10-Q 1 a13-19559_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, 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     60506

(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, 2013, the Registrant had outstanding 13,917,108 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,

 

 

2013

 

2012

Assets

 

 

 

 

Cash and due from banks

 

$

47,486

 

$

44,221

Interest bearing deposits with financial institutions

 

32,586

 

84,286

Cash and cash equivalents

 

80,072

 

128,507

Securities available-for-sale, at fair value

 

373,478

 

579,886

Securities held-to-maturity, at amortized cost

 

258,101

 

-

Federal Home Loan Bank and Federal Reserve Bank stock

 

10,292

 

11,202

Loans held-for-sale

 

3,129

 

9,571

Loans

 

1,077,640

 

1,150,050

Less: allowance for loan losses

 

29,547

 

38,597

Net loans

 

1,048,093

 

1,111,453

Premises and equipment, net

 

46,392

 

47,002

Other real estate owned

 

49,066

 

72,423

Mortgage servicing rights, net

 

5,456

 

4,116

Core deposit, net

 

1,702

 

3,276

Bank-owned life insurance (BOLI)

 

55,005

 

54,203

Deferred tax assets, net

 

78,865

 

928

Other assets

 

23,137

 

23,232

Total assets

 

$

2,032,788

 

$

2,045,799

 

 

 

 

 

Liabilities

 

 

 

 

Deposits:

 

 

 

 

Noninterest bearing demand

 

$

373,499

 

$

379,451

Interest bearing:

 

 

 

 

Savings, NOW, and money market

 

809,521

 

826,976

Time

 

490,103

 

510,792

Total deposits

 

1,673,123

 

1,717,219

Securities sold under repurchase agreements

 

20,719

 

17,875

Other short-term borrowings

 

55,000

 

100,000

Junior subordinated debentures

 

58,378

 

58,378

Subordinated debt

 

45,000

 

45,000

Notes payable and other borrowings

 

500

 

500

Other liabilities

 

38,029

 

34,275

Total liabilities

 

1,890,749

 

1,973,247

 

 

 

 

 

Stockholders’ Equity

 

 

 

 

Preferred stock

 

72,667

 

71,869

Common stock

 

18,830

 

18,729

Additional paid-in capital

 

66,168

 

66,189

Retained earnings

 

92,612

 

12,048

Accumulated other comprehensive loss

 

(12,435)

 

(1,327)

Treasury stock

 

(95,803)

 

(94,956)

Total stockholders’ equity

 

142,039

 

72,552

Total liabilities and stockholders’ equity

 

$

2,032,788

 

$

2,045,799

 

 

 

 

September 30, 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

 

18,829,734

 

73,000

 

18,729,134

Shares outstanding

 

73,000

 

13,917,108

 

73,000

 

14,084,328

Treasury shares

 

-

 

4,912,626

 

-

 

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)

 

(unaudited)

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30,

 

September 30,

 

 

2013

 

2012

 

2013

 

2012

Interest and Dividend Income

 

 

 

 

 

 

 

 

Loans, including fees

 

$

14,327

 

$

16,193

 

$

43,153

 

$

51,476

Loans held-for-sale

 

38

 

68

 

124

 

201

Securities:

 

 

 

 

 

 

 

 

Taxable

 

3,113

 

1,868

 

8,109

 

5,222

Tax exempt

 

148

 

98

 

441

 

303

Dividends from Federal Reserve Bank and Federal Home Loan Bank stock

 

76

 

77

 

228

 

228

Interest bearing deposits with financial institutions

 

22

 

29

 

91

 

89

Total interest and dividend income

 

17,724

 

18,333

 

52,146

 

57,519

Interest Expense

 

 

 

 

 

 

 

 

Savings, NOW, and money market deposits

 

206

 

253

 

655

 

807

Time deposits

 

1,674

 

1,973

 

5,327

 

6,920

Securities sold under repurchase agreements

 

1

 

1

 

2

 

2

Other short-term borrowings

 

5

 

-

 

24

 

4

Junior subordinated debentures

 

1,336

 

1,243

 

3,937

 

