10-Q 1 a13-8229_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 March 31, 2013

 

 

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 Rule 12b-2of the Exchange Act).

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 May 13, 2013, the Registrant had outstanding 13,882,910 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)

 

 

 

 

 

March 31,

 

December 31,

 

 

 

2013

 

2012

 

Assets

 

 

 

 

 

Cash and due from banks

 

  $

17,202

 

  $

44,221

 

Interest bearing deposits with financial institutions

 

63,915

 

84,286

 

Cash and cash equivalents

 

81,117

 

128,507

 

Securities available-for-sale

 

575,746

 

579,886

 

Federal Home Loan Bank and Federal Reserve Bank stock

 

11,202

 

11,202

 

Loans held-for-sale

 

6,381

 

9,571

 

Loans

 

1,113,302

 

1,150,050

 

Less: allowance for loan losses

 

38,634

 

38,597

 

Net loans

 

1,074,668

 

1,111,453

 

Premises and equipment, net

 

47,356

 

47,002

 

Other real estate owned

 

65,663

 

72,423

 

Mortgage servicing rights, net

 

4,469

 

4,116

 

Core deposit, net

 

2,751

 

3,276

 

Bank-owned life insurance (BOLI)

 

54,610

 

54,203

 

Other assets

 

30,081

 

24,160

 

Total assets

 

  $

1,954,044

 

  $

2,045,799

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

Deposits:

 

 

 

 

 

Noninterest bearing demand

 

  $

351,328

 

  $

379,451

 

Interest bearing:

 

 

 

 

 

Savings, NOW, and money market

 

865,863

 

826,976

 

Time

 

501,065

 

510,792

 

Total deposits

 

1,718,256

 

1,717,219

 

Securities sold under repurchase agreements

 

20,802

 

17,875

 

Other short-term borrowings

 

-

 

100,000

 

Junior subordinated debentures

 

58,378

 

58,378

 

Subordinated debt

 

45,000

 

45,000

 

Notes payable and other borrowings

 

500

 

500

 

Other liabilities

 

35,254

 

34,275

 

Total liabilities

 

1,878,190

 

1,973,247

 

 

 

 

 

 

 

Stockholders’ Equity

 

 

 

 

 

Preferred stock

 

72,130

 

71,869

 

Common stock

 

18,780

 

18,729

 

Additional paid-in capital

 

66,109

 

66,189

 

Retained earnings

 

16,747

 

12,048

 

Accumulated other comprehensive loss

 

(2,202)

 

(1,327)

 

Treasury stock

 

(95,710)

 

(94,956)

 

Total stockholders’ equity

 

75,854

 

72,552

 

Total liabilities and stockholders’ equity

 

  $

1,954,044

 

  $

2,045,799

 

 

 

 

March 31, 2013

 

December 31, 2012

 

 

 

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

 

18,779,734

 

73,000

 

18,729,134

 

Shares outstanding

 

73,000

 

13,882,910

 

73,000

 

14,084,328

 

Treasury shares

 

-

 

4,896,824

 

-

 

4,644,806

 

 

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)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2013

 

2012

 

Interest and dividend income

 

 

 

 

 

Loans, including fees

 

  $

14,914

 

  $

17,666

 

Loans held-for-sale

 

41

 

84

 

Securities:

 

 

 

 

 

Taxable

 

2,298

 

1,498

 

Tax-exempt

 

119

 

103

 

Dividends from Federal Reserve Bank and Federal Home Loan Bank stock

 

76

 

74

 

Interest bearing deposits with financial institutions

 

42

 

25

 

Total interest and dividend income

 

17,490

 

19,450

 

Interest expense

 

 

 

 

 

Savings, NOW, and money market deposits

 

228

 

300

 

Time deposits

 

1,853

 

2,605

 

Securities sold under repurchase agreements

 

1

 

-

 

Other short-term borrowings

 

19

 

3

 

Junior subordinated debentures

 

1,287

 

1,197

 

Subordinated debt

 

196

 

237

 

Notes payable and other borrowings

 

