10-Q 1 a12-19947_110q.htm 10-Q

Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

x

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

 

 

THE SECURITIES EXCHANGE ACT OF 1934

 

 

For the quarterly period ended September 30, 2012

 

 

OR

 

o

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

 

 

SECURITIES EXCHANGE ACT OF 1934

 

 

For transition period from                 to                

 

Commission File Number 0 -10537

 

OLD SECOND BANCORP, INC.

(Exact name of Registrant as specified in its charter)

 

Delaware

 

36-3143493

 (State or other jurisdiction

 

(I.R.S. Employer Identification Number)

of incorporation or organization)

 

 

 

37 South River Street, Aurora, Illinois        60507

(Address of principal executive offices)  (Zip Code)

 

(630) 892-0202

(Registrant’s telephone number, including area code)

 

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

 

Yes x               No o

 

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

 

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

 

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

 

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

Yes o               No x

 

Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date: As of November 9, 2012, the Registrant had outstanding 14,084,328 shares of common stock, $1.00 par value per share.

 




Table of Contents

 

PART I - FINANCIAL INFORMATION

 

Item 1.  Financial Statements

 

Old Second Bancorp, Inc. and Subsidiaries

 

Consolidated Balance Sheets

 

(In thousands, except share data)

 

 

 

(Unaudited)

 

 

 

 

 

September 30,

 

December 31,

 

 

 

2012

 

2011

 

Assets

 

 

 

 

 

Cash and due from banks

 

  $

38,185

 

  $

2,692

 

Interest bearing deposits with financial institutions

 

34,056

 

48,257

 

Cash and cash equivalents

 

72,241

 

50,949

 

Securities available-for-sale

 

412,346

 

307,564

 

Federal Home Loan Bank and Federal Reserve Bank stock

 

11,800

 

14,050

 

Loans held-for-sale

 

5,032

 

12,806

 

Loans

 

1,208,289

 

1,368,985

 

Less: allowance for loan losses

 

40,257

 

51,997

 

Net loans

 

1,168,032

 

1,316,988

 

Premises and equipment, net

 

48,509

 

50,477

 

Other real estate owned

 

88,093

 

93,290

 

Mortgage servicing rights, net

 

3,603

 

3,487

 

Core deposit intangible assets, net

 

3,813

 

4,678

 

Bank-owned life insurance (BOLI)

 

53,841

 

52,595

 

Other assets

 

36,090

 

34,534

 

Total assets

 

  $

1,903,400

 

  $

1,941,418

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

Deposits:

 

 

 

 

 

Noninterest bearing demand

 

  $

381,111

 

  $

361,963

 

Interest bearing:

 

 

 

 

 

Savings, NOW, and money market

 

798,281

 

761,335

 

Time

 

517,542

 

617,483

 

Total deposits

 

1,696,934

 

1,740,781

 

Securities sold under repurchase agreements

 

1,738

 

901

 

Junior subordinated debentures

 

58,378

 

58,378

 

Subordinated debt

 

45,000

 

45,000

 

Notes payable and other borrowings

 

500

 

500

 

Other liabilities

 

30,109

 

21,856

 

Total liabilities

 

1,832,659

 

1,867,416

 

 

 

 

 

 

 

Stockholders’ Equity

 

 

 

 

 

Preferred stock

 

71,611

 

70,863

 

Common stock

 

18,729

 

18,628

 

Additional paid-in capital

 

66,118

 

65,999

 

Retained earnings

 

11,795

 

17,107

 

Accumulated other comprehensive loss

 

(2,556)

 

(3,702)

 

Treasury stock

 

(94,956)

 

(94,893)

 

Total stockholders’ equity

 

70,741

 

74,002

 

Total liabilities and stockholders’ equity

 

  $

1,903,400

 

  $

1,941,418

 

 

 

 

 

September 30, 2012

 

December 31, 2011

 

 

 

Preferred
Stock

 

Common
Stock

 

Preferred
Stock

 

Common
Stock

 

Par value

 

  $

1

 

  $

1

 

  $

1

 

  $

1

 

Liquidation value

 

1,000

 

n/a

 

1,000

 

n/a

 

Shares authorized

 

300,000

 

60,000,000

 

300,000

 

60,000,000

 

Shares issued

 

73,000

 

18,729,134

 

73,000

 

18,627,858

 

Shares outstanding

 

73,000

 

14,084,328

 

73,000

 

14,034,991

 

Treasury shares

 

-

 

4,644,806

 

-

 

4,592,867

 

 

See accompanying notes to consolidated financial statements.

