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OLD SECOND BANCORP INC - Quarter Report: 2019 September (Form 10-Q)

I  

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

 

 

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

 

THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2019

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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) 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

 

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 ☒

 

 

 

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock

OSBC

The Nasdaq Stock Market

Preferred Securities of Old Second Capital Trust I

OSBCP

The Nasdaq Stock Market

 

As of November 4, 2019, the Registrant has 29,903,154 shares of common stock outstanding at $1.00 par value per share.

 

 

 

 

 

 

 

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

39

Item 3. 

Quantitative and Qualitative Disclosures about Market Risk

57

Item 4. 

Controls and Procedures

58

 

PART II

 

 

 

 

Item 1. 

Legal Proceedings

59

Item 1.A. 

Risk Factors

59

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

59

Item 3. 

Defaults Upon Senior Securities

59

Item 4. 

Mine Safety Disclosure

59

Item 5. 

Other Information

59

Item 6. 

Exhibits

59

 

 

 

 

Signatures

60

 

2

 

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This report and other publicly available documents of the Company contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act, including with respect to management’s expectations regarding future plans, strategies and financial performance, including 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,” “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 materially 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;

·

our ability to achieve anticipated results from our acquisition of Greater Chicago Financial Corp. depends on the state of the economic and financial markets going forward. Specifically, we may incur more credit losses than expected, cost savings may be less than expected, anticipated strategic gains may be significantly harder or take longer to achieve than expected or may not be achieved in their entirety, and customer attrition may be greater than expected;

·

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

·

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 from other financial service businesses and from nontraditional financial technology (“FinTech”) companies;

·

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 and other counter-party risk;

·

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;

·

adverse federal or state tax assessments;

·

risks associated with actual or potential litigation or investigations by customers, regulatory agencies or others;

·

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; and

·

each of the factors and risks under the heading “Risk Factors” in our 2018 Annual Report on Form 10-K and in subsequent filings we make 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, except as required by applicable law.

3

 

PART I - FINANCIAL INFORMATION

Item 1.  Financial Statements

 

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Balance Sheets

(In thousands, except share data)

 

 

 

 

 

 

 

 

 

(unaudited)

 

 

 

 

 

September 30, 

 

December 31, 

 

    

2019

    

2018

Assets

 

 

 

 

 

 

Cash and due from banks

 

$

42,671

 

$

38,599

Interest earning deposits with financial institutions

 

 

11,366

 

 

16,636

Cash and cash equivalents

 

 

54,037

 

 

55,235

Securities available-for-sale, at fair value

 

 

488,422

 

 

541,248

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

 

 

10,711

 

 

13,433

Loans held-for-sale

 

 

5,592

 

 

2,984

Loans

 

 

1,899,811

 

 

1,897,027

Less: allowance for loan and lease losses

 

 

19,651

 

 

19,006

Net loans

 

 

1,880,160

 

 

1,878,021

Premises and equipment, net

 

 

42,900

 

 

42,439

Other real estate owned

 

 

4,682

 

 

7,175

Mortgage servicing rights, net

 

 

5,361

 

 

7,357

Goodwill and core deposit intangible

 

 

21,404

 

 

21,814

Bank-owned life insurance ("BOLI")

 

 

62,589

 

 

61,544

Deferred tax assets, net

 

 

12,691

 

 

21,280

Other assets

 

 

25,766

 

 

23,473

Total assets

 

$

2,614,315

 

$

2,676,003

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

Noninterest bearing demand

 

$

643,355

 

$

618,830

Interest bearing:

 

 

 

 

 

 

Savings, NOW, and money market

 

 

1,004,501

 

 

1,040,668

Time

 

 

426,635

 

 

457,175

Total deposits

 

 

2,074,491

 

 

2,116,673

Securities sold under repurchase agreements

 

 

48,870

 

 

46,632

Other short-term borrowings

 

 

84,000

 

 

149,500

Junior subordinated debentures

 

 

57,722

 

 

57,686

Senior notes

 

 

44,244

 

 

44,158

Notes payable and other borrowings

 

 

8,856

 

 

15,379

Other liabilities

 

 

26,111

 

 

16,894

Total liabilities

 

 

2,344,294

 

 

2,446,922

 

 

 

 

 

 

 

Stockholders’ Equity

 

 

 

 

 

 

Common stock

 

 

34,825

 

 

34,720

Additional paid-in capital

 

 

120,291

 

 

119,081

Retained earnings

 

 

204,486

 

 

175,463

Accumulated other comprehensive income (loss)

 

 

6,371

 

 

(4,079)

Treasury stock

 

 

(95,952)

 

 

(96,104)

Total stockholders’ equity

 

 

270,021

 

 

229,081

Total liabilities and stockholders’ equity

 

$

2,614,315

 

$

2,676,003

 

 

 

 

 

 

 

 

 

September 30, 2019

 

December 31, 2018

 

Common

 

Common

 

Stock

    

Stock

Par value

$

1.00

 

$

1.00

Shares authorized

 

60,000,000

 

 

60,000,000

Shares issued

 

34,825,340

 

 

34,719,517

Shares outstanding

 

29,903,154

 

 

29,763,078

Treasury shares

 

4,922,186

 

 

4,956,439

 

See accompanying notes to consolidated financial statements.

4

 

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Income

(In thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(unaudited)

 

(unaudited)

 

 

 

Three Months Ended  September 30, 

 

Nine Months Ended  September 30, 

 

    

2019

    

2018

    

2019

    

2018

    

Interest and dividend income

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans, including fees

 

$

25,109

 

$

23,377

 

$

74,132

 

$

64,625

 

Loans held-for-sale

 

 

47

 

 

39

 

 

100

 

 

94

 

Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

 

2,296

 

 

2,491

 

 

6,933

 

 

7,053

 

Tax exempt

 

 

1,719

 

 

2,064

 

 

5,958

 

 

6,239

 

Dividends from FHLBC and FRBC stock

 

 

154

 

 

121

 

 

459

 

 

338

 

Interest bearing deposits with financial institutions

 

 

119

 

 

84

 

 

344

 

 

230

 

Total interest and dividend income

 

 

29,444

 

 

28,176

 

 

87,926

 

 

78,579

 

Interest expense

 

 

 

 

 

 

 

 

 

 

 

 

 

Savings, NOW, and money market deposits

 

 

724

 

 

642

 

 

2,254

 

 

1,487

 

Time deposits

 

 

1,672

 

 

1,568

 

 

4,931

 

 

4,187

 

Securities sold under repurchase agreements

 

 

135

 

 

140

 

 

431

 

 

323

 

Other short-term borrowings

 

 

429

 

 

311

 

 

1,611

 

 

916

 

Junior subordinated debentures

 

 

933

 

 

930

 

 

2,791

 

 

2,784

 

Senior notes

 

 

682

 

 

672

 

 

2,026

 

 

2,016

 

Notes payable and other borrowings

 

 

89

 

 

173

 

 

312

 

 

268

 

Total interest expense

 

 

4,664

 

 

4,436

 

 

14,356

 

 

11,981

 

Net interest and dividend income

 

 

24,780

 

 

23,740

 

 

73,570

 

 

66,598

 

Provision for loan and lease losses

 

 

550

 

 

 -

 

 

1,450

 

 

728

 

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

 

 

24,230

 

 

23,740

 

 

72,120

 

 

65,870

 

Noninterest income

 

 

 

 

 

 

 

 

 

 

 

 

 

Trust income

 

 

1,730

 

 

1,644

 

 

4,955

 

 

4,784

 

Service charges on deposits

 

 

2,020

 

 

1,923

 

 

5,841

 

 

5,284

 

Secondary mortgage fees

 

 

282

 

 

199

 

 

621

 

 

556

 

Mortgage servicing rights mark to market (loss) gain

 

 

(946)

 

 

(11)

 

 

(2,902)

 

 

189

 

Mortgage servicing income

 

 

460

 

 

471

 

 

1,408

 

 

1,550

 

Net gain on sales of mortgage loans

 

 

2,074

 

 

965

 

 

3,999

 

 

3,122

 

Securities gains, net

 

 

3,463

 

 

13

 

 

4,476

 

 

360

 

Increase in cash surrender value of BOLI

 

 

267

 

 

347

 

 

1,045

 

 

946

 

Death benefit realized on BOLI

 

 

 -

 

 

 -

 

 

 -

 

 

1,026

 

Debit card interchange income

 

 

1,124

 

 

1,135

 

 

3,277

 

 

3,279

 

Other income

 

 

1,459

 

 

1,128

 

 

3,838

 

 

3,755

 

Total noninterest income

 

 

11,933

 

 

7,814

 

 

26,558

 

 

24,851

 

Noninterest expense

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

12,062

 

 

11,165

 

 

35,261

 

 

33,727

 

Occupancy, furniture and equipment

 

 

2,235

 

 

1,782

 

 

6,149

 

 

4,992

 

Computer and data processing

 

 

1,490

 

 

1,247

 

 

4,346

 

 

5,332

 

FDIC insurance

 

 

(114)

 

 

162

 

 

176

 

 

483

 

General bank insurance

 

 

270

 

 

230

 

 

756

 

 

780

 

Amortization of core deposit intangible

 

 

157

 

 

136

 

 

410

 

 

254

 

Advertising expense

 

 

360

 

 

492

 

 

975

 

 

1,325

 

Debit card interchange expense

 

 

279

 

 

320

 

 

659

 

 

902

 

Legal fees

 

 

111

 

 

243

 

 

480

 

 

688

 

Other real estate expense, net

 

 

26

 

 

(370)

 

 

324

 

 

232

 

Other expense

 

 

3,078

 

 

3,304

 

 

9,738

 

 

9,636

 

Total noninterest expense

 

 

19,954

 

 

18,711

 

 

59,274

 

 

58,351

 

Income before income taxes

 

 

16,209

 

 

12,843

 

 

39,404

 

 

32,370

 

Provision for income taxes

 

 

4,036

 

 

3,201

 

 

9,485

 

 

6,978

 

Net income

 

$

12,173

 

$

9,642

 

$

29,919

 

$

25,392

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

$

0.41

 

$

0.32

 

$

1.00

 

$

0.85

 

Diluted earnings per share

 

 

0.40

 

 

0.32

 

 

0.98

 

 

0.84

 

Dividends declared per share

 

 

0.01

 

 

0.01

 

 

0.03

 

 

0.03

 

 

See accompanying notes to consolidated financial statements.

5

 

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(unaudited)

 

(unaudited)

 

 

Three Months Ended  September 30, 

 

Nine Months Ended  September 30, 

 

    

2019

    

2018

    

2019

    

2018

Net Income

 

$

12,173

 

$

9,642

 

$

29,919

 

$

25,392

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

5,824

 

 

(2,801)

 

 

23,661

 

 

(12,999)

Related tax (expense) benefit

 

 

(1,638)

 

 

788

 

 

(6,657)

 

 

3,664

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

 

 

4,186

 

 

(2,013)

 

 

17,004

 

 

(9,335)

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

Net realized gains

 

 

3,463

 

 

13

 

 

4,476

 

 

360

Related tax expense

 

 

(973)

 

 

(3)

 

 

(1,257)

 

 

(100)

Net realized gains after tax

 

 

2,490

 

 

10

 

 

3,219

 

 

260

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

 

 

1,696

 

 

(2,023)

 

 

13,785

 

 

(9,595)

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in fair value of derivatives used for cash flow hedges

 

 

(1,996)

 

 

628

 

 

(4,638)

 

 

2,422

Related tax benefit (expense)

 

 

559

 

 

(176)

 

 

1,303

 

 

(683)

Other comprehensive (loss) income on cash flow hedges

 

 

(1,437)

 

 

452

 

 

(3,335)

 

 

1,739

 

 

 

 

 

 

 

 

 

 

 

 

 

Total other comprehensive income (loss)

 

 

259

 

 

(1,571)

 

 

10,450

 

 

(7,856)

Total comprehensive income

 

$

12,432

 

$

8,071

 

$

40,369

 

$

17,536

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

Accumulated

 

Total

 

 

Unrealized Gain

 

Unrealized Gain

 

Accumulated Other

 

 

(Loss) on Securities

 

(Loss) on Derivative

 

Comprehensive

 

 

Available-for -Sale

 

Instruments

 

Income/(Loss)

For the Three Months Ended

 

 

 

 

 

 

 

 

 

Balance, June 30, 2019

 

$

8,051

 

$

(1,939)

 

$

6,112

Other comprehensive income (loss), net of tax

 

 

1,696

 

 

(1,437)

 

 

259

Balance, September 30, 2019

 

$

9,747

 

$

(3,376)

 

$

6,371

 

 

 

 

 

 

 

 

 

 

Balance, June 30, 2018

 

$

(4,851)

 

$

364

 

$

(4,487)

Other comprehensive (loss) income, net of tax

 

 

(2,023)

 

 

452

 

 

(1,571)

Balance, September 30, 2018

 

$

(6,874)

 

$

816

 

$

(6,058)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the nine Months Ended

 

 

 

 

 

 

 

 

 

Balance, December 31, 2018

 

$

(4,038)

 

$

(41)

 

$

(4,079)

Other comprehensive income (loss), net of tax

 

 

13,785

 

 

(3,335)

 

 

10,450

Balance, September 30, 2019

 

$

9,747

 

$

(3,376)

 

$

6,371

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2017

 

$

2,239

 

$

(760)

 

$

1,479

Reclassification of stranded tax effects

 

 

482

 

 

(163)

 

 

319

Other comprehensive (loss) income, net of tax

 

 

(9,595)

 

 

1,739

 

 

(7,856)

Balance, September 30, 2018

 

$

(6,874)

 

$

816

 

$

(6,058)

 

 

See accompanying notes to consolidated financial statements.

 

6

 

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

(Unaudited)

 

 

Nine Months Ended  September 30, 

 

 

2019

 

2018

Cash flows from operating activities

 

 

 

 

 

 

Net income

 

$

29,919

 

$

25,392

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

Net premium / discount from amortization on securities

 

 

2,128

 

 

2,128

Securities gains, net

 

 

(4,476)

 

 

(360)

Provision for loan and lease losses

 

 

1,450

 

 

728

Originations of loans held-for-sale

 

 

(126,929)

 

 

(107,947)

Proceeds from sales of loans held-for-sale

 

 

127,455

 

 

111,169

Net gains on sales of mortgage loans

 

 

(3,999)

 

 

(3,122)

Mortgage servicing rights mark to market loss (gain)

 

 

2,902

 

 

(189)

Net discount / premium from accretion on loans

 

 

(1,052)

 

 

(776)

Increase in cash surrender value of BOLI

 

 

(1,045)

 

 

(946)

Net gains on sale of other real estate owned

 

 

(254)

 

 

(716)

Provision for other real estate owned valuation losses

 

 

399

 

 

485

Depreciation of fixed assets and amortization of leasehold improvements

 

 

1,869

 

 

1,778

Net (gains) on disposal  and transfer of fixed assets

 

 

(32)

 

 

 -

Amortization of core deposit intangible

 

 

410

 

 

254

Change in current income taxes receivable

 

 

3,319

 

 

671

Provision for deferred tax expense

 

 

4,493

 

 

6,777

Change in accrued interest receivable and other assets

 

 

(7,441)

 

 

533

Accretion of purchase accounting adjustment on time deposits

 

 

(38)

 

 

 -

Amortization of purchase accounting adjustment on notes payable and other borrowings

 

 

75

 

 

 -

Amortization of junior subordinated debentures issuance costs

 

 

36

 

 

35

Amortization of senior notes issuance costs

 

 

86

 

 

75

Change in accrued interest payable and other liabilities

 

 

6,366

 

 

2,432

Stock based compensation

 

 

1,905

 

 

1,641

Net cash provided by operating activities

 

 

37,546

 

 

40,042

Cash flows from investing activities

 

 

 

 

 

 

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

 

 

32,631

 

 

32,890

Proceeds from sales of securities available-for-sale

 

 

177,824

 

 

94,663

Purchases of securities available-for-sale

 

 

(136,096)

 

 

(71,488)

Net proceeds from sales of FHLBC stock

 

 

2,722

 

 

2,627

Net disbursements from purchases of FRB stock

 

 

 -

 

 

(1,421)

Net change in loans

 

 

(2,833)

 

 

9,988

Proceeds from claims on BOLI

 

 

 -

 

 

1,204

Improvements in other real estate owned

 

 

 -

 

 

(59)

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

 

 

2,644

 

 

4,292

Proceeds from disposition of fixed assets

 

 

32

 

 

 -

Net purchases of premises and equipment

 

 

(2,330)

 

 

(1,563)

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

 

 

 -

 

 

(35,711)

Net cash provided by investing activities

 

 

74,594

 

 

35,422

Cash flows from financing activities

 

 

 

 

 

 

Net change in deposits

 

 

(42,144)

 

 

(39,053)

Net change in securities sold under repurchase agreements

 

 

2,238

 

 

8,792

Net change in other short-term borrowings

 

 

(65,500)

 

 

(44,000)

Net change in notes payable and other borrowings

 

 

(6,598)

 

 

(5,317)

Proceeds from exercise of stock options

 

 

32

 

 

 -

Dividends paid on common stock

 

 

(896)

 

 

(892)

Purchase of treasury stock

 

 

(470)

 

 

(505)

Net cash used in financing activities

 

 

(113,338)

 

 

(80,975)

Net change in cash and cash equivalents

 

 

(1,198)

 

 

(5,511)

Cash and cash equivalents at beginning of period

 

 

55,235

 

 

55,833

Cash and cash equivalents at end of period

 

$

54,037

 

$

50,322

 

See accompanying notes to consolidated financial statements.  

7

 

 

 

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Changes in

Stockholders’ Equity

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

Other

 

 

 

 

Total

 

 

Common

 

Paid-In

 

Retained

 

Comprehensive

 

Treasury

 

Stockholders’

 

    

Stock

    

Capital

    

Earnings

    

Income (Loss)

    

Stock

    

Equity

For the Three Months Ended

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, June 30, 2019

 

$

34,825

 

$

119,762

 

$

192,612

 

$

6,112

 

$

(96,047)

 

$

257,264

Net income

 

 

 

 

 

 

 

 

12,173

 

 

 

 

 

 

 

 

12,173

Other comprehensive income, net of tax

 

 

 

 

 

 

 

 

 

 

 

259

 

 

 

 

 

259

Dividends declared and paid, ($0.01 per share)

 

 

 

 

 

 

 

 

(299)

 

 

 

 

 

 

 

 

(299)

Vesting of restricted stock

 

 

 

 

 

(135)

 

 

 

 

 

 

 

 

135

 

 

 -

Stock based compensation

 

 

 

 

 

664

 

 

 

 

 

 

 

 

 

 

 

664

Purchase of treasury stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(40)

 

 

(40)

Balance, September 30, 2019

 

$

34,825

 

$

120,291

 

$

204,486

 

$

6,371

 

$

(95,952)

 

$

270,021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, June 30, 2018

 

$

34,717

 

$

118,082

 

$

157,796

 

$

(4,487)

 

$

(96,294)

 

$

209,814

Net income

 

 

 

 

 

 

 

 

9,642

 

 

 

 

 

 

 

 

9,642

Other comprehensive loss, net of tax

 

 

 

 

 

 

 

 

 

 

 

(1,571)

 

 

 

 

 

(1,571)

Dividends declared and paid, ($0.01 per share)

 

 

 

 

 

 

 

 

(298)

 

 

 

 

 

 

 

 

(298)

Stock based compensation

 

 

 

 

 

543

 

 

 

 

 

 

 

 

 

 

 

543

Balance, September 30, 2018

 

$

34,717

 

$

118,625

 

$

167,140

 

$

(6,058)

 

$

(96,294)

 

$

218,130

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

Other

 

 

 

 

Total

 

 

Common

 

Paid-In

 

Retained

 

Comprehensive

 

Treasury

 

Stockholders’

 

 

Stock

    

Capital

    

Earnings

    

Income (Loss)

    

Stock

    

Equity

For the Nine Months Ended

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2018

 

$

34,720

 

$

119,081

 

$

175,463

 

$

(4,079)

 

$

(96,104)

 

$

229,081

Net income

 

 

 

 

 

 

 

 

29,919

 

 

 

 

 

 

 

 

29,919

Other comprehensive income, net of tax

 

 

 

 

 

 

 

 

 

 

 

10,450

 

 

 

 

 

10,450

Dividends declared and paid, ($0.03 per share)

 

 

 

 

 

 

 

 

(896)

 

 

 

 

 

 

 

 

(896)

Vesting of restricted stock

 

 

103

 

 

(389)

 

 

 

 

 

 

 

 

286

 

 

 -

Stock option exercised

 

 

 2

 

 

 7

 

 

 

 

 

 

 

 

23

 

 

32

Stock warrants exercised

 

 

 

 

 

(313)

 

 

 

 

 

 

 

 

313

 

 

 -

Stock based compensation

 

 

 

 

 

1,905

 

 

 

 

 

 

 

 

 

 

 

1,905

Purchase of treasury stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(470)

 

 

(470)

Balance, September 30, 2019

 

$

34,825

 

$

120,291

 

$

204,486

 

$

6,371

 

$

(95,952)

 

$

270,021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2017

 

$

34,626

 

$

117,742

 

$

142,959

 

$

1,479

 

$

(96,456)

 

$

200,350

Net income

 

 

 

 

 

 

 

 

25,392

 

 

 

 

 

 

 

 

25,392

Other comprehensive loss, net of tax

 

 

 

 

 

 

 

 

 

 

 

(7,856)

 

 

 

 

 

(7,856)

Dividends declared and paid, ($0.03 per share)

 

 

 

 

 

 

 

 

(892)

 

 

 

 

 

 

 

 

(892)

Vesting of restricted stock

 

 

91

 

 

(758)

 

 

 

 

 

 

 

 

667

 

 

 -

Reclassification of stranded tax effects

 

 

 

 

 

 

 

 

(319)

 

 

319

 

 

 

 

 

 -

Stock based compensation

 

 

 

 

 

1,641

 

 

 

 

 

 

 

 

 

 

 

1,641

Purchase of treasury stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(505)

 

 

(505)

Balance, September 30, 2018

 

$

34,717

 

$

118,625

 

$

167,140

 

$

(6,058)

 

$

(96,294)

 

$

218,130

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

8

 

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 September 30, 2019, are not necessarily indicative of the results that may be expected for the year ending December 31, 2019.  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, 2018.  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, 2018.  These policies, along with the disclosures presented in the other financial statement notes and in this discussion, provide information on how significant assets and liabilities are valued in the consolidated financial statements and how those values are determined.