4

 

4

 

Total interest expense

 

3,588

 

4,346

 

Net interest and dividend income

 

13,902

 

15,104

 

Provision for loan losses

 

(2,500)

 

6,084

 

Net interest and dividend income after provision for loan losses

 

16,402

 

9,020

 

Noninterest income

 

 

 

 

 

Trust income

 

1,491

 

1,651

 

Service charges on deposits

 

1,677

 

1,831

 

Secondary mortgage fees

 

230

 

296

 

Mortgage servicing income

 

244

 

187

 

Net gain on sales of mortgage loans

 

1,976

 

2,647

 

Securities gains, net

 

1,453

 

101

 

Increase in cash surrender value of bank-owned life insurance

 

407

 

495

 

Debit card interchange income

 

792

 

760

 

Lease revenue from other real estate owned

 

408

 

1,179

 

Net gain on sale of other real estate owned

 

181

 

23

 

Other income

 

1,737

 

1,294

 

Total noninterest income

 

10,596

 

10,464

 

Noninterest expense

 

 

 

 

 

Salaries and employee benefits

 

9,032

 

9,049

 

Occupancy expense, net

 

1,279

 

1,235

 

Furniture and equipment expense

 

1,144

 

1,155

 

FDIC insurance

 

1,035

 

1,000

 

General bank insurance

 

849

 

846

 

Amortization of core deposit asset

 

525

 

195

 

Advertising expense

 

166

 

318

 

Debit card interchange expense

 

344

 

342

 

Legal fees

 

323

 

685

 

Other real estate expense

 

3,686

 

4,654

 

Other expense

 

3,144

 

2,973

 

Total noninterest expense

 

21,527

 

22,452

 

Income (loss) before income taxes

 

5,471

 

(2,968)

 

Income tax expense

 

-

 

-

 

Net income (loss)

 

5,471

 

(2,968)

 

Preferred stock dividends and accretion of discount

 

1,289

 

1,223

 

Net income (loss) available to common shareholders

 

  $

4,182

 

  $

(4,191)

 

 

 

 

 

 

 

Share and per share information:

 

 

 

 

 

Ending number of shares

 

13,882,910

 

14,084,328

 

Average number of shares

 

14,076,114

 

14,043,545

 

Diluted average number of shares

 

14,157,523

 

14,196,143

 

Basic income (loss) per share

 

  $

0.30

 

  $

(0.30)

 

Diluted income (loss) per share

 

0.30

 

(0.30)

 

Dividends paid per share

 

-

 

-

 

 

See accompanying notes to consolidated financial statements.

 

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Table of Contents

 

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income (Loss)

(In thousands, except share data)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2013

 

2012

 

Net Income (loss)

 

  $

5,471

 

  $

(2,968)

 

 

 

 

 

 

 

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

 

(35)

 

1,004

 

Related tax benefit (expense)

 

17

 

(413)

 

Holding (losses) income after tax

 

(18)

 

591

 

 

 

 

 

 

 

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

 

 

 

 

 

Net realized gains

 

1,453

 

101

 

Income tax expense on net realized gains

 

(596)

 

(41)

 

Net realized gains after tax

 

857

 

60

 

Total other comprehensive (loss) income

 

(875)

 

531

 

Comprehensive income (loss)

 

  $

4,596

 

  $

(2,437)

 

 

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)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2013

 

 

2012

 

Cash flows from operating activities

 

 

 

 

 

 

Net income (loss)

 

  $

5,471

 

 

  $

(2,968

)

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

 

 

 

 

 

 

Depreciation and amortization of leasehold improvement

 

746

 

 

801

 

Change in market value on mortgage servicing rights

 

106

 

 

123

 

Provision for loan losses

 

(2,500

)

 

6,084

 

Gain on recapture of restricted stock

 

(612

)

 

-

 

Originations of loans held-for-sale

 

(53,138

)

 

(64,140

)

Proceeds from sales of loans held-for-sale

 

57,755

 

 

72,729

 

Net gain on sales of mortgage loans

 

