as of June 30, 2018, which is expected to be recognized over a weighted-average period of 2.22 years. 

 

Note 11 – Earnings Per Share

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 

 

Six Months Ended June 30, 

 

 

    

2018

    

2017

    

2018

    

2017

    

Basic earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average common shares outstanding

 

 

29,747,078

 

 

29,587,095

 

 

29,703,508

 

 

29,573,881

 

Net income

 

$

6,261

 

$

5,146

 

$

15,750

 

$

9,573

 

Basic earnings per share

 

$

0.21

 

$

0.17

 

$

0.53

 

$

0.32

 

Diluted earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average common shares outstanding

 

 

29,747,078

 

 

29,587,095

 

 

29,703,508

 

 

29,573,881

 

Dilutive effect of unvested restricted awards1

 

 

539,166

 

 

426,264

 

 

506,234

 

 

400,232

 

Dilutive effect of stock options and warrants

 

 

51,038

 

 

2,546

 

 

43,698

 

 

2,431

 

Diluted average common shares outstanding

 

 

30,337,282

 

 

30,015,905

 

 

30,253,440

 

 

29,976,544

 

Net Income

 

$

6,261

 

$

5,146

 

$

15,750

 

$

9,573

 

Diluted earnings per share

 

$

0.21

 

$

0.17

 

$

0.52

 

$

0.32

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 -

 

 

900,839

 

 

 -

 

 

900,839

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

The above earnings per share calculation also includes a warrant for 815,339 shares of common stock, at an exercise price of $13.43 per share, that was outstanding as of June 30, 2018, as it is considered dilutive.  The same warrant was not included as of June 30, 2017, because the warrant was anti-dilutive.  The ten-year warrant was issued in 2009, and was sold at auction by the U.S. 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 June 30, 2018, the Bank exceeded those thresholds.

 

At June 30, 2018, the Bank’s Tier 1 capital leverage ratio was 10.75%, an increase of 4 basis points from December 31, 2017, and is well above the 8.00% objective.  The Bank’s total capital ratio was 13.51%, an increase of 27 basis points from December 31, 2017, and also well above the objective of 12.00%.

 

Bank holding companies are required to maintain minimum levels of capital in accordance with capital guidelines implemented by the Board of Governors of the Federal Reserve System.  The general bank and holding company capital adequacy guidelines are shown in the accompanying table, as are the capital ratios of the Company and the Bank, as of June 30, 2018, and December 31, 2017.

 

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, 2017, under the heading “Supervision and Regulation.”

 

At June 30, 2018, and December 31, 2017, the Company, on a consolidated basis, exceeded the minimum thresholds to be considered “well capitalized” under current regulatory defined capital ratios.

 

28

 


 

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

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

 

June 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common equity tier 1 capital to risk weighted assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

$

185,044

 

8.49

%

 

$

138,946

 

6.375

%

 

 

N/A

 

N/A

 

Old Second Bank

 

 

273,950

 

12.62

 

 

 

138,386

 

6.375

 

 

$

141,099

 

6.50

%

Total capital to risk weighted assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

 

258,854

 

11.87

 

 

 

215,348

 

9.875

 

 

 

N/A

 

N/A

 

Old Second Bank

 

 

293,266

 

13.51

 

 

 

214,360

 

9.875

 

 

 

217,073

 

10.00

 

Tier 1 capital to risk weighted assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

 

239,538

 

10.99

 

 

 

171,643

 

7.875

 

 

 

N/A

 

N/A

 

Old Second Bank

 

 

273,950

 

12.62

 

 

 

170,947

 

7.875

 

 

 

173,661

 

8.00

 

Tier 1 capital to average assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

 

239,538

 

9.37

 

 

 

102,257

 

4.00

 

 

 

N/A

 

N/A

 

Old Second Bank

 

 

273,950

 

10.75

 

 

 

101,935

 

4.00

 

 

 

127,419

 

5.00

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common equity tier 1 capital to risk weighted assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

$

179,853

 

9.25

%

 

$

111,801

 

5.750

%

 

 

N/A

 

N/A

 

Old Second Bank

 

 

249,417

 

12.88

 

 

 

111,347

 

5.750

 

 

$

125,870

 

6.50

%

Total capital to risk weighted assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

 

251,383

 

12.93

 

 

 

179,837

 

9.250

 

 

 

N/A

 

N/A

 

Old Second Bank

 

 

266,873

 

13.78

 

 

 

179,142

 

9.250

 

 

 

193,667

 

10.00

 

Tier 1 capital to risk weighted assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

 

233,927

 

12.03

 

 

 

140,978

 

7.250

 

 

 

N/A

 

N/A

 

Old Second Bank

 

 

249,417

 

12.88

 

 

 

140,394

 

7.250

 

 

 

154,917

 

8.00

 

Tier 1 capital to average assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

 

233,927

 

10.08

 

 

 

92,828

 

4.00

 

 

 

N/A

 

N/A

 

Old Second Bank

 

 

249,417

 

10.79

 

 

 

92,462

 

4.00

 

 

 

115,578

 

5.00

 

 

1  As of June 30, 2018, amounts are shown inclusive of a capital conservation buffer of 1.875%; as compared to December 31, 2017, of 1.25%.

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.

 

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:

 

29

 


 

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

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 and lease 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, 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.

 

30

 


 

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

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

 

The tables below present the balance of assets and liabilities at June 30, 2018, and December 31, 2017, respectively, measured by the Company at fair value on a recurring basis:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2018

 

    

Level 1

    

Level 2

    

Level 3

    

Total

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Securities available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury

 

$

3,876

 

$

 -

 

$

 -

 

$

3,876

U.S. government agencies

 

 

 -

 

 

12,216

 

 

 -

 

 

12,216

U.S. government agencies mortgage-backed

 

 

 -

 

 

13,407

 

 

 -

 

 

13,407

States and political subdivisions

 

 

 -

 

 

257,663

 

 

18,449

 

 

276,112

Corporate bonds

 

 

 -

 

 

700

 

 

 -

 

 

700

Collateralized mortgage obligations

 

 

 -

 

 

59,661

 

 

1,771

 

 

61,432

Asset-backed securities

 

 

 -

 

 

109,263

 

 

 -

 

 

109,263

Collateralized loan obligations

 

 

 -

 

 

66,638

 

 

 -

 

 

66,638

Loans held-for-sale

 

 

 -

 

 

5,206

 

 

 -

 

 

5,206

Mortgage servicing rights

 

 

 -

 

 

 -

 

 

7,812

 

 

7,812

Interest rate swap agreements

 

 

 -

 

 

2,287

 

 

 -

 

 

2,287

Mortgage banking derivatives

 

 

 -

 

 

261

 

 

 -

 

 

261

Total

 

$

3,876

 

$

527,302

 

$

28,032

 

$

559,210

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swap agreements

 

$

 -

 

$

2,287

 

$

 -

 

$

2,287

Total

 

$

 -

 

$

2,287

 

$

 -

 

$

2,287

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

    

Level 1

    

Level 2

    

Level 3

    

Total

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Securities available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury

 

$

3,947

 

$

 -

 

$

 -

 

$

3,947

U.S. government agencies

 

 

 -

 

 

13,061

 

 

 -

 

 

13,061

U.S. government agencies mortgage-backed

 

 

 -

 

 

12,214

 

 

 -

 

 

12,214

States and political subdivisions

 

 

 -

 

 

263,831

 

 

14,261

 

 

278,092

Corporate bonds

 

 

 -

 

 

833

 

 

 -

 

 

833

Collateralized mortgage obligations

 

 

 -

 

 

63,671

 

 

2,268

 

 

65,939

Asset-backed securities

 

 

 -

 

 

112,932

 

 

 -

 

 

112,932

Collateralized loan obligations

 

 

 -

 

 

54,421

 

 

 -

 

 

54,421

Loans held-for-sale

 

 

 -

 

 

4,067

 

 

 -

 

 

4,067

Mortgage servicing rights

 

 

 -

 

 

 -

 

 

6,944

 

 

6,944

Interest rate swap agreements

 

 

 -

 

 

727

 

 

 -

 

 

727

Mortgage banking derivatives

 

 

 -

 

 

238

 

 

 -

 

 

238

Total

 

$

3,947

 

$

525,995

 

$

23,473

 

$

553,415

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swap agreements

 

$

 -

 

$

2,014

 

$

 -

 

$

2,014

Total

 

$

 -

 

$

2,014

 

$

 -

 

$

2,014

 

31

 


 

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30, 2018

 

 

Securities available-for-sale

 

 

 

 

 

Collateralized

 

States and

 

Mortgage

 

 

Mortgage

 

Political

 

Servicing

 

   

Obligation

   

Subdivisions

   

Rights

Beginning balance January 1, 2018

 

$

2,268

 

$

14,261

 

$

6,944

Transfers into Level 3

 

 

 -

 

 

 -

 

 

 -

Transfers out of Level 3

 

 

 -

 

 

 -

 

 

 -

Total gains or losses

 

 

 

 

 

 

 

 

 

Included in earnings (or changes in net assets)

 

 

26

 

 

 -

 

 

520

Included in other comprehensive income

 

 

31

 

 

(551)

 

 

 -

Purchases, issuances, sales, and settlements

 

 

 

 

 

 

 

 

 

Purchases

 

 

 -

 

 

19,934

 

 

 -

Issuances

 

 

 -

 

 

 -

 

 

668

Settlements

 

 

(554)

 

 

(15,195)

 

 

(320)

Sales

 

 

 -

 

 

-

 

 

-

Ending balance June 30, 2018

 

$

1,771

 

$

18,449

 

$

7,812

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 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

Transfers into Level 3

 

 

 -

 

 

 -

 

 

 -

Transfers out of Level 3

 

 

 -

 

 

 -

 

 

 -

Total gains or losses

 

 

 

 

 

 

 

 

 

Included in earnings (or changes in net assets)

 

 

23

 

 

 -

 

 

(280)

Included in other comprehensive income

 

 

(1)

 

 

(289)

 

 

 -

Purchases, issuances, sales, and settlements

 

 

 

 

 

 

 

 

 

Purchases

 

 

 -

 

 

10,456

 

 

 -

Issuances

 

 

 -

 

 

 -

 

 

601

Settlements

 

 

(463)

 

 

(12,045)

 

 

(282)

Sales

 

 

 -

 

 

-

 

 

-

Ending balance June 30, 2017

 

$

2,678

 

$

20,348

 

$

6,528

 

The following table and commentary presents quantitative and qualitative information about Level 3 fair value measurements as of June 30, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted

Measured at fair value

 

 

 

 

 

 

Unobservable

 

 

 

Average

on a recurring basis:

   

Fair Value

   

Valuation Methodology

   

Inputs

   

Range of Input

   

of Inputs

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage servicing rights

 

$

7,812

 

Discounted Cash Flow

 

Discount Rate

 

10.0 - 417.6%

 

10.2

%

 

 

 

 

 

 

 

Prepayment Speed

 

7.0 - 68.4%

 

8.2

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

32

 


 

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

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

 

$

6,944

 

Discounted Cash Flow

 

Discount Rate

 

10.0 - 34.3%

 

10.2

%

 

 

 

 

 

 

 

Prepayment Speed

 

7.0 - 68.4%

 

9.6

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

In addition to the above, Level 3 fair value measurement included $18.4 million for state and political subdivisions representing various local municipality securities and $1.8 million of collateralized mortgage obligations at June 30, 2018.  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 June 30, 2017, was $20.3 million and collateralized mortgage obligation balance in Level 3 was $2.3 million at December 31, 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.

 

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

 

The Company may be required, from time to time, to measure certain other assets at fair value on a nonrecurring basis in accordance with GAAP.  These assets consist of impaired loans and OREO.  For assets measured at fair value on a nonrecurring basis at June 30, 2018, and December 31, 2017, respectively, the following tables provide the level of valuation assumptions used to determine each valuation and the carrying value of the related assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2018

 

    

Level 1

    

Level 2

    

Level 3

    

Total

Impaired loans1

 

$

 -

 

$

 -

 

$

8,386

 

$

8,386

Other real estate owned, net2

 

 

 -

 

 

 -

 

 

8,912

 

 

8,912

Total

 

$

 -

 

$

 -

 

$

17,298

 

$

17,298

 

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 $8.9 million and a valuation allowance of $498,000 resulting in an increase of specific allocations within the allowance for loan and lease losses of $90,000 for the six months ended June 30, 2018.

2 OREO is measured at the lower of carrying or fair value less costs to sell, and had a net carrying amount of $8.9 million, which is made up of the outstanding balance of $18.2 million, net of a valuation allowance of $8.3 million and participations of $937,000 at June 30, 2018.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

    

Level 1

    

Level 2

    

Level 3

    

Total

Impaired loans1

 

$

 -

 

$

 -

 

$

5,113

 

$

5,113

Other real estate owned, net2

 

 

 -

 

 

 -

 

 

8,371

 

 

8,371

Total

 

$

 -

 

$

 -

 

$

13,484

 

$

13,484

 

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 $5.3 million and a valuation allowance of $144,000, resulting in an increase of specific allocations within the allowance for loan and lease losses of $856,000 for the year December 31, 2017.