 

Recent Accounting Pronouncements

 

In 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 to create a new model to follow for sale-leaseback transactions.  The impact of this pronouncement will primarily affect lessees, 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.  In July 2018, the FASB issued ASU No. 2018-11, “Leases (Topic 842): Targeted Improvements” which provided additional guidance on the transition method, including application as a cumulative-effect adjustment to equity and practical expedients to use when accounting for lease components.  The Company adopted this standard as of January 1, 2019, and recorded right of use assets of $817,000 with a like lease liability.  As of September 30, 2019, the right of use assets and lessee lease liability both totaled $3.3 million. The Company also recorded leases receivable related to lessor leases of $174,000 as of January 1, 2019 with a like entry to lease liabilities for the lessor position; these tenant leases receivable balances and lessor lease liabilities both totaled approximately $97,000 as of September 30, 2019.  There was no impact to equity for the adoption of this standard on a modified retrospective basis. 

 

In June 2016, the FASB issued ASU No. 2016-13 “Measurement of Credit Losses on Financial Instruments (Topic 326).” This ASU  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 has determined that a combination of loss rate models utilizing weighted average remaining life, migration and vintage analysis will be used for calculation of future expected losses based on data availability and the characteristics of each loan pool being assessed upon the ASU’s adoption in 2020.  The Company has accumulated historical data by loan pools and collateral classifications, and is reviewing and refining the parallel calculation performed as of September 30, 2019,  to confirm the model processes and determine financial statement impact prior to adoption in 2020.  The Company is also developing internal control processes and disclosure documentation related to adoption of this standard. 

 

9

 

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

 

Subsequent Events

 

On October 15, 2019, the Company’s Board of Directors declared a cash dividend of $0.01 per share payable on November 4, 2019, to stockholders of record as of October 25, 2019; dividends of $299,000 were paid to stockholders on November 4, 2019.

 

Note 2 – Acquisitions

 

On April 20, 2018, the Company acquired Greater Chicago Financial Corp. (“GCFC”) and its wholly-owned subsidiary, ABC Bank, which operated 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 retirement of the debentures 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 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 $10.2 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 $10.2 million recorded as goodwill is expected to be deductible for tax purposes.    Acquisition related costs incurred by the Company for the year ended December 31, 2018, totaled $3.5 million, pre-tax, and included $1.1 million of salaries and employee benefits related expenses, and $1.8 million of data processing, computer and ATM related conversion costs.  No acquisition related costs were incurred in the nine months ended September 30, 2019.

 

The assets and liabilities associated with the acquisition of GCFC were recorded in the Consolidated Balance Sheets at their estimated fair values 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 table shows the estimated fair value of the assets acquired and liabilities assumed as of April 20, 2018.  These fair value estimates were considered final as of March 31, 2019, and no further refinements to the values listed below are anticipated.

 

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

 

 

401

Goodwill and core deposit intangible

 

 

13,280

Deferred tax assets, net

 

 

3,459

Other assets

 

 

1,767

Total assets

 

$

336,949

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10

 

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

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

 

 

5,623

Other short-term borrowings

 

 

10,875

Notes payable and other borrowings

 

 

23,367

Other liabilities

 

 

1,406

Total liabilities

 

 

289,769

 

 

 

 

Cash consideration paid

 

 

47,180

Total Liabilities Assumed and Cash Consideration Paid for Acquisition

 

$

336,949

 

 

 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 loans should be considered purchased credit impaired (“PCI loans”), defined as impaired loans as those that were either not accruing interest or exhibited credit risk factors consistent with nonperforming loans at the acquisition date, or purchased non-credit impaired loans (“non-PCI loans”), defined as loans acquired that did not show signs of deteriorated credit quality at acquisition.

 

The following table represents the acquired loans as of date of acquisition and as of September 30, 2019:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

April 20, 2018

 

September 30, 2019

ABC Bank Acquired Loans

    

PCI

    

Non-PCI

    

PCI

    

Non-PCI

Fair Value

 

$

11,360

 

$

216,234

 

$

9,403

 

$

134,536

Contractually required principal and interest payments

 

 

19,447

 

 

220,308

 

 

15,083

 

 

135,822

Best estimate of contractual cash flows not expected to be collected

 

 

6,537

 

 

2,511

 

 

4,893

 

 

614

Best estimate of contractual cash flows expected to be collected

 

 

12,910

 

 

217,797

 

 

10,190

 

 

135,208

 

 

 

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 $4.5 million at September 30, 2019, and $7.2 million at December 31, 2018. FRBC stock was recorded at $6.2 million at September 30, 2019, and December 31, 2018. 

 

11

 

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 summarize the amortized cost and fair value of the securities portfolio at September 30, 2019, and December 31, 2018, and the corresponding amounts of gross unrealized gains and losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

September 30, 2019

    

Cost

    

Gains

    

Losses

    

Value

Securities available-for-sale

 

 

 

 

 

 

 

 

U.S. Treasuries

 

$

4,009

 

$

29

 

$

 -

 

$

4,038

U.S. government agencies

 

 

9,304

 

 

 -

 

 

(161)

 

 

9,143

U.S. government agencies mortgage-backed

 

 

16,338

 

 

619

 

 

(17)

 

 

16,940

States and political subdivisions

 

 

227,680

 

 

11,962

 

 

(915)

 

 

238,727

Collateralized mortgage obligations

 

 

62,965

 

 

1,216

 

 

(60)

 

 

64,121

Asset-backed securities

 

 

82,106

 

 

1,243

 

 

(167)

 

 

83,182

Collateralized loan obligations

 

 

72,454

 

 

46

 

 

(229)

 

 

72,271

Total securities available-for-sale

 

$

474,856

 

$

15,115

 

$

(1,549)

 

$

488,422

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

December 31, 2018

    

Cost

    

Gains

    

Losses

    

Value

Securities available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury

 

$

4,006

 

$

 -

 

$

(83)

 

$

3,923

U.S. government agencies

 

 

11,112

 

 

 -

 

 

(161)

 

 

10,951

U.S. government agencies mortgage-backed

 

 

14,407

 

 

45

 

 

(377)

 

 

14,075

States and political subdivisions

 

 

277,112

 

 

1,916

 

 

(4,961)

 

 

274,067

Collateralized mortgage obligations

 

 

66,494

 

 

79

 

 

(2,144)

 

 

64,429

Asset-backed securities

 

 

108,574

 

 

1,165

 

 

(225)

 

 

109,514

Collateralized loan obligations

 

 

65,162

 

 

24

 

 

(897)

 

 

64,289

Total securities available-for-sale

 

$

546,867

 

$

3,229

 

$

(8,848)

 

$

541,248

 

The fair value, amortized cost and weighted average yield of debt securities at September 30, 2019, 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

 

$

736

 

1.92

%

 

$

736

 

Due after one year through five years

 

 

4,655

 

1.88

 

 

 

4,687

 

Due after five years through ten years

 

 

4,645

 

3.29

 

 

 

4,944

 

Due after ten years

 

 

230,957

 

3.04

 

 

 

241,541

 

 

 

 

240,993

 

3.02

 

 

 

251,908

 

Mortgage-backed and collateralized mortgage obligations

 

 

79,303

 

3.15

 

 

 

81,061

 

Asset-backed securities

 

 

82,106

 

3.27

 

 

 

83,182

 

Collateralized loan obligations

 

 

72,454

 

4.53

 

 

 

72,271

 

Total securities available-for-sale

 

$

474,856

 

3.31

%

 

$

488,422

 

 

At September 30, 2019, the Company’s investments included $55.7 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 $4.7 million, or 8.30% of outstanding principal.

 

12

 

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 two originators that individually amount to over 10% of the Company’s stockholders equity.  Information regarding these two issuers and the value of the securities issued follows:

 

 

 

 

 

 

 

 

 

 

September 30, 2019

 

    

Amortized

    

Fair

Issuer

 

Cost

 

Value

GCO Education Loan Funding Corp

 

$

27,840

 

$

27,744

Towd Point Mortgage Trust

 

 

33,744

 

 

34,378

 

Securities with unrealized losses at September 30, 2019, and December 31, 2018, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, were as follows (in thousands except for number of securities):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less than 12 months

 

12 months or more

 

 

 

 

 

 

 

 

September 30, 2019

 

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

 

 -

 

$

 -

 

$

 -

 

 -

 

$

 -

 

$

 -

 

 -

 

$

 -

 

$

 -

U.S. government agencies

 

 -

 

 

 -

 

 

 -

 

 4

 

 

161

 

 

9,143

 

 4

 

 

161

 

 

9,143

U.S. government agencies mortgage-backed

 

 3

 

 

 7

 

 

3,044

 

 2

 

 

10

 

 

848

 

 5

 

 

17

 

 

3,892

States and political subdivisions

 

 3

 

 

326

 

 

15,526

 

 2

 

 

589

 

 

6,757

 

 5

 

 

915

 

 

22,283

Collateralized mortgage obligations

 

 2

 

 

44

 

 

9,320

 

 3

 

 

16

 

 

2,332

 

 5

 

 

60

 

 

11,652

Asset-backed securities

 

 2

 

 

101

 

 

29,389

 

 1

 

 

66

 

 

3,213

 

 3

 

 

167

 

 

32,602

Collateralized loan obligations

 

 5

 

 

56

 

 

26,932

 

 4

 

 

173

 

 

25,030

 

 9

 

 

229

 

 

51,962

Total securities available-for-sale

 

15

 

$

534

 

$

84,211

 

16

 

$

1,015

 

$

47,323

 

31

 

$

1,549

 

$

131,534

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less than 12 months

 

12 months or more

 

 

 

 

 

 

 

 

December 31, 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

 

$

83

 

$

3,923

 

 1

 

$

83

 

$

3,923

U.S. government agencies

 

 3

 

 

100

 

 

7,385

 

 1

 

 

61

 

 

3,566

 

 4

 

 

161

 

 

10,951

U.S. government agencies mortgage-backed

 

 -

 

 

 -

 

 

 -

 

11

 

 

377

 

 

11,439

 

11

 

 

377

 

 

11,439

States and political subdivisions

 

 4

 

 

126

 

 

17,713

 

33

 

 

4,835

 

 

110,326

 

37

 

 

4,961

 

 

128,039

Collateralized mortgage obligations

 

 2

 

 

309

 

 

15,211

 

10

 

 

1,835

 

 

43,687

 

12

 

 

2,144

 

 

58,898

Asset-backed securities

 

 -

 

 

 -

 

 

 -

 

 4

 

 

225

 

 

16,473

 

 4

 

 

225

 

 

16,473

Collateralized loan obligations

 

 7

 

 

721

 

 

46,547

 

 1

 

 

176

 

 

7,824

 

 8

 

 

897

 

 

54,371

Total securities available-for-sale

 

16

 

$

1,256

 

$

86,856

 

61

 

$

7,592

 

$

197,238

 

77

 

$

8,848

 

$

284,094

 

Recognition of other-than-temporary impairment was not necessary as of the three months ended September 30, 2019.  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 nine months ended September 30, 2019 and 2018. 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

 

September 30, 

 

 

September 30, 

 

Securities available-for-sale

    

2019

    

2018

    

2019

    

2018

    

Proceeds from sales of securities

 

$

57,228

 

$

1,917

 

$

177,824

 

$

94,663

 

Gross realized gains on securities

 

 

3,841

 

 

23

 

 

5,432

 

 

370

 

Gross realized losses on securities

 

 

(378)

 

 

(10)

 

 

(956)

 

 

(10)

 

Net realized gains

 

$

3,463

 

$

13

 

$

4,476

 

$

360

 

Income tax expense on net realized gains

 

$

(973)

 

$

(3)

 

$

(1,257)

 

$

(100)

 

Effective tax rate applied

 

 

28.1

%

 

23.1

%

 

28.1

%

 

27.8

%

 

Securities valued at $328.8 million as of September 30, 2019, an increase from $311.2 million at year-end 2018, were pledged to secure deposits and borrowings, and for other purposes. 

13

 

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:

 

 

 

 

 

 

 

 

 

 

    

September 30, 2019

    

December 31, 2018

 

Commercial

 

$

333,664

 

$

314,323

 

Leases

 

 

108,152

 

 

78,806

 

Real estate - commercial

 

 

826,780

 

 

820,941

 

Real estate - construction

 

 

91,066

 

 

108,390

 

Real estate - residential

 

 

388,511

 

 

407,068

 

HELOC

 

 

126,309

 

 

140,442

 

Other 1

 

 

14,140

 

 

14,439

 

Total loans, excluding deferred loan costs and PCI loans

 

 

1,888,622

 

 

1,884,409

 

Net deferred loan costs

 

 

2,054

 

 

1,653

 

Total loans, excluding PCI loans

 

 

1,890,676

 

 

1,886,062

 

PCI loans, net of purchase accounting adjustments

 

 

9,135

 

 

10,965

 

Total loans

 

$

1,899,811

 

$

1,897,027

 

 

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 75.4% and 77.9% of the portfolio at September 30, 2019, and December 31, 2018, respectively. 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recorded

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

90 days or

 

 

 

 

 

 

 

 

90 Days or

 

 

 

 

 

 

 

 

 

 

 

 

 

Greater Past

 

 

30-59 Days

 

60-89 Days

 

Greater Past

 

Total Past

 

 

 

 

 

 

 

 

 

 

Due and

September 30, 2019

    

Past Due

    

Past Due

    

Due

    

Due

    

Current

    

Nonaccrual

    

Total Loans

    

Accruing

Commercial

 

$

 -

 

$

 -

 

$

 -

 

$

 -

 

$

333,516

 

$

148

 

$

333,664

 

$

 -

Leases

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

108,078

 

 

74

 

 

108,152

 

 

 -

Real estate - commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied general purpose

 

 

1,397

 

 

1,216

 

 

 -

 

 

2,613

 

 

140,928

 

 

1,183

 

 

144,724

 

 

 -

Owner occupied special purpose

 

 

1,416

 

 

93

 

 

 -

 

 

1,509

 

 

173,835

 

 

1,591

 

 

176,935

 

 

 -

Non-owner occupied general purpose

 

 

623

 

 

 -

 

 

 -

 

 

623

 

 

328,870

 

 

564

 

 

330,057

 

 

 -

Non-owner occupied special purpose

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

106,043

 

 

2,960

 

 

109,003

 

 

 -

Retail properties

 

 

597

 

 

 -

 

 

 -

 

 

597

 

 

51,015

 

 

1,122

 

 

52,734

 

 

 -

Farm

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

13,327

 

 

 -

 

 

13,327

 

 

 -

Real estate - construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Homebuilder

 

 

93

 

 

 -

 

 

 -

 

 

93

 

 

5,142

 

 

 -

 

 

5,235

 

 

 -

Land

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

12,258

 

 

 -

 

 

12,258

 

 

 -

Commercial speculative

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

51,991

 

 

 -

 

 

51,991

 

 

 -

All other

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

21,488

 

 

94

 

 

21,582

 

 

 -

Real estate - residential

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investor

 

 

 -

 

 

496

 

 

 -

 

 

496

 

 

68,114

 

 

379

 

 

68,989

 

 

 -

Multi-family

 

 

 1

 

 

 -

 

 

 -

 

 

 1

 

 

183,475

 

 

 -

 

 

183,476

 

 

 -

Owner occupied

 

 

106

 

 

307

 

 

 -

 

 

413

 

 

132,933

 

 

2,700

 

 

136,046

 

 

 -

HELOC

 

 

627

 

 

93

 

 

18

 

 

738

 

 

124,556

 

 

1,015

 

 

126,309

 

 

19

Other 1

 

 

 7

 

 

 -

 

 

 -

 

 

 7

 

 

16,165

 

 

22

 

 

16,194

 

 

 -

Total, excluding PCI loans

 

$

4,867

 

$

2,205

 

$

18

 

$

7,090

 

$

1,871,734

 

$

11,852

 

$

1,890,676

 

$

19

PCI loans, net of purchase accounting adjustments

 

 

865

 

 

 -

 

 

 -

 

 

865

 

 

6,474

 

 

1,796

 

 

9,135

 

 

 -

Total

 

$

5,732

 

$

2,205

 

$

18

 

$

7,955

 

$

1,878,208

 

$

13,648

 

$

1,899,811

 

$

19

 

 

14

 

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, 2018

    

Past Due

    

Past Due

    

Due

    

Due

    

Current

    

Nonaccrual

    

Total Loans

    

Accruing

Commercial

 

$

58

 

$

 -

 

$

352

 

$

410

 

$

313,913

 

$

 -

 

$

314,323

 

$

361

Leases

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

78,806

 

 

 -

 

 

78,806

 

 

 -

Real estate - commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied general purpose

 

 

1,768

 

 

 -

 

 

33

 

 

1,801

 

 

160,892

 

 

1,579

 

 

164,272

 

 

36

Owner occupied special purpose

 

 

826

 

 

135

 

 

 -

 

 

961

 

 

192,426

 

 

395

 

 

193,782

 

 

 -

Non-owner occupied general purpose

 

 

2,832

 

 

203

 

 

 -

 

 

3,035

 

 

286,115

 

 

4,236

 

 

293,386

 

 

 -

Non-owner occupied special purpose

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

106,036

 

 

3,099

 

 

109,135

 

 

 -

Retail properties

 

 

 -

 

 

620

 

 

 -

 

 

620

 

 

45,968

 

 

 -

 

 

46,588

 

 

 -

Farm

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

13,778

 

 

 -

 

 

13,778

 

 

 -

Real estate - construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Homebuilder

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

5,102

 

 

 -

 

 

5,102

 

 

 -

Land

 

 

266

 

 

 -

 

 

 -

 

 

266

 

 

2,478

 

 

 -

 

 

2,744

 

 

 -

Commercial speculative

 

 

 -

 

 

 -

 

 

350

 

 

350

 

 

55,060

 

 

 -

 

 

55,410

 

 

355

All other

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

45,028

 

 

106

 

 

45,134

 

 

 -

Real estate - residential

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investor

 

 

801

 

 

156

 

 

 -

 

 

957

 

 

69,148

 

 

353

 

 

70,458

 

 

 -

Multi-family

 

 

545

 

 

 -

 

 

179

 

 

724

 

 

195,504

 

 

 -

 

 

196,228

 

 

180

Owner occupied

 

 

1,241

 

 

705

 

 

 -

 

 

1,946

 

 

135,360

 

 

3,076

 

 

140,382

 

 

 -

HELOC

 

 

775

 

 

 -

 

 

 -

 

 

775

 

 

138,801

 

 

866

 

 

140,442

 

 

 -

Other 1

 

 

53

 

 

 5

 

 

 3

 

 

61

 

 

16,000

 

 

31

 

 

16,092

 

 

 3

Total, excluding PCI loans

 

$

9,165

 

$

1,824

 

$

917

 

$

11,906

 

$

1,860,415

 

$

13,741

 

$

1,886,062

 

$

935

PCI loans, net of purchase accounting adjustments

 

 

1,452

 

 

 -

 

 

 -

 

 

1,452

 

 

7,248

 

 

2,265

 

 

10,965

 

 

 -

Total

 

$

10,617

 

$

1,824

 

$

917

 

$

13,358

 

$

1,867,663

 

$

16,006

 

$

1,897,027

 

$

935

 

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

 

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.

 

15

 

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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2019

 

 

 

 

Special

 

 

 

 

 

 

 

 

 

 

    

Pass

    

Mention

    

Substandard 

    

Doubtful

    

Total

Commercial

 

$

316,680

 

$

8,905

 

$

8,079

 

$

-

 

$

333,664

Leases

 

 

108,078

 

 

 -

 

 

74

 

 

 -

 

 

108,152

Real estate - commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied general purpose

 

 

140,867

 

 

851

 

 

3,006

 

 

-

 

 

144,724

Owner occupied special purpose

 

 

170,525

 

 

4,819

 

 

1,591

 

 

-

 

 

176,935

Non-owner occupied general purpose

 

 

325,621

 

 

590

 

 

3,846

 

 

-

 

 

330,057

Non-owner occupied special purpose

 

 

106,043

 

 

 -

 

 

2,960

 

 

-

 

 

109,003

Retail Properties

 

 

51,015

 

 

597

 

 

1,122

 

 

-

 

 

52,734

Farm

 

 

10,899

 

 

1,218

 

 

1,210

 

 

-

 

 

13,327

Real estate - construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Homebuilder

 

 

5,235

 

 

 -

 

 

 -

 

 

-

 

 

5,235

Land

 

 

12,258

 

 

 -

 

 

 -

 

 

-

 

 

12,258

Commercial speculative

 

 

51,991

 

 

 -

 

 

 -

 

 

-

 

 

51,991

All other

 

 

21,318

 

 

 -

 

 

264

 

 

-

 

 

21,582

Real estate - residential

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investor

 

 

68,005

 

 

 -

 

 

984

 

 

-

 

 

68,989

Multi-Family

 

 

183,046

 

 

 -

 

 

430

 

 

 -

 

 

183,476

Owner occupied

 

 

132,146

 

 

134

 

 

3,766

 

 

-

 

 

136,046

HELOC

 

 

124,185

 

 

139

 

 

1,985

 

 

-

 

 

126,309

Other 1

 

 

15,832

 

 

340

 

 

22

 

 

-

 

 

16,194

Total, excluding PCI loans

 

$

1,843,744

 

$

17,593

 

$

29,339

 

$

 -

 

$

1,890,676

PCI loans, net of purchase accounting adjustments

 

 

825

 

 

 -

 

 

8,310

 

 

 -

 

 

9,135

Total

 

$

1,844,569

 

$

17,593

 

$

37,649

 

$

 -

 

$

1,899,811

 

16

 

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, 2018

 

 

 

 

Special

 

 

 

 

 

 

 

 

 

 

    

Pass

    

Mention

    

Substandard 

    

Doubtful

    

Total

Commercial

 

$

305,993

 

$

8,193

 

$

137

 

$

-

 

$

314,323

Leases

 

 

78,806

 

 

 -

 

 

 -

 

 

 -

 

 

78,806

Real estate - commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied general purpose

 

 

157,334

 

 

1,660

 

 

5,278

 

 

-

 

 

164,272

Owner occupied special purpose

 

 

186,218

 

 

3,429

 

 

4,135

 

 

-

 

 

193,782

Non-owner occupied general purpose

 

 

284,818

 

 

202

 

 

8,366

 

 

-

 

 

293,386

Non-owner occupied special purpose

 

 

104,526

 

 

1,510

 

 

3,099

 

 

-

 

 

109,135

Retail Properties

 

 

44,805

 

 

 -

 

 

1,783

 

 

-

 

 

46,588

Farm

 

 

11,307

 

 

1,249

 

 

1,222

 

 

-

 

 

13,778

Real estate - construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Homebuilder

 

 

5,102

 

 

 -

 

 

 -

 

 

-

 

 

5,102

Land

 

 

2,744

 

 

 -

 

 

 -

 

 

-

 

 

2,744

Commercial speculative

 

 

55,410

 

 

 -

 

 

 -

 

 

-

 

 

55,410

All other

 

 

42,524

 

 

 -

 

 

2,610

 

 

-

 

 

45,134

Real estate - residential

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investor

 

 

69,242

 

 

 -

 

 

1,216

 

 

-

 

 

70,458

Multi-Family

 

 

195,249

 

 

 -

 

 

979

 

 

 -

 

 

196,228

Owner occupied

 

 

135,858

 

 

 -

 

 

4,524

 

 

-

 

 

140,382

HELOC

 

 

138,553

 

 

 -

 

 

1,889

 

 

-

 

 

140,442

Other 1

 

 

16,061

 

 

 -

 

 

31

 

 

-

 

 

16,092

Total, excluding PCI loans

 

$

1,834,550

 

$

16,243

 

$

35,269

 

$

 -

 

$

1,886,062

PCI loans, net of purchase accounting adjustments

 

 

907

 

 

2,906

 

 

7,152

 

 

 -

 

 

10,965

Total

 

$

1,835,457

 

$

19,149

 

$

42,421

 

$

 -

 

$

1,897,027

 

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

 

 

The Company had $425,000 and $448,000 in residential real estate loans in the process of foreclosure as of September 30, 2019 and December 31, 2018, respectively. 