(1,976

)

 

(2,647

)

Increase in cash surrender value of bank-owned life insurance

 

(407

)

 

(495

)

Change in accrued interest receivable and other assets

 

(5,215

)

 

(4,635

)

Change in accrued interest payable and other liabilities

 

634

 

 

3,420

 

Net premium amortization on securities

 

414

 

 

403

 

Securities gains, net

 

(1,453

)

 

(101

)

Amortization of core deposit intangible

 

525

 

 

195

 

Stock based compensation

 

14

 

 

87

 

Net gain on sale of other real estate owned

 

(181

)

 

(23

)

Provision for other real estate owned losses

 

1,987

 

 

2,500

 

Net gain on disposal of fixed assets

 

(5

)

 

-

 

Net cash provided by operating activities

 

2,165

 

 

11,333

 

Cash flows from investing activities

 

 

 

 

 

 

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

 

18,055

 

 

17,254

 

Proceeds from sales of securities available-for-sale

 

231,155

 

 

8,359

 

Purchases of securities available-for-sale

 

(240,190

)

 

(76,819

)

Proceeds from sales of Federal Home Loan Bank stock

 

-

 

 

1,467

 

Net change in loans

 

26,971

 

 

20,248

 

Improvements in other real estate owned

 

(50

)

 

(318

)

Proceeds from sales of other real estate owned

 

11,842

 

 

5,369

 

Proceeds from disposition of fixed assets

 

6

 

 

-

 

Net purchases of premises and equipment

 

(1,123

)

 

(154

)

Net cash provided by (used in) investing activities

 

46,666

 

 

(24,594

)

 

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

 

Net change in deposits

 

1,037

 

 

23,089

 

Net change in securities sold under repurchase agreements

 

2,927

 

 

903

 

Net change in other short-term borrowings

 

(100,000

)

 

15,000

 

Purchase of treasury stock

 

(185

)

 

(63

)

Net cash (used in) provided by financing activities

 

(96,221

)

 

38,929

 

Net change in cash and cash equivalents

 

(47,390

)

 

25,668

 

Cash and cash equivalents at beginning of period

 

128,507

 

 

50,949

 

Cash and cash equivalents at end of period

 

  $

81,117

 

 

  $

76,617

 

 

 

 

 

 

 

 

Supplemental cash flow information

 

 

 

 

 

 

Interest paid for deposits

 

  $

2,124

 

 

  $

3,394

 

Interest paid for borrowings

 

225

 

 

243

 

Non-cash transfer of loans to other real estate

 

6,985

 

 

15,918

 

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

 

5,329

 

 

-

 

Accretion on preferred stock warrants

 

261

 

 

245

 

Fair value difference on recapture of restricted stock

 

43

 

 

-

 

 

See accompanying notes to consolidated financial statements.

 

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Table of Contents

 

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Changes in

Stockholders’ Equity

(In thousands, except share data)

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

Other

 

 

 

Total

 

 

 

Common

 

Preferred

 

Paid-In

 

Retained

 

Comprehensive

 

Treasury

 

Stockholders’

 

 

 

Stock

 

Stock

 

Capital

 

Earnings

 

Loss

 

Stock

 

Equity

 

Balance, December 31, 2011

 

  $

18,628

 

  $

70,863

 

  $

65,999

 

  $

17,107

 

  $

(3,702)

 

  $

(94,893)

 

  $

74,002

 

Net loss

 

 

 

 

 

 

 

(2,968)

 

 

 

 

 

(2,968)

 

Change in net unrealized gain on securities available-for-sale net of $372 tax effect

 

 

 

 

 

 

 

 

 

531

 

 

 

531

 

Change in restricted stock

 

101

 

 

 

(101)

 

 

 

 

 

 

 

-

 

Stock based compensation

 

 

 

 

 

87

 

 

 

 

 

 

 

87

 

Purchase of treasury stock

 

 

 

 

 

 

 

 

 

 

 

(63)

 

(63)

 

Preferred stock accretion and declared dividends

 