2 OREO is measured at the lower of carrying or fair value less costs to sell, and had a net carrying amount of $8.4 million, which is made up of the outstanding balance of $17.5 million, net of a valuation allowance of $8.2 million and participations of $937,000, at December 31, 2017.

 

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

33

 


 

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

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.  For June 30, 2018, the fair values of loans and leases are estimated on an exit price basis incorporating discounts for credit, liquidity and marketability factors.  This is not comparable with the fair value disclosures for December 31, 2017, which were estimated using an entrance price basis.  For December 31, 2017, fair values of variable rate loans and leases with no significant change in credit risk were based on carrying values.  The fair values of other loans and leases were estimated using discounted cash flow analyses which used interest rates being offered for loans and leases with similar terms to borrowers of similar credit quality. The fair value of time deposits is estimated using discounted future cash flows at current rates offered for deposits of similar remaining maturities.  The fair values of borrowings were estimated based on interest rates available to the Company for debt with similar terms and remaining maturities.  The fair value of off balance sheet volume is not considered material.

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2018

 

 

Carrying

 

Fair

 

 

 

 

 

 

 

 

 

 

    

Amount

    

Value

    

Level 1

    

Level 2

    

Level 3

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

34,161

 

$

34,161

 

$

34,161

 

$

 -

 

$

 -

Interest bearing deposits with financial institutions

 

 

31,147

 

 

31,147

 

 

31,147

 

 

 -

 

 

 -

Securities available-for-sale

 

 

543,644

 

 

543,644

 

 

3,876

 

 

519,548

 

 

20,220

FHLBC and FRBC Stock

 

 

9,093

 

 

9,093

 

 

 -

 

 

9,093

 

 

 -

Loans held-for-sale

 

 

5,206

 

 

5,206

 

 

 -

 

 

5,206

 

 

 -

Loans, net

 

 

1,829,841

 

 

1,816,393

 

 

 -

 

 

 -

 

 

1,816,393

Accrued interest receivable

 

 

10,244

 

 

10,244

 

 

 -

 

 

10,244

 

 

 -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest bearing deposits

 

$

620,807

 

$

620,807

 

$

620,807

 

$

 -

 

$

 -

Interest bearing deposits

 

 

1,541,044

 

 

1,534,109

 

 

 -

 

 

1,534,109

 

 

 -

Securities sold under repurchase agreements

 

 

54,038

 

 

54,038

 

 

 -

 

 

54,038

 

 

 -

Other short-term borrowings

 

 

76,625

 

 

76,625

 

 

 -

 

 

76,625

 

 

 -

Junior subordinated debentures

 

 

57,662

 

 

59,471

 

 

33,267

 

 

26,204

 

 

 -

Senior notes

 

 

44,108

 

 

46,743

 

 

 -

 

 

46,743

 

 

 -

Note payable and other borrowings

 

 

23,496

 

 

23,496

 

 

 -

 

 

23,496

 

 

 -

Borrowing interest payable

 

 

192

 

 

192

 

 

 -

 

 

192

 

 

 -

Deposit interest payable

 

 

800

 

 

800

 

 

 -

 

 

800

 

 

 -

 

 

34

 


 

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

 

Carrying

 

Fair

 

 

 

 

 

 

 

    

Amount

    

Value

    

Level 1

    

Level 2

    

Level 3

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

37,444

 

$

37,444

 

$

37,444

 

$

 -

 

$

 -

Interest bearing deposits with financial institutions

 

 

18,389

 

 

18,389

 

 

18,389

 

 

 -

 

 

 -

Securities available-for-sale

 

 

541,439

 

 

541,439

 

 

3,947

 

 

520,963

 

 

16,529

FHLBC and FRBC Stock

 

 

10,168

 

 

10,168

 

 

 -

 

 

10,168

 

 

 -

Loans held-for-sale

 

 

4,067

 

 

4,067

 

 

 -

 

 

4,067

 

 

 -

Loans, net

 

 

1,600,161

 

 

1,586,722

 

 

 -

 

 

 -

 

 

1,586,722

Accrued interest receivable

 

 

8,595

 

 

8,595

 

 

 -

 

 

8,595

 

 

 -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest bearing deposits

 

$

572,404

 

$

572,404

 

$

572,404

 

$

 -

 

$

 -

Interest bearing deposits

 

 

1,350,521

 

 

1,346,339

 

 

 -

 

 

1,346,339

 

 

 -

Securities sold under repurchase agreements

 

 

29,918

 

 

29,918

 

 

 -

 

 

29,918

 

 

 -

Other short-term borrowings

 

 

115,000

 

 

115,000

 

 

 -

 

 

115,000

 

 

 -

Junior subordinated debentures

 

 

57,639

 

 

59,471

 

 

33,267

 

 

26,204

 

 

 -

Subordinated debenture

 

 

44,058

 

 

46,743

 

 

 -

 

 

46,743

 

 

 -

Interest rate swap agreements

 

 

1,287

 

 

1,287

 

 

 -

 

 

1,287

 

 

 -

Borrowing interest payable

 

 

140

 

 

140

 

 

 -

 

 

140

 

 

 -

Deposit interest payable

 

 

631

 

 

631

 

 

 -

 

 

631

 

 

 -

 

 

Note 15 – Derivatives, Hedging Activities and Financial Instruments with Off-Balance Sheet Risk

 

Risk Management Objective of Using Derivatives

 

The Company is exposed to certain risk arising from both its business operations and economic conditions.  The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its assets and liabilities and the use of derivative financial instruments.  Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates.  The Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to the Company’s loan portfolio. 

 

Cash Flow Hedges of Interest Rate Risk

 

The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy.  Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.  During 2018, such derivatives were used to hedge the variable cash flows associated with existing variable-rate borrowings. 

 

For derivatives designated and that qualify as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded in Accumulated Other Comprehensive Income and subsequently reclassified into interest expense in the same period(s) during which the hedged transaction affects earnings. Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are received on the Company’s variable-rate borrowings. During the next twelve months, the Company estimates that an additional $59,000 will be reclassified as a reduction to interest expense. 

 

Non-designated Hedges

 

Derivatives not designated as hedges are not speculative and result from a service the Company provides to certain customers.  The Company executes interest rate swaps with commercial banking customers to facilitate their respective risk management strategies.  Those interest rate swaps are simultaneously hedged by offsetting derivatives that the Company executes with a third party, such that the Company minimizes its net risk exposure resulting from such transactions.  As the interest rate derivatives associated with this

35

 


 

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

program do not meet the strict hedge accounting requirements, changes in the fair value of both the customer derivatives and the offsetting derivatives are recognized directly in earnings. 

 

Disclosure of Fair Values of Derivative Instruments on the Balance Sheet 

 

The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the Balance Sheet as of June 30, 2018 and December 31, 2017.

 

Fair Value of Derivative Instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset Derivatives

 

Liability Derivatives

 

 

 

 

 

June 30, 2018

 

December 31, 2017

 

June 30, 2018

 

December 31, 2017

 

Number of Transactions

 

Notional Amount   $

 

Balance Sheet Location

Fair Value   $

 

Balance Sheet Location

Fair Value   $

 

Balance Sheet Location

Fair Value   $

 

Balance Sheet Location

Fair Value   $

Derivatives designated as hedging instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Rate Products

1

 

25,774

 

Other Assets

507

 

Other Assets

 -

 

Other Liabilities

 -

 

Other Liabilities

1,287

Total derivatives designated as hedging instruments

 

 

 

 

 

507

 

 

 -

 

 

 -

 

 

1,287

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives not designated as hedging instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Rate Products

2

 

51,548

 

Other Assets

507

 

Other Assets

 -

 

Other Liabilities

507

 

Other Liabilities

1,287

Other Contracts

3

 

15,857

 

Other Assets

 -

 

Other Assets

 -

 

Other Liabilities

 5

 

Other Liabilities

13

Total derivatives not designated as hedging instruments

 

 

 

 

 

507

 

 

 -

 

 

512

 

 

1,301

 

Disclosure of the Effect of Fair Value and Cash Flow Hedge Accounting

 

The fair value and cash flow hedge accounting related to derivatives covered under ASC Subtopic 815-20 impacted Accumulated Other Comprehensive Income (“AOCI”) and the Income Statement.  The gain recognized in AOCI on derivatives totaled $473,000 as of June 30, 2018, and a loss in AOCI of $632,000 as of June 30, 2017.   The amount of the gain (loss) reclassified from AOCI to interest income on the income statement totaled ($42,000) and ($18,000) for the three months ended June 30, 2018, and June 30, 2017, respectively.  The amount of the gain (loss) reclassified from AOCI to interest income or interest expense on the income statement totaled ($116,000) and ($18,000) for the six months ended June 30, 2018, and June 30, 2017, respectively.

 

Credit-risk-related Contingent Features

 

For derivative transactions involving counterparties who are lending customers of the Company, the derivative credit exposure is managed through the normal credit review and monitoring process, which may include collateralization, financial covenants and/or financial guarantees of affiliated parties.  Agreements with such customers require that losses associated with derivative transactions receive payment priority from any funds recovered should a customer default and ultimate disposition of collateral or guarantees occur.

 

Credit exposure to broker/dealer counterparties is managed through agreements with each derivative counterparty that require collateralization of fair value gains owed by such counterparties.  Some small degree of credit exposure exists due to timing differences between when a gain may occur and the subsequent point in time that collateral is delivered to secure that gain.  This is monitored by the Company and procedures are in place to minimize this exposure.  Such agreements also require the Company to collateralize counterparties in circumstances wherein the fair value of the derivatives result in loss to the Company.

 

Other provisions of such agreements include the definition of certain events that may lead to the declaration of default and/or the early termination of the derivative transaction(s):

·

if the Company either defaults or is capable of being declared in default on any of its indebtedness (exclusive of deposit obligations), then the Company could also be declared in default on its derivative obligations.

·

if a merger occurs that materially changes the Company's creditworthiness in an adverse manner.

36

 


 

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

·

If certain specified adverse regulatory actions occur, such as the issuance of a Cease and Desist Order, or citations for actions considered Unsafe and Unsound or that may lead to the termination of deposit insurance coverage by the Federal Deposit Insurance Corporation.

 

As of June 30, 2018, there were no derivatives in a net liability position. As of June 30, 2018, the Company has not posted any collateral related to derivatives agreements.

 

The Bank also issues letters of credit, which are conditional commitments that guarantee the performance of a customer to a third party.  The credit risk involved and collateral obtained in issuing letters of credit are essentially the same as that involved in extending loan commitments to our customers.  In addition to customer related commitments, the Company is responsible for letters of credit commitments that relate to properties held in OREO.  The following table represents the Company’s contractual commitments due to letters of credit as of June 30, 2018, and December 31, 2017.

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2018

 

December 31, 2017

 

 

    

Fixed

    

Variable

    

Total

    

Fixed

    

Variable

    

Total

  

Letters of credit:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Borrower:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial standby

 

$

2,017

 

$

5,320

 

$

7,337

 

$

177

 

$

3,770

 

$

3,947

 

Commercial standby

 

 

 -

 

 

395

 

 

395

 

 

 -

 

 

354

 

 

354

 

Performance standby

 

 

914

 

 

6,676

 

 

7,590

 

 

241

 

 

7,594

 

 

7,835

 

 

 

 

2,931

 

 

12,391

 

 

15,322

 

 

418

 

 

11,718

 

 

12,136

 

Non-borrower:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performance standby

 

 

 -

 

 

67

 

 

67

 

 

 -

 

 

142

 

 

142

 

Total letters of credit

 

$

2,931

 

$

12,458

 

$

15,389

 

$

418

 

$

11,860

 

$

12,278

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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Table of Contents

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

 

Overview

 

The following management’s discussion and analysis presents information concerning our financial condition as of June 30, 2018, as compared to December 31, 2017, and our results of operations for the three and six months ended June 30, 2018 and June 30, 2017.  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, 2017.  The results of operations for the quarter and six months ended June 30, 2018, are not necessarily indicative of future results.

 

In this report, unless the context suggests otherwise, references to the “Company,” “we,” “us,” and “our” mean the combined business of Old Second Bancorp, Inc. and its subsidiary bank, Old Second National Bank (the “Bank”).

 

We have made, and will continue to make, various forward-looking statements with respect to financial and business matters. Comments regarding our business that are not historical facts are considered forward-looking statements that involve inherent risks and uncertainties. Actual results may differ materially from those contained in these forward-looking statements. For additional information regarding our cautionary disclosures, see the “Cautionary Note Regarding Forward-Looking Statements” on page 3 of this report.