17

 

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 as of September 30, 2019, and the average recorded investment and interest income recognized for the three and nine months ended September 30, 2019:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

As of September 30, 2019

 

September 30, 2019

 

September 30, 2019

 

 

 

 

 

Unpaid

 

 

 

 

Average

 

Interest

 

Average

 

Interest

 

 

Recorded

 

Principal

 

Related

 

Recorded

 

Income

 

Recorded

 

Income

 

    

Investment

    

Balance

    

Allowance

    

Investment

    

Recognized

    

Investment

    

Recognized

With no related allowance recorded

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

 -

 

$

 -

 

$

 -

 

$

 -

 

$

 -

 

$

 -

 

$

 -

Leases

 

 

74

 

 

75

 

 

 -

 

 

43

 

 

 -

 

 

37

 

 

 -

Commercial real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied general purpose

 

 

1,254

 

 

1,328

 

 

 -

 

 

1,108

 

 

 2

 

 

1,457

 

 

 5

Owner occupied special purpose

 

 

1,591

 

 

1,748

 

 

 -

 

 

1,045

 

 

 -

 

 

993

 

 

 -

Non-owner occupied general purpose

 

 

564

 

 

595

 

 

 -

 

 

566

 

 

 -

 

 

851

 

 

 -

Non-owner occupied special purpose

 

 

2,960

 

 

3,575

 

 

 -

 

 

2,960

 

 

 -

 

 

1,480

 

 

 -

Retail properties

 

 

1,122

 

 

1,159

 

 

 -

 

 

1,130

 

 

 -

 

 

561

 

 

 -

Farm

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Homebuilder

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Land

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Commercial speculative

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

All other

 

 

94

 

 

131

 

 

 -

 

 

98

 

 

 -

 

 

71

 

 

 -

Residential

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investor

 

 

379

 

 

500

 

 

 -

 

 

381

 

 

 -

 

 

366

 

 

 -

Multi-Family

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Owner occupied

 

 

3,059

 

 

4,595

 

 

 -

 

 

3,078

 

 

11

 

 

3,209

 

 

32

HELOC

 

 

1,032

 

 

1,407

 

 

 -

 

 

1,075

 

 

 -

 

 

958

 

 

 1

Other 1

 

 

 4

 

 

 4

 

 

 -

 

 

 4

 

 

 -

 

 

 6

 

 

 -

Total impaired loans with no recorded allowance

 

 

12,133

 

 

15,117

 

 

 -

 

 

11,488

 

 

13

 

 

9,989

 

 

38

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

With an allowance recorded

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

148

 

 

150

 

 

110

 

 

149

 

 

 -

 

 

74

 

 

 -

Leases

 

 

 -

 

 

 -

 

 

 -

 

 

57

 

 

 -

 

 

 -

 

 

 -

Commercial real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied general purpose

 

 

125

 

 

125

 

 

36

 

 

395

 

 

 3

 

 

260

 

 

11

Owner occupied special purpose

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Non-owner occupied general purpose

 

 

55

 

 

55

 

 

 1

 

 

55

 

 

 2

 

 

1,577

 

 

 4

Non-owner occupied special purpose

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

1,549

 

 

 -

Retail properties

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Farm

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Homebuilder

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Land

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Commercial speculative

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

All other

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

29

 

 

 -

Residential

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investor

 

 

791

 

 

791

 

 

10

 

 

795

 

 

13

 

 

799

 

 

35

Multi-Family

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Owner occupied

 

 

3,280

 

 

3,280

 

 

55

 

 

3,321

 

 

37

 

 

3,478

 

 

117

HELOC

 

 

1,359

 

 

1,359

 

 

55

 

 

1,370

 

 

20

 

 

1,358

 

 

59

Other 1

 

 

18

 

 

20

 

 

 7

 

 

19

 

 

 -

 

 

21

 

 

 -

Total impaired loans with a recorded allowance

 

 

5,776

 

 

5,780

 

 

274

 

 

6,161

 

 

75

 

 

9,145

 

 

226

Total impaired loans

 

$

17,909

 

$

20,897

 

$

274

 

$

17,649

 

$

88

 

$

19,134

 

$

264

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

18

 

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 as of December 31, 2018, and the average recorded investment and interest income recognized for the three and nine months ended September 30, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

As of December 31, 2018

 

September 30, 2018

 

September 30, 2018

 

 

 

 

Unpaid 

 

 

 

Average 

 

Interest 

 

Average 

 

Interest 

 

 

Recorded

 

Principal 

 

Related 

 

Recorded 

 

Income 

 

Recorded 

 

Income 

 

    

 Investment

    

Balance

    

Allowance

    

Investment

    

Recognized

    

Investment

    

Recognized

With no related allowance recorded

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

 -

 

$

 -

 

$

 -

 

$

 -

 

$

 -

 

$

 -

 

$

 -

Leases

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Commercial real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied general purpose

 

 

1,659

 

 

1,782

 

 

 -

 

 

1,263

 

 

 2

 

 

1,035

 

 

 5

Owner occupied special purpose

 

 

395

 

 

530

 

 

 -

 

 

417

 

 

 -

 

 

375

 

 

 -

Non-owner occupied general purpose

 

 

1,138

 

 

1,159

 

 

 -

 

 

91

 

 

 -

 

 

653

 

 

 -

Non-owner occupied special purpose

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Retail properties

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Farm

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Homebuilder

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Land

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Commercial speculative

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

All other

 

 

49

 

 

73

 

 

 -

 

 

121

 

 

 -

 

 

125

 

 

 -

Residential

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investor

 

 

353

 

 

459

 

 

 -

 

 

368

 

 

 -

 

 

369

 

 

 -

Multi-Family

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

2,361

 

 

 -

Owner occupied

 

 

3,359

 

 

4,882

 

 

 -

 

 

4,050

 

 

11

 

 

4,532

 

 

29

HELOC

 

 

884

 

 

1,003

 

 

 -

 

 

687

 

 

 -

 

 

880

 

 

 1

Other 1

 

 

 7

 

 

 7

 

 

 -

 

 

15

 

 

 -

 

 

10

 

 

 -

Total impaired loans with no recorded allowance

 

 

7,844

 

 

9,895

 

 

 -

 

 

7,012

 

 

13

 

 

10,340

 

 

35

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

With an allowance recorded

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Leases

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Commercial real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied general purpose

 

 

396

 

 

396

 

 

 3

 

 

259

 

 

22

 

 

259

 

 

22

Owner occupied special purpose

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Non-owner occupied general purpose

 

 

3,098

 

 

4,038

 

 

97

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Non-owner occupied special purpose

 

 

3,099

 

 

3,575

 

 

139

 

 

3,099

 

 

 -

 

 

1,550

 

 

 -

Retail properties

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Farm

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Homebuilder

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Land

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Commercial speculative

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

All other

 

 

57

 

 

58

 

 

 1

 

 

30

 

 

 -

 

 

29

 

 

 -

Residential

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investor

 

 

808

 

 

808

 

 

 4

 

 

812

 

 

11

 

 

820

 

 

33

Multi-Family

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Owner occupied

 

 

3,676

 

 

3,679

 

 

46

 

 

3,678

 

 

35

 

 

3,576

 

 

108

HELOC

 

 

1,357

 

 

1,357

 

 

49

 

 

1,371

 

 

17

 

 

1,203

 

 

41

Other 1

 

 

24

 

 

25

 

 

13

 

 

14

 

 

 -

 

 

13

 

 

 -

Total impaired loans with a recorded allowance

 

 

12,515

 

 

13,936

 

 

352

 

 

9,263

 

 

85

 

 

7,450

 

 

204

Total impaired loans

 

$

20,359

 

$

23,831

 

$

352

 

$

16,275

 

$

98

 

$

17,790

 

$

239

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

19

 

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

 

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

 

The specific allocation of the allowance for loan 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  September 30, 2019

 

Nine Months Ended  September 30, 2019

 

 

 

# 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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-owner occupied general purpose

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other1

 

 -

 

$

 -

 

$

 -

 

 1

 

$

58

 

$

55

 

Retail properties

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other1

 

 1

 

 

1,159

 

 

1,122

 

 1

 

 

1,159

 

 

1,122

 

Real estate - residential

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

HAMP2

 

 -

 

 

 -

 

 

 -

 

 3

 

 

399

 

 

297

 

HELOC

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

HAMP2

 

 -

 

 

 -

 

 

 -

 

 1

 

 

39

 

 

34

 

Other1

 

 -

 

 

 -

 

 

 -

 

 1

 

 

39

 

 

38

 

Total

 

 1

 

$

1,159

 

$

1,122

 

 7

 

$

1,694

 

$

1,546

 

 

20

 

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

TDR Modifications

 

TDR Modifications

 

 

 

Three Months Ended  September 30, 2018

 

Nine Months Ended September 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 general purpose

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other1

 

 1

 

$

427

 

$

424

 

 1

 

$

427

 

$

424

 

Owner occupied special purpose

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other1

 

 

 

 

 

 

 

 

 

 1

 

 

110

 

 

52

 

Real estate - residential

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

HAMP2

 

 1

 

 

211

 

 

211

 

 3

 

 

383

 

 

331

 

Other1

 

 1

 

 

34

 

 

29

 

 1

 

 

34

 

 

29

 

HELOC

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

HAMP2

 

 1

 

 

26

 

 

26

 

 1

 

 

26

 

 

26

 

Rate3

 

 

 

 

 

 

 

 

 

 1

 

 

24

 

 

24

 

Other1

 

 2

 

 

93

 

 

92

 

 9

 

 

596

 

 

587

 

Total

 

 6

 

$

791

 

$

782

 

17

 

$

1,600

 

$

1,473

 

 

1 Other:  Change of terms from bankruptcy court.

2 HAMP:  Home Affordable Modification Program. 

3 Rate:  Refers to interest rate reduction.

 

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 periods ended September 30, 2019 and September 30, 2018, 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 September 30, 2019 and September 30, 2018.  The Company acquired non-PCI loans when it purchased the Chicago branch of Talmer Bank and Trust in late 2016 and in its acquisition of ABC Bank in 2018.  The accretable discount recorded in the third quarter of 2019 totaled $1.0 million; the balance of the non-PCI loan discount was $6.6 million as of September 30, 2019.  In the third quarter of 2018, the accretable discount totaled $775,000; the balance of the non-PCI loan discount was $9.6 million as of September 30, 2018.  The accretable discount recorded for the nine months ended 2019 totaled $1.8 million; the balance of the non-PCI loan discount was $6.6 million as of September 30, 2019.  For the nine months ended 2018, the accretable discount totaled $2.0 million; the balance of the non-PCI loan discount was $9.6 million as of September 30, 2018.

21

 

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Purchased Accounting Accretion

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended

 

Accretable Discount- Non-PCI Loans

 

Accretable Discount- PCI Loans

 

Non-Accretable Discount- PCI Loans

 

Total

Beginning balance, July 1, 2019

 

$

1,216

 

$

931

 

$

5,500

 

$

7,647

Accretion

 

 

(217)

 

 

(218)

 

 

(606)

 

 

(1,041)

Transfer

 

 

 -

 

 

 1

 

 

(1)

 

 

 -

Ending balance, September 30, 2019

 

$

999

 

$

714

 

$

4,893

 

$

6,606

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended

 

Accretable Discount- Non-PCI Loans

 

Accretable Discount- PCI Loans

 

Non-Accretable Discount- PCI Loans

 

Total

Beginning balance, July 1, 2018

 

$

2,995

 

$

1,373

 

$

6,403

 

$

10,771

Accretion

 

 

(312)

 

 

(129)

 

 

(334)

 

 

(775)

Transfer

 

 

(373)

 

 

(26)

 

 

 -

 

 

(399)

Ending balance, September 30, 2018

 

$

2,310

 

$

1,218

 

$

6,069

 

$

9,597

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Nine Months Ended

 

Accretable Discount - Non-PCI Loans

 

Accretable Discount - PCI Loans

 

Non-Accretable Discount - PCI Loans

 

Total

Beginning balance, January 1, 2019

 

$

1,867

 

$

1,099

 

$

5,969

 

$

8,935

Accretion

 

 

(868)

 

 

(340)

 

 

(606)

 

 

(1,814)

Charge-offs

 

 

 -

 

 

(48)

 

 

(467)

 

 

(515)

Transfer

 

 

 -

 

 

 3

 

 

(3)

 

 

 -

Ending balance, September 30, 2019

 

$

999

 

$

714

 

$

4,893

 

$

6,606

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Nine Months Ended

 

Accretable Discount - Non-PCI Loans

 

Accretable Discount - PCI Loans

 

Non-Accretable Discount - PCI Loans

 

Total

Beginning balance, January 1, 2018

 

$

835

 

$

 -

 

$

 -

 

$

835

Purchases

 

 

3,182

 

 

1,551

 

 

6,536

 

 

11,269

Accretion

 

 

(1,334)

 

 

(305)

 

 

(334)

 

 

(1,973)

Transfer

 

 

(373)

 

 

(28)

 

 

(133)

 

 

(534)

Ending balance, September 30, 2018

 

$

2,310

 

$

1,218

 

$

6,069

 

$

9,597

22

 

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

 

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 nine months ended September 30, 2019, 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 September 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

3,377

 

$

961

 

$

10,517

 

$

820

 

$

1,790

 

$

1,335

 

$

572

 

$

19,372

Charge-offs

 

 

20

 

 

47

 

 

159

 

 

 7

 

 

 3

 

 

19

 

 

142

 

 

397

Recoveries

 

 

10

 

 

 -

 

 

12

 

 

 -

 

 

22

 

 

21

 

 

61

 

 

126

(Release) Provision

 

 

(49)

 

 

66

 

 

(88)

 

 

(7)

 

 

56

 

 

(74)

 

 

646

 

 

550

Ending balance

 

$

3,318

 

$

980

 

$

10,282

 

$

806

 

$

1,865

 

$

1,263

 

$

1,137

 

$

19,651

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

2,832

 

$

734

 

$

10,470

 

$

969

 

$

1,931

 

$

1,449

 

$

621

 

$

19,006

Charge-offs

 

 

99

 

 

47

 

 

432

 

 

 8

 

 

21

 

 

298

 

 

311

 

 

1,216

Recoveries

 

 

46

 

 

 -

 

 

47

 

 

 1

 

 

86

 

 

79

 

 

152

 

 

411

Provision (Release)

 

 

539

 

 

293

 

 

197

 

 

(156)

 

 

(131)

 

 

33

 

 

675

 

 

1,450

Ending balance

 

$

3,318

 

$

980

 

$

10,282

 

$

806

 

$

1,865

 

$

1,263

 

$

1,137

 

$

19,651

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance: Individually evaluated for impairment

 

$

110

 

$

 -

 

$

37

 

$

 -

 

$

65

 

$

55

 

$

 7

 

$

274

Ending balance: Collectively evaluated for impairment

 

 

3,208

 

 

980

 

 

9,690

 

 

806

 

 

1,800

 

 

1,208

 

 

1,113

 

 

18,805

Ending balance: Acquired and accounted for ASC 310-30

 

 

 -

 

 

 -

 

 

555

 

 

 -

 

 

 -

 

 

 -

 

 

17

 

 

572

Total ending allowance balance

 

$

3,318

 

$

980

 

$

10,282

 

$

806

 

$

1,865

 

$

1,263

 

$

1,137

 

$

19,651

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance: Individually evaluated for Impairment

 

$

148

 

$

74

 

$

7,671

 

$

94

 

$

7,509

 

$

2,391

 

$

22

 

$

17,909

Ending balance: Collectively evaluated for impairment

 

 

333,516

 

 

108,078

 

 

819,109

 

 

90,972

 

 

381,002

 

 

123,918

 

 

16,172

 

 

1,872,767

Ending balance: Acquired and accounted for ASC 310-30

 

 

 -

 

 

 -

 

 

3,933

 

 

637

 

 

4,565

 

 

 -

 

 

 -

 

 

9,135

Total ending loans balance

 

$

333,664

 

$

108,152

 

$

830,713

 

$

91,703

 

$

393,076

 

$

126,309

 

$

16,194

 

$

1,899,811

 

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

 

Changes in the allowance for loan and lease losses by segment of loans based on method of impairment for three and nine months ended September 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 September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

2,676

 

$

634

 

$

10,537

 

$

1,398

 

$

1,818

 

$

1,390

 

$

868

 

$

19,321

Charge-offs

 

 

 7

 

 

 -

 

 

201

 

 

 -

 

 

 -

 

 

49

 

 

115

 

 

372

Recoveries

 

 

32

 

 

 -

 

 

37

 

 

32

 

 

83

 

 

139

 

 

56

 

 

379

Provision (Release)

 

 

96

 

 

31

 

 

(144)

 

 

(374)

 

 

67

 

 

(372)

 

 

696

 

 

 -

Ending balance

 

$

2,797

 

$

665

 

$

10,229

 

$

1,056

 

$

1,968

 

$

1,108

 

$

1,505

 

$

19,328

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

2,453

 

$

692

 

$

9,522

 

$

923

 

$

1,846

 

$

1,446

 

$

579

 

$

17,461

Charge-offs

 

 

38

 

 

13

 

 

609

 

 

(16)

 

 

(55)

 

 

141

 

 

316

 

 

1,046

Recoveries

 

 

141

 

 

 -

 

 

425

 

 

35

 

 

1,099

 

 

277

 

 

208

 

 

2,185

Provision (Release)

 

 

241

 

 

(14)

 

 

891

 

 

82

 

 

(1,032)

 

 

(474)

 

 

1,034

 

 

728

Ending balance

 

$

2,797

 

$

665

 

$

10,229

 

$

1,056

 

$

1,968

 

$

1,108

 

$

1,505

 

$

19,328

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance: Individually evaluated for impairment

 

$

 -

 

$

 -

 

$

185

 

$

42

 

$

59

 

$

61

 

$

26

 

$

373

Ending balance: Collectively evaluated for impairment

 

 

2,797

 

 

665

 

 

10,044

 

 

1,014

 

 

1,909

 

 

1,047

 

 

1,479

 

 

18,955

Ending balance: Acquired and accounted for ASC 310-30

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Total ending allowance balance

 

$

2,797

 

$

665

 

$

10,229

 

$

1,056

 

$

1,968

 

$

1,108

 

$

1,505

 

$

19,328

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance: Individually evaluated for impairment

 

$

 -

 

$

 -

 

$

5,782

 

$

109

 

$

8,740

 

$

2,054

 

$

40

 

$

16,725

Ending balance: Collectively evaluated for impairment

 

 

306,407

 

 

70,661

 

 

798,402

 

 

112,764

 

 

384,858

 

 

119,968

 

 

14,277

 

 

1,807,337

Ending balance: Acquired and accounted for ASC 310-30

 

 

 -

 

 

 -

 

 

4,126

 

 

778

 

 

5,983

 

 

 -

 

 

 -

 

 

10,887

Total ending loan balance

 

$

306,407

 

$

70,661

 

$

808,310

 

$

113,651

 

$

399,581

 

$

122,022

 

$

14,317

 

$

1,834,949

 

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)

 

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 

 

Nine Months Ended

 

 

    

September 30, 

    

September 30, 

  

Other real estate owned

    

2019

    

2018

    

2019

    

2018

 

Balance at beginning of period

 

$

5,668

 

$

8,912

 

$

7,175

 

$

8,371

 

Property additions, net of acquisition adjustments

 

 

305

 

 

(217)

 

 

305

 

 

2,595

 

Property improvements

 

 

 -

 

 

 -

 

 

 -

 

 

59

 

Less:

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

1,088

 

 

1,612

 

 

2,390

 

 

3,576

 

Period valuation adjustments

 

 

203

 

 

119

 

 

399

 

 

485

 

Other adjustments

 

 

 -

 

 

 -

 

 

 9

 

 

 -

 

Balance at end of period

 

$

4,682

 

$

6,964

 

$

4,682

 

$

6,964

 

 

Activity in the valuation allowance was as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Three Months Ended 

 

Nine Months Ended

  

 

    

September 30, 

    

September 30, 

  

 

    

2019

    

2018

    

2019

    

2018

  

Balance at beginning of period

 

$

8,061

 

$

8,348

 

$

8,027

 

$

8,208

 

Provision for unrealized losses

 

 

203

 

 

119

 

 

399

 

 

485

 

Reductions taken on sales

 

 

(798)

 

 

(456)

 

 

(960)

 

 

(682)

 

Balance at end of period

 

$

7,466

 

$

8,011

 

$

7,466

 

$

8,011

 

 

Expenses related to OREO, net of lease revenue includes:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended 

 

Nine Months Ended

 

 

 

September 30, 

    

September 30, 

 

 

    

2019

    

2018

    

2019

    

2018

 

Gain on sales, net

 

$

(104)

 

$

(612)

 

$

(254)

 

$

(716)

 

Provision for unrealized losses

 

 

203

 

 

119

 

 

399

 

 

485

 

Operating expenses

 

 

(73)

 

 

133

 

 

184

 

 

502

 

Less:

 

 

 

 

 

 

 

 

 

 

 

 

 

Lease revenue

 

 

 -

 

 

10

 

 

 5

 

 

39

 

Net OREO expense

 

$

26

 

$

(370)

 

$

324

 

$

232

 

 

 

 

 

Note 7 – Deposits

Major classifications of deposits were as follows:

 

 

 

 

 

 

 

 

 

    

September 30, 2019

    

December 31, 2018

  

Noninterest bearing demand

 

$

643,355

 

$

618,830

 

Savings

 

 

304,726

 

 

304,400

 

NOW accounts

 

 

413,291

 

 

425,878

 

Money market accounts

 

 

286,484

 

 

310,390

 

Certificates of deposit of less than $100,000

 

 

222,378

 

 

230,781

 

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

 

 

142,669

 

 

159,953

 

Certificates of deposit of more than $250,000

 

 

61,588

 

 

66,441

 

Total deposits

 

$

2,074,491

 

$

2,116,673

 

24

 

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

 

 

 

Note 8 – Borrowings

 

The following table is a summary of borrowings as of September 30, 2019, and December 31, 2018.  Junior subordinated debentures are discussed in detail in Note 9:

 

 

 

 

 

 

 

 

 

 

    

September 30, 2019

    

December 31, 2018

  

Securities sold under repurchase agreements

 

$

48,870

 

$

46,632

 

Other short-term borrowings 1

 

 

84,000

 

 

149,500

 

Junior subordinated debentures

 

 

57,722

 

 

57,686

 

Senior notes

 

 

44,244

 

 

44,158

 

Notes payable and other borrowings

 

 

8,856

 

 

15,379

 

Total borrowings

 

$

243,692

 

$

313,355

 

 

1 Includes short-term FHLBC advances for both periods presented as well as the outstanding portion of an operating line of credit as of December 31, 2018, which totaled $4.0 million.