 

 

245

 

 

 

(1,223)

 

 

 

 

 

(978)

 

Balance, March 31, 2012

 

  $

18,729

 

  $

71,108

 

  $

65,985

 

  $

12,916

 

  $

(3,171)

 

  $

(94,956)

 

  $

70,611

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2012

 

  $

18,729

 

  $

71,869

 

  $

66,189

 

  $

12,048

 

  $

(1,327)

 

  $

(94,956)

 

  $

72,552

 

Net income

 

 

 

 

 

 

 

5,471

 

 

 

 

 

5,471

 

Change in net unrealized loss on securities available-for-sale, net of $613 tax effect

 

 

 

 

 

 

 

 

 

(875)

 

 

 

(875)

 

Change in restricted stock

 

51

 

 

 

(51)

 

 

 

 

 

 

 

-

 

Recapture of restricted stock

 

 

 

 

 

(43)

 

 

 

 

 

(569)

 

(612)

 

Stock based compensation

 

 

 

 

 

14

 

 

 

 

 

 

 

14

 

Purchase of treasury stock

 

 

 

 

 

 

 

 

 

 

 

(185)

 

(185)

 

Preferred stock accretion and declared dividends

 

 

 

261

 

 

 

(772)

 

 

 

 

 

(511)

 

Balance, March 31, 2013

 

  $

18,780

 

  $

72,130

 

  $

66,109

 

  $

16,747

 

  $

(2,202)

 

  $

(95,710)

 

  $

75,854

 

 

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 March 31, 2013, are not necessarily indicative of the results that may be expected for the year ending December 31, 2013.  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, 2012.  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 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.

 

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, 2012.  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.

 

Recent Accounting Pronouncements

 

In February 2013, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2013-02 “Comprehensive Income (Topic 220) — Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.” ASU 2013-02 requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under United States generally accepted accounting practices (“GAAP”) to be reclassified to net income in its entirety in the same reporting period.  The impact of ASU 2013-02 on the Company’s consolidated financial statements is reflected in the consolidated statement of comprehensive income (loss).

 

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 will reflect liquidity needs, loan demand and interest income objectives.

 

8



Table of Contents

 

Portfolio size and composition may be adjusted from time to time.  While a significant portion of the portfolio will always consist 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 will change 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, Federal Reserve Bank of Chicago (“FRB”) stock and various other equity securities.  FHLBC stock was recorded at a value of $6.4 million at March 31, 2013, and December 31, 2012.  FRB stock was recorded at $4.8 million at March 31, 2013, and December 31, 2012.  Our FHLB stock is necessary to maintain our program of access to FHLB advances.

 

The following table summarizes the amortized cost and fair value of the available-for-sale securities at March 31, 2013, and December 31, 2012 and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive loss were as follows:

 

 

 

 

 

 

Gross

 

 

Gross

 

 

 

 

 

 

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

Fair

 

 

 

Cost

 

 

Gains

 

 

Losses

 

 

Value

 

March 31, 2013:

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury

 

  $

1,500

 

 

  $

2

 

 

  $

-

 

 

  $

1,502

 

U.S. government agencies

 

69,189

 

 

129

 

 

(53

)

 

69,265

 

U.S. government agency mortgage-backed

 

76,500

 

 

804

 

 

(952

)

 

76,352

 

States and political subdivisions

 

25,876

 

 

1,139

 

 

-

 

 

27,015

 

Corporate Bonds

 

38,090

 

 

650

 

 

(161

)

 

38,579

 

Collateralized mortgage obligations

 

131,181

 

 

964

 

 

(476

)

 

131,669

 

Asset-backed securities

 

219,234

 

 

2,174

 

 

(671

)

 

220,737

 

Collateralized debt obligations

 

17,919

 

 

-

 

 

(7,292

)

 

10,627

 

 

 

  $

579,489

 

 

  $

5,862

 

 

  $

(9,605

)

 

  $

575,746

 

December 31, 2012:

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury

 

  $

1,500

 

 