 

Business Overview

 

The Company is a banking holding company headquartered in Aurora, Illinois. Through our wholly-owned subsidiary bank, Old Second National Bank, a national banking organization also headquartered in Aurora, Illinois, we offer a wide range of financial services through our 29 banking centers located in Cook, Kane, Kendall, DeKalb, DuPage, LaSalle and Will counties in Illinois.  These banking centers offer access to a full range of traditional retail and commercial banking services including treasury management operations as well as fiduciary and wealth management services.  We focus our business on establishing and maintaining relationships with our clients while maintaining a commitment to provide for the financial services needs of the communities in which we operate.  We emphasize relationships with individual customers as well as small to medium-sized businesses throughout our market area.  We also have extensive wealth management services, which includes a registered investment advisory platform in addition to trust administration and trust services related to personal and corporate trusts and employee benefit plan administration services.

 

Financial Overview

 

Our community-focused banking franchise experienced total asset and overall market growth in the second quarter of 2018, as compared to the fourth quarter and second quarter of 2017, and we believe we are positioned for further growth as we continue to serve our customers’ needs in a competitive economic environment.  While industry and regulatory developments in the past few years have made it challenging to attain the levels of profitability and growth reflected prior to the economic recession of 2007-2009, we are continuing to seek to provide value to our customers and the communities in which we operate, by executing on growth opportunities in our local markets and developing new banking relationships. 

 

The following provides an overview of some of the factors impacting our financial performance for the three and six month period ending June 30, 2018:

 

·

This is the first quarter of results of operations that included our recent acquisition of Greater Chicago Financial Corp., and its wholly-owned subsidiary bank, ABC Bank, which closed on April 20, 2018.

 

·

Net income for the second quarter of 2018 was $6.3 million, or $0.21 per diluted share, compared to $5.1 million, or $0.17 per diluted share, for the second quarter of 2017.  Net income for the six months ended June 30, 2018, totaled $15.8 million, or $0.52 per diluted share, compared to $9.6 million, or $0.32 per diluted share for the six months ended June 30, 2017.

 

·

Net interest and dividend income was $23.2 million for the second quarter of 2018, compared to $18.7 million for the quarter ended June 30, 2017.  Net interest and dividend income was $42.9 million for the six months ended June 30, 2018, compared to $36.2 million for the like period in 2017.

 

·

Noninterest income was $8.5 million for the second quarter of 2018, which reflects an increase of $1.2 million, or 16.6%, compared to the second quarter of 2017.  Noninterest income was $17.0 million for the six months ended June 30, 2018, which reflected an 18.8% increase over the like period in 2017.

 

·

Noninterest expense was $22.3 million for the second quarter of 2018, which reflects an increase of $4.3 million, or 23.9%, from the second quarter of 2017.  For the six months ended June 30, 2018, noninterest expense totaled $39.6 million, an increase of $3.6 million, or 10.0%, over the like period in 2017.

 

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·

Asset quality remained consistent, with nonperforming loans as a percent of total loans declining to 0.6% as of June 30, 2018 from 1.0% as of June 30, 2017.  We added $11.2 million of purchase credit impaired loans (“PCI loans”), net of purchase accounting adjustments, in our acquisition of ABC Bank in the second quarter of 2018.  PCI loans, net of purchase accounting adjustments, to total loans were 0.6% as of June 30, 2018.  We had no PCI loans before our acquisition of ABC Bank.

 

·

Income tax expense declined due to the enactment of the “Tax Cuts and Jobs Act,” which was effective as of January 1, 2018, and lowered the Federal corporate income tax rate to 21%, as well as income tax credits that were recorded in the first quarter of 2018 due to the vesting of restricted stock awards.

 

Recent Developments

 

On April 20, 2018, we completed our previously announced acquisition of Greater Chicago Financial Corp., and its wholly-owned bank subsidiary, ABC Bank.  In connection with the merger, Greater Chicago Financial Corp merged with and into the Company, with the Company as the surviving company in the merger.  Immediately following the merger, ABC Bank, an Illinois state-chartered bank and wholly owned subsidiary of Greater Chicago Financial Corp., merged with and into the Bank, with the Bank as the surviving bank.  With the acquisition of ABC Bank, we acquired four branches in the Chicago, Illinois, metropolitan area.  We acquired $227.6 million of loans, net of purchase accounting adjustments, and $248.5 million of deposits, net of purchase accounting adjustments for time deposits, in the acquisition.

Critical Accounting Policies

 

The Company’s consolidated financial statements are prepared based on the application of accounting policies in accordance with generally accepted accounting principles (“GAAP”) and follow general practices within the banking industry.  These policies require the reliance on estimates and assumptions, which may prove inaccurate or are subject to variations.  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.  Changes in underlying factors, assumptions, or estimates could have a material impact on the Company’s future financial condition and results of operations.  The most critical of these significant accounting policies are the policies related to the allowance for loan and lease losses, fair valuation methodologies and income taxes.  In addition, as a result of our acquisition of Greater Chicago Financial Corporation and its wholly-owned subsidiary, ABC Bank, that closed on April 20, 2018, the Company has implemented accounting policies regarding loans purchased in a business combination, as discussed below and more fully described in Note 1 to our unaudited consolidated financial statements contained in this Quarterly Report on Form 10-Q.   

 

Loans Acquired in Business Combinations

 

We record purchased loans at fair value at the date of acquisition based on a discounted cash flow methodology that considers various factors, including the type of loan and related collateral, classification status, whether the loan has a fixed or variable interest rate, its term and whether or not the loan was amortizing, and our assessment of risk inherent in the cash flow estimates.  These cash flow evaluations are inherently subjective as they require material estimates, all of which may be susceptible to significant change.  Purchased loans are segregated into two categories upon purchase: (1) loans purchased without evidence of deteriorated credit quality since origination, referred to as purchased non-credit impaired (“non-PCI”) loans, and (2) loans purchased with evidence of deteriorated credit quality since origination for which it is probable that all contractually required payments will not be collected, referred to as purchased credit impaired (“PCI”) loans.

 

We account for and evaluate PCI loans for impairment in accordance with the provisions of ASC 310-30.  We estimate the cash flows expected to be collected on purchased loans based upon the expected remaining life of the loans, which includes the effects of estimated prepayments.  Cash flow evaluations are inherently subjective as they require material estimates, all of which may be susceptible to significant change.  We will perform re-estimations of cash flows on our PCI loan portfolio on a quarterly basis.  Any decline in expected cash flows as a result of these re-estimations, due in any part to a change in credit, is deemed credit impairment, and recorded as provision for loan and lease losses during the period.  Any decline in expected cash flows due only to changes in expected timing of cash flows is recognized prospectively as a decrease in yield on the loan and any improvement in expected cash flows, once any previously recorded impairment is recaptured, is recognized prospectively as an adjustment to the yield on the loan.

 

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Non-PCI loans outside the scope of ASC 310-30 are accounted for under ASC 310-20.  For non-PCI loans, credit discounts representing the principal losses expected over the life of the loan are a component of the initial fair value and the discount is accreted to interest income over the life of the loan. Subsequent to the purchase date, the method used to evaluate the sufficiency of the credit discount is similar to organic loans, and if necessary, additional reserves are recognized in the allowance for loan and lease losses.

 

No Other Material Changes in Significant Accounting Policies

 

The Company’s significant accounting policies are more fully described in Note 1 to the audited consolidated financial statements contained in our Annual Report on Form 10-K for the year ended December 31, 2017, and the more significant assumptions and estimates made by management are more fully described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies” in our Annual Report on Form 10-K for the year ended December 31, 2017. Other than as described above, there have been no material changes to the Company’s significant accounting policies or the estimates made pursuant to those policies from those disclosed in our 2017 Annual Report on Form 10-K during the most recent quarter.

 

Non-GAAP Financial Measures

 

This report contains references to financial measures that are not defined in GAAP. Such non-GAAP financial measures include the presentation of net interest income and net interest income to interest earning assets on a tax equivalent (“TE”) basis, our adjusted efficiency ratio and our tangible common equity to tangible assets ratio.  Management believes that the presentation of these non-GAAP financial measures (a) provides important supplemental information that contributes to a proper understanding of our operating performance, (b) enables a more complete understanding of factors and trends affecting our business, and (c) allows investors to evaluate our performance in a manner similar to management, the financial services industry, bank stock analysts, and bank regulators. Management uses non-GAAP measures as follows: in the preparation of our operating budgets, monthly financial performance reporting, and in our presentation to investors of our performance.  However, we acknowledge that these non-GAAP financial measures have a number of limitations. Limitations associated with non-GAAP financial measures include the risk that persons might disagree as to the appropriateness of items comprising these measures and that different companies might calculate these measures differently.  These disclosures should not be considered an alternative to our GAAP results.  A reconciliation of non-GAAP financial measures to the most directly comparable GAAP financial measures is presented below or alongside the first instance where each non-GAAP financial measure is used.

 

Results of Operations 

 

Three months ended June 30, 2018 and 2017

Our net income before taxes was $8.0 million in the second quarter of 2018 compared to $7.2 million in the second quarter of 2017.  Net interest and dividend income increased $4.6 million, and noninterest income increased $1.2 million in the second quarter of 2018 compared to the second quarter of 2017.  These increases to income were partially offset by an increase in provision for loan and lease losses of $700,000, and an increase of $4.3 million in noninterest expense due primarily to acquisition related costs incurred in 2018, which totaled $3.3 million, pretax, for the quarter. 

The increase in net interest and dividend income stems from the rising interest rate environment, as well as loan growth due to the ABC Bank acquisition.  Loans acquired, net of the purchase accounting adjustments, totaled $227.6 million in the second quarter of 2018.  Loans and loans held for sale yielded 5.0% in the second quarter of 2018, compared to 4.57% in the second quarter of 2017. 

Management has remained diligent in reviewing our loan portfolio to analyze and to determine if charge-offs are required.  In the second quarter of 2018, management’s review of the loan portfolio concluded that additional provision expense of $1.5 million was appropriate, based on analysis of the allowance and loan portfolio held.  The analysis methodology incorporated an adjustment in the second quarter of 2018 to include minimal charge-off assumptions for the five year historical look back period, as the Company has experienced a high rate or recoveries in the last few years, and management does not believe this recovery rate is sustainable in the long term.  In addition, management assigned a slightly elevated qualitative factor to variable rate commercial and HELOC loans due to the rising interest rate environment.  Management determined an additional provision for loan and lease losses of $750,000 was appropriate for the quarter ended June 30, 2017. 

Earnings for the second quarter of 2018 were $0.21 per diluted share on $6.3 million of net income, as compared to $0.17 per diluted share on net income of $5.1 million for the second quarter of 2017.  Earnings in the 2018 period, compared to the like 2017 period, were positively impacted by increased loan volumes due to the ABC Bank acquisition, as well as the favorable impact of a rising interest rate environment and the federal income tax rate reduction to 21% from 35% stemming from the “Tax Cuts and Jobs Act” passed in late 2017.  

 

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Six months ended June 30, 2018 and 2017

 

Our net income before taxes was $19.5 million for the six months ended June 30, 2018, compared to $13.8 million for the six months ended June 30, 2017.  Net interest and dividend income increased $6.7 million, and noninterest income increased $2.7 million for the six months ended June 30, 2018, compared to the like period in 2017.  The increase in net interest income was driven by rising interest rates and the ABC Bank acquisition, while the increase in noninterest income was primarily due to a $1.0 million death benefit received on a BOLI claim in the first quarter of 2018, as well as increases in mortgage servicing rights interest rate driven mark to market adjustments.  These increases to income were partially offset by a $3.6 million increase in noninterest expenses in the 2018 period due primarily to acquisition related costs incurred year to date of $3.4 million, pretax.

 

Earnings for the six month period ending June 30, 2018, were $0.52 per diluted share on $15.8 million of net income, as compared to $0.32 per diluted share on net income of $9.6 million for the six month period ending June 30, 2017.  Earnings in the 2018 period, compared to the like 2017 period, were positively impacted by increased loan volumes due to the ABC Bank acquisition, recoveries on a few nonperforming credits and the BOLI death benefit in the first quarter of 2018, as well as the favorable impact of a rising interest rate environment and the federal income tax rate reduction to 21% from 35% stemming from the “Tax Cuts and Jobs Act” passed in late 2017.  The performance of our loan portfolio, the impact of the restructuring of our securities portfolio into higher yielding instruments and organic loan growth in the year over year period also contributed to the increase in earnings for the 2018 period

 

Net Interest Income

 

Net interest income, which is our primary source of earnings, is the difference between interest income earned on interest-earning assets, such as loans and investment securities, as well as accretion income on purchased loans, and interest incurred on interest-bearing liabilities, such as deposits and borrowings.  Net interest income depends upon the relative mix of interest-earning assets and interest-bearing liabilities, the ratio of interest-earning assets to total assets and of interest-bearing liabilities to total funding sources, and movements in market interest rates.  Our net interest income can be significantly influenced by a variety of factors, including overall loan demand, economic conditions, credit risk, the amount of nonearning assets including nonperforming loans and OREO, the amounts of and rates at which assets and liabilities reprice, variances in prepayment of loans and securities, early withdrawal of deposits, exercise of call options on borrowings or securities, a general rise or decline in interest rates, changes in the slope of the yield-curve, and balance sheet growth or contraction.