3,660

Subordinated debt

 

209

 

223

 

610

 

684

Notes payable and other borrowings

 

4

 

5

 

12

 

13

Total interest expense

 

3,435

 

3,698

 

10,567

 

12,090

Net interest and dividend income

 

14,289

 

14,635

 

41,579

 

45,429

(Release) provision for loan losses

 

(1,750)

 

-

 

(6,050)

 

6,284

Net interest and dividend income after provision for loan losses

 

16,039

 

14,635

 

47,629

 

39,145

Noninterest Income

 

 

 

 

 

 

 

 

Trust income

 

1,494

 

1,489

 

4,666

 

4,603

Service charges on deposits

 

1,904

 

1,982

 

5,379

 

5,706

Secondary mortgage fees

 

183

 

350

 

680

 

957

Mortgage servicing income, net of changes in fair value

 

235

 

(155)

 

1,222

 

(365)

Net gain on sales of mortgage loans

 

814

 

2,504

 

4,601

 

7,509

Securities (losses) gains, net

 

(7)

 

513

 

2,191

 

1,306

Increase in cash surrender value of bank-owned life insurance

 

419

 

425

 

1,198

 

1,246

Death benefit realized on bank-owned life insurance

 

6

 

-

 

381

 

-

Debit card interchange income

 

873

 

788

 

2,565

 

2,661

Lease revenue from other real estate owned

 

309

 

840

 

974

 

2,930

Net gain on sale of other real estate owned

 

608

 

20

 

1,175

 

398

Other income

 

1,549

 

1,592

 

4,434

 

4,257

Total noninterest income

 

8,387

 

10,348

 

29,466

 

31,208

Noninterest Expense

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

9,299

 

8,963

 

27,508

 

26,835

Occupancy expense, net

 

1,266

 

1,242

 

3,787

 

3,684

Furniture and equipment expense

 

1,026

 

1,078

 

3,274

 

3,416

FDIC insurance

 

987

 

1,029

 

3,046

 

3,058

General bank insurance

 

489

 

851

 

1,829

 

2,538

Amortization of core deposit and other intangible asset

 

524

 

420

 

1,574

 

865

Advertising expense

 

347

 

400

 

841

 

982

Debit card interchange expense

 

366

 

388

 

1,072

 

1,183

Legal fees

 

615

 

760

 

1,424

 

2,215

Other real estate expense

 

3,461

 

6,545

 

11,092

 

17,987

Other expense

 

3,119

 

3,187

 

9,773

 

9,186

Total noninterest expense

 

21,499

 

24,863

 

65,220

 

71,949

Income (loss) before income taxes

 

2,927

 

120

 

11,875

 

(1,596)

Income tax benefit

 

(69,997)

 

-

 

(69,997)

 

-

Net Income (loss)

 

$

72,924

 

$

120

 

$

81,872

 

$

(1,596)

Preferred stock dividends and accretion

 

1,323

 

1,255

 

3,917

 

3,716

Net income (loss) available to common stockholders

 

$

71,601

 

$

(1,135)

 

$

77,955

 

$

(5,312)

 

 

 

 

 

 

 

 

 

Basic earnings (loss) per share

 

$

5.08

 

$

(0.08)

 

$

5.52

 

$

(0.37)

Diluted earnings (loss) per share

 

5.08

 

(0.08)

 

5.52

 

(0.37)

 

 

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)

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

Net Income (loss)

 

$

72,924

 

$

120

 

$

81,872

 

$

(1,596)

 

 

 

 

 

 

 

 

 

 

 

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

 

(3,411)

 

2,908

 

(16,780)

 

3,255

 

Related tax benefit (expense)

 

1,405

 

(1,194)

 

6,913

 

(1,335)

 

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

 

(2,006)

 

1,714

 

(9,867)

 

1,920

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

Net realized (losses) gains

 

(7)

 

513

 

2,191

 

1,306

 

Income tax benefit (expense) on net realized gains

 

3

 

(208)

 

(899)

 

(532)

 

Net realized (losses) gains after tax

 

(4)

 

305

 

1,292

 

774

 