 

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 $48.9 million at September 30, 2019, and $46.6 million at December 31, 2018.  The fair value of the pledged collateral was $62.4 million at September 30, 2019 and $72.8 million at December 31, 2018.  At September 30, 2019, there were no customers with secured balances exceeding 10% of stockholders’ equity.

 

The Company’s borrowings at the FHLBC require the Bank to be a member and invest in the stock of the FHLBC.  Total borrowings are generally limited to the lower of 35% of total assets or 60% of the book value of certain mortgage loans.  As of September 30, 2019, the Bank had $84.0 million in short-term advances outstanding under the FHLBC compared to $145.5 million outstanding as of December 31, 2018; $65.0 million and $10.0 million of the September 30, 2019, balance was issued at 2.02% and 2.04%, respectively, and the remaining $8.9 million was issued at rates ranging from 1.76% to 2.23%.  The additional $4.0 million in other short-term borrowings as of December 31, 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; advances under the line can be outstanding up to 360 days from the date of issuance.  This line of credit was repaid with operating cash on hand in late January 2019.  The Bank also assumed $23.4 million of long-term FHLBC advances with the ABC Bank acquisition.  At September 30, 2019, these advances have a total outstanding balance of $8.9 million and are scheduled to mature over the next seven years with interest rates ranging between 2.19% and 2.83%.  FHLBC stock held at September 30, 2019 was valued at $4.5 million, and any potential FHLBC advances were collateralized by securities with a fair value of $54.9 million and loans with a principal balance of $610.3 million, which carried a FHLBC-calculated combined collateral value of $464.1 million.  The Company had excess collateral of $277.0 million available to secure borrowings at September 30, 2019.  The increase in collateral availability of 367.4% since December 2018 is due to the completion of an analysis of FHLBC loan collateral eligibility in the first quarter of 2019, which expanded the capacity of funding at the FHLBC as additional loan collateral was deemed acceptable.

 

The Company also has $44.2 million of senior notes outstanding, net of deferred issuance costs, as of September 30, 2019, and December 31, 2018.  The senior notes were issued in December 2016 with a ten years maturity, 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 September 30, 2019, and December 31, 2018, unamortized debt issuance costs related to the senior notes were $756,000 and $842,000, 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.  Distributions on the securities are payable quarterly at an annual rate of 7.80%, unless the Company

25

 

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

elects to defer such interest payments as permitted by the terms of the securities.  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.  Upon conversion to a floating rate, a cash flow hedge was initiated which resulted in the total interest rate paid on the debt of 4.40% as of September 30, 2019, compared to the rate paid prior to June 15, 2017 of 6.77%. The Company issued a new $25.8 million subordinated debenture to Old Second Capital Trust II in return for the aggregate net proceeds of this trust preferred offering.  The interest rate and payment frequency on the debenture are equivalent to the cash distribution basis on the trust preferred securities. 

 

Both of the debentures issued by the Company are disclosed on the Consolidated Balance Sheet as junior subordinated debentures and the related interest expense for each issuance is included in the Consolidated Statements of Income.  As of September 30, 2019, and December 31, 2018, unamortized debt issuance costs related to the junior subordinated debentures were $657,000 and $692,000 respectively, and are included as a reduction to the balance of the junior subordinated debentures on the Consolidated Balance Sheet.  These deferred issuance costs will be amortized to interest expense over the 30-year term of the notes and are included in the Consolidated Statements of Income.

 

Note 10 – Equity Compensation Plans

 

Stock-based awards are outstanding under the Company’s 2008 Equity Incentive Plan (the “2008 Plan”), the Company’s 2014 Equity Incentive Plan, as amended (the “2014 Plan”), and the Company’s 2019 Equity Incentive Plan (the “2019 Plan” and together with the 2008 Plan and the 2014 Plan, the “Plans”). The 2019 Plan was approved at the May 2019 annual stockholders’ meeting and the number of authorized shares under the 2019 Plan is fixed at 600,000.  Following approval of the 2014 Plan, no further awards were to be granted under the 2008 Plan or any other prior Company equity compensation plan, and following the approval of the 2019 Plan, no further awards will be granted under the 2014 Plan.  The 2019 Plan authorizes the granting of qualified stock options, non-qualified stock options, restricted stock, restricted stock units, and stock appreciation rights (“SARs”).  Awards may be granted to selected directors, officers, employees or eligible service providers under the 2019 Plan at the discretion of the Compensation Committee of the Company’s Board of Directors.  As of September 30, 2019, 433,894 shares remained available for issuance under the 2019 Plan.

 

There were 4,500 stock options exercised and no stock options granted in the nine months ended September 30, 2019, and no stock options granted or exercised in the nine months ended September 30, 2018.  All stock options are granted for a term of ten years.  There is no unrecognized compensation cost related to unvested stock options as all stock options of the Company’s common stock have fully vested.

 

A summary of stock option activity in the Plans for the nine months ended September 30, 2019, is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-

 

 

 

 

 

 

 

Weighted

 

Average

 

 

 

 

 

 

 

Average

 

Remaining

 

 

 

 

 

 

 

Exercise

 

Contractual

 

Aggregate

 

    

Shares

    

per Price

    

Term (years)

    

Intrinsic Value

Beginning outstanding

 

4,500

 

$

7.49

 

0.1

 

$

25

Canceled

 

 -

 

 

 -

 

 -

 

 

 -

Exercised

 

(4,500)

 

 

7.49

 

 -

 

 

(27)

Expired

 

 -

 

 

 -

 

 -

 

 

 -

Ending outstanding

 

 -

 

$

 -

 

 -

 

$

 -

 

 

 

 

 

 

 

 

 

 

 

Exercisable at end of period

 

 -

 

$

 -

 

 -

 

$

 -

 

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.

 

26

 

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

Under the 2019 Plan, unless otherwise provided in an award agreement, upon the occurrence of a change in control, all stock options and SARs then held by the participant will become fully exercisable immediately if, and all stock awards and cash incentive awards will become fully earned and vested immediately if, (i) the 2019 Plan is not an obligation of the successor entity following a change in control or (ii) the 2019 Plan is an obligation of the successor entity following a change in control and the participant incurs a  termination of service without cause  or for good reason  following the change in control.  Notwithstanding the immediately preceding sentence, if the vesting of an award is conditioned upon the achievement of performance measures, then such vesting will generally be subject to the following: if, at the time of the change in control, the performance measures are less than 50% attained (pro rata based upon the time of the period through the change in control), the award will become vested and exercisable on a fractional basis with the numerator being equal to the percentage of attainment and the denominator being 50%; and if, at the time of the change in control, the performance measures are at least 50% attained (pro rata based upon the time of the period through the change in control), the award will become fully earned and vested immediately upon 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.  Awards of restricted stock 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.  Awards of 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 166,106 restricted stock units issued under the 2019 Plan during the nine months ended September 30, 2019.  There were 254,281 restricted stock units issued under the 2014 Plan during the nine months ended September 30, 2018.  Compensation expense is recognized over the vesting period of the restricted stock unit based on the market value of the award on the issue date.  Total compensation cost that has been recorded for the Plans was $1.9 million and $1.7 million in the first nine months of 2019 and 2018, respectively.

 

A summary of changes in the Company’s unvested restricted awards for the nine months ended September 30, 2019, is as follows:

 

 

 

 

 

 

 

 

 

September 30, 2019

 

 

 

 

Weighted

 

 

Restricted

 

Average

 

 

Stock Shares

 

Grant Date

 

    

and Units

    

Fair Value

Unvested at January 1

 

552,281

 

$

11.30

Granted

 

166,106

 

 

12.77

Vested

 

(123,937)

 

 

7.43

Forfeited

 

 -

 

 

 -

Unvested at September 30

 

594,450

 

$

12.52

 

Total unrecognized compensation cost of restricted awards was $3.6 million as of September 30, 2019, which is expected to be recognized over a weighted-average period of 1.97 years. 

 

27

 

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

Note 11 – Earnings Per Share

 

The earnings per share, both basic and diluted, are included below as of September 30:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 

 

Nine Months Ended September 30, 

 

 

    

2019

    

2018

    

2019

    

2018

    

Basic earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average common shares outstanding

 

 

29,899,063

 

 

29,747,078

 

 

29,880,511

 

 

29,718,191

 

Net income

 

$

12,173

 

$

9,642

 

$

29,919

 

$

25,392

 

Basic earnings per share

 

$

0.41

 

$

0.32

 

$

1.00

 

$

0.85

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average common shares outstanding

 

 

29,899,063

 

 

29,747,078

 

 

29,880,511

 

 

29,718,191

 

Dilutive effect of unvested restricted awards

 

 

539,270

 

 

563,781

 

 

510,454

 

 

525,627

 

Dilutive effect of stock options and warrants

 

 

 -

 

 

73,032

 

 

 -

 

 

53,476

 

Diluted average common shares outstanding

 

 

30,438,333

 

 

30,383,891

 

 

30,390,965

 

 

30,297,294

 

Net Income

 

$

12,173

 

$

9,642

 

$

29,919

 

$

25,392

 

Diluted earnings per share

 

$

0.40

 

$

0.32

 

$

0.98

 

$

0.84

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The above 2018 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 September 30, 2018, and was considered 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.  This warrant was not included as a dilutive factor as of September 30, 2019, due to its cashless exercise on January 16, 2019.  As of the date of exercise, the Company’s closing market stock price was $14.23 per share, resulting in 45,836 shares being issued.  The cashless warrant exercise resulted in a net $313,000 reduction to treasury stock as these shares were issued from stock held by the Company.

 

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 risk-based capital regulatory guidelines, the Bank’s Board of Directors has established an internal guideline requiring the Bank to maintain a Tier 1 leverage capital ratio at or above eight percent (8%) and a total risk-based capital ratio at or above twelve percent (12%).  At September 30, 2019, the Bank exceeded those thresholds.

 

At September 30, 2019, the Bank’s Tier 1 capital leverage ratio was 12.68%, an increase of 132 basis points from December 31, 2018, and is well above the 8.00% objective.  The Bank’s total capital ratio was 15.72%, an increase of 158 basis points from December 31, 2018, and also well above the objective of 12.00%.

 

Bank holding companies are generally required to maintain minimum levels of capital in accordance with capital guidelines implemented by the Board of Governors of the Federal Reserve System.  The general bank and holding company capital adequacy guidelines are shown in the accompanying table, as are the capital ratios of the Company and the Bank, as of September 30, 2019 and December 31, 2018.

 

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. The Basel III Rules are applicable to all banking organizations that are subject to minimum capital requirements, including federal and state banks and savings and loan associations, as well as to bank and savings and loan holding companies, other than “small bank holding companies” generally holding companies with consolidated assets of less than $3 billion. The Company is currently considered a “small bank holding company.” 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, 2018, under the heading “Supervision and Regulation.”

 

At September 30, 2019, and December 31, 2018, 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

 

Well Capitalized

 

 

 

 

 

 

 

 

 

Adequacy with Capital

 

Under Prompt Corrective

 

 

 

Actual

 

Conservation Buffer, if applicable1

 

Action Provisions2

 

 

    

Amount

    

Ratio

    

Amount

    

Ratio

    

Amount

    

Ratio

 

September 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common equity tier 1 capital to risk weighted assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

$

240,643

 

10.89

%

 

$

154,683

 

7.000

%

 

 

N/A

 

N/A

 

Old Second Bank

 

 

325,983

 

14.83

 

 

 

153,869

 

7.000

 

 

$

153,869

 

6.50

%

Total capital to risk weighted assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

 

316,914

 

14.34

 

 

 

232,050

 

10.500

 

 

 

N/A

 

N/A

 

Old Second Bank

 

 

345,629

 

15.72

 

 

 

230,859

 

10.500

 

 

 

230,859

 

10.00

 

Tier 1 capital to risk weighted assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

 

297,268

 

13.45

 

 

 

187,865

 

8.500

 

 

 

N/A

 

N/A

 

Old Second Bank

 

 

325,983

 

14.83

 

 

 

186,841

 

8.500

 

 

 

186,841

 

8.00

 

Tier 1 capital to average assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

 

297,268

 

11.54

 

 

 

103,039

 

4.00

 

 

 

N/A

 

N/A

 

Old Second Bank

 

 

325,983

 

12.68

 

 

 

102,834

 

4.00

 

 

 

128,542

 

5.00

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common equity tier 1 capital to risk weighted assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

$

207,597

 

9.29

%

 

$

142,444

 

6.375

%

 

 

N/A

 

N/A

 

Old Second Bank

 

 

295,599

 

13.29

 

 

 

141,791

 

6.375

 

 

$

144,571

 

6.50

%

Total capital to risk weighted assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

 

282,126

 

12.63

 

 

 

220,648

 

9.875

 

 

 

N/A

 

N/A

 

Old Second Bank

 

 

314,600

 

14.14

 

 

 

219,637

 

9.875

 

 

 

222,417

 

10.00

 

Tier 1 capital to risk weighted assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

 

263,125

 

11.78

 

 

 

175,960

 

7.875

 

 

 

N/A

 

N/A

 

Old Second Bank

 

 

295,599

 

13.29

 

 

 

175,153

 

7.875

 

 

 

177,934

 

8.00

 

Tier 1 capital to average assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

 

263,125

 

10.08

 

 

 

104,415

 

4.00

 

 

 

N/A

 

N/A

 

Old Second Bank

 

 

295,599

 

11.36

 

 

 

104,084

 

4.00

 

 

 

130,105

 

5.00

 

 

1  As of September 30, 2019, amounts are shown inclusive of a capital conservation buffer of 2.50%; as compared to 1.875% at December 31, 2018. Under the Federal Reserve’s Small Bank Holding Company Policy Statement, the Company is not subject to the minimum capital adequacy and capital conservation buffer capital requirements at the holding company level, unless otherwise advised by the Federal Reserve (such capital requirements are applicable only at the Bank level). Although the minimum regulatory capital requirements are not applicable to the Company, we calculate these ratios for our own planning and monitoring purposes.

2 The prompt corrective action provisions are only applicable at the Bank level. 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 and were fully phased in as of January 1, 2019, the Bank must keep a capital conservation buffer of 2.50% above the new regulatory minimum capital requirements, which must consist entirely of Common Equity Tier 1 capital in order to avoid additional limitations on capital distributions and certain other payments.

 

29

 

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

Note 13 Fair Value Measurements

 

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

 

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

 

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

 

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

 

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

 

·

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

·

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

·

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

·

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

·

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

·

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

·

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

·

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

·

The fair value of mortgage servicing rights is based on a valuation model that calculates the present value of estimated net servicing income.  The valuation model incorporates assumptions that market participants would use in estimating future net servicing income to derive the resultant value.  The Company is able to compare the valuation model inputs, such as the discount rate, prepayment speeds, weighted average delinquency and foreclosure/bankruptcy rates to widely available published industry data for reasonableness.

·

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

·

The fair value of impaired loans with specific allocations of the allowance for loan 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

30

 

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

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 fair value, less costs to sell.  Fair values are based on third party appraisals of the property, resulting in a Level 3 classification, or an executed pending sales contract.  In cases where the carrying amount exceeds the fair value, less costs to sell, an impairment loss is recognized.

 

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

 

The tables below present the balance of assets and liabilities at September 30, 2019, and December 31, 2018, respectively, measured by the Company at fair value on a recurring basis:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2019

 

    

Level 1

    

Level 2

    

Level 3

    

Total

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Securities available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury

 

$

4,038

 

$

 -

 

$

 -

 

$

4,038

U.S. government agencies

 

 

 -

 

 

9,143

 

 

 -

 

 

9,143

U.S. government agencies mortgage-backed

 

 

 -

 

 

16,940

 

 

 -

 

 

16,940

States and political subdivisions

 

 

 -

 

 

232,854

 

 

5,873

 

 

238,727

Collateralized mortgage obligations

 

 

 -

 

 

64,121

 

 

 -

 

 

64,121

Asset-backed securities

 

 

 -

 

 

83,182

 

 

 -

 

 

83,182

Collateralized loan obligations

 

 

 -

 

 

72,271

 

 

 -

 

 

72,271

Loans held-for-sale

 

 

 -

 

 

5,592

 

 

 -

 

 

5,592

Mortgage servicing rights

 

 

 -

 

 

 -

 

 

5,361

 

 

5,361

Interest rate swap agreements

 

 

 -

 

 

3,756

 

 

 -

 

 

3,756

Mortgage banking derivatives

 

 

 -

 

 

453

 

 

 -

 

 

453

Total

 

$

4,038

 

$

488,312

 

$

11,234

 

$

503,584

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swap agreements, including risk participation agreements

 

$

 -

 

$

8,532

 

$

 -

 

$

8,532

Total

 

$

 -

 

$

8,532

 

$

 -

 

$

8,532

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2018

 

    

Level 1

    

Level 2

    

Level 3

    

Total

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Securities available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury

 

$

3,923

 

$

 -

 

$

 -

 

$

3,923

U.S. government agencies

 

 

 -

 

 

10,951

 

 

 -

 

 

10,951

U.S. government agencies mortgage-backed

 

 

 -

 

 

14,075

 

 

 -

 

 

14,075

States and political subdivisions

 

 

 -

 

 

265,902

 

 

8,165

 

 

274,067

Corporate bonds

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Collateralized mortgage obligations

 

 

 -

 

 

64,429

 

 

 -

 

 

64,429

Asset-backed securities

 

 

 -

 

 

109,514

 

 

 -

 

 

109,514

Collateralized loan obligations

 

 

 -

 

 

64,289

 

 

 -

 

 

64,289

Loans held-for-sale

 

 

 -

 

 

2,984

 

 

 -

 

 

2,984

Mortgage servicing rights

 

 

 -

 

 

 -

 

 

7,357

 

 

7,357

Interest rate swap agreements

 

 

 -

 

 

672

 

 

 -

 

 

672

Mortgage banking derivatives

 

 

 -

 

 

159

 

 

 -

 

 

159

Total

 

$

3,923

 

$

532,975

 

$

15,522

 

$

552,420

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swap agreements, including risk participation agreements

 

$

 -

 

$

756

 

$

 -

 

$

756

Total

 

$

 -

 

$

756

 

$

 -

 

$

756

 

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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2019

 

 

Securities available-for-sale

 

 

 

 

 

Collateralized

 

States and

 

Mortgage

 

 

Mortgage

 

Political

 

Servicing

 

   

Obligation

   

Subdivisions

   

Rights

Beginning balance January 1, 2019

 

$

 -

 

$

8,165

 

$

7,357

Transfers into Level 3

 

 

 -

 

 

 -

 

 

 -

Transfers out of Level 3

 

 

 -

 

 

 -

 

 

 -

Total gains or losses

 

 

 

 

 

 

 

 

 

Included in earnings

 

 

 -

 

 

(25)

 

 

(2,384)

Included in other comprehensive income

 

 

 -

 

 

898

 

 

 -

Purchases, issuances, sales, and settlements

 

 

 

 

 

 

 

 

 

Purchases

 

 

 -

 

 

17,643

 

 

 -

Issuances

 

 

 -

 

 

 -

 

 

906

Settlements

 

 

 -

 

 

(20,808)

 

 

(518)

Ending balance September 30, 2019

 

$

 -

 

$

5,873

 

$

5,361

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 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

 

 

32

 

 

 -

 

 

636

Included in other comprehensive income

 

 

34

 

 

(805)

 

 

 -

Purchases, issuances, sales, and settlements

 

 

 

 

 

 

 

 

 

Purchases

 

 

 -

 

 

20,421

 

 

 -

Issuances

 

 

 -

 

 

 -

 

 

997

Settlements

 

 

(770)

 

 

(24,366)

 

 

(446)

Ending balance September 30, 2018

 

$

1,564

 

$

9,511

 

$

8,131

 

The following table and commentary presents quantitative and qualitative information about Level 3 fair value measurements as of September 30, 2019:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted

Measured at fair value

 

 

 

 

 

 

Unobservable

 

 

 

Average

on a recurring basis:

   

Fair Value

   

Valuation Methodology

   

Inputs

   

Range of Input

   

of Inputs

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage servicing rights

 

$

5,361

 

Discounted Cash Flow

 

Discount Rate

 

10.0% - 17.0%

 

10.1

%

 

 

 

 

 

 

 

Prepayment Speed

 

7.0 - 69.0%

 

16.6

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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, 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

 

$

7,357

 

Discounted Cash Flow

 

Discount Rate

 

10.0 - 229.7%

 

10.2

%

 

 

 

 

 

 

 

Prepayment Speed

 

7.0 - 68.9%

 

9.6

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

In addition to the above, Level 3 fair value measurement included $5.9 million for state and political subdivisions representing various local municipality securities at September 30, 2019.  This was classified as securities available-for-sale, and was valued using a discount based on market spreads of similar assets, but the liquidity premium was an unobservable input.  The state and political subdivisions securities balance in Level 3 fair value at September 30, 2018, was $9.5 million and collateralized mortgage obligation balance in Level 3 was $1.6 million.  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 September 30, 2019, and December 31, 2018, respectively, the following tables provide the level of valuation assumptions used to determine each valuation and the carrying value of the related assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2019

 

    

Level 1

    

Level 2

    

Level 3

    

Total

Impaired loans1

 

$

 -

 

$

 -

 

$

5,502

 

$

5,502

Other real estate owned, net2

 

 

 -

 

 

 -

 

 

4,682

 

 

4,682

Total

 

$

 -

 

$

 -

 

$

10,184

 

$

10,184

 

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 $5.8 million and a valuation allowance of $274,000 resulting in a decrease of specific allocations within the allowance for loan and lease losses of $78,000 for the nine months ended September 30, 2019.