 

Three months ended June 30, 2018 and 2017

 

Net interest and dividend income increased by $4.6 million from $18.7 million for the quarter ended June 30, 2017, to $23.2 million for the quarter ended June 30, 2018.  Our interest and dividend income increased $4.1 million, or 17.8%, for the quarter ended June 30, 2018 compared to the first quarter of 2018, and reflected an increase of $5.5 million, or 25.1%, compared to the second quarter of 2017.  Tax equivalent interest and dividend income increased by $5.1 million from $22.7 million for the quarter ended June 30, 2017, to $27.8 million for the quarter ended June 30, 2018.  Average earning assets for the quarter ended June 30, 2018, were $2.39 billion reflecting an increase of $217.2 million compared to the first quarter of 2018, and an increase of $276.5 million compared to the second quarter of 2017.  Total average loans, including loans held-for-sale, totaled $1.81 billion in the second quarter of 2018, which reflected an increase of $206.1 million compared to the first quarter of 2018, and an increase of $299.9 million compared to the second quarter of 2017.  The growth in average balances and resultant interest income was primarily due to $227.6 million of loans acquired, net of purchase accounting adjustments, in our acquisition of ABC Bank on April 20, 2018.  In addition, the rising interest rate environment in the 2018 period and the repositioning on our securities portfolio over the past year has driven higher yields and growth in interest and dividend income.  Total securities yields have increased by 15 basis points for the quarter ended June 30, 2018, compared to the quarter ended June 30, 2017, due to the repositioning of our portfolio into higher yielding tax exempt securities.  Our average tax exempt securities portfolio increased by $61.4 million in the second quarter of 2018 compared to the second quarter of 2017; yields have declined in the portfolio on a tax equivalent basis due to the lower federal income tax rate effective in 2018. 

 

Quarterly average interest bearing liabilities increased $162.1 million, or 10.2%, as of June 30, 2018, compared to March 31, 2018, and increased $178.5 million, or 11.4%, compared to June 30, 2017.  Growth from the prior periods was primarily due to deposits of $248.5 million, net of purchase accounting adjustments, recorded in our acquisition of ABC Bank in the second quarter of 2018.  In addition, an increase in the average balances of securities sold under repurchase agreements, as well as other short-term borrowed funds, which primarily consist of FHLBC advances, was reflected.  The short-term FHLBC advances were impacted by the higher interest rate environment in the second quarter of 2018, reflecting a cost of funds of 1.90% compared to 1.53% for the first quarter of 2018, and 0.99% for the second quarter of 2017.  The rate on our junior subordinated debentures declined in the second quarter of 2018, compared to the second quarter of 2017, due to the rate conversion on the debt from fixed to floating rate at three month LIBOR plus 150 basis points on June 15, 2017.  Upon conversion to a floating rate, we initiated a cash flow hedge that resulted in a reduction in the total interest rate paid on the debt from 6.77% prior to June 15, 2017, to 4.34% as June 30, 2018.  This rate conversion and hedge resulted in a reduction of $132,000 of expense related to our interest on our junior subordinated debt in the second quarter of 2018 compared to the second quarter of 2017.

 

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Our net interest margin (on a tax-equivalent basis), expressed as a percentage of average earning assets, was 3.99% in the second quarter of 2018, reflecting a 23 basis point increase from the first quarter of 2018, and an increase of 28 basis points from the second quarter of 2017.  The average tax-equivalent yield on earning assets increased to 4.67% for the second quarter of 2018, compared to 4.42% for the first quarter of 2018 and 4.26% for the second quarter of 2017.  Increases in net interest margin and yield on average earning assets for the second quarter of 2018 compared to the second quarter of 2017 was attributable to growth in loan volumes and rates, as well as the restructuring of our securities portfolio into higher yielding tax exempt holdings, as discussed above.  The cost of funds on interest bearing liabilities was 0.92% for the second quarter of 2018, 0.90% for the first quarter of 2018, and 0.80% for the second quarter of 2017.  The increase in our cost of funds in each period was driven by the rising interest rate environment, specifically impacting the rates on newly issued time deposits and FHLBC advances.

 

Six months ended June 30, 2018 and 2017

 

Net interest and dividend income increased by $6.6 million from $36.2 million for the six months ended June 30, 2017, to $42.9 million for the six months ended June 30, 2018.  Our interest and dividend income increased $8.0 million, or 18.8%, for the six months ended June 30, 2018 compared to the six months ended June 30, 2017.  Tax equivalent interest and dividend income increased by $7.7 million from $43.8 million for the six months ended June 30, 2017, to $51.5 million for the six months ended June 30, 2018.

 

Our net interest margin (on a tax equivalent basis) for the six months ended June 30, 2018, was 3.88% compared to 3.63% for the like 2017 period, reflecting a 25 basis point increase.  Average earning assets for the six months ended June 30, 2018, were $2.28 billion, reflecting an increase of $190.7 million compared to the six months ended June 30, 2017.  The yield on average earning assets for the six months ended June 30, 2018, was 4.55%, compared to 4.17% for the six months ended June 30, 2017.  Average interest bearing liabilities for the six months ended June 30, 2018, increased $105.3 million, or 6.8%, compared to the six months ended June 30, 2017.  The cost of funds for the six months ended June 30, 2018, was 91 basis points, compared to the cost of funds of 80 basis points for the like 2017 period.  Growth in volumes and rates has resulted in an increase for all line items presented, excluding the junior subordinated debentures.  The rate on our junior subordinated debentures declined 95 basis points in the six months ended June 30, 2018, compared to the like 2017 period, due to the rate conversion on the debt from fixed to floating rate at three month LIBOR plus 150 basis points on June 15, 2017, as described above.

 

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 in the following tables have been adjusted to a non-GAAP tax equivalent (“TE”) basis using a marginal rate of 21% in 2018 and 35% in 2017 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

 

June 30, 2018

 

March 31, 2018

 

June 30, 2017

 

Average

 

 

 

 

Rate

 

Average

 

 

 

 

Rate

 

Average

 

 

 

 

Rate

 

Balance

 

Interest

 

%

 

Balance

 

Interest

 

%

 

Balance

 

Interest

 

%

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest bearing deposits with financial institutions

$

19,161

 

$

97

 

2.03

 

$

13,819

 

$

49

 

1.44

 

$

11,938

 

$

31

 

1.03

Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

268,591

 

 

2,392

 

3.57

 

 

269,330

 

 

2,170

 

3.27

 

 

361,504

 

 

2,607

 

2.88

Non-taxable (TE)

 

286,611

 

 

2,676

 

3.74

 

 

279,831

 

 

2,609

 

3.78

 

 

225,182

 

 

2,536

 

4.50

Total securities

 

555,202

 

 

5,068

 

3.66

 

 

549,161

 

 

4,779

 

3.53

 

 

586,686

 

 

5,143

 

3.51

Dividends from FHLBC and FRBC

 

8,619

 

 

111

 

5.17

 

 

8,920

 

 

106

 

4.82

 

 

7,699

 

 

92

 

4.78

Loans and loans held-for-sale1

 

1,809,077

 

 

22,552

 

5.00

 

 

1,602,947

 

 

18,767

 

4.75

 

 

1,509,188

 

 

17,445

 

4.57

Total interest earning assets

 

2,392,059

 

 

27,828

 

4.67

 

 

2,174,847

 

 

23,701

 

4.42

 

 

2,115,511

 

 

22,711

 

4.26

Cash and due from banks

 

36,720

 

 

 -

 

 -

 

 

29,776

 

 

 -

 

 -

 

 

39,425

 

 

 -

 

 -

Allowance for loan and lease losses

 

(18,494)

 

 

 -

 

 -

 

 

(18,263)

 

 

 -

 

 -

 

 

(15,779)

 

 

 -

 

 -

Other noninterest bearing assets

 

176,608

 

 

 -

 

 -

 

 

166,507

 

 

 -

 

 -

 

 

189,928

 

 

 -

 

 -

Total assets

$

2,586,893

 

 

 

 

 

 

$

2,352,867

 

 

 

 

 

 

$

2,329,085

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NOW accounts

$

443,586

 

$

238

 

0.22

 

$

429,301

 

$

176

 

0.17

 

$

432,248

 

$

107

 

0.10

Money market accounts

 

317,775

 

 

193

 

0.24

 

 

275,334

 

 

109

 

0.16

 

 

280,482

 

 

86

 

0.12

Savings accounts

 

298,240

 

 

70

 

0.09

 

 

266,363

 

 

59

 

0.09

 

 

265,066

 

 

40

 

0.06

Time deposits

 

460,909

 

 

1,444

 

1.26

 

 

382,422

 

 

1,175

 

1.25

 

 

392,779

 

 

1,025

 

1.05

Interest bearing deposits

 

1,520,510

 

 

1,945

 

0.51

 

 

1,353,420

 

 

1,519

 

0.46

 

 

1,370,575

 

 

1,258

 

0.37

Securities sold under repurchase agreements

 

44,655

 

 

104

 

0.93

 

 

40,275

 

 

79

 

0.80

 

 

35,652

 

 

 4

 

0.05

Other short-term borrowings

 

58,199

 

 

276

 

1.90

 

 

87,444

 

 

329

 

1.53

 

 

58,572

 

 

146

 

0.99

Junior subordinated debentures

 

57,657

 

 

927

 

6.45

 

 

57,645

 

 

927

 

6.52

 

 

57,609

 

 

1,059

 

7.35

Senior notes

 

44,096

 

 

672

 

6.11

 

 

44,071

 

 

672

 

6.18

 

 

43,995

 

 

672

 

6.11

Notes payable and other borrowings

 

19,795

 

 

95

 

1.92

 

 

 -

 

 

 -

 

 -

 

 

 -

 

 

 -

 

 -

Total interest bearing liabilities

 

1,744,912

 

 

4,019

 

0.92

 

 

1,582,855

 

 

3,526

 

0.90

 

 

1,566,403

 

 

3,139

 

0.80

Noninterest bearing deposits

 

618,765

 

 

 -

 

 -

 

 

554,624

 

 

 -

 

 -

 

 

557,265

 

 

 -

 

 -

Other liabilities

 

15,679

 

 

 -

 

 -

 

 

13,969

 

 

 -

 

 -

 

 

18,047

 

 

 -

 

 -

Stockholders' equity

 

207,537

 

 

 -

 

 -

 

 

201,419

 

 

 -

 

 -

 

 

187,370

 

 

 -

 

 -

Total liabilities and stockholders' equity

$

2,586,893

 

 

 

 

 

 

$

2,352,867

 

 

 

 

 

 

$

2,329,085

 

 

 

 

 

Net interest income (TE)

 

 

 

$

23,809

 

 

 

 

 

 

$

20,175

 

 

 

 

 

 

$

19,572

 

 

Net interest income (TE)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

to total earning assets

 

 

 

 

 

 

3.99

 

 

 

 

 

 

 

3.76

 

 

 

 

 

 

 

3.71

Interest bearing liabilities to earning assets

 

72.95

%

 

 

 

 

 

 

72.78

%

 

 

 

 

 

 

74.04

%

 

 

 

 

 

1 Interest income from loans is shown on a tax equivalent basis, which is a non-GAAP financial measure, as discussed in the table on page 45, and includes fees of $233,000, $182,000 and $573,000 for the second quarter of 2018, the first quarter of 2018, and the second quarter of 2017, 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

Six Months Ended June 30, 2018, and 2017

(In thousands - unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2018

 

2017

 

Average

 

 

 

 

Rate

 

Average

 

 

 

 

Rate

 

Balance

 

Interest

 

%

 

Balance

 

Interest

 

%

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest bearing deposits with financial institutions

$

16,505

 

$

146

 

1.78

 

$

12,029

 

$

54

 

0.89

Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

268,959

 

 

4,562

 

3.42

 

 

391,646

 

 

5,570

 

2.84

Non-taxable (TE)

 

283,240

 

 

5,285

 

3.76

 

 

183,708

 

 

3,939

 

4.29

Total securities

 

552,199

 

 

9,847

 

3.60

 

 

575,354

 

 

9,509

 

3.31

Dividends from FHLBC and FRBC

 

8,769

 

 

217

 

4.99

 

 

7,657

 

 

177

 

4.62

Loans and loans held-for-sale1

 

1,706,581

 

 

41,319

 

4.88

 

 

1,498,268

 

 

34,100

 

4.53

Total interest earning assets

 

2,284,054

 

 

51,529

 

4.55

 

 

2,093,308

 

 

43,840

 

4.17

Cash and due from banks

 

33,267

 

 

 -

 

 -

 

 

36,521

 

 

 -

 