  $

7

 

 

  $

-

 

 

  $

1,507

 

U.S. government agencies

 

49,848

 

 

122

 

 

(120

)

 

49,850

 

U.S. government agency mortgage-backed

 

127,716

 

 

1,605

 

 

(583

)

 

128,738

 

States and political subdivisions

 

14,639

 

 

1,216

 

 

-

 

 

15,855

 

Corporate Bonds

 

36,355

 

 

586

 

 

(55

)

 

36,886

 

Collateralized mortgage obligations

 

168,795

 

 

1,895

 

 

(1,090

)

 

169,600

 

Asset-backed securities

 

165,347

 

 

2,468

 

 

(322

)

 

167,493

 

Collateralized debt obligations

 

17,941

 

 

-

 

 

(7,984

)

 

9,957

 

 

 

  $

582,141

 

 

  $

7,899

 

 

  $

(10,154

)

 

  $

579,886

 

 

The fair value, amortized cost and weighted average yield of debt securities at March 31, 2013, by contractual maturity, were as follows.  Securities not due at a single maturity date, primarily mortgage-backed securities, collateralized debt obligations and equity securities are shown separately.

 

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Table of Contents

 

 

 

 

 

 

Weighted

 

 

 

 

 

Amortized

 

 

Average

 

Fair

 

 

 

Cost

 

 

Yield

 

Value

 

Due in one year or less

 

  $

10,976

 

 

1.61%

 

  $

10,984

 

Due after one year through five years

 

25,685

 

 

1.97%

 

26,456

 

Due after five years through ten years

 

37,930

 

 

3.03%

 

38,730

 

Due after ten years

 

60,064

 

 

2.93%

 

60,191

 

 

 

134,655

 

 

2.67%

 

136,361

 

Mortgage-backed securities

 

207,681

 

 

2.02%

 

208,021

 

Asset-back securites

 

219,234

 

 

1.55%

 

220,737

 

Collateralized debt obligations

 

17,919

 

 

1.64%

 

10,627

 

 

 

  $

579,489

 

 

1.98%

 

  $

575,746

 

 

Securities with unrealized losses at March 31, 2013, and December 31, 2012, 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):

 

 

 

Less than 12 months

 

Greater than 12 months

 

 

March 31, 2013

 

in an unrealized loss position

 

in an unrealized loss position

 

Total

 

 

Number of

 

Unrealized

 

Fair

 

Number of

 

Unrealized

 

Fair

 

Number of

 

Unrealized

 

Fair

 

 

Securities

 

Losses

 

Value

 

Securities

 

Losses

 

Value

 

Securities

 

Losses

 

Value

U.S. government agencies

 

3

 

$

53

 

$

12,225

 

-

 

$

-

 

$

-

 

3

 

$

53

 

12,225

U.S. government agency mortgage-backed

 

9

 

952

 

49,575

 

-

 

-

 

-

 

9

 

952

 

49,575

Corporate bonds

 

5

 

141

 

13,657

 

1

 

20

 

1,032

 

6

 

161

 

14,689

Collateralized mortgage obligations

 

7

 

476

 

57,201

 

-

 

-

 

-

 

7

 

476

 

57,201

Asset-backed securities

 

7

 

671

 

47,281

 

-

 

-

 

-

 

7

 

671

 

47,281

Collateralized debt obligations

 

-

 

-

 

-

 

2

 

7,292

 

10,627

 

2

 

7,292

 

10,627

 

 

31

 

$

2,293

 

$

179,939

 

3

 

$

7,312

 

$

11,659

 

34

 

$

9,605

 

$

191,598

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less than 12 months

 

Greater than 12 months

 

 

December 31, 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

 

4

 

$

120

 

$

17,039

 

-

 

$

-

 

$

-

 

4

 

$

120

 

$

17,039

U.S. government agency mortgage-backed

 

12

 

583

 

53,184

 

-

 

-

 

-

 

12

 

583

 

53,184

Corporate bonds

 

4

 

55

 

9,724

 

-

 

-

 

-

 