 

3



Table of Contents

 

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Operations

(In thousands, except share data)

 

 

 

(unaudited)

 

(unaudited)

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Interest and Dividend Income

 

 

 

 

 

 

 

 

 

Loans, including fees

 

  $

16,193

 

  $

19,800

 

  $

51,476

 

  $

61,765

 

Loans held-for-sale

 

68

 

72

 

201

 

198

 

Securities:

 

 

 

 

 

 

 

 

 

Taxable

 

1,868

 

928

 

5,222

 

2,691

 

Tax exempt

 

98

 

114

 

303

 

383

 

Dividends from Federal Reserve Bank and Federal Home Loan Bank stock

 

77

 

73

 

228

 

216

 

Federal funds sold

 

-

 

-

 

-

 

1

 

Interest bearing deposits with financial institutions

 

29

 

58

 

89

 

197

 

Total interest and dividend income

 

18,333

 

21,045

 

57,519

 

65,451

 

Interest Expense

 

 

 

 

 

 

 

 

 

Savings, NOW, and money market deposits

 

253

 

327

 

807

 

1,275

 

Time deposits

 

1,973

 

3,436

 

6,920

 

11,220

 

Securities sold under repurchase agreements

 

1

 

-

 

2

 

-

 

Other short-term borrowings

 

-

 

-

 

4

 

-

 

Junior subordinated debentures

 

1,243

 

1,155

 

3,660

 

3,401

 

Subordinated debt

 

223

 

201

 

684

 

610

 

Notes payable and other borrowings

 

5

 

4

 

13

 

12

 

Total interest expense

 

3,698

 

5,123

 

12,090

 

16,518

 

Net interest and dividend income

 

14,635

 

15,922

 

45,429

 

48,933

 

Provision for loan losses

 

-

 

3,000

 

6,284

 

7,500

 

Net interest and dividend income after provision for loan losses

 

14,635

 

12,922

 

39,145

 

41,433

 

Noninterest Income

 

 

 

 

 

 

 

 

 

Trust income

 

1,489

 

1,657

 

4,603

 

5,156

 

Service charges on deposits

 

1,982

 

2,157

 

5,706

 

6,021

 

Secondary mortgage fees

 

350

 

269

 

957

 

732

 

Mortgage servicing income, net of changes in fair value

 

(155)

 

(328)

 

(365)

 

(221)

 

Net gain on sales of mortgage loans

 

2,504

 

1,314

 

7,509

 

3,667

 

Securities gains (losses), net

 

513

 

(63)

 

1,306

 

588

 

Increase in cash surrender value of bank-owned life insurance

 

425

 

233

 

1,246

 

1,130

 

Debit card interchange income

 

788

 

775

 

2,661

 

2,259

 

Lease revenue from other real estate owned

 

840

 

1,060

 

2,930

 

2,537

 

Net gain on sale of other real estate owned

 

20

 

297

 

398

 

933

 

Other income

 

1,592

 

1,137

 

4,257

 

4,044

 

Total noninterest income

 

10,348

 

8,508

 

31,208

 

26,846

 

Noninterest Expense

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

8,963

 

7,985

 

26,835

 

25,494

 

Occupancy expense, net

 

1,242

 

1,273

 

3,684

 

3,928

 

Furniture and equipment expense

 

1,078

 

1,405

 

3,416

 

4,340

 

FDIC insurance

 

1,029

 

1,032

 

3,058

 

3,884

 

General bank insurance

 

851

 

845

 

2,538

 

2,496

 

Amortization of core deposit and other intangible asset

 

420

 

276

 

865

 

711

 

Advertising expense

 

400

 

311

 

982

 

731

 

Debit card interchange expense

 

388

 

394

 

1,183

 

1,091

 

Legal fees

 

760

 

924

 

2,215

 

2,907

 

Other real estate expense

 

6,545

 

5,353

 

17,987

 

16,618

 

Other expense

 

3,187

 

3,022

 

9,186

 

9,576

 

Total noninterest expense

 

24,863

 

22,820

 

71,949

 

71,776

 

Income (loss) before income taxes

 

120

 

(1,390)

 

(1,596)

 

(3,497)

 

Income taxes

 

-

 

-

 

-

 

-

 

Net Income (loss)

 

  $

 120

 

  $

 (1,390)

 

  $

(1,596)

 

  $

 (3,497)

 

Preferred stock dividends and accretion

 

1,255

 

1,190

 

3,716

 

3,524

 

Net loss available to common stockholders

 

  $

 (1,135)

 

  $

 (2,580)

 

  $

(5,312)

 

  $

 (7,021)

 

 

 

 

 

 

 

 

 

 

 

Basic loss per share

 

  $

 (0.08)

 

  $

 (0.18)

 

  $

(0.37)

 

  $

 (0.49)

 

Diluted loss per share

 

(0.08)

 

(0.18)

 

(0.37)

 

(0.49)

 

Dividends declared per share

 

-

 

-

 

-

 

-

 

 

See accompanying notes to consolidated financial statements.

 

4



Table of Contents

 

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income (Loss)

(In thousands, except share data)

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Net income (loss)

 

  $

120

 

  $

(1,390)

 

  $

(1,596)

 

  $

(3,497)

 

 

 

 

 

 

 

 

 

 

 

Total unrealized holding gains (loss) on available-for-sale securities arising during the period

 

2,908

 

(962)

 

3,255

 

500

 

Related tax (expense) benefit

 

(1,194)

 

396

 

(1,335)

 

(130)

 

Holding income (loss) after tax

 

1,714

 

(566)

 

1,920

 

370

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

Net realized gains (losses)

 

513

 

(63)

 

1,306

 

588

 

Income tax (expense) benefit on net realized gains

 

(208)

 

25

 

(532)

 

(241)

 

Net realized gains (losses) after tax

 

305

 

(38)

 

774

 

347

 

Total other comprehensive income (loss)

 

1,409

 

(528)

 

1,146

 

23

 

Comprehensive income (loss)

 

  $

1,529

 

  $

(1,918)

 

  $

(450)

 

  $

 (3,474)

 

 

See accompanying notes to consolidated financial statements.