 -

Allowance for loan and lease losses

 

(18,379)

 

 

 -

 

 -

 

 

(16,034)

 

 

 -

 

 -

Other noninterest bearing assets

 

171,585

 

 

 -

 

 -

 

 

191,374

 

 

 -

 

 -

Total assets

$

2,470,527

 

 

 

 

 

 

$

2,305,169

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NOW accounts

$

436,483

 

$

414

 

0.19

 

$

429,443

 

$

208

 

0.10

Money market accounts

 

296,672

 

 

302

 

0.21

 

 

282,042

 

 

169

 

0.12

Savings accounts

 

282,390

 

 

129

 

0.09

 

 

262,240

 

 

79

 

0.06

Time deposits

 

421,882

 

 

2,619

 

1.25

 

 

393,579

 

 

2,004

 

1.03

Interest bearing deposits

 

1,437,427

 

 

3,464

 

0.49

 

 

1,367,304

 

 

2,460

 

0.36

Securities sold under repurchase agreements

 

42,477

 

 

183

 

0.87

 

 

32,745

 

 

 6

 

0.04

Other short-term borrowings

 

72,741

 

 

605

 

1.68

 

 

57,348

 

 

252

 

0.87

Junior subordinated debentures

 

57,651

 

 

1,854

 

6.49

 

 

57,603

 

 

2,143

 

7.44

Senior notes

 

44,084

 

 

1,344

 

6.15

 

 

43,987

 

 

1,345

 

6.12

Notes payable and other borrowings

 

9,952

 

 

95

 

1.92

 

 

 -

 

 

 -

 

 -

Total interest bearing liabilities

 

1,664,332

 

 

7,545

 

0.91

 

 

1,558,987

 

 

6,206

 

0.80

Noninterest bearing deposits

 

586,871

 

 

 -

 

 -

 

 

541,447

 

 

 -

 

 -

Other liabilities

 

14,829

 

 

 -

 

 -

 

 

21,535

 

 

 -

 

 -

Stockholders' equity

 

204,495

 

 

 -

 

 -

 

 

183,200

 

 

 -

 

 -

Total liabilities and stockholders' equity

$

2,470,527

 

 

 

 

 

 

$

2,305,169

 

 

 

 

 

Net interest income (TE)

 

 

 

$

43,984

 

 

 

 

 

 

$

37,634

 

 

Net interest income (TE) to total earning assets

 

 

 

 

 

 

3.88

 

 

 

 

 

 

 

3.63

Interest bearing liabilities to earning assets

 

72.87

%

 

 

 

 

 

 

74.47

%

 

 

 

 

 

1 Interest income from loans is shown on a tax equivalent basis, which is a non-GAAP financial measure, as discussed in the table on page 45, and includes fees of $414,000 and $1.1 million for the first six months of 2018 and 2017, respectively.  Nonaccrual loans are included in the above-stated average balances.

 

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Table of Contents

Reconciliation of Tax-Equivalent Non-GAAP Financial Measures

 

Net interest income and net interest income to earning assets have been adjusted to a non-GAAP TE basis using a marginal rate of 21% for 2018 and 35% for 2017 to more appropriately compare returns on tax-exempt loans and securities to other earning assets.  The table below provides a reconciliation of each non-GAAP TE measure to the GAAP equivalent for the periods indicated:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30, 

 

March 31, 

 

June 30, 

 

 

June 30, 

 

 

    

2018

    

2018

 

2017

 

    

2018

 

2017

 

Net Interest Margin

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income (GAAP)

 

$

27,261

 

$

23,142

 

$

21,800

 

 

$

50,403

 

$

42,416

 

Taxable-equivalent adjustment:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans

 

 

 5

 

 

11

 

 

23

 

 

 

16

 

 

45

 

Securities

 

 

562

 

 

548

 

 

888

 

 

 

1,110

 

 

1,379

 

Interest income (TE)

 

 

27,828

 

 

23,701

 

 

22,711

 

 

 

51,529

 

 

43,840

 

Interest expense (GAAP)

 

 

4,019

 

 

3,526

 

 

3,139

 

 

 

7,545

 

 

6,206

 

Net interest income (TE)

 

$

23,809

 

$

20,175

 

$

19,572

 

 

$

43,984

 

$

37,634

 

Net interest income  (GAAP)

 

$

23,242

 

$

19,616

 

$

18,661

 

 

$

42,858

 

$

36,210

 

Average interest earning assets

 

$

2,392,059

 

$

2,174,847

 

$

2,115,511

 

 

$

2,284,054

 

$

2,093,308

 

Net interest margin (GAAP)

 

 

3.90

%

 

3.66

%

 

3.54

%

 

 

3.78

%

 

3.49

%

Net interest margin  (TE)

 

 

3.99

%

 

3.76

%

 

3.71

%

 

 

3.88

%

 

3.63

%

 

 

 

 

Noninterest Income and Expense

 

The following table details the major components of noninterest income for the periods presented:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2nd Qtr 2018

 

Noninterest Income

 

Three Months Ended

 

Percent Change From

 

(dollars in thousands)

 

June 30, 

 

March 31, 

 

June 30, 

 

March 31, 

 

June 30, 

 

 

    

2018

    

2018

    

2017

    

2018

    

2017

 

Trust income

 

$

1,645

 

$

1,495

 

$

1,638

 

10.0

 

0.4

 

Service charges on deposits

 

 

1,769

 

 

1,592

 

 

1,615

 

11.1

 

9.5

 

Residential mortgage banking revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Secondary mortgage fees

 

 

195

 

 

162

 

 

223

 

20.4

 

(12.6)

 

Mortgage servicing rights mark to market (loss) gain

 

 

(105)

 

 

305

 

 

(429)

 

N/M

 

N/M

 

Mortgage servicing income

 

 

627

 

 

452

 

 

444

 

38.7

 

41.2

 

Net gain on sales of mortgage loans

 

 

1,240

 

 

917

 

 

1,473

 

35.2

 

(15.8)

 

Total residential mortgage banking revenue

 

 

1,957

 

 

1,836

 

 

1,711

 

6.6

 

14.4

 

Securities gain (loss), net

 

 

312

 

 

35

 

 

(131)

 

791.4

 

338.2

 

Increase in cash surrender value of BOLI

 

 

351

 

 

248

 

 

350

 

41.5

 

0.3

 

Death benefit realized on BOLI

 

 

 -

 

 

1,026

 

 

 -

 

N/M

 

N/M

 

Debit card interchange income

 

 

1,132

 

 

1,012

 

 

1,081

 

11.9

 

4.7

 

Gain on disposal and transfer of fixed assets

 

 

 -

 

 

 -

 

 

12

 

N/M

 

N/M

 

Other income

 

 

1,366

 

 

1,261

 

 

1,041

 

8.3

 

31.2

 

Total noninterest income

 

$

8,532

 

$

8,505

 

$

7,317

 

0.3

 

16.6

 

 

N/M - Not meaningful

 

Noninterest income for the second quarter of 2018 increased $27,000, or 0.3%, compared to the first quarter of 2018, and increased $1.2 million, or 16.6%, compared to the second quarter of 2017. 

 

The increase in noninterest income in the second quarter of 2018, compared to the first quarter of 2018, was driven primarily by increases in trust income, service charges on deposit accounts, total residential mortgage banking revenue, securities gains and debit card interchange income, partially offset by a decrease in death benefit realized on BOLI.  Securities gain (loss), net, experienced the most significant positive fluctuation, as a percentage of total change on a linked quarter basis, as we repositioned our securities portfolio over the past year.  Mortgage servicing income and net gain on the sale of mortgage loans contributed the majority of total residential mortgage banking revenue growth in the second quarter of 2018 compared to the prior linked quarter, due to volume increases in the rising rate environment.  The $1.0 million of death benefit realized on BOLI in the first quarter of 2018 was due to the death of a covered employee in February 2018.

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Table of Contents

The increase in noninterest income in the second quarter of 2018 compared to the second quarter of 2017 was driven primarily by increases in service charges on deposit accounts, total residential mortgage banking revenue, securities gains and other income.  Securities gain (loss), net, experienced the most significant positive fluctuation, as a percentage of total change on a year over year basis, as we repositioned our securities portfolio over the past year.  Mortgage servicing income and mortgage servicing rights mark to market adjustments contributed to the total residential mortgage banking revenue growth in the second quarter of 2018 compared to the second quarter of 2017, due to volume increases in the rising rate environment.  The increase in other income was primarily attributable to an increase in commercial swap fee income of $186,000 in the second quarter of 2018 compared to the second quarter of 2017.

 

The following table details the major components of noninterest expense for the periods presented:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2nd Qtr 2018

 

Noninterest Expense

 

Three Months Ended

 

Percent  Change From

 

(dollars in thousands)

 

June 30, 

 

March 31, 

 

June 30, 

 

March 31, 

 

June 30, 

 

 

    

2018

    

2018

    

2017

    

2018

    

2017

 

Salaries

 

$

9,703

 

$

7,335

 

$

7,972

 

32.3

 

21.7

 

Officers incentive

 

 

740

 

 

787

 

 

854

 

(6.0)

 

(13.3)

 

Benefits and other

 

 

1,912

 

 

2,085

 

 

1,719

 

(8.3)

 

11.2

 

Total salaries and employee benefits

 

 

12,355

 

 

10,207

 

 

10,545

 

21.0

 

17.2

 

Occupancy, furniture and equipment expense

 

 

1,652

 

 

1,558

 

 

1,462

 

6.0

 

13.0

 

Computer and data processing

 

 

2,741

 

 

1,344

 

 

1,112

 

103.9

 

146.5

 

FDIC insurance

 

 

165

 

 

156

 

 

165

 

5.8

 

 -

 

General bank insurance

 

 

299

 

 

251

 

 

264

 

19.1

 

13.3

 

Amortization of core deposit intangible asset

 

 

97

 

 

21

 

 

25

 

361.9

 

288.0

 

Advertising expense

 

 

492

 

 

341

 

 

452

 

44.3

 

8.8

 

Debit card interchange expense

 

 

301

 

 

281

 

 

399

 

7.1

 

(24.6)

 

Legal fees

 

 

286

 

 

159

 

 

184

 

79.9

 

55.4

 

Other real estate owned expense, net

 

 

429

 

 

173

 

 

539

 

148.0

 

(20.4)

 

Other expense

 

 

3,469

 

 

2,863

 

 

2,839

 

21.2

 

22.2

 

Total noninterest expense

 

$

22,286

 

$

17,354

 

$

17,986

 

28.4

 

23.9

 

Efficiency ratio (GAAP)

 

 

69.16

%

 

63.41

%

 

66.73

%

 

 

 

 

Adjusted efficiency ratio (non-GAAP)1

 

 

57.88

%

 

60.50

%

 

62.95

%

 

 

 

 

 

1  The adjusted efficiency ratio shown in the table above is a non-GAAP financial measure 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 and the BOLI death benefit recorded. 

See the section entitled “Reconciliation of Adjusted Efficiency Ratio Non-GAAP Financial Measures” on page 47 for a reconciliation of this non-GAAP measure to the most comparable GAAP equivalent.

Noninterest expense for the second quarter of 2018 increased $4.9 million, or 28.4%, compared to the first quarter of 2018, and increased $4.3 million, or 23.9%, compared to the second quarter of 2017. 

 

The increase in noninterest expense in the second quarter of 2018, compared to the first quarter of 2018, was primarily attributable to ABC Bank acquisition-related costs incurred in the second quarter of 2018, which included $1.2 million of salaries and employee benefit expense, $1.6 million of computer and data processing expense, $114,000 of legal expense, and $76,000 of core deposit intangible amortization.  Other expense for the second quarter of 2018 reflects an increase from the prior linked quarter due to various acquisition related costs such as appraisals, audit fees, and consulting expenses.

 

The increase in noninterest expense in the second quarter of 2018 compared to the second quarter of 2017 was primarily attributable to ABC Bank acquisition-related costs incurred in the second quarter of 2018, which included $1.2 million of salaries and employee benefit expense, $1.6 million of computer and data processing expense, $114,000 of legal expense, and $76,000 of core deposit intangible amortization.  The increase in noninterest expense in the second quarter of 2018 was partially offset by reduced OREO related costs in 2018, compared to the second quarter of 2017, as our OREO portfolio balance continued to decline.