2 OREO is measured at fair value, less costs to sell, and had a net carrying amount of $4.7 million, which is made up of the outstanding balance of $13.1 million, net of a valuation allowance of $8.1 million and a participation of $937,000 at September 30, 2019.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2018

 

    

Level 1

    

Level 2

    

Level 3

    

Total

Impaired loans1

 

$

 -

 

$

 -

 

$

12,163

 

$

12,163

Other real estate owned, net2

 

 

 -

 

 

 -

 

 

7,175

 

 

7,175

Total

 

$

 -

 

$

 -

 

$

19,338

 

$

19,338

 

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 $12.5 million and a valuation allowance of $352,000, resulting in an increase of specific allocations within the allowance for loan and lease losses of $208,000 for the year December 31, 2018.

2 OREO is measured at fair value, less costs to sell, and had a net carrying amount of $7.2 million, which is made up of the outstanding balance of $16.0 million, net of a valuation allowance of $8.0 million and a participation of $900,000, at December 31, 2018.

 

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

33

 

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

 

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.  As of September 30, 2019 and 2018, the fair values of loans and leases are estimated on an exit price basis incorporating discounts for credit, liquidity and marketability factors.  The fair value of time deposits is estimated using discounted future cash flows at current rates offered for deposits of similar remaining maturities.  The fair values of borrowings were estimated based on interest rates available to the Company for debt with similar terms and remaining maturities.  The fair value of off balance sheet volume is not considered material.

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2019

 

 

Carrying

 

Fair

 

 

 

 

 

 

 

 

 

 

    

Amount

    

Value

    

Level 1

    

Level 2

    

Level 3

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

42,671

 

$

42,671

 

$

42,671

 

$

 -

 

$

 -

Interest bearing deposits with financial institutions

 

 

11,366

 

 

11,366

 

 

11,366

 

 

 -

 

 

 -

Securities available-for-sale

 

 

488,422

 

 

488,422

 

 

4,038

 

 

478,511

 

 

5,873

FHLBC and FRBC stock

 

 

10,711

 

 

10,711

 

 

 -

 

 

10,711

 

 

 -

Loans held-for-sale

 

 

5,592

 

 

5,592

 

 

 -

 

 

5,592

 

 

 -

Net loans

 

 

1,880,160

 

 

1,915,103

 

 

 -

 

 

 -

 

 

1,915,103

Accrued interest receivable

 

 

9,854

 

 

9,854

 

 

 -

 

 

9,854

 

 

 -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest bearing deposits

 

$

643,355

 

$

643,355

 

$

643,355

 

$

 -

 

$

 -

Interest bearing deposits

 

 

1,431,136

 

 

1,431,267

 

 

 -

 

 

1,431,267

 

 

 -

Securities sold under repurchase agreements

 

 

48,870

 

 

48,870

 

 

 -

 

 

48,870

 

 

 -

Other short-term borrowings

 

 

84,000

 

 

84,000

 

 

 -

 

 

84,000

 

 

 -

Junior subordinated debentures

 

 

57,722

 

 

42,170

 

 

34,557

 

 

7,613

 

 

 -

Senior notes

 

 

44,244

 

 

46,269

 

 

46,269

 

 

 -

 

 

 -

Note payable and other borrowings

 

 

8,856

 

 

8,856

 

 

 -

 

 

8,856

 

 

 -

Interest rate swap agreements

 

 

4,696

 

 

4,696

 

 

 -

 

 

4,696

 

 

 -

Borrowing interest payable

 

 

744

 

 

744

 

 

 -

 

 

744

 

 

 -

Deposit interest payable

 

 

950

 

 

950

 

 

 -

 

 

950

 

 

 -

 

 

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, 2018

 

 

Carrying

 

Fair

 

 

 

 

 

 

 

    

Amount

    

Value

    

Level 1

    

Level 2

    

Level 3

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

38,599

 

$

38,599

 

$

38,599

 

$

 -

 

$

 -

Interest bearing deposits with financial institutions

 

 

16,636

 

 

16,636

 

 

16,636

 

 

 -

 

 

 -

Securities available-for-sale

 

 

541,248

 

 

541,248

 

 

3,923

 

 

529,160

 

 

8,165

FHLBC and FRBC stock

 

 

13,433

 

 

13,433

 

 

 -

 

 

13,433

 

 

 -

Loans held-for-sale

 

 

2,984

 

 

2,984

 

 

 -

 

 

2,984

 

 

 -

Net loans

 

 

1,878,021

 

 

1,867,594

 

 

 -

 

 

 -

 

 

1,867,594

Accrued interest receivable

 

 

10,940

 

 

10,940

 

 

 -

 

 

10,940

 

 

 -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest bearing deposits

 

$

618,830

 

$

618,830

 

$

618,830

 

$

 -

 

$

 -

Interest bearing deposits

 

 

1,497,843

 

 

1,495,614

 

 

 -

 

 

1,495,614

 

 

 -

Securities sold under repurchase agreements

 

 

46,632

 

 

46,632

 

 

 -

 

 

46,632

 

 

 -

Other short-term borrowings

 

 

149,500

 

 

149,500

 

 

 -

 

 

149,500

 

 

 -

Junior subordinated debentures

 

 

57,686

 

 

47,625

 

 

32,989

 

 

14,636

 

 

 -

Senior notes

 

 

44,158

 

 

45,008

 

 

45,008

 

 

 -

 

 

 -

Note payable and other borrowings

 

 

15,379

 

 

15,379

 

 

 -

 

 

15,379

 

 

 -

Interest rate swap agreements

 

 

58

 

 

58

 

 

 -

 

 

58

 

 

 -

Borrowing interest payable

 

 

281

 

 

281

 

 

 -

 

 

281

 

 

 -

Deposit interest payable

 

 

973

 

 

973

 

 

 -

 

 

973

 

 

 -

 

 

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 2019 and 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 $256,000 will be reclassified as an increase 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

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Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

the Company minimizes its net risk exposure resulting from such transactions.  As the interest rate derivatives associated with this 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. 

 

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

 

Disclosure of Fair Values of Derivative Instruments on the Balance Sheet 

 

The Company entered into a forward starting interest rate swap on August 18, 2015, with an effective date of June 15, 2017.  This transaction had a notional amount totaling $25.8 million as of December 31, 2018, was designated as a cash flow hedge of certain junior subordinated debentures and was determined to be fully effective during the period presented.  As such, no amount of ineffectiveness has been included in net income.  Therefore, the aggregate fair value of the swap is recorded in other liabilities with changes in fair value recorded in other comprehensive income, net of tax.  The amount included in other comprehensive income would be reclassified to current earnings should all or a portion of the hedge no longer be considered effective.  The Company expects the hedge to remain fully effective during the remaining term of the swap.  The Bank will pay the counterparty a fixed rate and receive a floating rate based on three month LIBOR.  The trust preferred securities changed from fixed rate to floating rate in June 15, 2017.  The cash flow hedge has a maturity date of June 15, 2037.

 

The Bank also has interest rate derivative positions to assist with risk management that are not designated as hedging instruments.  These derivative positions relate to transactions in which the Bank enters an interest rate swap with a client while at the same time entering into an offsetting interest rate swap with another financial institution.  The Bank had $176,000 of cash collateral pledged with one correspondent financial institution to support interest rate swap activity at September 30, 2019; $11.3 million of investment securities were required to be pledged to two correspondent financial institutions.  The Bank had $260,000 of cash collateral pledged with one correspondent financial institution to support interest rate swap activity at December 31, 2018; no investment securities were required to be pledged.  At September 30, 2019, the notional amount of non-hedging interest rate swaps was $174.5 million with a weighted average maturity of 6.0 years.  At December 31, 2018, the notional amount of non-hedging interest rate swaps was $188.9 million with a weighted average maturity of 6.6 years.  The Bank offsets derivative assets and liabilities that are subject to a master netting arrangement.

 

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 September 30, 2019, and December 31, 2018.

 

Fair Value of Derivative Instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2019

 

No. of Trans.

 

Notional Amount   $

 

Balance Sheet Location

Fair Value   $

 

Balance Sheet Location

Fair Value   $

Derivatives designated as hedging instruments

 

 

 

 

 

 

 

 

 

Interest rate swaps

1

 

25,774

 

Other Assets

 -

 

Other Liabilities

4,696

Total derivatives designated as hedging instruments

 

 

 

 

 

 -

 

 

4,696

 

 

 

 

 

 

 

 

 

 

Derivatives not designated as hedging instruments

 

 

 

 

 

 

 

 

 

Interest rate swaps with commercial loan customers

24

 

174,531

 

Other Assets

3,756

 

Other Liabilities

3,756

Interest rate lock commitments and forward contracts

141

 

50,520

 

Other Assets

453

 

Other Liabilities

 -

Other contracts

4

 

28,231

 

Other Assets

 -

 

Other Liabilities

79

Total derivatives not designated as hedging instruments

 

 

 

 

 

4,209

 

 

3,835

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2018

 

No. of Trans.

 

Notional Amount   $

 

Balance Sheet Location

Fair Value   $

 

Balance Sheet Location

Fair Value   $

Derivatives designated as hedging instruments

 

 

 

 

 

 

 

 

 

Interest rate swaps

1

 

25,774

 

Other Assets

 -

 

Other Liabilities

58

Total derivatives designated as hedging instruments

 

 

 

 

 

 -

 

 

58

 

 

 

 

 

 

 

 

 

 

Derivatives not designated as hedging instruments

 

 

 

 

 

 

 

 

 

Interest rate swaps with commercial loan customers

25

 

188,931

 

Other Assets

672

 

Other Liabilities

672

Interest rate lock commitments and forward contracts

63

 

18,130

 

Other Assets

159

 

Other Liabilities

 -

Other contracts

3

 

18,155

 

Other Assets

 -

 

Other Liabilities

26

Total derivatives not designated as hedging instruments

 

 

 

 

 

831

 

 

698

 

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 $2.0 million as of September 30, 2019, and a loss in AOCI of $599,000 as of September 30, 2018.  The amount of the loss reclassified from AOCI to interest income on the income statement totaled $12,000 and $29,000 for the three months ended September 30, 2019, and September 30, 2018, respectively.  The amount of the loss reclassified from AOCI to interest income or interest expense on the income statement totaled $27,000 and $145,000 for the nine months ended September 30, 2019, and September 30, 2018, 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.

·

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.

 

The Bank also issues letters of credit, which are conditional commitments that guarantee the performance of a customer to a third party.  The credit risk involved and collateral obtained in issuing letters of credit are essentially the same as that involved in extending loan commitments to our customers.  In addition to customer related commitments, the Company is responsible for letters of credit commitments that relate to properties held in OREO.  The following table represents the Company’s contractual commitments due to letters of credit as of September 30, 2019, and December 31, 2018.

 

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Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

The following table is a summary of letter of credit commitments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2019

 

December 31, 2018

 

 

    

Fixed

    

Variable

    

Total

    

Fixed

    

Variable

    

Total

  

Letters of credit:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Borrower:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial standby

 

$

339

 

$

7,418

 

$

7,757

 

$

327

 

$

7,158

 

$

7,485

 

Commercial standby

 

 

 -

 

 

354

 

 

354

 

 

 -

 

 

397

 

 

397

 

Performance standby

 

 

571

 

 

6,312

 

 

6,883

 

 

532

 

 

6,381

 

 

6,913

 

 

 

 

910

 

 

14,084

 

 

14,994

 

 

859

 

 

13,936

 

 

14,795

 

Non-borrower:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performance standby

 

 

 -

 

 

67

 

 

67

 

 

 -

 

 

67

 

 

67

 

Total letters of credit

 

$

910

 

$

14,151

 

$

15,061

 

$

859

 

$

14,003

 

$

14,862

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

Overview

 

The following discussion provides additional information regarding our operations for the three and nine months ended September 30, 2019, as compared to September 30, 2018, and our financial condition at September 30, 2019 and December 31, 2018.  This discussion should be 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, 2018.  The results of operations for the three and nine months ended September 30, 2019, are not necessarily indicative of future results.  Dollar amounts presented in the following tables are in thousands, except per share data, and September 2019 and 2018 amounts are unaudited.

 

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 bank 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, DeKalb, DuPage, Kane, Kendall, 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 growth in total loans in the third quarter of 2019, compared to both the year ended December 31, 2018 and the third quarter of 2018, and we believe we are positioned for further loan 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 to 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.  Overall stable market conditions over the past few years are reflected in the financials presented for the reporting period ended September 30, 2019.

 

The following provides an overview of some of the factors impacting our financial performance for the quarter and nine month period ending September 30, 2019:

 

·

Net income for the third quarter of 2019 was $12.2 million, or $0.40 per diluted share, compared to $9.6 million, or $0.32 per diluted share, for the third quarter of 2018.  Net income for the nine months ended September 30, 2019, totaled $29.9 million, or $0.98 per diluted share, compared to $25.4 million, or $0.84 per diluted share for the nine months ended September 30, 2018.

 

·

Net interest and dividend income was $24.8 million for the third quarter of 2019, compared to $23.7 million for the third quarter September 30, 2018.  Net interest and dividend income was $73.6 million for the nine months ended September 30, 2019, compared to $66.6 million for the like period in 2018. The increases in 2019 were primarily due to growth in our loan portfolio, as well as a more profitable loan product mix, with increases in our commercial, leases and real estate-commercial loan portfolios and reductions in our real estate-residential and construction loan portfolios.

 

·

Noninterest income was $11.9 million for the third quarter of 2019, compared to $7.8 million for the third quarter of 2018.  The increase was primarily due to pretax securities gains, net, of $3.5 million in the third quarter of 2019, compared to $13,000 in the third quarter of 2018, as well as growth in net gain on sales of mortgage loans of $1.1 million, compared to the third quarter of 2018.  This increase was partially offset by a $946,000 interest rate driven mark to market loss on mortgage servicing rights (“MSR”) recorded in the third quarter of 2019, compared to $11,000 of MSR losses recorded in the third quarter of 2018.  Noninterest income was $26.6 million for the nine months ended September 30, 2019, which reflected a 6.9% increase from the like period in 2018, due primarily to a $4.1 million increase in income related to pretax securities

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gains, net, for the nine months ended September 30, 2019, partially offset by a $3.1 million interest rate driven mark to market loss on MSRs increase for the nine months ended September 30, 2019, compared to a $189,000 MSR gain recorded for the nine months ended September 30, 2018.

 

·

Noninterest expense was $20.0 million for the third quarter of 2019, compared to $18.7 million for the third quarter of 2018, an increase of $1.2 million, or 6.6%.  Noninterest expense totaled $59.3 million for the nine months ended September 30, 2019, compared to $58.4 million for the like 2018 period, reflecting an increase of $923,000, or 1.6%.  The increases in 2019 were due primarily to an increase in salaries and employee benefit expense related to recent hires within our commercial lending team, as well as growth in occupancy, furniture and equipment expense due to scheduled facilities repairs. 

 

·

Income tax expense increased in the third quarter of 2019 compared to the like period in 2018, due primarily to the increase in pretax income of $3.4 million. The effective tax rate was 24.9% for both the third quarter of 2019 and 2018.  Income tax expense for the nine months ended September 30, 2019 totaled $9.5 million, which was $2.5 million, or 35.9%, higher than the income tax expense for the nine months ended September 30, 2018, due primarily to the increase in pretax income of $7.0 million. The effective tax rate was 24.1% for the nine months ended September 30, 2019, compared to 21.6% for the nine months ended September 30, 2018. 

 

·

Asset quality remained consistent with nonperforming loans as a percent of total loans remaining relatively steady at 0.7% as of September 30, 2019 and 0.6% as of September 30, 2018. 

 

·

We added $11.4 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.  As of September 30, 2019, PCI loans, net of purchase accounting adjustments, totaled $9.1 million, and PCI loans to total loans was 0.5%.  As of September 30, 2018, PCI loans, net of purchase accounting adjustments, totaled $10.9 million, and PCI loans to total loans was 0.6%.  We had no PCI loans before our acquisition of ABC Bank.

 

Critical Accounting Policies

 

Our 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 our 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, income taxes and the accounting related to loans acquired in business combinations. Our 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, 2018, 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, 2018. There have been no material changes to our significant accounting policies or the estimates made pursuant to those policies from those disclosed in our 2018 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.

 

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Results of Operations 

 

Overview

 

Three months ended September 30, 2019 and 2018

Our income before taxes was $16.2 million in the third quarter of 2019 compared to $12.8 million in the third quarter of 2018.  The $3.4 million increase in pretax income for the third quarter of 2019, compared to the like quarter in 2018, resulted in a $835,000 increase in income tax expense for the third quarter of 2019, compared to the like quarter in 2018.   Our net income was $12.2 million, or $0.40 per diluted share, for the third quarter of 2019, compared to net income of $9.6 million, or $0.32 per diluted share, for the third quarter of 2018.

The increase in net income was driven by a $1.3 million increase in interest and dividend income in the third quarter of 2019, compared to the third quarter of 2018, primarily because of higher loan yields in the 2019 period due to growth in average volumes, partially offset by a $228,000 increase in interest expense.  In addition, our noninterest income increased $4.1 million in the third quarter of 2019, compared to the like quarter in 2018, which was partially offset by a $1.2 million increase in noninterest expense in the third quarter of 2019, compared to the third quarter of 2018. 

Management has remained diligent in reviewing our loan portfolio to analyze and determine if charge-offs are required.  Average loan growth, including loans held for sale, in the third quarter of 2019 totaled $51.7 million, primarily in commercial loans and leases, compared to the third quarter of 2018.  Management’s review of the loan portfolio resulted in $550,000 of provision expense in the third quarter of 2019, based on analysis of the allowance and loan portfolio held; no provision expense was recorded in the third quarter of 2018.  Our allowance for loan and lease loss analysis methodology remained consistent, with no material changes incorporated in the third quarter of 2019 from the prior quarter. 

 

Nine months ended September 30, 2019 and 2018

Our income before taxes was $39.4 million for the nine months ended September 30, 2019, compared to $32.4 million for the nine months ended September 30, 2018.  The $7.0 million increase in pretax income for the nine months ended September 30, 2019, compared to the like period in 2018, resulted in a $2.5 million increase in income tax expense for the nine months ended September 30, 2019, compared to the like period in 2018.

 

Our net income was $29.9 million, or $0.98 per diluted share, for the nine months ended September 30, 2019, compared to net income of $25.4 million, or $0.84 per diluted share, for the nine months ended September 30, 2018.  The increase in net income was driven by a $9.3 million increase in interest and dividend income for the nine months ended September 30, 2019, compared the like period of 2018, driven by increased average loan volumes due to organic loan and lease growth and a select HELOC portfolio purchase in late 2018, partially offset by a $2.4 million increase in interest expense and an additional $722,000 in provision expense.  Also impacting net income was a $1.7 million increase in noninterest income for the nine months ended September 30, 2019, compared to the 2018 period, driven primarily by an increase in pretax securities gains, net, of $4.1 million for the nine months ended September 30, 2019, compared to the like 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 September 30, 2019 and 2018

 

Our net interest and dividend income increased by $1.1 million, from $23.7 million for the third quarter of 2018, to $24.8 million for the third quarter of 2019.  Our interest and dividend income decreased $142,000, or 0.48%, for the third quarter 2019, compared to the second quarter of 2019, but reflected an increase of $1.3 million, or 4.5%, compared to the third quarter of 2018.  Interest and dividend income (TE) increased by $1.2 million, or 4.1%, from $28.7 million for the third quarter of 2018, to $29.9 million for the third quarter of 2019.

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Average earning assets for the third quarter of 2019 were $2.42 billion, reflecting a decrease of $26.4 million compared to the second quarter of 2019, but an increase of $9.6 million compared to the third quarter of 2018.  Total average loans, including loans held-for-sale, totaled $1.90 billion in the third quarter of 2019, which reflected a decrease of $1.9 million compared to the second quarter of 2019, but an increase of $52.9 million compared to the third quarter of 2018.  The growth in average loan balances and resultant interest income in the year over year period was primarily due to an increase in commercial, lease and real estate-commercial loans stemming from organic growth, as well as a HELOC portfolio purchase of $20.7 million in late 2018.    For the third quarter of 2019, yields on average securities decreased by 14 basis points and yields on average loans increased by 23 basis points, each compared to the third quarter of 2018, due primarily to the growth in loans partially funded by securities.

 

Average interest bearing liabilities decreased $59.8 million, or 3.5%, in the third quarter of 2019, compared to the second quarter of 2019, and decreased $96.6 million, or 5.5%, compared to third quarter of 2018.  The reduction in average interest bearing deposits from the prior quarter and prior year periods was partially offset by growth in average noninterest bearing deposits of $6.3 million, compared to the prior quarter, and $25.9 million, compared to like 2018 quarter, primarily consisting of commercial demand deposits.  Average other short-term borrowings, which primarily consist of FHLBC advances, decreased $18.1 million in the third quarter of 2019, compared to the second quarter of 2019, and increased $20.2 million compared to the third quarter of 2018.  The average rate paid on short-term FHLBC advances was impacted by the reduction in interest rates  in the third quarter of 2019, resulting in an average rate of 2.26% for the third quarter of 2019, compared to 2.47% for the second quarter of 2019 and 2.24% for the third quarter of 2018.  In addition, we acquired notes payable and other borrowings in our acquisition of ABC Bank, consisting solely of long-term FHLBC advances, which resulted in increases to average interest bearing liabilities of $11.0 million for the third quarter of 2019, $13.1 million for the second quarter of 2019, and $20.8 million for the third quarter of 2018.  The average cost of funds on these long-term advances was 3.22% for the third quarter of 2019, 3.28% for the second quarter of 2019, and 3.30% for the third quarter of 2018.  The rate on our junior subordinated debentures was within a seven basis point range over the past year, reflecting an average rate of 6.41% for the third quarter of 2019, 6.47% for the second quarter of 2019, and 6.40% for the third quarter of 2018.    

 

Our net interest margin, on a tax-equivalent (TE) basis, expressed as a percentage of average earning assets, was 4.14% for the third quarter of 2019, reflecting one basis point decrease from the second quarter of 2019, and an increase of 14 basis points from the third quarter of 2018.  The average tax-equivalent yield on earning assets decreased to 4.90% for the third quarter of 2019, compared to 4.94% for the second quarter of 2019, but reflected an increase compared to 4.73% for the third quarter of 2018.  The decreases in net interest margin and the yield on average earning assets for the third quarter of 2019, compared to the second quarter of 2019, was attributable to a decline in loan and security volumes and interest rate reductions in the third quarter of 2019.  The cost of funds on interest bearing liabilities was 1.11% for the third quarter of 2019, 1.13% for the second quarter of 2019, and 1.00% for the third quarter of 2018.  The decrease in our cost of funds for the linked quarter in the 2019 period was driven by declining interest bearing deposit volumes in the third quarter of 2019 and the decline in interest rates in the third quarter, specifically impacting the rates on FHLBC advances.

 

Nine months ended September 30, 2019 and 2018

 

Our net interest and dividend income increased by $7.0 million, from $66.6 million for the nine months ended September 30, 2018, to $73.6 million for the nine months ended September 30, 2019.  Our interest and dividend income increased $9.3 million, or 11.9%, for the nine months ended September 30, 2019, compared to the nine months ended September 30, 2018.  Interest and dividend income (TE) increased by $9.3 million from $80.3 million for the nine months ended September 30, 2018 to $89.5 million for the nine months ended September 30, 2019.