 

5



Table of Contents

 

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(In thousands)

 

 

 

(Unaudited)

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2012

 

2011

 

Cash flows from operating activities

 

 

 

 

 

Net loss

 

  $

(1,596)

 

  $

(3,497)

 

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

 

 

 

 

 

Depreciation and amortization of leasehold improvement

 

2,339

 

3,160

 

Change in market value of mortgage servicing rights

 

1,315

 

1,144

 

Provision for loan losses

 

6,284

 

7,500

 

Originations of loans held-for-sale

 

(208,710)

 

(152,925)

 

Proceeds from sales of loans held-for-sale

 

222,590

 

157,276

 

Net gain on sales of mortgage loans

 

(7,509)

 

(3,667)

 

Change in current income taxes receivable

 

815

 

5,749

 

Increase in cash surrender value of bank-owned life insurance

 

(1,246)

 

(1,130)

 

Change in accrued interest receivable and other assets

 

(2,437)

 

(1,681)

 

Change in accrued interest payable and other liabilities

 

4,689

 

(365)

 

Net premium amortization on securities

 

664

 

117

 

Securities gains, net

 

(1,306)

 

(588)

 

Amortization of core deposit and other intangible assets

 

865

 

711

 

Stock based compensation

 

220

 

666

 

Net gain on sale of other real estate owned

 

(398)

 

(933)

 

Write-down of other real estate owned expensed

 

12,101

 

9,153

 

Net cash provided by operating activities

 

28,680

 

20,690

 

Cash flows from investing activities

 

 

 

 

 

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

 

65,940

 

38,384

 

Proceeds from sales of securities available-for-sale

 

185,861

 

15,277

 

Purchases of securities available-for-sale

 

(353,992)

 

(92,818)

 

Net sales (purchases) of Federal Reserve Bank and Federal Home Loan Bank stock

 

2,250

 

(359)

 

Net change in loans

 

115,728

 

181,861

 

Investment in other real estate owned

 

(646)

 

(2,561)

 

Proceeds from sales of other real estate owned

 

20,915

 

29,687

 

Net purchases of premises and equipment

 

(371)

 

(492)

 

Net cash provided by investing activities

 

35,685

 

168,979

 

Cash flows from financing activities

 

 

 

 

 

Net change in deposits

 

(43,847)

 

(180,494)

 

Net change in securities sold under repurchase agreements

 

837

 

613

 

Net change in other short-term borrowings

 

-

 

174

 

Purchase of treasury stock

 

(63)

 

(49)

 

Net cash used in financing activities

 

(43,073)

 

(179,756)

 

Net change in cash and cash equivalents

 

21,292

 

9,913

 

Cash and cash equivalents at beginning of period

 

50,949

 

98,758

 

Cash and cash equivalents at end of period

 

  $

72,241

 

  $

108,671

 

 

 

 

 

 

 

Supplemental cash flow information

 

 

 

 

 

Income taxes received

 

    $

(815)

 

  $

(5,746)

 

Interest paid for deposits

 

8,444

 

13,268

 

Interest paid for borrowings

 

702

 

623

 

Non-cash transfer of loans to other real estate owned

 

26,944

 

60,355

 

Change in dividends declared not paid

 

2,968

 

2,823

 

Accretion on preferred stock warrants

 

748

 

701

 

 

See accompanying notes to consolidated financial statements.

 

6



Table of Contents

 

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Changes in

Stockholders’ Equity

(In thousands, except share data)

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

Other

 

 

 

Total

 

 

 

Common

 

Preferred

 

Paid-In

 

Retained

 

Comprehensive

 

Treasury

 

Stockholders’

 

 

 

Stock

 

Stock

 

Capital

 

Earnings

 

Income (Loss)

 

Stock

 

Equity

 

Balance, December 31, 2010

 

    $

 18,467

 

  $

69,921

 

  $

65,209

 

  $

28,335

 

  $

 (3,130)

 

  $

(94,844)

 

  $

 83,958

 

Comprehensive loss:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

 

 

 

 

 

(3,497)

 

 

 

 

 

(3,497)

 

Change in net unrealized loss on securities available-for-sale net of $111 tax effect

 

 

 

 

 

 

 

 

 

23

 

 

 

23

 

Change in restricted stock

 

161

 

 

 

(161)

 

 

 

 

 

 

 

-

 

Stock based compensation

 

 

 

 

 

666

 

 

 

 

 

 

 

666

 

Purchase of treasury stock

 

 

 

 

 

 

 

 

 

 

 

(49)

 

(49)

 

Preferred dividends declared and accrued (5% per preferred share)