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

 

(2,002)

 

1,409

 

(11,159)

 

1,146

 

 

 

 

 

 

 

 

 

 

 

Accretion of net unrealized holding losses on held-to-maturity transferred from available-for-sale securities

 

87

 

-

 

87

 

-

 

Related tax expense

 

(36)

 

-

 

(36)

 

-

 

Other comprehensive income on held-to-maturity securities

 

51

 

-

 

51

 

-

 

Total other comprehensive (loss) income

 

(1,951)

 

1,409

 

(11,108)

 

1,146

 

Total comprehensive income (loss)

 

$

70,973

 

$

1,529

 

$

70,764

 

$

(450)

 

 

 

See accompanying notes to consolidated financial statements.

 

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Table of Contents

 

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(In thousands)

 

 

 

(Unaudited)

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2013

 

2012

 

Cash flows from operating activities

 

 

 

 

 

Net income (loss)

 

$

81,872

 

$

(1,596)

 

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

 

 

 

 

 

Depreciation and amortization of leasehold improvement

 

2,147

 

2,339

 

Change in market value of mortgage servicing rights

 

(81)

 

1,315

 

(Release) provision for loan losses

 

(6,050)

 

6,284

 

Gain on recapture of restricted stock

 

(612)

 

-

 

Provision for deferred tax benefit

 

(70,161)

 

-

 

Originations of loans held-for-sale

 

(151,601)

 

(208,710)

 

Proceeds from sales of loans held-for-sale

 

160,966

 

222,590

 

Net gain on sales of mortgage loans

 

(4,601)

 

(7,509)

 

Change in current income taxes (payable) receivable

 

(101)

 

815

 

Increase in cash surrender value of bank-owned life insurance

 

(1,198)

 

(1,246)

 

Death claim on bank owned life insurance

 

396

 

-

 

Change in accrued interest receivable and other assets

 

(334)

 

(2,437)

 

Change in accrued interest payable and other liabilities

 

4,341

 

4,689

 

Net discount (accretion)/premium amortization on securities

 

(131)

 

664

 

Securities gains, net

 

(2,191)

 

(1,306)

 

Amortization of core deposit and other intangible assets

 

1,574

 

865

 

Stock based compensation

 

123

 

220

 

Net gain on sale of other real estate owned

 

(1,175)

 

(398)

 

Provision for other real estate owned losses

 

6,537

 

12,101

 

Net gain on disposal of fixed assets

 

(5)

 

-

 

Net cash provided by operating activities

 

19,715

 

28,680

 

Cash flows from investing activities

 

 

 

 

 

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

 

38,175

 

65,940

 

Proceeds from sales of securities available-for-sale

 

484,112

 

185,861

 

Purchases of securities available-for-sale

 

(564,372)

 

(353,992)

 

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

 

541

 

-

 

Purchases of securities held-to-maturity

 

(21,382)

 

-

 

Net sales of Federal Reserve Bank and Federal Home Loan Bank stock

 

910

 

2,250

 

Net change in loans

 

49,885

 

115,728

 

Investment in other real estate owned

 

(60)

 

(646)

 

Proceeds from sales of other real estate owned

 

32,103

 

20,915

 

Proceeds from disposition of fixed assets

 

6

 

-

 

Net purchases of premises and equipment

 

(1,538)

 

(371)

 

Net cash provided by investing activities

 

18,380

 

35,685

 

Cash flows from financing activities

 

 

 

 

 

Net change in deposits

 

(44,096)

 

(43,847)

 

Net change in securities sold under repurchase agreements

 

2,844

 

837

 

Net change in other short-term borrowings

 

(45,000)

 

-

 

Purchase of treasury stock

 

(278)

 

(63)

 

Net cash used in financing activities

 

(86,530)

 

(43,073)

 

Net change in cash and cash equivalents

 

(48,435)

 

21,292

 

Cash and cash equivalents at beginning of period

 

128,507

 

50,949

 

Cash and cash equivalents at end of period

 

$

80,072

 

$

72,241

 

 

6



Table of Contents

 

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Cash Flows  - Continued

(In thousands)