4

 

55

 

9,724

Collateralized mortgage obligations

 

6

 

1,060

 

37,778

 

1

 

30

 

2,343

 

7

 

1,090

 

40,121

Asset-backed securities

 

6

 

322

 

37,488

 

-

 

-

 

-

 

6

 

322

 

37,488

Collateralized debt obligations

 

-

 

-

 

-

 

2

 

7,984

 

9,957

 

2

 

7,984

 

9,957

 

 

32

 

$

2,140

 

$

155,213

 

3

 

$

8,014

 

$

12,300

 

35

 

$

10,154

 

$

167,513

 

Recognition of other-than-temporary impairment was not necessary in the three months ended March 31, 2013, or the year ended December 31, 2012.  The changes in fair values related primarily to interest rate fluctuations and were generally not related to credit quality deterioration, although the amount of deferrals and defaults in the pooled collateralized debt obligations (“CDO”) decreased in the period from December 31, 2012 to March 31, 2013.

 

Continued uncertainty in the financial markets in the periods presented has resulted in sharply reduced liquidity for certain investments, particularly the CDO securities.  In the case of the CDO securities fair value measurement, management included a risk premium adjustment as of March 31, 2013, 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 March 31, 2013.  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.

 

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Table of Contents

 

Below is additional information as it relates to the CDOs, 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

 

 

Rating1

 

Issuance

 

Amount

 

Collateral%

 

Amount

 

Collateral%

 

March 31, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Class A1

 

  $

8,981

 

 

  $

6,055

 

 

  $

(2,926

)

 

BB+

 

63

 

  $

207,000

 

27.6%

 

  $

194,387

 

25.9%

 

Class A2A

 

8,938

 

 

4,572

 

 

(4,366

)

 

B+

 

63

 

207,000

 

27.6%

 

97,387

 

13.0%

 

 

 

  $

17,919

 

 

  $

10,627

 

 

  $

(7,292

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Class A1

 

  $

9,038

 

 

  $

5,768

 

 

  $

(3,270

)

 

BB+

 

63

 

  $

208,000

 

27.7%

 

  $

190,982

 

25.5%

 

Class A2A

 

8,903

 

 

4,189

 

 

(4,714

)

 

B+

 

63

 

208,000

 

27.7%

 

93,982

 

12.5%

 

 

 

  $

17,941

 

 

  $

9,957

 

 

  $

(7,984

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1 Moody’s credit rating for class A1 and A2A were Baa2 and Ba2, respectively, as of March 31, 2013, and December 31, 2012.  The Fitch ratings for class A1 and A2A were BBB and B, respectively, as of March 31, 2013, and December 31, 2012.

 

Note 3 – Loans

 

Major classifications of loans were as follows:

 

 

 

March 31, 2013

 

December 31, 2012

Commercial

 

  $

84,332

 

 

  $

86,941

 

Real estate - commercial

 

566,349

 

 

579,687

 

Real estate - construction

 

40,698

 

 

42,167

 

Real estate - residential

 

394,599

 

 

414,543

 

Consumer

 

2,908

 

 

3,101

 

Overdraft

 

584

 

 

994

 

Lease financing receivables

 

8,574

 

 

6,060

 

Other

 

15,022

 

 

16,451

 

 

 

1,113,066

 

 

1,149,944

 

Net deferred loan cost (fees)

 

236

 

 

106

 

 

 

  $

1,113,302

 

 

  $

1,150,050

 

 

It is the policy of the Company to review each prospective credit in order to determine an adequate level of security or collateral was obtained prior to making a loan.  The type of collateral, when required, will vary from liquid assets to real estate.  The Company’s access to collateral, in the event of borrower default, is assured through adherence to 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 90.0% and 90.1% of the portfolio at March 31, 2013, and December 31, 2012, 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 Consent Order the Bank entered into with the Office of the Controller of the Currency (the “OCC”) on May 16, 2011 (the “Consent Order”).  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.