 

 

 

701

 

 

 

(3,524)

 

 

 

 

 

(2,823)

 

Balance, September 30, 2011

 

    $

 18,628

 

  $

70,622

 

  $

65,714

 

  $

21,314

 

  $

 (3,107)

 

  $

 (94,893)

 

  $

 78,278

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2011

 

    $

 18,628

 

  $

70,863

 

  $

65,999

 

  $

17,107

 

  $

 (3,702)

 

  $

 (94,893)

 

  $

 74,002

 

Comprehensive loss:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

 

 

 

 

 

(1,596)

 

 

 

 

 

(1,596)

 

Change in net unrealized gain on securities available-for-sale net of $803 tax effect

 

 

 

 

 

 

 

 

 

1,146

 

 

 

1,146

 

Change in restricted stock

 

101

 

 

 

(101)

 

 

 

 

 

 

 

-

 

Stock based compensation

 

 

 

 

 

220

 

 

 

 

 

 

 

220

 

Purchase of treasury stock

 

 

 

 

 

 

 

 

 

 

 

(63)

 

(63)

 

Preferred dividends declared and accrued (5% per preferred share)

 

 

 

748

 

 

 

(3,716)

 

 

 

 

 

(2,968)

 

Balance, September 30, 2012

 

    $

 18,729

 

  $

71,611

 

  $

66,118

 

  $

11,795

 

  $

 (2,556)

 

  $

 (94,956)

 

  $

 70,741

 

 

See accompanying notes to consolidated financial statements.

 

7



Table of Contents

 

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

 

Note 1 – Summary of Significant Accounting Policies

 

The accounting policies followed in the preparation of the interim financial statements are consistent with those used in the preparation of the annual financial information.  The interim financial statements reflect all normal and recurring adjustments, which are necessary, in the opinion of management, for a fair statement of results for the interim period presented.  Results for the period ended September 30, 2012, are not necessarily indicative of the results that may be expected for the year ending December 31, 2012.  These interim financial statements 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, 2011.  Unless otherwise indicated, amounts in the tables contained in the notes 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 accounting principles generally accepted in the United States (“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 financial statements and accompanying notes.  These estimates, assumptions, and judgments are based on information available as of the date of the financial statements.  Future changes in information may affect these estimates, assumptions, and judgments, which, in turn, may affect amounts reported in the financial statements.

 

The Company uses the accrual basis of accounting for financial reporting purposes. Certain reclassifications were made to prior year amounts to conform to the current year presentation.

 

All significant accounting policies are presented in Note 1 to the consolidated financial statements included in the Company’s annual report on Form 10-K for the year ended December 31, 2011.  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 financial statements and how those values are determined.

 

In May 2011, the FASB issued ASU No. 2011-04 “Fair Value Measurement (Topic 820) - Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.”  ASU 2011-04 changes the wording used to describe many of the requirements in GAAP for measuring fair value and for disclosing information about fair value measurements.  Consequently, the amendments in this update result in common fair value measurement and disclosure requirements in GAAP and International Financial Reporting Standards.  ASU 2011-04 is effective prospectively during interim and annual periods beginning on or after December 15, 2011.  The Company has assessed and implemented  ASU 2011-04 in its fair value disclosures and found no material impact.

 

In June 2011, the FASB issued ASU No. 2011-05 “Comprehensive Income (Topic 220) - Presentation of Comprehensive Income.”  ASU 2011-05 requires that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements.  In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income.  Retrospective application of the standard is required.  In December 2011, the FASB issued Accounting Standards Update (ASU) No. 2011-12: “Comprehensive Income (Topic 220)—Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income” in ASU No. 2011-05, to defer the effective date for the part of ASU No. 2011-05 that would require adjustments of items out of accumulated other income to be presented on the components of both net income and other comprehensive income in financial statements.  The Company has included the consolidated statements of

 

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comprehensive income.  There was no impact on the consolidated statements of operations or balance sheets based on the adoption of this standard.

 

In April 2011, the FASB issued ASU No. 2011-03 “Transfers and Servicing (Topic 860) - Reconsideration of Effective Control for Repurchase Agreement.”  ASU 2011-03 removed from the assessment of effective control the criterion relating to the transferor’s ability to repurchase or redeem financial assets on substantially the agreed terms, even in the event of default by the transferee.  ASU 2011-03 was effective for the first interim or annual period beginning on or after December 15, 2011.  The guidance should be applied prospectively to transactions or modifications of existing transactions that occurred on or after the effective date.  Early adoption was not permitted.  ASU 2011-03 did not have an impact on the Company’s financial condition, results of operations, or liquidity.

 

Note 2 – Securities

 

Investment Portfolio Management

 

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

 

Portfolio size and composition may 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.  All debt securities are classified as available-for-sale and may be sold under our management and asset/liability management strategies.  Securities available-for-sale are carried at fair value.  Unrealized gains and losses 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.