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Table of Contents

Reconciliation of Adjusted Efficiency Ratio Non-GAAP Financial Measures

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

June 30, 

 

March 31, 

 

June 30, 

 

 

 

2018

 

2018

 

2017

 

Efficiency Ratio

 

 

 

 

 

 

 

 

 

 

Noninterest expense

 

$

22,286

 

$

17,354

 

$

17,986

 

Less amortization of core deposit

 

 

97

 

 

21

 

 

25

 

Less other real estate expense, net

 

 

429

 

 

173

 

 

539

 

Less transition related executive costs

 

 

 -

 

 

 -

 

 

294

 

Less acquisition related costs

 

 

3,168

 

 

246

 

 

 -

 

Adjusted noninterest expense

 

 

18,592

 

 

16,914

 

 

17,128

 

Net interest income (GAAP)

 

 

23,242

 

 

19,616

 

 

18,661

 

Taxable-equivalent adjustment:

 

 

 

 

 

 

 

 

 

 

Loans

 

 

 5

 

 

11

 

 

23

 

Securities

 

 

562

 

 

548

 

 

888

 

Net interest income (TE)

 

 

23,809

 

 

20,175

 

 

19,572

 

Noninterest income

 

 

8,532

 

 

8,505

 

 

7,317

 

Taxable-equivalent adjustment:

 

 

 

 

 

 

 

 

 

 

Increase in cash surrender value of BOLI (TE)

 

 

93

 

 

339

 

 

188

 

Noninterest income  (TE)

 

 

8,625

 

 

8,844

 

 

7,505

 

Less death benefit related to BOLI

 

 

 -

 

 

1,026

 

 

 -

 

Less securities gain (loss), net

 

 

312

 

 

35

 

 

(131)

 

Adjusted noninterest income, plus net interest income (TE)

 

$

32,122

 

$

27,958

 

$

27,208

 

Efficiency ratio (GAAP)

 

 

69.16

%

 

63.41

%

 

66.73

%

Adjusted efficiency ratio (non-GAAP)

 

 

57.88

%

 

60.50

%

 

62.95

%

 

Income Taxes

 

The Company recorded a tax expense of $1.8 million on $8.0 million of pre-tax income for the second quarter of 2018, compared to an income tax expense of $2.0 million in the first quarter of 2018 and $2.1 million of income tax expense in the second quarter of 2017.  The effective tax rate for the second quarter of 2018 was 22.1%, an increase from 17.4% for the first quarter of 2018, but a decrease from 28.9% in the second quarter of 2017.  Lower tax rates were effective in 2018 due to the “Tax Cuts and Jobs Act” which was signed into law in December 2017, and resulted in the federal corporate tax rate being reduced to 21% from 35%.   We recorded an income tax expense credit of $483,000 in the first quarter of 2018 related to the vesting of restricted stock awards; this credit also contributed to the reduction of the effective tax rate for the first quarter.  The first quarter of 2018 was also favorably impacted by the receipt of a $1.0 million death benefit realized on BOLI, which is not taxable.  Income tax expense reflected all relevant statutory tax rates and GAAP accounting.

There were no significant changes in the Company’s ability to utilize the deferred tax assets during the quarter ended June 30, 2018.  The Company has no valuation reserve on the deferred tax assets as of June 30, 2018.

 

Financial Condition

 

Total assets increased $266.3 million from $2.38 billion as of December 31, 2017, to $2.65 billion at June 30, 2018, due primarily to the Company’s acquisition of ABC Bank in the second quarter of 2018.  Total loans as of June 30, 2018, increased $231.5 million, or 14.3%, compared to December 31, 2017.  The securities portfolio totaled $543.6 million at June 30, 2018, an increase of $2.2 million from $541.4 million at December 31, 2017.  Total deposits also reflected an increase in the second quarter of 2018, ending at $2.16 billion, compared to $1.92 billion at December 31, 2017, due primarily to the ABC Bank acquisition which contributed $248.5 million, net of purchase accounting adjustments, of deposit growth.

 

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June 30, 2018

Securities

 

As of

 

Percent Change From

(in thousands)

 

June 30, 

 

December 31, 

 

June 30, 

 

December 31, 

 

June 30, 

 

    

2018

    

2017

    

2017

    

2017

    

2017

Securities available-for-sale, at fair value

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasuries

 

$

3,876

 

$

3,947

 

$

 -

 

(1.8)

 

N/M

U.S. government agencies

 

 

12,216

 

 

13,061

 

 

 -

 

(6.5)

 

N/M

U.S. government agencies mortgage-backed

 

 

13,407

 

 

12,214

 

 

20,846

 

9.8

 

(35.7)

States and political subdivisions

 

 

276,112

 

 

278,092

 

 

225,518

 

(0.7)

 

22.4

Corporate bonds

 

 

700

 

 

833

 

 

12,616

 

(16.0)

 

(94.5)

Collateralized mortgage obligations

 

 

61,432

 

 

65,939

 

 

100,913

 

(6.8)

 

(39.1)

Asset-backed securities

 

 

109,263

 

 

112,932

 

 

140,385

 

(3.2)

 

(22.2)

Collateralized loan obligations

 

 

66,638

 

 

54,421

 

 

67,949

 

22.4

 

(1.9)

Total securities

 

$

543,644

 

$

541,439

 

$

568,227

 

0.4

 

(4.3)

 

N/M - Not meaningful

 

Available-for-sale security purchases during the second quarter of 2018 consisted primarily of collateralized loan obligations, whereas purchases during the year over year period were primarily tax exempt state and political subdivisions securities.  We immediately liquidated the securities portfolio acquired with our acquisition of ABC Bank in the second quarter of 2018 as the holdings were not considered consistent with our investment strategies.  This liquidation resulted in a cash inflow of approximately $72.1 million.  During the second quarter of 2018, security sales resulted in net realized gains of $312,000, as compared to net realized gains of $639,000 for the fourth quarter of 2017 and net realized losses of $131,000 for the second quarter of 2017.

 

Loans

 

Total loans were $1.85 billion as of June 30, 2018, an increase of $231.5 million from total loans as of December 31, 2017.  The increase in total loans was due primarily to our acquisition of ABC Bank in April 2018, which resulted in $227.6 million of loans recorded, net of purchase accounting adjustments.  Significant loan payoffs continued to occur in the second quarter of 2018, including payoff of one large commercial relationship of approximately $21.5 million.  We continued to diversify our loan portfolio driving organic growth in commercial loans in the second quarter of 2018 compared to December 31, 2017, and June 30, 2017.  We also purchased $21.8 million of high grade multifamily real estate loans in the second quarter of 2018, which contributed to the total residential real estate growth, excluding PCI loans, of $91.5 million from December 31, 2017, to June 30, 2018.

 

Total loans increased $309.5 million from June 30, 2017, to June 30, 2018, due primarily to our acquisition of ABC Bank, as discussed above, as well as organic loan growth in commercial, real estate-construction, leases, and real estate-residential loans, the high grade multifamily real estate loan purchase of $21.8 million in June 2018, and the home equity portfolio purchase from TCF Bank in the first quarter of 2018 of $20.0 million.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2018

Loans

As of

 

Percent Change From

(in thousands)

June 30, 

 

December 31, 

 

June 30, 

 

December 31, 

 

June 30, 

 

2018

 

2017

 

2017

 

2017

    

2017

Commercial

$

299,536

 

$

272,851

 

$

256,760

 

9.8

 

16.7

Leases

 

66,687

 

 

68,325

 

 

70,138

 

(2.4)

 

(4.9)

Real estate - commercial

 

808,264

 

 

750,991

 

 

706,103

 

7.6

 

14.5

Real estate - construction

 

115,486

 

 

85,162

 

 

93,661

 

35.6

 

23.3

Real estate - residential

 

404,908

 

 

313,397

 

 

282,118

 

29.2

 

43.5

HELOC

 

127,986

 

 

112,833

 

 

116,052

 

13.4

 

10.3

Other 1

 

13,969

 

 

13,383

 

 

14,137

 

4.4

 

(1.2)

Total loans, excluding deferred loan costs and PCI loans

 

1,836,836

 

 

1,616,942

 

 

1,538,969

 

13.6

 

19.4

Net deferred loan costs

 

1,112

 

 

680

 

 

678

 

63.5

 

64.0

Total loans, excluding PCI loans

 

1,837,948

 

 

1,617,622

 

 

1,539,647

 

13.6

 

19.4

PCI loans, net of purchase accounting adjustments

 

11,214

 

 

 -

 

 

 -

 

N/M

 

N/M

Total loans

$

1,849,162

 

$

1,617,622

 

$

1,539,647

 

14.3

 

20.1

 

N/M - Not meaningful

1 The “Other” class includes consumer and overdrafts.

 

The quality of our loan portfolio is impacted not only by the Company’s credit decisions but also by the economic health of the communities in which we operate.  Since we are located in a corridor with significant open space and undeveloped real estate, real

48

 


 

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estate lending (including commercial, construction, residential, and HELOCs) have been and continue to be a sizeable portion of our portfolio.  These categories comprised 78.8% of the portfolio as of June 30, 2018, compared to 78.0% of the portfolio as of December 31, 2017.  We continue to oversee and manage our loan portfolio in accordance with interagency guidance on risk management.

 

Asset Quality

 

The Company recorded a provision for loan and lease losses of $1.5 million as of June 30, 2018, compared to a provision of $750,000 as of June 30, 2017.  On a quarterly basis, management estimates the amount required and records the appropriate provision expense or release to maintain an adequate reserve for all potential and estimated loan and lease losses.

Nonperforming loans consist of nonaccrual loans, performing restructured accruing loans and loans 90 days or greater past due.  PCI loans with an accretable yield are considered current, and are not included within nonperforming loans.  Remediation work continues in all segments.  Nonperforming loans decreased by $3.8 million at June 30, 2018, from $15.6 million at both December 31, 2017, and June 30, 2017.  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 0.6% as of June 30, 2018, from 1.0% as of December 31, 2017, and June 30, 2017.  The distribution of the Company’s nonperforming loans is shown in the following table.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2018

 

Nonperforming Loans

As of

 

Percent Change From

 

(in thousands)

June 30, 

 

December 31, 

 

June 30, 

 

December 31, 

 

June 30, 

 

 

2018

 

2017

 

2017

 

2017

 

2017

 

Commercial

$

 -

 

$

 -

 

$

216

 

 -

 

 

(100.0)

 

 

Leases

 

 -

 

 

178

 

 

460

 

(100.0)

 

 

(100.0)

 

 

Real estate-commercial, nonfarm

 

5,012

 

 

3,289

 

 

3,055

 

52.4

 

 

64.1

 

 

Real estate-construction

 

635

 

 

201

 

 

220

 

215.9

 

 

188.6

 

 

Real estate-residential:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investor

 

409

 

 

372

 

 

686

 

9.9

 

 

(40.4)

 

 

Multifamily

 

 -

 

 

4,723

 

 

4,824

 

(100.0)

 

 

(100.0)

 

 

Owner occupied

 

4,278

 

 

4,964

 

 

4,285

 

(13.8)

 

 

(0.2)

 

 

HELOC

 

1,524

 

 

1,890

 

 

1,863

 

(19.4)

 

 

(18.2)

 

 

Other 1

 

16

 

 

 7

 

 

 9

 

128.6

 

 

77.8

 

 

Total nonperforming loans

$

11,874

 

$

15,624

 

$

15,618

 

(24.0)

 

 

(24.0)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1 The “Other” class includes consumer and overdrafts.

 

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Loan Charge-offs, net of recoveries

Three Months Ended

(in thousands)

June 30, 

 

% of

 

March 31, 

 

% of

 

June 30, 

 

% of

 

2018

 

Total1

 

2018

 

Total1

 

2017

 

Total1

Commercial

$

(77)

 

(24.3)

 

$

(1)

 

0.1

 

$

 1

 

0.2

Leases

 

 8

 

2.5

 

 

 5

 

(0.3)

 

 

 -

 

 -

Real estate-commercial, nonfarm

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner general purpose

 

27

 

8.5

 

 

(41)

 

2.8

 

 

(1)

 

(0.2)

Owner special purpose

 

 -

 

 -

 

 

(21)

 

1.4

 

 

(6)

 

(0.9)

Non-owner general purpose

 

(20)

 

(6.3)

 

 

(313)

 

21.6

 

 

(39)

 

(6.0)

Non-owner special purpose

 

476

 

150.2

 

 

(1)

 

0.1

 

 

 -

 

 -

Retail properties

 

 -

 

 -

 

 

(87)

 

6.0

 

 

 4

 

0.6

Total real estate-commercial, nonfarm

 

483

 

152.4

 

 

(463)

 

31.9

 

 

(42)

 

(6.5)

Real estate-construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Homebuilder

 

 -

 

 -

 

 

 2

 

(0.1)

 

 

(1)

 

(0.2)

Land

 

(2)

 

(0.6)

 

 

(4)

 

0.3

 

 

(48)

 

(7.3)

Commercial speculative

 

 -

 

 -

 

 

(18)

 

1.2

 

 

 -

 

 -

All other

 

 2

 

0.6

 

 

 1

 

(0.1)

 

 

(11)

 

(1.7)

Total real estate-construction

 

 -

 

 -

 

 

(19)

 

1.3

 

 

(60)

 

(9.2)

Real estate-residential

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investor

 

(63)

 

(19.9)

 

 

(30)

 

2.1

 

 

(16)

 

(2.4)

Multifamily

 

(11)

 

(3.5)

 

 

(175)

 

12.1

 

 

129

 

19.7

Owner occupied

 

(26)

 

(8.2)

 

 

(766)

 

52.9

 

 

723

 

110.4

Total real estate-residential

 

(100)

 

(31.6)

 

 

(971)

 

67.1

 

 

836

 

127.7

HELOC

 

(26)

 

(8.2)

 

 

(20)

 

1.4

 

 

(109)

 

(16.6)

Other  2

 

29

 

9.2

 

 

20

 

(1.5)

 

 

29

 

4.4

Net charge-offs / (recoveries) 

$

317

 

100.0

 

$

(1,449)

 

100.0

 

$

655

 

100.0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

2 The “Other” class includes consumer and overdrafts.

 

Net charge-offs for the second quarter of 2018 were $317,000, compared to net recoveries of $1.4 million for the first quarter of 2018 and net charge-offs of $655,000 for the second quarter of 2017, reflecting continuing management attention to credit quality.  We have continued our conservative loan valuations and aggressive recovery efforts on prior charge-offs.