 

Average earning assets for the nine months ended September 30, 2019 were $2.43 billion, reflecting an increase of $109.0 million compared to the nine months ended September 30, 2018.  The yield on average earning assets for the nine months ended September 30, 2019 was 4.91%, compared to 4.61% for the nine months ended September 30, 2018.  Total average loans, including loans held-for-sale, totaled $1.90 billion for the nine months ended September 30, 2019, which reflected an increase of $143.7 million compared to the nine months ended September 30, 2018.  The growth in average loan balances and the 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, organic loan growth and the rising interest rate environment for the majority of the year over year period.  For the nine months ended September 30, 2019, yields on average securities increased by 16 basis points and yields on average loans increased by 30 basis points, each as compared to the nine months ended September 30, 2018, due primarily to the rising interest rate environment. The $3.5 million gain on sale recorded in the third quarter of 2019 was driven by the sale of approximately $57.2 million of tax exempt municipal securities, as the spread risk on these assets has increased considerably due to historically tight spreads in the sector. The security sales occurred to reduce the exposure related to this risk; these sale proceeds were partially used to purchase taxable municipal bonds, which had spread levels near their historical average.

 

Average interest bearing liabilities increased $18.1 million, or 1.07%, in the nine months ended September 30, 2019, compared to the nine months ended September 30, 2018. The reduction in average interest bearing deposits for the nine months ended September 30, 2019, compared to the like 2018 period, was partially offset by growth in average noninterest bearing deposits of $41.0 million, primarily consisting of commercial demand deposits.   The increase was due primarily to increases in other short-term borrowings of

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$22.1 million, which primarily consist of FHLBC advances.  The average rate paid on short-term FHLBC advances was impacted by the higher interest rate environment, resulting in an average rate of 2.42% for the nine months ended September 30, 2019, compared to 1.83% for the nine months ended September 30, 2018.  In addition, we acquired notes payable and other borrowings in our acquisition of ABC Bank, consisting solely of long-term FHLBC advances, which resulted in an increase to average interest bearing liabilities of $13.1 million for the nine months ended September 30, 2019, and an increase of $13.6 million for the nine months ended September 30, 2018.  The average cost of funds on these long-term advances was 3.18% for the nine months ended September 30, 2019, compared to 2.64% for the nine months ended September 30, 2018.  The rate on our junior subordinated debentures was 6.47% for the nine months ended September 30, 2019, compared to 6.46% for the nine months ended September 30, 2018.    

 

Our net interest margin (TE) for the nine months ended September 30, 2019, was 4.13% compared to 3.92% for the nine months ended September 30, 2018, reflecting a 21 basis point increase. The increase in net interest margin for the nine months ended September 30, 2019, compared to the nine months ended September 30, 2018, was due primarily to the ABC Bank acquisition and organic loan growth, as well as a shift to noninterest bearing deposit accounts, which partially offset increases in cost of funds due to the rising rate environment year over year.

 

We continue to observe competitive pressure to maintain reduced interest rates on loans retained at renewal.  While our loan prices are targeted to achieve certain returns on equity, significant competition for commercial and industrial loans 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 our average consolidated balance sheet 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 2019 and 2018 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 Income / Expense and Rates

(Dollars in thousands - unaudited)

 

 

Quarters Ended

 

September 30, 2019

 

June 30, 2019

 

September 30, 2018

 

Average

 

Income /

 

Rate

 

Average

 

Income /

 

Rate

 

Average

 

Income /

 

Rate

 

Balance

 

Expense

 

%

 

Balance

 

Expense

 

%

 

Balance

 

Expense

 

%

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest earning deposits with financial institutions

$

21,425

 

$

119

 

2.20

 

$

19,053

 

$

111

 

2.34

 

$

17,975

 

$

84

 

1.85

Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

260,842

 

 

2,296

 

3.49

 

 

229,263

 

 

2,223

 

3.89

 

 

268,015

 

 

2,491

 

3.69

Non-taxable (TE)1

 

233,208

 

 

2,176

 

3.70

 

 

290,743

 

 

2,710

 

3.74

 

 

274,282

 

 

2,612

 

3.78

Total securities (TE)1

 

494,050

 

 

4,472

 

3.59

 

 

520,006

 

 

4,933

 

3.80

 

 

542,297

 

 

5,103

 

3.73

Dividends from FHLBC and FRBC

 

10,398

 

 

154

 

5.88

 

 

11,317

 

 

156

 

5.53

 

 

8,905

 

 

121

 

5.39

Loans and loans held-for-sale1, 2

 

1,895,454

 

 

25,159

 

5.27

 

 

1,897,324

 

 

24,958

 

5.28

 

 

1,842,561

 

 

23,421

 

5.04

Total interest earning assets

 

2,421,327

 

 

29,904

 

4.90

 

 

2,447,700

 

 

30,158

 

4.94

 

 

2,411,738

 

 

28,729

 

4.73

Cash and due from banks

 

34,315

 

 

 -

 

 -

 

 

33,618

 

 

 -

 

 -

 

 

34,608

 

 

 -

 

 -

Allowance for loan and lease losses

 

(19,452)

 

 

 -

 

 -

 

 

(19,435)

 

 

 -

 

 -

 

 

(19,696)

 

 

 -

 

 -

Other noninterest bearing assets

 

172,250

 

 

 -

 

 -

 

 

174,075

 

 

 -

 

 -

 

 

191,296

 

 

 -

 

 -

Total assets

$

2,608,440

 

 

 

 

 

 

$

2,635,958

 

 

 

 

 

 

$

2,617,946

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NOW accounts

$

420,437

 

$

334

 

0.32

 

$

442,430

 

$

373

 

0.34

 

$

444,790

 

$

301

 

0.27

Money market accounts

 

282,797

 

 

269

 

0.38

 

 

288,698

 

 

262

 

0.36

 

 

319,492

 

 

250

 

0.31

Savings accounts

 

308,483

 

 

121

 

0.16

 

 

313,822

 

 

124

 

0.16

 

 

300,519

 

 

91

 

0.12

Time deposits

 

420,429

 

 

1,672

 

1.58

 

 

422,975

 

 

1,641

 

1.56

 

 

467,933

 

 

1,568

 

1.33

Interest bearing deposits

 

1,432,146

 

 

2,396

 

0.66

 

 

1,467,925

 

 

2,400

 

0.66

 

 

1,532,734

 

 

2,210

 

0.57

Securities sold under repurchase agreements

 

40,342

 

 

135

 

1.33

 

 

44,184

 

 

147

 

1.33

 

 

46,850

 

 

140

 

1.19

Other short-term borrowings

 

75,310

 

 

429

 

2.26

 

 

93,369

 

 

575

 

2.47

 

 

55,119

 

 

311

 

2.24

Junior subordinated debentures

 

57,716

 

 

933

 

6.41

 

 

57,704

 

 

931

 

6.47

 

 

57,669

 

 

930

 

6.40

Senior notes

 

44,222

 

 

682

 

6.12

 

 

44,196

 

 

672

 

6.10

 

 

44,121

 

 

672

 

6.04

Notes payable and other borrowings

 

10,973

 

 

89

 

3.22

 

 

13,101

 

 

107

 

3.28

 

 

20,768

 

 

173

 

3.30

Total interest bearing liabilities

 

1,660,709

 

 

4,664

 

1.11

 

 

1,720,479

 

 

4,832

 

1.13

 

 

1,757,261

 

 

4,436

 

1.00

Noninterest bearing deposits

 

651,863

 

 

 -

 

 -

 

 

645,580

 

 

 -

 

 -

 

 

625,982

 

 

 -

 

 -

Other liabilities

 

30,329

 

 

 -

 

 -

 

 

19,586

 

 

 -

 

 -

 

 

20,142

 

 

 -

 

 -

Stockholders' equity

 

265,539

 

 

 -

 

 -

 

 

250,313

 

 

 -

 

 -

 

 

214,561

 

 

 -

 

 -

Total liabilities and stockholders' equity

$

2,608,440

 

 

 

 

 

 

$

2,635,958

 

 

 

 

 

 

$

2,617,946

 

 

 

 

 

Net interest income (GAAP)

 

 

 

$

24,780

 

 

 

 

 

 

$

24,754

 

 

 

 

 

 

$

23,740

 

 

Net interest margin (GAAP)

 

 

 

 

 

 

4.06

 

 

 

 

 

 

 

4.06

 

 

 

 

 

 

 

3.91

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income (TE)1

 

 

 

$

25,240

 

 

 

 

 

 

$

25,326

 

 

 

 

 

 

$

24,293

 

 

Net interest margin (TE)1

 

 

 

 

 

 

4.14

 

 

 

 

 

 

 

4.15

 

 

 

 

 

 

 

4.00

Interest bearing liabilities to earning assets

 

68.59

%

 

 

 

 

 

 

70.29

%

 

 

 

 

 

 

72.86

%

 

 

 

 

 

 1 Tax equivalent basis is calculated using a marginal tax rate of 21% in 2019 and 2018. See the discussion entitled “Non-GAAP Presentations” below and the table on page 46 that provides a reconciliation of each non-GAAP measure to the most comparable GAAP equivalent.

 

2 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 46, and includes fees of $295,000, $184,000 and $197,000 for the third quarter of 2019, the second quarter of 2019, and the third quarter of 2018, respectively.  Nonaccrual loans are included in the above-stated average balances.

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Analysis of Average Balances,

Tax Equivalent Income / Expense and Rates

(Dollars in thousands - unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 

 

2019

 

2018

 

Average

 

Income /

 

Rate

 

Average

 

Income /

 

Rate

 

Balance

 

Expense

 

%

 

Balance

 

Expense

 

%

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest earning deposits with financial institutions

$

19,783

 

$

344

 

2.32

 

$

17,000

 

$

230

 

1.81

Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

242,417

 

 

6,933

 

3.82

 

 

268,640

 

 

7,053

 

3.51

Non-taxable (TE)1

 

266,694

 

 

7,542

 

3.78

 

 

280,221

 

 

7,897

 

3.77

Total securities (TE)1

 

509,111

 

 

14,475

 

3.80

 

 

548,861

 

 

14,950

 

3.64

Dividends from FHLBC and FRBC

 

11,056

 

 

459

 

5.55

 

 

8,815

 

 

338

 

5.13

Loans and loans held-for-sale 1 , 2

 

1,896,096

 

 

74,243

 

5.24

 

 

1,752,406

 

 

64,740

 

4.94

Total interest earning assets

 

2,436,046

 

 

89,521

 

4.91

 

 

2,327,082

 

 

80,258

 

4.61

Cash and due from banks

 

33,896

 

 

 -

 

 -

 

 

33,719

 

 

 -

 

 -

Allowance for loan and lease losses

 

(19,375)

 

 

 -

 

 -

 

 

(18,823)

 

 

 -

 

 -

Other noninterest bearing assets

 

175,998

 

 

 -

 

 -

 

 

178,228

 

 

 -

 

 -

Total assets

$

2,626,565

 

 

 

 

 

 

$

2,520,206

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NOW accounts

$

437,025

 

$

1,086

 

0.33

 

$

439,283

 

$

715

 

0.22

Money market accounts

 

290,206

 

 

801

 

0.37

 

 

304,362

 

 

552

 

0.24

Savings accounts

 

310,018

 

 

367

 

0.16

 

 

288,499

 

 

220

 

0.10

Time deposits

 

429,403

 

 

4,931

 

1.54

 

 

437,401

 

 

4,187

 

1.28

Interest bearing deposits

 

1,466,652

 

 

7,185

 

0.65

 

 

1,469,545

 

 

5,674

 

0.52

Securities sold under repurchase agreements

 

43,210

 

 

431

 

1.33

 

 

43,951

 

 

323

 

0.98

Other short-term borrowings

 

88,918

 

 

1,611

 

2.42

 

 

66,802

 

 

916

 

1.83

Junior subordinated debentures

 

57,704

 

 

2,791

 

6.47

 

 

57,657

 

 

2,784

 

6.46

Senior notes

 

44,196

 

 

2,026

 

6.13

 

 

44,096

 

 

2,016

 

6.11

Notes payable and other borrowings

 

13,100

 

 

312

 

3.18

 

 

13,597

 

 

268

 

2.64

Total interest bearing liabilities

 

1,713,780

 

 

14,356

 

1.12

 

 

1,695,648

 

 

11,981

 

0.94

Noninterest bearing deposits

 

641,053

 

 

 -

 

 -

 

 

600,052

 

 

 -

 

 -

Other liabilities

 

21,285

 

 

 -

 

 -

 

 

16,619

 

 

 -

 

 -

Stockholders' equity

 

250,447

 

 

 -

 

 -

 

 

207,887

 

 

 -

 

 -

Total liabilities and stockholders' equity

$

2,626,565

 

 

 

 

 

 

$

2,520,206

 

 

 

 

 

Net interest income (GAAP)

 

 

 

$

73,570

 

 

 

 

 

 

$

66,598

 

 

Net interest margin (GAAP)

 

 

 

 

 

 

4.04

 

 

 

 

 

 

 

3.83

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income (TE)1

 

 

 

$

75,165

 

 

 

 

 

 

$

68,277

 

 

Net interest margin (TE)1

 

 

 

 

 

 

4.13

 

 

 

 

 

 

 

3.92

Interest bearing liabilities to earning assets

 

70.35

%

 

 

 

 

 

 

72.87

%

 

 

 

 

1 Tax equivalent basis is calculated using a marginal tax rate of 21% in 2019 and 2018. See the discussion entitled “Non-GAAP Presentations” below and the table on page 46 that provides a reconciliation of each non-GAAP measure to the most comparable GAAP equivalent.

2 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 46, and includes fees of $708,000 and $611,000 for the first nine months of 2019 and 2018, respectively. Nonaccrual loans are included in the above-stated average balances.

 

Reconciliation of Tax-Equivalent Non-GAAP Financial Measures

 

Net interest and dividend income (TE) and net interest income (TE) to average interest earning assets are non-GAAP measures that have been adjusted on a TE basis using a marginal rate of 21% for 2019 and 2018 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:

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Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30, 

 

June 30, 

 

September 30, 

 

 

September 30, 

 

 

    

2019

    

2019

 

2018

 

    

2019

 

2018

 

Net Interest Margin

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income (GAAP)

 

$

29,444

 

$

29,586

 

$

28,176

 

 

$

87,926

 

$

78,579

 

Taxable-equivalent adjustment:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans

 

 

 3

 

 

 3

 

 

 5

 

 

 

11

 

 

21

 

Securities

 

 

457

 

 

569

 

 

548

 

 

 

1,584

 

 

1,658

 

Interest and dividend income (TE)

 

 

29,904

 

 

30,158

 

 

28,729

 

 

 

89,521

 

 

80,258

 

Interest expense (GAAP)

 

 

4,664

 

 

4,832

 

 

4,436

 

 

 

14,356

 

 

11,981

 

Net interest income (TE)

 

$

25,240

 

$

25,326

 

$

24,293

 

 

$

75,165

 

$

68,277

 

Net interest income  (GAAP)

 

$

24,780

 

$

24,754

 

$

23,740

 

 

$

73,570

 

$

66,598

 

Average interest earning assets

 

$

2,421,327

 

$

2,447,700

 

$

2,411,738

 

 

$

2,436,046

 

$

2,327,082

 

Net interest margin (GAAP)

 

 

4.06

%

 

4.06

%

 

3.91

%

 

 

4.04

%

 

3.83

%

Net interest margin  (TE)

 

 

4.14

%

 

4.15

%

 

4.00

%

 

 

4.13

%

 

3.92

%

 

 

 

 

Noninterest Income

 

Three months ended September 30, 2019 and 2018

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3rd Quarter 2019

 

Noninterest Income

 

Three Months Ended

 

Percent Change From

 

 

 

September 30, 

 

June 30, 

 

September 30, 

 

June 30, 

 

September 30, 

 

 

    

2019

    

2019

    

2018

    

2019

    

2018

 

Trust income

 

$

1,730

 

$

1,739

 

$

1,644

 

(0.5)

 

5.2

 

Service charges on deposits

 

 

2,020

 

 

1,959

 

 

1,923

 

3.1

 

5.0

 

Residential mortgage banking revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Secondary mortgage fees

 

 

282

 

 

203

 

 

199

 

38.9

 

41.7

 

Mortgage servicing rights mark to market (loss)

 

 

(946)

 

 

(1,137)

 

 

(11)

 

16.8

 

N/M

 

Mortgage servicing income

 

 

460

 

 

491

 

 

471

 

(6.3)

 

(2.3)

 

Net gain on sales of mortgage loans

 

 

2,074

 

 

1,163

 

 

965

 

78.3

 

114.9

 

Total residential mortgage banking revenue

 

 

1,870

 

 

720

 

 

1,624

 

159.7

 

15.1

 

Securities gain, net

 

 

3,463

 

 

986

 

 

13

 

251.2

 

N/M

 

Increase in cash surrender value of BOLI

 

 

267

 

 

320

 

 

347

 

(16.6)

 

(23.1)

 

Debit card interchange income

 

 

1,124

 

 

1,166

 

 

1,135

 

(3.6)

 

(1.0)

 

Other income

 

 

1,459

 

 

1,253

 

 

1,128

 

16.4

 

29.3

 

Total noninterest income

 

$

11,933

 

$

8,143

 

$

7,814

 

46.5

 

52.7

 

 

Noninterest income for the third quarter of 2019 increased $3.8 million, or 46.5%, compared to the second quarter of 2019, and increased $4.1 million, or 52.7%, compared to the third quarter of 2018. 

 

The $3.8 million increase in noninterest income in the third quarter of 2019, compared to the second quarter of 2019, was driven primarily by a $2.5 million increase in pretax securities gain, net, in the third quarter of 2019, primarily due to tax exempt security sales in the quarter.  In addition, aggregate increases of $1.4 million were reflected in the third quarter of 2019 in service charges on deposits, total residential mortgage banking revenue, and other income, compared to the second quarter of 2019.  Due to interest rate driven valuation reductions, income related to the cash surrender value of BOLI decreased $53,000 in the third quarter of 2019, compared to the prior linked quarter. 

 

The $4.1 million increase in noninterest income for the third quarter of 2019, compared to the third quarter of 2018, was primarily driven by a $3.5 million increase in pretax securities gains, net, in the third quarter of 2019, as well as growth in net gain on sales of mortgage loans of $1.1 million, compared to the third quarter of 2018.  In addition, service charges on deposits, total residential mortgage banking income, and other income reflected increases in the year over year period.  These increases were partially offset by a $946,000 interest rate driven mark to market loss on mortgage servicing rights (“MSR”) recorded in the third quarter of 2019, compared to $11,000 of MSR losses recorded in the third quarter of 2018.

 

 

46

 

Table of Contents

 

 

Nine months ended September 30, 2019 and 2018

 

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

 

 

 

 

 

 

 

 

 

 

Noninterest Income

 

Nine Months Ended

 

YTD

 

 

September 30, 

 

September 30, 

 

Percent

 

    

2019

    

2018

    

Change

Trust income

 

$

4,955

 

$

4,784

 

3.6

Service charges on deposits

 

 

5,841

 

 

5,284

 

10.5

Residential mortgage banking revenue

 

 

 

 

 

 

 

 

Secondary mortgage fees

 

 

621

 

 

556

 

11.7

Mortgage servicing rights mark to market (loss) gain

 

 

(2,902)

 

 

189

 

N/M

Mortgage servicing income

 

 

1,408

 

 

1,550

 

(9.2)

Net gain on sales of mortgage loans

 

 

3,999

 

 

3,122

 

28.1

Total residential mortgage banking revenue

 

 

3,126

 

 

5,417

 

(42.3)

Securities gain, net

 

 

4,476

 

 

360

 

N/M

Increase in cash surrender value of BOLI

 

 

1,045

 

 

946

 

10.5

Debit card interchange income

 

 

3,277

 

 

3,279

 

(0.1)

Other income

 

 

3,838

 

 

3,755

 

2.2

Total noninterest income

 

$

26,558

 

$

24,851

 

6.9

 

N/M - Not meaningful

 

Noninterest income for the nine months ended September 30, 2019 increased $1.7 million, or 6.9%, compared to the nine months ended September 30, 2018.  The increase in noninterest income for the nine months ended September 30, 2019, compared to the prior year period, was primarily driven by a $4.1 million increase in pretax securities gains, net.  This increase was partially offset by the $2.3 million decrease in total residential mortgage banking revenue, which included a $3.1 million increase in the interest rate driven mark to market loss on MSRs for the nine months ended September 30, 2019, compared to a $189,000 MSR gain recorded for the nine months ended September 30, 2018, due to the impact of changes in interest rates.

 

Noninterest Expense

 

Three months ended September 30, 2019 and 2018

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3rd Quarter 2019

 

Noninterest Expense

 

Three Months Ended

 

Percent  Change From

 

 

 

September 30, 

 

June 30, 

 

September 30, 

 

June 30, 

 

September 30, 

 

 

    

2019

    

2019

    

2018

    

2019

    

2018

 

Salaries

 

$

9,460

 

$

9,004

 

$

8,509

 

5.1

 

11.2

 

Officers incentive

 

 

923

 

 

893

 

 

820

 

3.4

 

12.6

 

Benefits and other

 

 

1,679

 

 

1,690

 

 

1,836

 

(0.7)

 

(8.6)

 

Total salaries and employee benefits

 

 

12,062

 

 

11,587

 

 

11,165

 

4.1

 

8.0

 

Occupancy, furniture and equipment expense

 

 

2,235

 

 

1,925

 

 

1,782

 

16.1

 

25.4

 

Computer and data processing

 

 

1,490

 

 

1,524

 

 

1,247

 

(2.2)

 

19.5

 

FDIC insurance

 

 

(114)

 

 

116

 

 

162

 

(198.3)

 

(170.4)

 

General bank insurance

 

 

270

 

 

236

 

 

230

 

14.4

 

17.4

 

Amortization of core deposit intangible asset

 

 

157

 

 

121

 

 

136

 

29.8

 

15.4

 

Advertising expense

 

 

360

 

 

381

 

 

492

 

(5.5)

 

(26.8)

 

Debit card interchange expense

 

 

279

 

 

233

 

 

320

 

19.7

 

(12.8)

 

Legal fees

 

 

111

 

 

243

 

 

243

 

(54.3)

 

(54.3)

 

Other real estate owned expense, net

 

 

26

 

 

248

 

 

(370)

 

(89.5)

 

(107.0)

 

Other expense

 

 

3,078

 

 

3,512

 

 

3,304

 

(12.4)

 

(6.8)

 

Total noninterest expense

 

$

19,954

 

$

20,126

 

$

18,711

 

(0.9)

 

6.6

 

Efficiency ratio (GAAP)1

 

 

59.46

%

 

61.91

%

 

60.06

%

 

 

 

 

Adjusted efficiency ratio (non-GAAP)2

 

 

58.53

%

 

60.66

%

 

59.11

%

 

 

 

 

 

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Table of Contents

 

1  The efficiency ratio shown in the table above is a GAAP financial measure calculated as noninterest expense, excluding OREO expenses and amortization of core deposits, divided by the sum of net interest income and total noninterest income less net gains and losses on securities and any BOLI death benefit recorded.