 

11



Table of Contents

 

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

 

March 31, 2013

 

 

 

 

30-59 Days
Past Due

 

60-89 Days
Past Due

 

90 Days or
Greater Past
Due

 

Total Past
Due

 

Current

 

Nonaccrual

 

Total Loans

 

Recorded
Investment
90 days or
Greater Past
Due and
Accruing

 

Commercial

 

$

58

 

$

-

 

$

-

 

$

58

 

$

92,638

 

$

210

 

$

92,906

 

$

-

 

Real estate - commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied general purpose

 

2,535

 

-

 

-

 

2,535

 

114,871

 

4,990

 

122,396

 

-

 

Owner occupied special purpose

 

-

 

-

 

-

 

-

 

145,443

 

10,457

 

155,900

 

-

 

Non-owner occupied general purpose

 

310

 

-

 

165

 

475

 

127,904

 

10,082

 

138,461

 

165

 

Non-owner occupied special purpose

 

-

 

-

 

-

 

-

 

75,649

 

1,470

 

77,119

 

-

 

Retail properties

 

-

 

-

 

-

 

-

 

38,351

 

8,846

 

47,197

 

-

 

Farm

 

-

 

52

 

-

 

52

 

22,807

 

2,417

 

25,276

 

-

 

Real estate - construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Homebuilder

 

-

 

-

 

-

 

-

 

5,827

 

168

 

5,995

 

-

 

Land

 

-

 

-

 

-

 

-

 

2,712

 

254

 

2,966

 

-

 

Commercial speculative

 

-

 

-

 

-

 

-

 

11,182

 

5,353

 

16,535

 

-

 

All other

 

47

 

-

 

-

 

47

 

14,549

 

606

 

15,202

 

-

 

Real estate - residential

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investor

 

3,905

 

-

 

-

 

3,905

 

127,536

 

8,524

 

139,965

 

-

 

Owner occupied

 

3,359

 

-

 

-

 

3,359

 

109,617

 

7,916

 

120,892

 

-

 

Revolving and junior liens

 

508

 

87

 

112

 

707

 

129,432

 

3,603

 

133,742

 

112

 

Consumer

 

5

 

-

 

-

 

5

 

2,903

 

-

 

2,908

 

-

 

All other

 

-

 

-

 

-

 

-

 

15,842

 

-

 

15,842

 

-

 

 

 

$

10,727

 

$

139

 

$

277

 

$

11,143

 

$

1,037,263

 

$

64,896

 

$

1,113,302

 

$

277

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2012

 

 

 

 

30-59 Days
Past Due

 

60-89 Days
Past Due

 

90 Days or
Greater Past
Due

 

Total Past
Due

 

Current

 

Nonaccrual

 

Total Loans

 

Recorded
Investment
90 days or
Greater Past
Due and
Accruing

 

Commercial

 

$

159

 

$

-

 

$

-

 

$

159

 

$

92,080

 

$

762

 

$

93,001

 

$

-

 

Real estate - commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied general purpose

 

1,580

 

50

 

-

 

1,630

 

119,994

 

5,487

 

127,111

 

-

 

Owner occupied special purpose

 

172

 

-

 

-

 

172

 

149,439

 

11,433

 

161,044

 

-

 

Non-owner occupied general purpose

 

-

 

1,046

 

-

 

1,046

 

128,817

 

13,436

 

143,299

 

-

 

Non-owner occupied special purpose

 

-

 

4,304

 

-

 

4,304

 

69,299

 

477

 

74,080

 

-

 

Retail properties

 

-

 

-

 

-

 

-

 

37,732

 

10,532

 

48,264

 

-

 

Farm

 

-

 

-

 

-

 

-

 

23,372

 

2,517

 

25,889

 

-

 

Real estate - construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Homebuilder

 

-

 

-

 

-

 

-

 

4,469

 

1,855

 

6,324

 

-

 

Land

 

-

 

-

 

-

 

-

 

2,747

 

254

 

3,001

 

-

 

Commercial speculative

 

-

 

-

 

-

 

-

 

10,755

 

6,587

 