 

Non-marketable equity investments include Federal Home Loan Bank of Chicago (“FHLBC”) stock and Federal Reserve Bank of Chicago (“FRB”) stock.  FHLBC stock was recorded at a value of $7.0 million at September 30, 2012, a decrease of $2.3 million from December 31, 2011.  Our FHLBC stock is necessary to maintain our continued access to FHLBC advances.  In late 2011, management at the Bank evaluated the October 17, 2011, FHLBC Capital Plan and determined the best overall course for the Bank was to accept the stock conversion as of January 1, 2012.  Subsequently, during the first nine months of 2012 management redeemed excess FHLBC stock held by the Bank reducing the value of FHLBC stock held by the Bank to $7.0 million.  FRB stock was recorded at $4.8 million at September 30, 2012, which was unchanged from December 31, 2011.

 

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Table of Contents

 

The following table summarizes the amortized cost and fair value of the available-for-sale securities at September 30, 2012 and December 31, 2011 and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive loss:

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

 

 

Cost

 

Gains

 

Losses

 

Value

 

September 30, 2012:

 

 

 

 

 

 

 

 

 

U.S. Treasury

 

  $

1,500

 

  $

11

 

  $

 

  $

1,511

 

U.S. government agencies

 

49,332

 

191

 

(68)

 

49,455

 

U.S. government agency mortgage-backed

 

71,215

 

2,114

 

(38)

 

73,291

 

States and political subdivisions

 

11,598

 

1,207

 

 

12,805

 

Corporate Bonds

 

33,673

 

562

 

(18)

 

34,217

 

Collateralized mortgage obligations

 

95,894

 

1,075

 

(531)

 

96,438

 

Asset-backed securities

 

135,577

 

774

 

(1,265)

 

135,086

 

Collateralized debt obligations

 

17,902

 

-

 

(8,359)

 

9,543

 

 

 

  $

416,691

 

  $

5,934

 

  $

(10,279)

 

  $

412,346

 

December 31, 2011:

 

 

 

 

 

 

 

 

 

U.S. Treasury

 

  $

1,501

 

  $

23

 

  $

 

  $

1,524

 

U.S. government agencies

 

43,112

 

286

 

 

43,398

 

U.S. government agency mortgage-backed

 

152,473

 

1,553

 

(19)

 

154,007

 

States and political subdivisions

 

12,152

 

1,657

 

 

13,809

 

Corporate Bonds

 

32,357

 

14

 

(982)

 

31,389

 

Collateralized mortgage obligations

 

25,616

 

242

 

(736)

 

25,122

 

Asset-backed securities

 

28,755

 

-

 

(414)

 

28,341

 

Collateralized debt obligations

 

17,892

 

-

 

(7,918)

 

9,974

 

 

 

  $

313,858

 

  $

3,775

 

  $

(10,069)

 

  $

307,564

 

 

The fair value, amortized cost and weighted average yield of debt securities at September 30, 2012, by contractual maturity, were as follows. Securities not due at a single maturity date, primarily mortgage-backed securities and collateralized debt obligations are shown separately:

 

 

 

 

 

Weighted

 

 

 

 

 

Amortized

 

Average

 

Fair

 

 

 

Cost

 

Yield

 

Value

 

Due in one year or less

 

  $

9,962

 

2.20%

 

  $

10,053

 

Due after one year through five years

 

39,755

 

1.88%

 

40,543

 

Due after five years through ten years

 

12,190

 

3.43%

 

13,051

 

Due after ten years

 

34,196

 

3.85%

 

34,341

 

 

 

96,103

 

2.81%

 

97,988

 

Mortgage-backed securities

 

167,109

 

2.12%

 

169,729

 

Asset-back securites

 

135,577

 

1.49%

 

135,086

 

Collateralized debt obligations

 

17,902

 

1.90%

 

9,543

 

 

 

  $

416,691

 

2.06%

 

  $

412,346

 

 

Securities with unrealized losses at September 30, 2012, and December 31, 2011, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, are as follows (in thousands except for number of securities):

 

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Less than 12 months

 

Greater than 12 months

 

 

 

September 30, 2012

 

in an unrealized loss position

 

in an unrealized loss position

 

Total

 

 

 

Number of

 

Unrealized

 

Fair

 

Number of

 

Unrealized

 

Fair

 

Number of

 

Unrealized

 

Fair

 

 

 

Securities

 

Losses

 

Value

 

Securities

 

Losses

 

Value

 

Securities

 

Losses

 

Value

 

U.S. government agencies

 

2

 

  $

68

 

  $

13,197

 

 

 

  $

-

 

  $

-

 

2

 

  $

68

 

  $

13,197

 

U.S. government agency mortgage-backed

 

1

 

38

 

4,099

 

-

 

-

 

-

 

1

 

38

 

4,099

 

Corporate bonds

 

1

 

18

 

1,075

 

-

 

-

 

-

 

1

 

18

 

1,075

 

Collateralized mortgage obligations

 

7

 

531

 

38,294

 

-

 

-

 

-

 

7

 

531

 

38,294

 

Asset-backed securities

 

11

 

1,265

 

78,650

 

-

 

-

 

-

 

11

 

1,265

 

78,650

 

Collateralized debt obligations

 

-

 

-

 