 

The following table shows classified assets by segment for the following periods.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2018

Classified Assets

As of

 

Percent Change From

(in thousands)

June 30, 

 

December 31, 

 

June 30, 

 

December 31, 

 

June 30, 

 

2018

 

2017

 

2017

 

2017

 

2017

Commercial

$

393

 

$

 -

 

$

255

 

N/M

 

 

54.1

 

Leases

 

539

 

 

610

 

 

460

 

(11.6)

 

 

17.2

 

Real estate-commercial, nonfarm

 

12,362

 

 

6,098

 

 

7,494

 

102.7

 

 

65.0

 

Real estate-commercial, farm

 

1,248

 

 

2,439

 

 

1,305

 

(48.8)

 

 

(4.4)

 

Real estate-construction

 

366

 

 

371

 

 

397

 

(1.3)

 

 

(7.8)

 

Real estate-residential:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investor

 

1,029

 

 

436

 

 

843

 

136.0

 

 

22.1

 

Multifamily

 

3,302

 

 

 -

 

 

4,824

 

N/M

 

 

(31.6)

 

Owner occupied

 

5,428

 

 

5,476

 

 

4,935

 

(0.9)

 

 

10.0

 

HELOC

 

1,633

 

 

2,038

 

 

1,963

 

(19.9)

 

 

(16.8)

 

Other 1

 

18

 

 

18

 

 

 9

 

 -

 

 

100

 

Total classified loans

 

26,318

 

 

17,486

 

 

22,485

 

50.5

 

 

17.0

 

Other real estate owned

 

8,912

 

 

8,371

 

 

11,724

 

6.5

 

 

(24.0)

 

Total classified assets, excluding PCI loans

 

35,230

 

 

25,857

 

 

34,209

 

36.2

 

 

3.0

 

PCI, net of purchase accounting adjustments

 

11,214

 

 

 -

 

 

 -

 

N/M

 

 

N/M

 

Total classified assets

$

46,444

 

$

25,857

 

$

34,209

 

79.6

 

 

35.8

 

N/M - Not meaningful

1 The “Other” class includes consumer and overdrafts.

 

Classified loans include nonaccrual, performing troubled debt restructurings and all other loans considered substandard.  Classified assets include both classified loans and OREO.  Loans classified as substandard are inadequately protected by either the current net

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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.

Total classified loans and total classified assets both increased as of June 30, 2018, from the levels at December 31, 2017 and June 30, 2017 due to loans purchased in our acquisition of ABC Bank in the second quarter of 2018.  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, which is referred to as the “classified assets ratio.”  The classified assets ratio was 12.01% for the period ended June 30, 2018, compared to 11.87% as of December 31, 2017, and 13.66% as of June 30, 2017.

 

Allowance for Loan and Lease Losses

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

June 30, 

 

March 31, 

 

June 30, 

 

June 30, 

 

June 30, 

 

 

2018

 

2018

 

2017

 

2018

 

2017

 

Allowance at beginning of period

$

18,188

 

 

$

17,461

 

 

$

15,741

 

 

$

17,461

 

 

$

16,158

 

 

Charge-offs:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

15

 

 

 

16

 

 

 

 6

 

 

 

31

 

 

 

 7

 

 

Leases

 

 8

 

 

 

 5

 

 

 

 -

 

 

 

13

 

 

 

117

 

 

Real estate - commercial

 

504

 

 

 

(96)

 

 

 

 4

 

 

 

408

 

 

 

278

 

 

Real estate - construction

 

 -

 

 

 

(16)

 

 

 

 -

 

 

 

(16)

 

 

 

 4

 

 

Real estate - residential

 

 5

 

 

 

(60)

 

 

 

946

 

 

 

(55)

 

 

 

977

 

 

HELOC

 

65

 

 

 

27

 

 

 

30

 

 

 

92

 

 

 

194

 

 

Other 1

 

102

 

 

 

99

 

 

 

80

 

 

 

201

 

 

 

180

 

 

Total charge-offs

 

699

 

 

 

(25)

 

 

 

1,066

 

 

 

674

 

 

 

1,757

 

 

Recoveries:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

92

 

 

 

17

 

 

 

 5

 

 

 

109

 

 

 

 7

 

 

Leases

 

 -

 

 

 

 -

 

 

 

 -

 

 

 

 -

 

 

 

 -

 

 

Real estate - commercial

 

21

 

 

 

367

 

 

 

46

 

 

 

388

 

 

 

81

 

 

Real estate - construction

 

 -

 

 

 

 3

 

 

 

60

 

 

 

 3

 

 

 

78

 

 

Real estate - residential

 

105

 

 

 

911

 

 

 

110

 

 

 

1,016

 

 

 

153

 

 

HELOC

 

91

 

 

 

47

 

 

 

139

 

 

 

138

 

 

 

238

 

 

Other 1

 

73

 

 

 

79

 

 

 

51

 

 

 

152

 

 

 

128

 

 

Total recoveries

 

382

 

 

 

1,424

 

 

 

411

 

 

 

1,806

 

 

 

685

 

 

Net charge-offs / (recoveries)

 

317

 

 

 

(1,449)

 

 

 

655

 

 

 

(1,132)

 

 

 

1,072

 

 

Provision (release) for loan and lease losses

 

1,450

 

 

 

(722)

 

 

 

750

 

 

 

728

 

 

 

750

 

 

Allowance at end of period

$

19,321

 

 

$

18,188

 

 

$

15,836

 

 

$

19,321

 

 

$

15,836

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

$

1,806,209

 

 

$

1,600,594

 

 

$

1,505,572

 

 

$

1,703,969

 

 

$

1,495,122

 

 

Net charge-offs / (recoveries) to average loans

 

0.02

%

 

 

(0.09)

%

 

 

0.04

%

 

 

(0.07)

%

 

 

0.07

%

 

Allowance at period end to average loans

 

1.07

%

 

 

1.14

%

 

 

1.05

%

 

 

1.13

%

 

 

1.06

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance: Individually evaluated for impairment

$

498

 

 

$

588

 

 

$

98

 

 

$

498

 

 

$

98

 

 

Ending balance: Collectively evaluated for impairment

$

18,823

 

 

$

17,600

 

 

$

15,738

 

 

$

18,823

 

 

$

15,738

 

 

Ending balance: Acquired and accounted for ASC 310-30

$

 -

 

 

$

 -

 

 

$

 -

 

 

$

 -

 

 

$

 -

 

 

 

1 The “Other” class includes consumer and overdrafts.

 

Net charge-offs for the quarter ended June 30, 2018, totaled $317,000, compared to $655,000 of net charge-offs for the quarter ended June 30, 2017.  Net recoveries for the six months ended June 30, 2018 were $1.1 million, compared to net charge-offs of $1.1 million for the six months ended June 30, 2017.  The coverage ratio of the allowance for loan and lease losses to nonperforming loans was 162.7% as of June 30, 2018, which was an increase from the coverage ratio of 111.8% as of December 31, 2017, and 101.4% coverage ratio as of June 30, 2017.  When measured as a percentage of average loans as of June 30, 2018, our total allowance for loan and lease losses decreased to 1.07% of quarterly average loans from 1.14% as of March 31, 2018, but increased compared to 1.05% as of June 30, 2017.  The total allowance for loan and lease losses as a percent of total period end loans was 1.22% as of June 30, 2018, excluding the loans purchased from the ABC Bank and Talmer branch acquisitions.  Total charge-offs for the quarter ended March 31, 2018, reflected a negative balance due to the unearned net loan fees on loans charged off in prior periods being taken as a charge-off reduction in the first quarter of 2018. 

 

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In accordance with the accounting guidance for business combinations, there was no allowance brought forward on any of the acquired loans in our acquisition of ABC Bank or our Talmer branch purchase.  For non-PCI loans, credit discounts representing the principal losses expected over the life of the loan are a component of the initial fair value and the discount is accreted to interest income over the life of the loan.  Subsequent to the purchase date, the method used to evaluate the sufficiency of the credit discount is similar to organic loans, and if necessary, additional reserves are recognized in the allowance for loan and lease losses.  The aggregate non-PCI loans related to our acquisition of ABC Bank and the Talmer branch purchase totaled $332.8 million as of June 30, 2018, net of purchase accounting adjustments, which included $2.3 million of credit discounts.  At June 30, 2018, of our $19.3 million allowance for loan and lease losses, $1.2 million related to non-PCI loans.  In management’s judgment, an adequate allowance for estimated losses has been established for inherent losses at June 30, 2018, 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. 

 

We recorded PCI loans in our acquisition of ABC Bank, which totaled $11.2 million, net of purchase accounting adjustments, which included $6.4 million of credit discounts as of June 30, 2018.  We will perform re-estimations of cash flows on our PCI loan portfolio on a quarterly basis.  Any decline in expected cash flows as a result of these re-estimations, due in any part to a change in credit, is deemed credit impairment, and recorded as provision for loan and lease losses during the period.  Any decline in expected cash flows due only to changes in expected timing of cash flows is recognized prospectively as a decrease in yield on the loan and any improvement in expected cash flows, once any previously recorded impairment is recaptured, is recognized prospectively as an adjustment to the yield on the loan.

 

Other Real Estate Owned

 

As of June 30, 2018, OREO increased to $8.9 million, compared to $8.4 million at December 31, 2017 and $11.7 million at June 30, 2017.  There were eight additions to the OREO portfolio in the second quarter of 2018.  The increase of $2.8 million in OREO for the quarter ended June 30, 2018, compared to the quarter ended June 30, 2017, was a result of our acquisition of ABC Bank.  The $709,000 in property disposals in the second quarter of 2018 was due to four property sales.  Valuation write-downs continued with an expense of $254,000 recorded on six properties in the second quarter of 2018, compared to $78,000 of valuation write-downs recorded in the fourth quarter of 2017, and $392,000 of valuation write-downs recorded in the second quarter of 2017.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2018

OREO

Three Months Ended

 

Percent Change From

(in thousands)

June 30, 

 

December 31, 

 

June 30, 

 

December 31, 

 

June 30, 

 

2018

 

2017

 

2017

 

2017

 

2017

Beginning balance

$

7,063

 

$

9,024

 

$

13,481

 

(21.7)

 

 

(47.6)

 

Property additions

 

2,812

 

 

 -

 

 

204

 

N/M

 

 

N/M

 

Less:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property disposals

 

709

 

 

575

 

 

1,569

 

23.3

 

 

(54.8)

 

Period valuation adjustments

 

254

 

 

78

 

 

392

 

225.6

 

 

(35.2)

 

Total other real estate owned

$

8,912

 

$

8,371

 

$

11,724

 

6.5

 

 

(24.0)

 

 

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 $4.7 million, or approximately 52.2% of total OREO at June 30, 2018, 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)

June 30, 2018

 

December 31, 2017

 

June 30, 2017

 

 

Amount

 

% of Total

 

 

Amount

 

% of Total

 

 

Amount

 

% of Total

Single family residence

$

2,460

 

28

%

 

$

900

 

11

%

 

$

986

 

8

%

Lots (single family and commercial)

 

4,395

 

49

%

 

 

5,329

 

63

%

 

 

6,305

 

54

%

Vacant land

 

470

 

5

%

 

 

479

 

6

%

 

 

627

 

5

%

Multi-family

 

 -

 

0

%

 

 

 -

 

0

%

 

 

89

 

1

%

Commercial property

 

1,587

 

18

%

 

 

1,663

 

20

%

 

 

3,717

 

32

%

Total OREO properties

$

8,912

 

100

%

 

$

8,371

 

100

%

 

$

11,724

 

100

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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Table of Contents

Deposits and Borrowings

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2018

Deposits

As of

 

Percent Change From

(in thousands)

June 30, 

 

December 31, 

 

June 30, 

 

December 31, 

 

June 30, 

 

2018

 

2017

 

2017

 

2017

    

2017

Noninterest bearing demand

$

620,807

 

$

572,404

 

$

546,463

 

8.5

 

13.6

Savings

 

301,832

 

 

262,220

 

 

265,643

 

15.1

 

13.6

NOW accounts

 

435,514

 

 

429,448

 

 

429,205

 

1.4

 

1.5

Money market accounts

 

320,949

 

 

276,082

 

 

276,867

 

16.3

 

15.9

Certificates of deposit of less than $100,000

 

249,049

 

 

216,493

 

 

221,806

 

15.0

 

12.3

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

 

175,174

 

 

122,489

 

 

115,279

 

43.0

 

52.0

Certificates of deposit of more than $250,000

 

58,526

 

 

43,789

 

 

54,882

 

33.7

 

6.6

Total deposits

$

2,161,851

 

$

1,922,925

 

$

1,910,145

 

12.4

 

13.2

 

Total deposits were $2.16 billion as of June 30, 2018, which reflects a $238.9 million increase from total deposits of $1.92 billion as of December 31, 2017, and an increase of $251.7 million over the $1.91 billion as of June 30, 2017.  The growth in deposits was primarily due to our acquisition of ABC Bank, as $248.5 million of deposits were recorded, net of purchase accounting adjustments.  Total noninterest bearing demand accounts increased $48.4 million, or 8.5%, to $620.8 million as of June 30, 2018, compared to noninterest bearing demand accounts of $572.4 million as of December 31, 2017.  Certificates of deposit reflected an increase of $100.0 million, or 26.1%, for the six months ended June 30, 2018, and savings and money market accounts reflected growth of 15.1% and 16.3%, respectively, for the same period.  In addition to deposit growth experienced related to the ABC Bank acquisition, an increase in deposits in the second quarter of 2018 compared to the prior year end and year over year periods was attributable to strong commercial demand deposit growth stemming from operational fund increases as well as growth in commercial loan clients over the past year. 