17,342

 

-

 

All other

 

300

 

215

 

68

 

583

 

14,360

 

557

 

15,500

 

68

 

Real estate - residential

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investor

 

276

 

164

 

-

 

440

 

140,141

 

9,910

 

150,491

 

-

 

Owner occupied

 

3,151

 

375

 

21

 

3,547

 

110,735

 

9,918

 

124,200

 

21

 

Revolving and junior liens

 

888

 

203

 

-

 

1,091

 

134,990

 

3,771

 

139,852

 

-

 

Consumer

 

3

 

-

 

-

 

3

 

3,075

 

23

 

3,101

 

-

 

All other

 

-

 

-

 

-

 

-

 

17,551

 

-

 

17,551

 

-

 

 

 

$

6,529

 

$

6,357

 

$

89

 

$

12,975

 

$

1,059,556

 

$

77,519

 

$

1,150,050

 

$

89

 

 

The Bank had no commitments to any borrower whose loans were classified as impaired at March 31, 2013.

 

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 line 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:

 

12



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.

 

13



Table of Contents

 

Credit Quality Indicators by class of loans as were as follows:

 

March 31, 2013

 

Pass

 

Special
Mention

 

Substandard 1

 

Doubtful

 

Total

 

Commercial

 

 

$

80,608

 

 

 

$

11,551

 

 

 

$

747

 

 

 

$

-

 

 

 

$

92,906

 

 

Real estate - commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied general purpose

 

 

100,321

 

 

 

11,250

 

 

 

10,825

 

 

 

-

 

 

 

122,396

 

 

Owner occupied special purpose

 

 

129,797

 

 

 

5,223

 

 

 

20,880

 

 

 

-

 

 

 

155,900

 

 

Non-owner occupied general purpose

 

 

107,492

 

 

 

14,152

 

 

 

16,817

 

 

 

-

 

 

 

138,461

 

 

Non-owner occupied special purpose

 

 

70,166

 

 

 

5,483

 

 

 

1,470

 

 

 

-

 

 

 

77,119

 

 

Retail Properties

 

 

34,098

 

 

 

1,649

 

 

 

11,450

 

 

 

-

 

 

 

47,197

 

 

Farm

 

 

21,349

 

 

 

1,510

 

 

 

2,417

 

 

 

-

 

 

 

25,276

 

 

Real estate - construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Homebuilder

 

 

1,331

 

 

 

2,135

 

 

 

2,529

 

 

 

-

 

 

 

5,995

 

 

Land

 

 

2,712

 

 

 

-

 

 

 

254

 

 

 

-

 

 

 

2,966

 

 

Commercial speculative

 

 

7,567

 

 

 

-

 

 

 

8,968

 

 

 

-

 

 

 

16,535

 

 

All other

 

 

14,077

 

 

 

220

 

 

 

905

 

 

 

-

 

 

 

15,202

 

 

Real estate - residential

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investor

 

 

119,660

 

 

 

11,392

 

 

 

8,913

 

 

 

-

 

 

 

139,965

 

 

Owner occupied

 

 

109,105

 

 

 

1,324

 

 

 

10,463

 

 

 

-

 

 

 

120,892

 

 

Revolving and junior liens

 

 

127,820

 

 

 

200

 

 

 

5,722

 

 

 

-

 

 

 

133,742

 

 

Consumer

 

 

2,907

 

 

 

-

 

 

 

1

 

 

 

-

 

 

 

2,908

 

 

All other

 

 

15,842

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

15,842

 

 

Total

 

 

$

944,852

 

 

 

$

66,089

 

 

 

$

102,361

 

 

 

$

-

 

 

 

$

1,113,302

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2012

 

 

Pass

 

 

Special
Mention

 

Substandard 1

 

Doubtful

 

 

Total

 

 

Commercial

 

 

$

88,071

 

 

 

$

3,867

 

 

 

$

1,063

 

 

 

$

-

 

 

 

$

93,001

 

 

Real estate - commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied general purpose

 

 

113,118