-

 

2

 

8,359

 

9,543

 

2

 

8,359

 

9,543

 

 

 

22

 

  $

1,920

 

  $

135,315

 

2

 

  $

8,359

 

  $

9,543

 

24

 

  $

10,279

 

  $

144,858

 

 

 

 

Less than 12 months

 

Greater than 12 months

 

 

 

December 31, 2011

 

in an unrealized loss position

 

in an unrealized loss position

 

Total

 

 

 

Number of

 

Unrealized

 

Fair

 

Number of

 

Unrealized

 

Fair

 

Number of

 

Unrealized

 

Fair

 

 

 

Securities

 

Losses

 

Value

 

Securities

 

Losses

 

Value

 

Securities

 

Losses

 

Value

 

U.S. government agency mortgage-backed

 

4

 

  $

19

 

  $

27,935

 

-

 

  $

-

 

  $

-

 

4

 

  $

19

 

  $

27,935

 

Corporate bonds

 

11

 

982

 

28,605

 

-

 

-

 

-

 

11

 

982

 

28,605

 

Collateralized mortgage obligations

 

3

 

736

 

9,032

 

-

 

-

 

-

 

3

 

736

 

9,032

 

Asset-backed securities

 

4

 

414

 

28,341

 

-

 

-

 

-

 

4

 

414

 

28,341

 

Collateralized debt obligations

 

-

 

-

 

-

 

2

 

7,918

 

9,974

 

2

 

7,918

 

9,974

 

 

 

22

 

  $

2,151

 

  $

93,913

 

2

 

  $

7,918

 

  $

9,974

 

24

 

  $

10,069

 

  $

103,887

 

 

Recognition of other-than-temporary impairment for these securities was not necessary in the nine months ended September 30, 2012, or the year ended December 31, 2011.  The changes in fair values related primarily to interest rate fluctuations and were generally not related to credit quality deterioration.  Further as shown below, the amount of deferrals and defaults in the pooled collateralized debt obligations (“CDO”) decreased in the period from December 31, 2011, to September 30, 2012.

 

Uncertainty in the financial markets in the periods presented has resulted in reduced liquidity for certain investments, particularly the CDO.  In the case of the CDO fair value measurement, management included a risk premium adjustment as of September 30, 2012, to reflect an estimated yield that a market participant would demand because of uncertainty in cash flows, based on incomplete and sporadic levels of market activity.  Accordingly, management continues to designate these securities as Level 3 securities as described in Note 12 of this quarterly report as of September 30, 2012.  Management does not have the intent to sell the above securities and it is more likely than not the Company will not sell the securities before recovery of its cost basis.

 

Below is additional information as it relates to the CDO, Trapeza 2007-13A, which is secured by a pool of trust preferred securities issued by trusts sponsored by multiple financial institutions.

 

 

 

 

 

 

 

Gross

 

S&P

 

Number of

 

Issuance

 

Issuance

 

 

 

Amortized

 

Fair

 

Unrealized

 

Credit

 

Banks in

 

Deferrals & Defaults

 

Excess Subordination

 

 

 

Cost

 

Value

 

Loss

 

Rating 1

 

Issuance

 

Amount

 

Collateral %

 

Amount

 

Collateral %

 

September 30, 2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Class A1

 

 $

9,039

 

  $

5,403

 

  $

(3,636)

 

BB+

 

63

 

 $

208,000

 

27.7%

 

  $

190,670

 

25.4%

 

Class A2A

 

8,863

 

4,140

 

(4,723)

 

B+

 

63

 

208,000

 

27.7%

 

93,670

 

12.5%

 

 

 

 $

17,902

 

  $

9,543

 

  $

(8,359)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2011

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Class A1

 

 $

9,136

 

  $

5,584

 

  $

(3,552)

 

CCC+

 

63

 

 $

212,750

 

28.4%

 

  $

181,630

 

24.2%

 

Class A2A

 

8,756

 

4,390

 

(4,366)

 

CCC-

 

63

 

212,750

 

28.4%

 

84,630

 

11.3%

 

 

 

 $

17,892

 

  $

9,974

 

  $

(7,918)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1 Moody’s credit rating for class A1 and A2A were Baa2 and Ba2, respectively, as of September 30, 2012, and unchanged from December 31, 2011.  The Fitch ratings for class A1 and A2A were BBB and B, respectively, as of September 30, 2012, and unchanged from December 31, 2011.