2The 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 any BOLI death benefit, and includes a tax equivalent adjustment on the increase in cash surrender value of BOLI recorded. 

See the section entitled “Reconciliation of Adjusted Efficiency Ratio Non-GAAP Financial Measures” on page 49 for a reconciliation of this non-GAAP measure to the most comparable GAAP equivalent.

Noninterest expense for the third quarter of 2019 decreased $172,000, or 0.9%, compared to the second quarter of 2019, and increased $1.2 million, or 6.6%, compared to the third quarter of 2018. 

 

The decrease in noninterest expense in the third quarter of 2019, compared to the second quarter of 2019, was primarily attributable to a $222,000 decrease in other real estate expense, net, and a decrease of $434,000 in other expense due to decline in appraisal and commercial loan related fees, consulting fees, and the timing of audit fees.  FDIC insurance also reflected a decrease in the third quarter of 2019, compared to the second quarter of 2019, due to an assessment credit being issued through the first quarter of 2020.

 

The increase in noninterest expense in the third quarter of 2019, compared to the third quarter of 2018, is primarily attributable to growth in salaries and employee benefits primarily related to recent hires within our commercial lending team, as well as growth in occupancy, furniture and equipment expense due to scheduled facilities maintenance, and net gains on the sale of OREO in the third quarter of 2018 that were not repeated in the third quarter of 2019.   Partially offsetting the year over year increases were aggregate reductions of $807,000 in FDIC insurance, advertising expenses, legal fees, debit card interchange expense, and other expenses, compared to the third quarter of 2018.

 

Nine months ended September 30, 2019 and 2018

 

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

 

 

 

 

 

 

 

 

 

 

 

Noninterest Expense

 

Nine Months Ended

 

YTD

 

 

September 30, 

 

September 30, 

 

Percent

 

    

2019

    

2018

    

Change

Salaries

 

$

27,098

 

$

25,547

 

6.1

Officers incentive

 

 

2,698

 

 

2,347

 

15.0

Benefits and other

 

 

5,465

 

 

5,833

 

(6.3)

Total salaries and employee benefits

 

 

35,261

 

 

33,727

 

4.5

Occupancy, furniture and equipment expense

 

 

6,149

 

 

4,992

 

23.2

Computer and data processing

 

 

4,346

 

 

5,332

 

(18.5)

FDIC insurance

 

 

176

 

 

483

 

(63.6)

General bank insurance

 

 

756

 

 

780

 

(3.1)

Amortization of core deposit intangible asset

 

 

410

 

 

254

 

61.4

Advertising expense

 

 

975

 

 

1,325

 

(26.4)

Debit card interchange expense

 

 

659

 

 

902

 

(26.9)

Legal fees

 

 

480

 

 

688

 

(30.2)

Other real estate owned expense, net

 

 

324

 

 

232

 

39.7

Other expense

 

 

9,738

 

 

9,636

 

1.1

Total noninterest expense

 

$

59,274

 

$

58,351

 

1.6

Efficiency ratio (GAAP)1

 

 

61.20

%

 

64.25

%

 

Adjusted efficiency ratio (non-GAAP)2

 

 

60.03

%

 

59.10

%

 

 

 

1  The efficiency ratio shown in the table above is a GAAP financial measure calculated as noninterest expense, excluding OREO expenses and amortization of core deposits, divided by the sum of net interest income and total noninterest income less net gains and losses on securities and any BOLI death benefit recorded.

2The 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 any BOLI death benefit, and includes a tax equivalent adjustment on the increase in cash surrender value of BOLI recorded. 

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See the section entitled “Reconciliation of Adjusted Efficiency Ratio Non-GAAP Financial Measures” on page 49 for a reconciliation of this non-GAAP measure to the most comparable GAAP equivalent.

Noninterest expense for the nine months ended September 30, 2019, increased $923,000, or 1.6%, compared to the nine months ended September 30, 2018, primarily due to the increase in salaries and employee benefits of $1.5 million and occupancy, furniture and equipment expense of $1.2 million compared to the nine months ended September 30, 2018.

 

Reconciliation of Adjusted Efficiency Ratio Non-GAAP Financial Measures

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

GAAP

 

Non-GAAP

 

 

 

 

Three Months Ended

 

 

Three Months Ended

 

 

 

September 30, 

 

June 30, 

 

September 30, 

 

September 30, 

 

June 30, 

 

September 30, 

 

 

 

2019

 

2019

 

2018

 

2019

 

2019

 

2018

 

Efficiency Ratio / Adjusted Efficiency Ratio

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest expense

 

$

19,954

 

$

20,126

 

$

18,711

 

$

19,954

 

$

20,126

 

$

18,711

 

Less amortization of core deposit

 

 

157

 

 

121

 

 

136

 

 

157

 

 

121

 

 

136

 

Less other real estate expense, net

 

 

26

 

 

248

 

 

(370)

 

 

26

 

 

248

 

 

(370)

 

Less acquisition related costs

 

 

N/A

 

 

N/A

 

 

N/A

 

 

 -

 

 

 -

 

 

(82)

 

Noninterest expense less adjustments

 

$

19,771

 

$

19,757

 

$

18,945

 

$

19,771

 

$

19,757

 

$

19,027

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

$

24,780

 

$

24,754

 

$

23,740

 

$

24,780

 

$

24,754

 

$

23,740

 

Taxable-equivalent adjustment:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans

 

 

N/A

 

 

N/A

 

 

N/A

 

 

 3

 

 

 3

 

 

 5

 

Securities

 

 

N/A

 

 

N/A

 

 

N/A

 

 

457

 

 

569

 

 

548

 

Net interest income including adjustments

 

 

24,780

 

 

24,754

 

 

23,740

 

 

25,240

 

 

25,326

 

 

24,293

 

Noninterest income

 

 

11,933

 

 

8,143

 

 

7,814

 

 

11,933

 

 

8,143

 

 

7,814

 

Less securities gain, net

 

 

3,463

 

 

986

 

 

13

 

 

3,463

 

 

986

 

 

13

 

Taxable-equivalent adjustment:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Increase in cash surrender value of BOLI

 

 

N/A

 

 

N/A

 

 

N/A

 

 

71

 

 

85

 

 

92

 

Noninterest income (less) / including adjustments

 

 

8,470

 

 

7,157

 

 

7,801

 

 

8,541

 

 

7,242

 

 

7,893

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income including adjustments plus noninterest income (less) / including adjustments

 

$

33,250

 

$

31,911

 

$

31,541

 

$

33,781

 

$

32,568

 

$

32,186

 

Efficiency ratio / Adjusted efficiency ratio

 

 

59.46

%

 

61.91

%

 

60.06

%

 

58.53

%

 

60.66

%

 

59.11

%

 

 

Income Taxes

 

We recorded tax expense of $4.0 million on $16.2 million of pretax income for the third quarter of 2019, compared to income tax expense of $3.0 million in the second quarter of 2019, and $3.2 million of income tax expense in the third quarter of 2018.  The effective tax rate for the third quarter of 2019 was 24.9%, compared to 24.7% for the second quarter of 2019, and 24.9% for the third quarter of 2018. 

We recorded tax expense of $9.5 million on $39.4 million of pretax income for the nine months ended September 30, 2019, compared to income tax expense of $7.0 million on $32.4 million of pretax income for the nine months ended September 30, 2018.  The effective tax rate for the nine months ended September 30, 2019 was 24.1%, which was an increase from the effective tax rate of 21.6% for the nine months ended September 30, 2018, due to higher levels of taxable income in the nine months ended September 30, 2019, as the 2018 period included $1.0 million of proceeds from a nontaxable BOLI death benefit, and the 2019 period included lower levels of tax exempt securities income.

Income tax expense reflected all relevant statutory tax rates and GAAP accounting.  There were no significant changes in our ability to utilize the deferred tax assets during the quarter or nine months ended September 30, 2019.  We had no valuation reserve on the deferred tax assets as of September 30, 2019.

 

Financial Condition

 

Total assets decreased $61.7 million from $2.68 billion at December 31, 2018, to $2.61 billion at September 30, 2019, due primarily to a decrease of $52.8 million in securities available-for-sale, as well as $8.6 million decrease in the deferred tax assets, net.  Total loans

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Table of Contents

as of September 30, 2019, increased $2.8 million, or 0.1%, compared to December 31, 2018.  Total deposits were $2.07 billion at September 30, 2019, a decrease of $42.2 million from December 31, 2018, primarily due to reductions in time, NOW and money market accounts, partially offset by an increase in noninterest bearing demand accounts.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2019

Securities

 

As of

 

Percent Change From

 

 

September 30, 

 

December 31, 

 

September 30, 

 

December 31, 

 

September 30, 

 

    

2019

    

2018

    

2018

    

2018

    

2018

Securities available-for-sale, at fair value

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasuries

 

$

4,038

 

$

3,923

 

$

3,854

 

2.9

 

4.8

U.S. government agencies

 

 

9,143

 

 

10,951

 

 

11,703

 

(16.5)

 

(21.9)

U.S. government agencies mortgage-backed

 

 

16,940

 

 

14,075

 

 

14,766

 

20.4

 

14.7

States and political subdivisions

 

 

238,727

 

 

274,067

 

 

272,264

 

(12.9)

 

(12.3)

Collateralized mortgage obligations

 

 

64,121

 

 

64,429

 

 

64,960

 

(0.5)

 

(1.3)

Asset-backed securities

 

 

83,182

 

 

109,514

 

 

109,173

 

(24.0)

 

(23.8)

Collateralized loan obligations

 

 

72,271

 

 

64,289

 

 

65,618

 

12.4

 

10.1

Total securities

 

$

488,422

 

$

541,248

 

$

542,338

 

(9.8)

 

(9.9)

 

 

Available-for-sale security sales during the nine months ended September 30, 2019 totaled $177.8 million and primarily consisted of asset-backed securities and state and political subdivisions, whereas purchases during the nine month period of 2019 totaled $136.1 million and were primarily tax exempt state and political subdivisions securities.  During the nine months ended September 30, 2019, security sales resulted in net realized gains of $4.5 million, compared to $360,000 of security gains, net, for the nine months ended September 30, 2018.

 

Loans

 

Total loans were $1.90 billion as of September 30, 2019, an increase of $2.8 million from December 31, 2018.  The increase in total loans in the first nine months of 2019 was due primarily to organic growth in our commercial, leases, and real estate-commercial loan portfolios, partially offset by reductions in our real estate-construction, real-estate residential and HELOC portfolios.  Total loans increased $64.9 million from September 30, 2018 to September 30, 2019, due primarily to organic loan growth in our commercial, leases, and real estate-commercial portfolios, as well as a HELOC loan pool purchase of $20.7 million in November 2018.  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2019

Loans

As of

 

Percent Change From

 

September 30, 

 

December 31, 

 

September 30, 

 

December 31, 

 

September 30, 

 

2019

 

2018

 

2018

 

2018

    

2018

Commercial

$

333,664

 

$

314,323

 

$

306,407

 

6.2

 

8.9

Leases

 

108,152

 

 

78,806

 

 

70,661

 

37.2

 

53.1

Real estate - commercial

 

826,780

 

 

820,941

 

 

804,184

 

0.7

 

2.8

Real estate - construction

 

91,066

 

 

108,390

 

 

112,873

 

(16.0)

 

(19.3)

Real estate - residential

 

388,511

 

 

407,068

 

 

393,598

 

(4.6)

 

(1.3)

HELOC

 

126,309

 

 

140,442

 

 

122,022

 

(10.1)

 

3.5

Other 1

 

14,140

 

 

14,439

 

 

12,969

 

(2.1)

 

9.0

Total loans, excluding deferred loan costs and PCI loans

 

1,888,622

 

 

1,884,409

 

 

1,822,714

 

0.2

 

3.6

Net deferred loan costs

 

2,054

 

 

1,653

 

 

1,348

 

24.3

 

52.4

Total loans, excluding PCI loans

 

1,890,676

 

 

1,886,062

 

 

1,824,062

 

0.2

 

3.7

PCI loans, net of purchase accounting adjustments

 

9,135

 

 

10,965

 

 

10,887

 

(16.7)

 

(16.1)

Total loans

$

1,899,811

 

$

1,897,027

 

$

1,834,949

 

0.1

 

3.5

 

1 The “Other” class includes consumer and overdrafts.

 

The quality of our loan portfolio is impacted not only by our 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 estate lending (including commercial, construction, residential, and HELOCs) has been and continues to be a sizeable portion of our portfolio.  These categories comprised 75.4% of the portfolio as of September 30, 2019, compared to 77.9% of the portfolio as of December 31, 2018.  We continue to oversee and seek to manage our loan portfolio in accordance with interagency guidance on risk management.

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Asset Quality

 

We recorded a $550,000 provision for loan and lease losses for third quarter of 2019, compared to no provision for the third quarter of 2018.  In the third quarter of 2019, we determined provision expense was necessary at a level slightly higher than our net charge-offs for the quarter, which were $271,000.  Runoffs on our acquired loan portfolios are trending with expectations.  Management estimates the amount of provision required on a quarterly basis and records the appropriate provision expense, or release of expense, 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.  We do not consider our PCI loans, which showed evidence of deteriorated credit quality at acquisition, to be nonperforming assets as long as their cash flows and the timing of such cash flows continue to be estimable and probable of collection.  Therefore, interest income is recognized through accretion of the difference between the carrying value of these loans and the present value of expected future cash flows.  As a result, management has excluded PCI loans from the nonperforming loans in the table below.  Remediation work continues in all segments.  Nonperforming loans decreased by $2.9 million at September 30, 2019, to $13.4 million from $16.3 million at December 31, 2018.  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 0.7% as of September 30, 2019, from 0.9% as of December 31, 2018, and increased from 0.6% as of September 30, 2018.  The distribution of our nonperforming loans is shown in the following table.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2019

 

Nonperforming Loans

As of

 

Percent Change From

 

 

September 30, 

 

December

 

September 30, 

 

December

 

September 30, 

 

 

2019

 

2018

 

2018

 

2018

 

2018

 

Commercial

$

148

 

$

352

 

$

 6

 

(58.0)

 

 

N/M

 

 

Leases

 

74

 

 

 -

 

 

 -

 

N/M

 

 

N/M

 

 

Real estate-commercial, nonfarm

 

7,600

 

 

9,738

 

 

5,699

 

(22.0)

 

 

33.4

 

 

Real estate-construction

 

94

 

 

455

 

 

109

 

(79.3)

 

 

(13.8)

 

 

Real estate-residential:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investor

 

379

 

 

353

 

 

365

 

7.4

 

 

3.8

 

 

Multi-Family

 

 -

 

 

179

 

 

73

 

(100.0)

 

 

(100.0)

 

 

Owner occupied

 

3,300

 

 

3,616

 

 

4,108

 

(8.7)

 

 

(19.7)

 

 

HELOC

 

1,785

 

 

1,614

 

 

1,379

 

10.6

 

 

29.4

 

 

Other 1

 

22

 

 

34

 

 

40

 

(35.3)

 

 

(45.0)

 

 

Total nonperforming loans

$

13,402

 

$

16,341

 

$

11,779

 

(18.0)

 

 

13.8

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

N/M - Not meaningful

1 The “Other” class includes consumer and overdrafts.

 

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Loan Charge-offs, net of recoveries

Three Months Ended

 

September 30, 

 

% of

 

June 30, 

 

% of

 

September 30, 

 

% of

 

2019

 

Total1

 

2019

 

Total1

 

2018

 

Total1

Commercial

$

10

 

3.7

 

$

61

 

15.5

 

$

(25)

 

357.1

Leases

 

47

 

17.3

 

 

 -

 

 -

 

 

 -

 

 -

Real estate-commercial, nonfarm

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner general purpose

 

 -

 

 -

 

 

42

 

10.7

 

 

(6)

 

85.7

Owner special purpose

 

 -

 

 -

 

 

 -

 

 -

 

 

192

 

(2,742.9)

Non-owner general purpose

 

147

 

54.2

 

 

(12)

 

(3.0)

 

 

(22)

 

314.3

Non-owner special purpose

 

 -

 

 -

 

 

 -

 

 -

 

 

 -

 

 -

Retail properties

 

 -

 

 -

 

 

 -

 

 -

 

 

 -

 

 -

Total real estate-commercial, nonfarm

 

147

 

54.2

 

 

30

 

7.7

 

 

164

 

(2,342.9)

Real estate-commercial, farm

 

 -

 

 -

 

 

 -

 

 -

 

 

 -

 

 -

Real estate-construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Homebuilder

 

 -

 

 -

 

 

 -

 

 -

 

 

 -

 

 -

Land

 

 -

 

 -

 

 

 -

 

 -

 

 

(23)

 

328.6

Commercial speculative

 

 -

 

 -

 

 

(2)

 

(0.5)

 

 

 -

 

 -

All other

 

 7

 

2.6

 

 

 1

 

0.3

 

 

(9)

 

128.6

Total real estate-construction

 

 7

 

2.6

 

 

(1)

 

(0.2)

 

 

(32)

 

457.2

Real estate-residential

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investor

 

(6)

 

(2.2)

 

 

(3)

 

(0.8)

 

 

(18)

 

257.1

Multi-Family

 

 -

 

 -

 

 

 -

 

 -

 

 

(11)

 

157.1

Owner occupied

 

(13)

 

(4.8)

 

 

(11)

 

(2.8)

 

 

(54)

 

771.4

Total real estate-residential

 

(19)

 

(7.0)

 

 

(14)

 

(3.6)

 

 

(83)

 

1,185.6

HELOC

 

(2)

 

(0.7)

 

 

267

 

67.8

 

 

(90)

 

1,285.7

Other  2

 

81

 

29.9

 

 

51

 

12.8

 

 

59

 

(842.7)

Net charge-offs / (recoveries) 

$

271

 

100.0

 

$

394

 

100.0

 

$

(7)

 

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 of $271,000 were recorded for the third quarter of 2019, compared to net charge-offs of $394,000 for the second quarter of 2019 and net recoveries of $7,000 for the third quarter of 2018, reflecting continuing management attention to credit quality and remediation efforts.  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.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2019

Classified Assets

As of

 

Percent Change From

 

September 30, 

 

December 31, 

 

September 30, 

 

December 31, 

 

September 30, 

 

2019

 

2018

 

2018

 

2018

 

2018

Commercial

$

8,079

 

$

137

 

$

353

 

N/M

 

 

N/M

 

Leases

 

74

 

 

 -

 

 

 -

 

N/M

 

 

N/M

 

Real estate-commercial, nonfarm

 

12,525

 

 

22,661

 

 

21,008

 

(44.7)

 

 

(40.4)

 

Real estate-commercial, farm

 

1,210

 

 

1,222

 

 

1,241

 

(1.0)

 

 

(2.5)

 

Real estate-construction

 

264

 

 

2,610

 

 

282

 

(89.9)

 

 

(6.4)

 

Real estate-residential:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investor

 

984

 

 

1,216

 

 

1,103

 

(19.1)

 

 

(10.8)

 

Multi-Family

 

430

 

 

979

 

 

3,177

 

(56.1)

 

 

(86.5)

 

Owner occupied

 

3,766

 

 

4,524

 

 

5,022

 

(16.8)

 

 

(25.0)

 

HELOC

 

1,985

 

 

1,889

 

 

1,829

 

5.1

 

 

8.5

 

Other 1

 

22

 

 

31

 

 

55

 

(29.0)

 

 

(60.0)

 

Total classified loans, excluding PCI loans

 

29,339

 

 

35,269

 

 

34,070

 

(16.8)

 

 

(13.9)

 

Other real estate owned

 

4,682

 

 

7,175

 

 

6,964

 

(34.7)

 

 

(32.8)

 

Total classified assets, excluding PCI loans

 

34,021

 

 

42,444

 

 

41,034

 

(19.8)

 

 

(17.1)

 

PCI, net of purchase accounting adjustments

 

9,135

 

 

10,965

 

 

10,887

 

(16.7)

 

 

(16.1)

 

Total classified assets

$

43,156

 

$

53,409

 

$

51,921

 

(19.2)

 

 

(16.9)

 

 

N/M - Not meaningful

1 The “Other” class includes consumer and overdrafts.

 

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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 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 we will sustain some loss if deficiencies remain uncorrected.

Total classified loans decreased as of September 30, 2019, from the levels at December 31, 2018 and September 30, 2018, primarily due to paydowns and upgrades of classified loans.  Total classified assets reflected a decline as of September 30, 2019, compared to the level at December 31, 2018, and the level one year ago.  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 9.84% for the period ended September 30, 2019, compared to 13.49% as of December 31, 2018 and 13.48% as of September 30, 2018.  The decrease in the classified assets ratio for period ended September 30, 2019, compared to December 31, 2018, is also due to a $2.3 million decrease in other real estate owned and the continuing accretion of PCI loans, net of purchase accounting adjustments.   