 

In addition to deposits, the Bank obtained funding from other sources in all periods presented.  Securities sold under repurchase agreements totaled $54.0 million at June 30, 2018, an increase from $29.9 million at December 31, 2017.  The Bank also recorded a short-term advance of $72.6 million from the FHLBC at June 30, 2018, as compared to $115.0 million in short term borrowings outstanding from the FHLBC as of December 31, 2017.  The Bank also assumed $23.5 million of long-term FHLBC advances with the ABC Bank acquisition, with maturities scheduled over the next 7.75 years and paying interest at rates of 1.40% to 2.83 %.

 

The Company is indebted on senior notes totaling $44.1 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 semi-annually 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 $57.7 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, we initiated a cash flow hedge which resulted in the total interest rate paid on this debt of 4.34% as of June 30, 2018, as compared to 6.77%, which was the rate paid during the period prior to the June 15,  2017 rate reset.

 

Capital

 

As of June 30, 2018, total stockholders’ equity was $209.8 million, which was an increase of $9.5 million from $200.4 million as of December 31, 2017.  This increase is directly attributable to net income of $15.8 million for the first six months of 2018, partially offset by an accumulated other comprehensive net loss of $6.0 million, and $594,000 of dividends paid to common shareholders in 2018 year to date.

The Company’s total stockholders’ equity continues to include $4.8 million related to the value of a ten-year warrant to purchase shares of its common stock, with an exercise price of $13.43 per share.  This warrant was issued in January 2009 as part of the Company’s Series B preferred stock issuance; all preferred stock issued was redeemed as of September 30, 2015.  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, 2017, under the heading “Capital”.

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The following table shows the regulatory capital ratios and the current well capitalized regulatory requirements for the Company and the Bank as of the dates indicated:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 

 

December 31, 

 

June 30, 

 

 

Well-Capitalized1

 

 

2018

 

2017

 

2017

The Bank's common equity tier 1 capital ratio  1

 

6.50

%

 

12.62

%

 

12.88

%

 

12.46

%

The Company's common equity tier 1 capital ratio

 

N/A

 

 

8.49

%

 

9.25

%

 

8.55

%

The Bank's total capital ratio  1

 

10.00

%

 

13.51

%

 

13.78

%

 

13.30

%

The Company's total capital ratio

 

N/A

 

 

11.87

%

 

12.93

%

 

12.14

%

The Company's tier 1 leverage ratio

 

N/A

 

 

9.37

%

 

10.08

%

 

9.09

%

 

1 Prompt corrective action provisions are only applicable at the Bank level.

 

The Company, on a consolidated basis, exceeded the minimum capital ratios to be deemed “well capitalized” as of June 30, 2018, pursuant to the capital requirements in effect at that time.  All ratios conform to the regulatory calculation requirements in effect as of the date noted.  In addition to the above regulatory ratios, the Company’s GAAP common equity to asset ratio, which is used as a performance measurement for capital analysis and peer comparisons, decreased from 8.41% at December 31, 2017 to 7.92% at June 30, 2018, due to the ABC Bank acquisition.  The Company’s non-GAAP tangible common equity to tangible assets ratio, which management also considers a valuable performance measurement for capital analysis, decreased from 8.07% at December 31, 2017, to 7.19% at June 30, 2018; the reduction was due to intangibles of $13.0 million recorded related to the Company’s acquisition of ABC Bank in the second quarter of 2018.

 

 

 

Reconciliation of Tangible Common Equity to Tangible Assets Ratio Non-GAAP Measure

 

The Company’s GAAP tangible common equity to tangible assets ratio was 7.14% at June 30, 2018, compared to 8.06% as of December 31, 2017.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2018

 

 

December 31, 2017

 

(in thousands)

GAAP

 

 

Non-GAAP

 

 

GAAP

 

 

Non-GAAP

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tangible common equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Equity

$

209,814

 

 

$

209,814

 

 

$

200,350

 

 

$

200,350

 

Less: Intangible assets

 

22,074

 

 

 

20,692

 

 

 

8,922

 

 

 

8,813

 

Tangible common equity

$

187,740

 

 

$

189,122

 

 

$

191,428

 

 

$

191,537

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tangible assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

$

2,649,748

 

 

$

2,649,748

 

 

$

2,383,429

 

 

$

2,383,429

 

Less: Goodwill and intangible assets

 

22,074

 

 

 

20,692

 

 

 

8,922

 

 

 

8,813

 

Tangible assets

$

2,627,674

 

 

$

2,629,056

 

 

$

2,374,507

 

 

$

2,374,616

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common equity to total assets

 

7.92

%

 

 

7.92

%

 

 

8.41

%

 

 

8.41

%

Tangible common equity to tangible assets

 

7.14

%

 

 

7.19

%

 

 

8.06

%

 

 

8.07

%

 

The non-GAAP intangible asset exclusion reflects the 80% core deposit limitation per Basel III guidelines within risk based capital calculations, and is useful for the Company when reviewing risk based capital ratios and equity performance metrics.

 

 

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 $27.6 million during the first six months of 2018, compared with net cash inflows of $34.5 million in the same period in 2017.  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 six months of 2018 and 2017.  Interest paid, net of interest received, combined with changes in other assets and liabilities were a source of inflows for the first six months of 2018 and 2017.  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.

 

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Table of Contents

Net cash inflows from investing activities were $23.3 million in the first six months of 2018, compared to net cash outflows of $88.8 million in the same period in 2017.  In the first six months of 2018, securities transactions accounted for net inflows of $61.0 million, and the principal change on loans accounted for net outflows of $4.4 million.  Proceeds from claims on BOLI, net of premiums paid, accounted for net inflows of $1.2 million.  In the first six months of 2017, securities transactions accounted for net outflows of $27.0 million, and net principal disbursed on loans accounted for net outflows of $64.8 million.  Proceeds from sales of OREO accounted for $2.1 million and $3.3 million in investing cash inflows for the first six months of 2018 and 2017, respectively.  Cash outflows for the six months ended June 30, 2018, included cash paid for the Company’s purchase of ABC Bank of $35.7 million, net of cash and cash equivalents retained.

 

Net cash outflows from financing activities in the first six months of 2018 were $41.5 million, compared with net cash inflows of $58.1 million in the first six months of 2017.  Net deposit outflows in the first six months of 2018 were $9.6 million compared to net deposit inflows of $43.4 million in the first six months of 2017.  Other short-term borrowings had net cash outflows of $49.3 million in the first six months of 2018 and inflows of $5.0 million in the first six months of 2017.  Changes in securities sold under repurchase agreements accounted for $18.5 million and $10.6 million in net inflows in the first six months of 2018 and 2017, respectively.

 

Cash and cash equivalents for the six months ended June 30, 2018, totaled $65.3 million, as compared to $51.1 million as of June 30, 2017.   

 

 

 

 

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 2018, 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 interest rates higher during 2018 and potentially into 2019.  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 in October 2017 which result in increases in long-term rates.  The Company manages interest rate risk within guidelines established by policy which limits the amount of rate exposure.  In practice, we seek to maintain interest rate risk exposure well within those guidelines and we do not believe such risks pose a material risk to the future earnings of the Company.

 

The Company manages various market risks in its normal course of operations, including credit, liquidity risk, 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 at June 30, 2018, and December 31, 2017, 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 includes 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 a different interest rate environment in order to determine the percentage change.  As of December 31, 2017, the Company had modest amounts of earnings gains (in both dollars and percentage) should interest rates rise, and limited earnings reductions should interest rates fall. The changes in income across the various interest rate scenarios as of June 2018 were similar to those of December 2017, with somewhat lower rising-rate earnings gains. Earnings reductions in the 0.50% and 1.00% falling rate scenarios were slightly lower, while somewhat greater in the 2.00% falling-rate scenario. Although significant loan and deposit growth occurred during the quarter due to the acquisition of ABC Bank, the overall impact on the interest rate risk of the combined company was nominal. Overall, management considers the current level of interest rate risk to be moderate, but intends to continue closely monitoring changes in that risk in case corrective actions might be needed in the future. The Federal Funds rate and the Bank’s prime rate increased by 0.25% during the quarter to 2.00% and 5.00%, respectively.

 

55

 


 

Table of Contents

The following table summarizes the effect on annual income before income taxes based upon an immediate increase or decrease in interest rates of 0.5%, 1%, and 2% and no change in the slope of the yield curve.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Analysis of Net Interest Income Sensitivity

(dollars in thousands)

 

Immediate Changes in Rates

 

 

    

(2.0)

%

 

    

(1.0)

%

    

  

(0.5)

%

    

  

0.5

%

    

  

1.0

%

    

  

2.0

%

June 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dollar change

 

$

(10,532)

 

 

$

(4,749)

 

 

$

(1,958)

 

 

$

1,362

 

 

$

2,650

 

 

$

4,961

 

Percent change

 

 

(11.3)

%

 

 

(5.1)

%

 

 

(2.1)

%

 

 

1.5

%

 

 

2.8

%

 

 

5.3

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dollar change

 

$

(9,447)

 

 

$

(5,272)

 

 

$

(2,382)

 

 

$

1,375

 

 

$

2,764

 

 

$

5,273

 

Percent change

 

 

(12.0)

%

 

 

(6.7)

%

 

 

(3.0)

%

 

 

1.7

%

 

 

3.5

%

 

 

6.7

%

 

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

 

Item 4.  Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

The Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures, as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended, as of June 30, 2018.  Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that as of June 30, 2018, 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.

 

As a result of the Company’s acquisition of GCFC, and its wholly-owned subsidiary, ABC Bank, which closed on April 20, 2018, additional controls were added to the Company’s internal controls over financial reporting related to the accounting for purchased loans, including the methodology used to monitor and report purchased loans, specifically PCI loans. There were no other changes in the Company’s internal controls over financial reporting during the quarter ended June 30, 2018, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. 

 

The design of any system of controls and procedures is based in part upon certain assumptions about the likelihood of future events. There can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.

 

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, 2017.

 

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

 

None.

 

Item 3.  Defaults Upon Senior Securities

 

None.

 

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Table of Contents

Item 4.  Mine Safety Disclosures

 

Not applicable

 

Item 5.  Other Information

 

None.

 

 

Item 6.  Exhibits

 

Exhibits:

 

 

 

10.1

Form of Performance-Based Restricted Stock Unit Agreement (incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K filed on April 18, 2018).

 

 

10.2

Form of Director Performance-Based Restricted Stock Agreement. 

 

 

31.1

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

 

 

31.2

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

 

 

32.1

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

 

 

32.2

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

 

 

101

Interactive data files pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets at June 30, 2018, and December 31, 2017; (ii) Consolidated Statements of Income for the six months ended June 30, 2018 and 2017; (iii) Consolidated Statements of Stockholders’ Equity for the six months ended June 30, 2018 and 2017; (iv) Consolidated Statements of Cash Flows for the six months ended June 30,  2018 and 2017; and (v) Notes to Consolidated Financial Statements, tagged as blocks of text and in detail.*

 

 

 

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

 

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Table of Contents

SIGNATURES

 

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

 

 

 

 

 

 

OLD SECOND BANCORP, INC.

 

 

 

 

 

BY:

/s/ 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: August 7, 2018

 

 

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