 

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Table of Contents

 

Note 3 – Loans

 

Major classifications of loans were as follows:

 

 

 

September 30, 2012

 

December 31, 2011

 

 

 

 

 

 

 

 

 

Commercial

 

  $

81,438

 

  $

98,099

 

Real estate - commercial

 

621,715

 

704,492

 

Real estate - construction

 

48,606

 

71,436

 

Real estate - residential

 

436,837

 

477,200

 

Consumer

 

3,167

 

3,789

 

Overdraft

 

613

 

457

 

Lease financing receivables

 

3,229

 

2,087

 

Other

 

12,677

 

11,498

 

 

 

1,208,282

 

1,369,058

 

Net deferred loan fees and costs

 

7

 

(73

)

 

 

  $

1,208,289

 

  $

1,368,985

 

 

It is the policy of the Company to review each prospective credit in order to determine whether an adequate level of security or collateral was obtained prior to making a loan.  The type of collateral, when required, varies from liquid assets to real estate.  The Company’s access to collateral, in the event of borrower default, is assured through adherence to state lending laws, the Company’s lending standards and credit monitoring procedures.  The Bank generally makes loans solely within its market area.  There are no significant concentrations of loans where the customers’ ability to honor loan terms is dependent upon a single economic sector, although the real estate related categories listed above represent 91.6% and 91.5% of the portfolio at September 30, 2012, and December 31, 2011, respectively.  The Company remains committed to overseeing and managing its loan portfolio to reduce its real estate credit concentrations in accordance with the requirements of the Stipulation and Consent to the Issuance of a Consent Order (the “Consent Order”) with the Bank and the Office of the Comptroller of the Currency (“OCC”).  Regulatory and capital matters, including the Consent Order, are discussed in more detail in Note 11 of the consolidated financial statements included in this report.

 

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Table of Contents

 

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

 

September 30, 2012


 

30-59 Days
Past Due

 

60-89 Days
Past Due

 

90 Days or
Greater Past
Due

 

Total Past
Due

 

Current

 

Nonaccrual

 

Total
Financing
Receivables

 

Recorded
Investment
90 days or
Greater Past
Due and
Accruing

 

Commercial

 

  $

200

 

  $

68

 

  $

-

 

  $

268

 

  $

83,242

 

  $

1,157

 

  $

84,667

 

  $

-

 

Real estate - commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied general purpose

 

578

 

591

 

-

 

1,169

 

123,503

 

5,901

 

130,573

 

-

 

Owner occupied special purpose

 

24

 

71

 

-

 

95

 

154,129

 

12,889

 

167,113

 

-

 

Non-owner occupied general purpose

 

503

 

-

 

1,256

 

1,759

 

125,261

 

19,664

 

146,684

 

1,256

 

Non-owner occupied special purpose

 

-

 

-

 

-

 

-

 

97,995

 

487

 

98,482

 

-

 

Retail properties

 

-

 

-

 

-

 

-

 

38,552

 

11,721

 

50,273

 

-

 

Farm

 

-

 

-

 

-

 

-

 

26,800

 

1,790

 

28,590

 

-

 

Real estate - construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Homebuilder

 

265

 

-

 

47

 

312

 

4,764

 

5,523

 

10,599

 

47

 

Land

 

307

 

-

 

-

 

307

 

7,232

 

17

 

7,556

 

-

 

Commercial speculative

 

-

 

-

 

-

 

-

 

7,597

 

7,486

 

15,083

 

-

 

All other

 

-

 

-

 

-

 

-

 

14,732

 

636

 

15,368

 

-

 

Real estate - residential

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investor

 

975

 

-

 

169

 

1,144

 

147,137

 

12,838

 

161,119

 

169

 

Owner occupied

 

-

 

449

 

100

 

549

 

119,782

 

9,368

 

129,699

 

100

 

Revolving and junior liens

 

973

 

417

 

-

 

1,390

 

141,384

 

3,245

 

146,019

 

-

 

Consumer

 

25

 

-

 

-

 

25

 

3,142

 

-

 

3,167

 

-

 

All other

 

-

 

-

 

-

 

-

 

13,297

 

-

 

13,297

 

-

 

 

 

  $

3,850

 

  $

1,596

 

  $

1,572

 

  $

7,018

 

  $

1,108,549

 

  $

92,722

 

  $

1,208,289

 

  $

1,572

 

 

December 31, 2011

 

 

 

 

30-59 Days
Past Due

 

60-89 Days
Past Due

 

90 Days or
Greater Past
Due

 

Total Past
Due

 

Current

 

Nonaccrual

 

Total
Financing
Receivables

 

Recorded
Investment
90 days or
Greater Past
Due and
Accruing

 

Commercial

 

  $

161

 

  $

20

 

  $

-

 

  $

181

 

  $

98,840

 

  $

1,165

 

  $

100,186

 

  $

-

 

Real estate - commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied general purpose

 

912

 

-

 

-

 

912

 

137,250

 

12,744

 

150,906

 

-

 

Owner occupied special purpose

 

-

 

39

 

-

 

39

 

172,624

 

16,564

 

189,227

 

-

 

Non-owner occupied general purpose

 

471

 

-

 

318

 

789

 

147,099

 

12,893

 

160,781

 

318

 

Non-owner occupied special purpose

 

-

 

-

 

-

 

-

 

107,425

 

1,814

 

109,239

 

-

 

Retail properties

 

-

 

-

 

-

 

-

 

42,535

 

15,897

 

58,432

 

-

 

Farm

 

197

 

-

 

-

 

197

 

34,136

 

1,574

 

35,907

 

-

 

Real estate - construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Homebuilder

 

-

 

-

 

-

 

-

 

8,725

 

10,193

 

18,918

 

-

 