 

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

 

 

Nine Months Ended

 

 

September 30, 

 

June 30, 

 

September 30, 

 

September 30, 

 

September 30, 

 

 

2019

 

2019

 

2018

 

2019

 

2018

 

Allowance at beginning of period

$

19,372

 

 

$

19,316

 

 

$

19,321

 

 

$

19,006

 

 

$

17,461

 

 

Charge-offs:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

20

 

 

 

67

 

 

 

 7

 

 

 

99

 

 

 

38

 

 

Leases

 

47

 

 

 

 -

 

 

 

 -

 

 

 

47

 

 

 

13

 

 

Real estate - commercial

 

159

 

 

 

42

 

 

 

201

 

 

 

432

 

 

 

609

 

 

Real estate - construction

 

 7

 

 

 

 1

 

 

 

 -

 

 

 

 8

 

 

 

(16)

 

 

Real estate - residential

 

 3

 

 

 

 -

 

 

 

 -

 

 

 

21

 

 

 

(55)

 

 

HELOC

 

19

 

 

 

279

 

 

 

49

 

 

 

298

 

 

 

141

 

 

Other 1

 

142

 

 

 

85

 

 

 

115

 

 

 

311

 

 

 

316

 

 

Total charge-offs

 

397

 

 

 

474

 

 

 

372

 

 

 

1,216

 

 

 

1,046

 

 

Recoveries:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

10

 

 

 

 6

 

 

 

32

 

 

 

46

 

 

 

141

 

 

Leases

 

 -

 

 

 

 -

 

 

 

 -

 

 

 

 -

 

 

 

 -

 

 

Real estate - commercial

 

12

 

 

 

12

 

 

 

37

 

 

 

47

 

 

 

425

 

 

Real estate - construction

 

 -

 

 

 

 2

 

 

 

32

 

 

 

 1

 

 

 

35

 

 

Real estate - residential

 

22

 

 

 

14

 

 

 

83

 

 

 

86

 

 

 

1,099

 

 

HELOC

 

21

 

 

 

12

 

 

 

139

 

 

 

79

 

 

 

277

 

 

Other 1

 

61

 

 

 

34

 

 

 

56

 

 

 

152

 

 

 

208

 

 

Total recoveries

 

126

 

 

 

80

 

 

 

379

 

 

 

411

 

 

 

2,185

 

 

Net charge-offs / (recoveries)

 

271

 

 

 

394

 

 

 

(7)

 

 

 

805

 

 

 

(1,139)

 

 

Provision (release) for loan and lease losses

 

550

 

 

 

450

 

 

 

 -

 

 

 

1,450

 

 

 

728

 

 

Allowance at end of period

$

19,651

 

 

$

19,372

 

 

$

19,328

 

 

$

19,651

 

 

$

19,328

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

$

1,890,992

 

 

$

1,894,454

 

 

$

1,839,341

 

 

$

1,893,025

 

 

$

1,749,589

 

 

Net charge-offs / (recoveries) to average loans

 

0.01

%

 

 

0.02

%

 

 

(0.00)

%

 

 

0.04

%

 

 

(0.07)

%

 

Allowance at period end to average loans

 

1.04

%

 

 

1.02

%

 

 

1.05

%

 

 

1.04

%

 

 

1.10

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance: Individually evaluated for impairment

$

274

 

 

$

455

 

 

$

373

 

 

$

274

 

 

$

373

 

 

Ending balance: Collectively evaluated for impairment

$

18,805

 

 

$

18,513

 

 

$

18,955

 

 

$

18,805

 

 

$

18,955

 

 

Ending balance: Acquired and accounted for ASC 310-30

$

572

 

 

$

404

 

 

$

 -

 

 

$

572

 

 

$

 -

 

 

 

1 The “Other” class includes consumer and overdrafts.

 

Net charge-offs for the quarter ended September 30, 2019 totaled $271,000, compared to $394,000 for the quarter ended June 30, 2019, and net recoveries of $7,000 for the quarter ended September 30, 2018.  The coverage ratio of the allowance for loan and lease losses to nonperforming loans was 146.6% as of September 30, 2019, which was a decrease from the coverage ratio of 153.0% as of June 30, 2019, and a decrease from 164.1% as of September 30, 2018.  When measured as a percentage of average loans, our total allowance for loan and lease losses was 1.04% of quarterly average loans as of September 30, 2019 and 1.05% as of September 30, 2018.  The total

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allowance for loan and lease losses as a percent of total period end loans was 1.16% as of September 30, 2019, excluding the loans acquired in our acquisition of ABC Bank and in our Talmer branch purchase. 

 

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 purchased non-credit impaired loans (“non-PCI loans”), which refers to loans acquired in our acquisition that did not show signs of credit deterioration at acquisition, 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 $227.1 million as of September 30, 2019, net of purchase accounting adjustments of $1.0 million, which included $738,000 of credit discounts.  At September 30, 2019, of our $19.7 million allowance for loan and lease losses, $1.4 million related to non-PCI loans and $572,000 for PCI loans.  In management’s judgment, an adequate allowance for estimated losses has been established for inherent losses at September 30, 2019, 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, which refers to loans that showed evidence of deteriorated credit quality upon purchase, in our acquisition of ABC Bank. PCI loans totaled $9.1 million, net of purchase accounting adjustments, as of September 30, 2019, and included $4.9 million of credit discounts as of September 30, 2019.  We 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 September 30, 2019, OREO decreased to $4.7 million, compared to $7.2 million at December 31, 2018, and $7.0 million at September 30, 2018.  There was one property addition of $305,000 to the OREO portfolio in the third quarter of 2019.  Property disposals in the third quarter of 2019 totaled $1.1 million due to six property sales. Nine valuation write-downs occurred in the third quarter of 2019 with an expense total of $203,000, compared to $119,000 of valuation write-downs recorded in the third quarter of 2018.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2019

OREO

Three Months Ended

 

Percent Change From

 

September 30, 

 

December 31, 

 

September 30, 

 

December 31, 

 

September 30, 

 

2019

 

2018

 

2018

 

2018

 

2018

Balance at beginning of period

$

5,668

 

$

6,964

 

$

8,912

 

(18.6)

 

 

(36.4)

 

Property additions, net of acquisition adjustments

 

305

 

 

721

 

 

(217)

 

(57.7)

 

 

NM

 

Less:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

1,088

 

 

414

 

 

1,612

 

162.8

 

 

(32.5)

 

Period valuation adjustments

 

203

 

 

96

 

 

119

 

111.5

 

 

70.6

 

Balance at end of period

$

4,682

 

$

7,175

 

$

6,964

 

(34.7)

 

 

(32.8)

 

 

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 $4.0 million, or approximately 86.0% of total OREO at September 30, 2019, 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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2019

 

December 31, 2018

 

September 30, 2018

 

 

Amount

 

% of Total

 

 

Amount

 

% of Total

 

 

Amount

 

% of Total

Single family residence

$

 -

 

0

%

 

$

1,137

 

16

%

 

$

638

 

9

%

Lots (single family and commercial)

 

4,045

 

86

%

 

 

4,310

 

60

%

 

 

4,310

 

62

%

Vacant land

 

41

 

1

%

 

 

470

 

6

%

 

 

470

 

7

%

Commercial property

 

596

 

13

%

 

 

1,258

 

18

%

 

 

1,546

 

22

%

Total other real estate owned

$

4,682

 

100

%

 

$

7,175

 

100

%

 

$

6,964

 

100

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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Deposits and Borrowings

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2019

Deposits

As of

 

Percent Change From

 

September 30, 

 

December 31, 

 

September 30, 

 

December 31, 

 

September 30, 

 

2019

 

2018

 

2018

 

2018

    

2018

Noninterest bearing demand

$

643,355

 

$

618,830

 

$

621,580

 

4.0

 

3.5

Savings

 

304,726

 

 

304,400

 

 

298,073

 

0.1

 

2.2

NOW accounts

 

413,291

 

 

425,878

 

 

437,361

 

(3.0)

 

(5.5)

Money market accounts

 

286,484

 

 

310,390

 

 

310,452

 

(7.7)

 

(7.7)

Certificates of deposit of less than $100,000

 

222,378

 

 

230,781

 

 

235,272

 

(3.6)

 

(5.5)

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

 

142,669

 

 

159,953

 

 

163,716

 

(10.8)

 

(12.9)

Certificates of deposit of more than $250,000

 

61,588

 

 

66,441

 

 

65,916

 

(7.3)

 

(6.6)

Total deposits

$

2,074,491

 

$

2,116,673

 

$

2,132,370

 

(2.0)

 

(2.7)

 

Total deposits were $2.07 billion at September 30, 2019, which reflects a $42.2 million decrease from total deposits of $2.12 billion at December 31, 2018, and a decrease of $57.9 million from the $2.13 billion at September 30, 2018.  The decrease in deposits at September 30, 2019, compared to December 31, 2018, was due primarily to declines in NOW accounts, money market accounts and certificates of deposit, which was partially offset by growth in noninterest bearing demand and savings accounts. The reduction in deposits in the year over year period reflected an aggregate decrease in NOW accounts, money markets, and time deposits of $86.3 million or 7.1%, partially offset by aggregate increases in demand deposits and savings accounts of $28.4 million, or 3.1%  An increase in noninterest bearing demand deposits in the third quarter of 2019 compared to the second quarter of 2019 and the year over year like period 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, we obtained funding from other sources in all periods presented.  Securities sold under repurchase agreements totaled $48.9 million at September 30, 2019, a $2.2 million, or 4.8%, increase from $46.6 million at December 31, 2018.  We also recorded short-term borrowings of $84.0 million from the FHLBC at September 30, 2019, as compared to $149.5 million in short-term borrowings at December 31, 2018.  We assumed $23.4 million of long-term FHLBC advances in our ABC Bank acquisition, with maturities scheduled over the next seven years and paying interest at rates of 1.60% to 2.83%.  These long-term advances totaled $8.9 million as of September 30, 2019, compared to $15.4 million as of December 31, 2018.

 

The Company is indebted on senior notes totaling $44.2 million, net of deferred issuance costs, as of September 30, 2019.  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 4.40% as of September 30, 2019, as compared to 6.77%, which was the rate paid during the period prior to the June 15,  2017 rate reset.

 

Capital

 

As of September 30, 2019, total stockholders’ equity was $270.0 million, which was an increase of $40.9 million from $229.1 million as of December 31, 2018.  This increase is directly attributable to net income of $29.9 million for the first nine months of 2019, and a change in accumulated other comprehensive net income (loss), which was a net loss of $4.1 million at December 31, 2018, and a net gain of $6.4 million as of September 30, 2019. In addition, we paid $896,000 of dividends to our common stockholders in the nine months ended September 30, 2019.

Our total stockholders’ equity in 2018 included $4.8 million related to the value of a ten-year warrant to purchase shares of our common stock, with an exercise price of $13.43 per share.  We issued the warrant in January 2009 as part of our Series B preferred stock issuance. We redeemed all of our Series B preferred stock as of September 30, 2015. The warrant was subsequently sold at auction by the U.S. Treasury in June 2013 to a third party investor.  The warrant was exercised on January 16, 2019, in a cashless transaction.  As of the date of exercise, our closing market stock price was $14.23 per share, resulting in 45,836 shares being issued, and a net $313,000 reduction to treasury stock.

 

In the third quarter of 2019, our Board of Directors authorized a stock repurchase program, in which we may repurchase up to approximately 1.5 million shares (or approximately 5%) of our outstanding common stock over the next 18 months through open market purchases, trading plans established in accordance with U.S. Securities and Exchange Commission rules, privately negotiated transactions, or by other means.  The actual means and timing of any repurchases, quantity of purchased shares and prices will be, subject to certain limitations, at the discretion of management and will depend on a number of factors, including, without limitation,

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market prices of our common stock, general market and economic condition, and applicable legal and regulatory requirements.  These share purchases, if any, are anticipated to be funded by our cash on hand.

 

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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Minimum Capital

 

Well Capitalized

 

 

 

 

 

 

 

 

 

 

 

Adequacy with

 

Under Prompt 

 

 

 

 

 

 

 

 

 

 

 

Capital Conservation

 

 

Corrective Action

 

September 30, 

 

December 31, 

 

September 30, 

 

 

Buffer, if applicable1

 

Provisions2

 

2019

 

2018

 

2018

The Company

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common equity tier 1 capital ratio

 

7.00

%

 

N/A

 

 

10.89

%

 

9.29

%

 

9.12

%

Total risk-based capital ratio

 

10.50

%

 

N/A

 

 

14.34

%

 

12.63

%

 

12.57

%

Tier 1 risk-based capital ratio

 

8.50

%

 

N/A

 

 

13.45

%

 

11.78

%

 

11.67

%

Tier 1 leverage ratio

 

4.00

%

 

N/A

 

 

11.54

%

 

10.08

%

 

9.72

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The Bank

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common equity tier 1 capital ratio

 

7.00

%

 

6.50

%

 

14.83

%

 

13.29

%

 

13.26

%

Total risk-based capital ratio

 

10.50

%

 

10.00

%

 

15.72

%

 

14.14

%

 

14.16

%

Tier 1 risk-based capital ratio

 

8.50

%

 

8.00

%

 

14.83

%

 

13.29

%

 

13.26

%

Tier 1 leverage ratio

 

4.00

%

 

5.00

%

 

12.68

%

 

11.36

%

 

11.05

%

 

1 Amounts are shown inclusive of a capital conservation buffer of 2.50%. Under the Federal Reserve’s Small Bank Holding Company Policy Statement, the Company is not subject to the minimum capital adequacy and capital conservation buffer capital requirements at the holding company level, unless otherwise advised by the Federal Reserve (such capital requirements are applicable only at the Bank level). Although the minimum regulatory capital requirements are not applicable to the Company, we calculate these ratios for our own planning and monitoring purposes.

2 The prompt corrective action provisions are only applicable at the Bank level.

 

As of September 30, 2019, the Company, on a consolidated basis, exceeded the minimum capital ratios to be deemed “well capitalized” and met the now fully phased-in capital conservation buffer requirements.  In addition to the above regulatory ratios, our GAAP common equity to total assets ratio, which is used as a performance measurement for capital analysis and peer comparisons, increased from 8.56% at December 31, 2018, to 10.33% at September 30, 2019, due to net income generated for the first nine months of 2019, as well as a more favorable position related to unrealized gains on securities available-for-sale.  Our GAAP tangible common equity to tangible assets ratio was 9.59% at September 30, 2019, compared to 7.81% as of December 31, 2018.  Our non-GAAP tangible common equity to tangible assets ratio, which management also considers a valuable performance measurement for capital analysis, increased from 7.83% at December 31, 2018 to 9.61% at September 30, 2019.

 

On September 17, 2019, the federal banking agencies issued a final rule to provide an optional simplified measure of capital adequacy for qualifying community banking organizations, which we refer to as the community bank leverage ratio (“CBLR”) framework. Generally, under the CBLR framework, qualifying community banking organizations with total assets of less than $10 billion, and limited amounts of off-balance-sheet exposures and trading assets and liabilities, may elect whether to be subject to the CBLR framework if they have a CBLR of greater than 9%. Qualifying community banking organizations that elect to be subject to the CBLR framework and continue to meet all requirements under the framework would not be subject to risk-based or other leverage capital requirements and, in the case of an insured depository institution, would be considered to have met the well capitalized ratio requirements for purposes of the FDIC’s Prompt Corrective Action framework.  The final rule will become effective on January 1, 2020.  We are currently evaluating the CBLR framework and potential advantages and disadvantages that it may present for us.

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2019

 

 

December 31, 2018

 

 

GAAP

 

 

Non-GAAP

 

 

GAAP

 

 

Non-GAAP

 

Tangible common equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Equity

$

270,021

 

 

$

270,021

 

 

$

229,081

 

 

$

229,081

 

Less: Goodwill and intangible assets

 

21,404

 

 

 

21,404

 

 

 

21,814

 

 

 

21,814

 

Add: Limitation of exclusion of core deposit intangible (80%)

 

N/A

 

 

 

560

 

 

 

N/A

 

 

 

642

 

Adjusted goodwill and intangible assets

 

21,404

 

 

 

20,844

 

 

 

21,814

 

 

 

21,172

 

Tangible common equity

$

248,617

 

 

$

249,177

 

 

$

207,267

 

 

$

207,909

 

Tangible assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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Total assets

$

2,614,315

 

 

$

2,614,315

 

 

$

2,676,003

 

 

$

2,676,003

 

Less: Adjusted goodwill and intangible assets

 

21,404

 

 

 

20,844

 

 

 

21,814

 

 

 

21,172

 

Tangible assets

$

2,592,911

 

 

$

2,593,471

 

 

$

2,654,189

 

 

$

2,654,831

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common equity to total assets

 

10.33

%

 

 

10.33

%

 

 

8.56

%

 

 

8.56

%

Tangible common equity to tangible assets

 

9.59

%

 

 

9.61

%

 

 

7.81

%

 

 

7.83

%

 

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 us when reviewing risk based capital ratios and equity performance metrics.

 

 

Liquidity

 

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

 

Net cash inflows from operating activities were $37.5 million during the first nine months of 2019, compared with net cash inflows of $40.0 million in the same period of 2018.  Proceeds from sales of loans held-for-sale, net of funds used to originate loans held-for-sale, were a source of inflows for the first nine months of 2019 and inflows for the 2018 like period.  Interest paid, net of interest received, combined with changes in other assets and liabilities were a source of outflows for the first nine months of 2019 and inflows for 2018.  The management of investing and financing activities, as well as market conditions, determines the level and the stability of net interest cash flows.  Management’s policy is to mitigate the impact of changes in market interest rates to the extent possible, as part of the balance sheet management process.

 

Net cash inflows from investing activities were $74.6 million in the first nine months of 2019, compared to net cash inflows of $35.4 million in the same period in 2018.  In the first nine months of 2019, securities transactions accounted for net inflows of $77.1 million, and the principal change on loans accounted for net outflows of $2.8 million.  In the first nine months of 2018, securities transactions accounted for net inflows of $57.3 million, and net principal disbursed on loans accounted for net inflows of $10.0 million. Proceeds from claims on BOLI, net of premiums paid, accounted for net inflows of $1.2 million in the third quarter of 2018; there were no BOLI death benefits received in the third quarter of 2019.  Proceeds from sales of OREO accounted for $2.6 and $4.3 million in investing cash inflows for the first nine months of 2019 and 2018, respectively. 

 

Net cash outflows from financing activities in the first nine months of 2019 were $113.3 million, compared with net cash outflows of $81.0 million in the first nine months of 2018.  Net deposit outflows in the first nine months of 2019 were $42.1 million compared to net deposit outflows of $39.1 million in the first nine months of 2018.  Other short-term borrowings had net cash outflows of $65.5 million in the first nine months of 2019 and $44.0 million in the first nine months of 2018.  Changes in securities sold under repurchase agreements accounted for $2.2 million in net inflows and $8.8 million in net inflows in the first nine months of 2019 and 2018, respectively.

 

Cash and cash equivalents for the nine months ended September 30, 2019, totaled $54.0 million, as compared to $50.3 million as of September 30, 2018.   In addition to cash and cash equivalents on hand or held as deposits with other financial institutions, we rely on funding sources from customer deposits, cash flows from securities available-for-sale and loans, and a line of credit with the FHLBC to meet potential liquidity needs.  These sources of liquidity are immediately available to satisfy any funding requirements due to depositor or borrower demands through the ordinary course of our business.  Additional sources of funding include a $20 million undrawn line of credit held by the Company with a third party financial institution, as well as unpledged securities available-for-sale.  As of September 30, 2019, our unused borrowing capacity from the FHLBC totaled $277.0 million, and unpledged securities available-for-sale totaled $159.6 million. 

 

 

 

 

Item 3.  Quantitative and Qualitative Disclosures about Market Risk

 

Interest Rate Risk

 

As part of our normal operations, we are subject to interest-rate risk on the assets we invest in (primarily loans and securities) and the liabilities we fund (primarily customer deposits and borrowed funds).  Fluctuations in interest rates may result in changes in the fair market values our financial instruments, cash flows, and net interest income.  Like most financial institutions, we have an exposure to changes in both short-term and long-term interest rates.

 

In July, September and October 2019, the Federal Reserve lowered short-term interest rates by 0.25% for a total rate reduction of 0.75%.    Generally, Federal Reserve actions have not had a significant impact on long-term rates.   We manage interest rate risk within

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guidelines established by policy which are intended to limit the amount of rate exposure.  In practice, we seek to manage our interest rate risk exposure well within our guidelines so that such exposure does not pose a material risk to our future earnings.

 

We manage various market risks in the normal course of our 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 our business activities and operations.  In addition, since we do not hold a trading portfolio, we are not exposed to significant market risk from trading activities.  Our interest rate risk exposures at December 31, 2018 and September 30, 2019 are outlined in the table below.

Our 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.  Our asset-liability committee seeks to manage interest rate risk under a variety of rate environments by structuring our 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.  We seek to monitor and manage interest rate risk within approved policy guidelines and limits.

We use simulation analysis to quantify the impact of various rate scenarios on our net interest income.  Specific cash flows, repricing characteristics, and embedded options of the assets and liabilities held by us are incorporated into the simulation model.  Earnings at risk are 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, 2018, we 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 September 2019 were similar compared to those of December 2018.  The general balance sheet composition, both assets and liabilities, did not change appreciably during the quarter, which resulted in minimal change to our interest rate risk profile.  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 dropped by 0.50% during the quarter to 2.00% and 5.00%, respectively.

 

The following table summarizes the effect on annual income before income taxes based upon an immediate increase or decrease in interest rates of 0.5%, 1%, and 2% and no change in the slope of the yield curve.  Because of recent declines in market interest rates, it was not possible to calculate a decrease of 2% because many of the market interest rates would fall below zero in that scenario.

 

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

%

September 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dollar change

 

 

N/A

 

 

$

(5,135)

 

 

$

(1,945)

 

 

$

1,128

 

 

$

2,218

 

 

$

4,136

 

Percent change

 

 

N/A

 

 

 

(5.6)

%

 

 

(2.1)

%

 

 

1.2

%

 

 

2.4

%

 

 

4.5

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dollar change

 

$

(12,303)

 

 

$

(5,356)

 

 

$

(2,062)

 

 

$

1,084

 

 

$

2,145

 

 

$

4,178

 

Percent change

 

 

(12.2)

%

 

 

(5.3)

%

 

 

(2.1)

%

 

 

1.1

%

 

 

2.1

%

 

 

4.2

%

 

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

 

Item 4.  Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

The Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures, as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended, as of September 30, 2019.  Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that as of September 30, 2019, 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.

 

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There were no changes in the Company’s internal controls over financial reporting during the quarter ended September 30, 2019, 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, 2018.

 

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

 

In September 2019, our Board of Directors authorized the repurchase of up to approximately 1.5 million shares of our common stock.  No shares have been repurchased under such repurchase program since the board authorization.

 

Item 3.  Defaults Upon Senior Securities

 

None.

 

Item 4.  Mine Safety Disclosures

 

Not applicable

 

Item 5.  Other Information

 

None.

 

 

Item 6.  Exhibits

 

Exhibits:

 

 

 

 

 

 

 

 

 

 

3.1

Bylaws of Old Second Bancorp, Inc. as amended and restated through August 20, 2019 (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on August 21, 2019).

 

 

31.1

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

 

 

31.2

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

 

 

32.1

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

 

 

32.2

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

 

 

101

Interactive data files pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets at September 30, 2019, and December 31, 2018; (ii) Consolidated Statements of Income for the nine months ended September 30, 2019 and 2018; (iii) Consolidated Statements of Stockholders’ Equity for the nine months ended September 30, 2019 and 2018; (iv) Consolidated Statements of Cash Flows for the nine months ended September 30,  2019 and 2018; and (v) Notes to Consolidated Financial Statements, tagged as blocks of text and in detail.*

 

 

 

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

 

 

 

 

 

 

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SIGNATURES

 

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

 

 

 

 

 

 

OLD SECOND BANCORP, INC.

 

 

 

 

 

BY:

/s/ James L. Eccher

 

 

James L. Eccher

 

 

President and Chief Executive Officer

 

 

(principal executive officer)

 

 

 

 

 

BY:

/s/ Bradley S. Adams

 

 

Bradley S. Adams

 

 

Executive Vice President and Chief Financial Officer

 

 

(principal financial and accounting officer)

 

 

 

 

DATE: November 7, 2019

 

 

60