Land

 

-

 

-

 

-

 

-

 

7,976

 

2,025

 

10,001

 

-

 

Commercial speculative

 

-

 

669

 

-

 

669

 

5,154

 

14,217

 

20,040

 

-

 

All other

 

-

 

74

 

-

 

74

 

17,714

 

4,689

 

22,477

 

-

 

Real estate - residential

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investor

 

338

 

3,562

 

-

 

3,900

 

162,101

 

15,111

 

181,112

 

-

 

Owner occupied

 

3,414

 

573

 

-

 

3,987

 

119,266

 

15,059

 

138,312

 

-

 

Revolving and junior liens

 

1,525

 

166

 

-

 

1,691

 

153,244

 

2,841

 

157,776

 

-

 

Consumer

 

8

 

-

 

-

 

8

 

3,781

 

-

 

3,789

 

-

 

All other

 

-

 

-

 

-

 

-

 

11,882

 

-

 

11,882

 

-

 

 

 

  $

7,026

 

  $

5,103

 

  $

318

 

  $

12,447

 

  $

1,229,752

 

  $

126,786

 

  $

1,368,985

 

  $

318

 

 

Nonaccrual loans and loans past due 90 days still on accrual include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans.

 

The Bank had no commitments to any borrower whose loans were classified as impaired at September 30, 2012.

 

Credit Quality Indicators:

The Company categorizes loans into credit risk categories based on current financial information, overall debt service coverage, comparison against industry averages, historical payment experience, and current economic trends.  Each loan and loan relationship is examined.  This analysis includes loans with outstanding loans 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:

 

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Table of Contents

 

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

 

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

 

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

 

Credits that are not covered by the definitions above are “pass” credits, which are not considered to be adversely rated.  Loans listed as not rated have outstanding loans or commitments less than $50,000 or are included in groups of homogeneous loans.

 

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Table of Contents

 

Credit Quality Indicators by class of loans were as follows:

 

September 30, 2012

 

 

Pass

 

Special
Mention

 

Substandard 1

 

Doubtful

 

Total

 

Commercial

 

  $

82,532

 

  $

387

 

  $

1,748

 

  $

-

 

  $

84,667

 

Real estate - commercial

 

 

 

 

 

 

 

 

 

 

 

Owner occupied general purpose

 

114,064

 

3,846

 

12,663

 

-

 

130,573

 

Owner occupied special purpose

 

138,604

 

9,697

 

18,812

 

-

 

167,113

 

Non-owner occupied general purpose

 

100,478

 

19,822

 

26,384

 

-

 

146,684

 

Non-owner occupied special purpose

 

92,206

 

4,772

 

1,504

 

-

 

98,482

 

Retail Properties

 

32,385

 

3,531

 

14,357

 

-

 

50,273

 

Farm

 

23,666

 

3,134

 

1,790

 

-

 

28,590

 

Real estate - construction

 

 

 

 

 

 

 

 

 

 

 

Homebuilder

 

1,683

 

2,431

 

6,485

 

-

 

10,599

 

Land

 

5,189

 

-

 

2,367

 

-

 

7,556

 

Commercial speculative

 

3,954

 

-

 

11,129

 

-

 

15,083

 

All other

 

13,228

 

1,504

 

636

 

-

 

15,368

 

Real estate - residential

 

 

 

 

 

 

 

 

 

 

 

Investor

 

124,604

 

20,109

 

16,406

 

-

 

161,119

 

Owner occupied

 

116,082

 

401

 

13,216

 

-

 

129,699

 

Revolving and junior leins

 

140,821

 

145

 

5,053

 

-

 

146,019

 

Consumer

 

3,162

 

-

 

5

 

-

 

3,167

 

All other

 

13,077

 

220

 

-

 

-

 

13,297

 

Total

 

  $

1,005,735

 

  $

69,999

 

  $

132,555

 

  $

-

 

  $

1,208,289

 

 

December 31, 2011

 

 

Pass

 

Special
Mention

 

Substandard 1

 

Doubtful

 

Total

 

Commercial

 

  $

94,456

 

  $

3,350

 

  $

2,380

 

  $

-

 

  $

100,186

 

Real estate - commercial

 

 

 

 

 

 

 

 

 

 

 

Owner occupied general purpose

 

115,175

 

11,695

 

24,036

 

-

 

150,906

 

Owner occupied special purpose

 

154,650

 

5,254

 

29,323

 

-

 

189,227

 

Non-owner occupied general purpose

 

102,178

 

19,292

 

39,311

 

-

 

160,781

 

Non-owner occupied special purpose

 

85,931

 

6,017

 

17,291

 

-

 

109,239

 

Retail Properties

 

26,391

 

11,660

 

20,381

 

-

 

58,432

 

Farm

 

26,629

 

5,605

 

3,673

 

-

 

35,907

 

Real estate - construction

 

 

 

 

 

 

 

 

 

 

 

Homebuilder

 

4,206

 

2,905

 

11,807

 

-

 

18,918

 

Land

 

3,755

 

3,032

 

3,214

 

-

 

10,001

 

Commercial speculative