 

 

 

(Unaudited)

 

 

 

Nine Months Ended

 

 

 

September 30,

 

Supplemental cash flow information

 

2013

 

2012

 

Income taxes paid (received)

 

$

266

 

$

(815)

 

Interest paid for deposits

 

6,144

 

8,444

 

Interest paid for borrowings

 

656

 

702

 

Non-cash transfer of loans to other real estate owned

 

14,196

 

26,944

 

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

 

5,329

 

-

 

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

 

237,154

 

-

 

Change in dividends declared not paid

 

510

 

2,968

 

Accretion on preferred stock warrants

 

798

 

748

 

Fair value difference on recapture of restricted stock

 

43

 

-

 

 

 

See accompanying notes to consolidated financial statements.

 

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, 2011

 

$

18,628

 

$

70,863

 

$

65,999

 

$

17,107

 

$

(3,702)

 

$

(94,893)

 

$

74,002

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2012

 

$

18,729

 

$

71,869

 

$

66,189

 

$

12,048

 

$

(1,327)

 

$

(94,956)

 

$

72,552

 

Net income

 

 

 

 

 

 

 

81,872

 

 

 

 

 

81,872

 

Change in net unrealized loss on securities net of $7,776 tax effect

 

 

 

 

 

 

 

 

 

(11,108)

 

 

 

(11,108)

 

Change in restricted stock

 

101

 

 

 

(101)

 

 

 

 

 

 

 

-

 

Recapture of restricted stock

 

 

 

 

 

(43)

 

 

 

 

 

(569)

 

(612)

 

Stock based compensation

 

 

 

 

 

123

 

 

 

 

 

 

 

123

 

Purchase of treasury stock

 

 

 

 

 

 

 

 

 

 

 

(278)

 

(278)

 

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

 

 

 

798

 

 

 

(1,308)

 

 

 

 

 

(510)

 

Balance, September 30, 2013

 

$

18,830

 

$

72,667

 

$

66,168

 

$

92,612

 

$

(12,435)

 

$

(95,803)

 

$

142,039

 

 

 

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, 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 United States generally accepted accounting practices (“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 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 consolidated 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 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) and has been reflected in the Company’s financial statements since January 1, 2013.

 

 

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 Old Second National Bank (the “Bank”), portions of the portfolio also serve as income producing assets.  The size of the portfolio reflects liquidity needs, loan demand and interest income objectives.  The Company views the September 30, 2013, securities available-for-sale portfolio ($386.5 million amortized cost and $373.5 million fair value) as a substantial source of liquidity that will allow for loan growth without having to raise deposits.  Consistent with the comments above, management views the portion of the portfolio not carried in an unrealized loss

 

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position and the Bank’s ability to borrow a substantial amount with securities as collateral providing the Bank a comfortable liquidity position.  Portfolio size and composition may be adjusted from time to time.

 

Investments are comprised of debt securities and non-marketable equity investments.  Until the third quarter 2013, all debt securities had been classified as available-for-sale.  Past purchases and sales were done under our management and asset/liability 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.  As of September 1, 2013, securities with a fair value of $237.2 million, and a cost basis of $245.4 million, with an August 31, 2013 unrealized loss of $8.2 million, were transferred from available-for-sale to held-to-maturity.  In addition new held-to-maturity securities purchases were made during September.  Specifically, two purchases were made of securities issued by the Government National Mortgage Association.  In accordance with GAAP, the Company has the positive intent and ability to hold the securities to maturity.  Securities held-to-maturity are carried at amortized cost and the discount or premium created in the transfer is accreted or amortized to the maturity or expected payoff date but not an earlier call.  The Company has followed and will follow GAAP accounting on all securities holdings.

 

Nonmarketable 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 $5.5 million at September 30, 2013, and $6.4 million at December 31, 2012.  FRB stock was recorded at $4.8 million at September 30, 2013, and December 31, 2012.  Our FHLBC stock is necessary to maintain access to FHLBC advances.

 

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Table of Contents

 

The following table summarizes the amortized cost and fair value of the securities portfolio at September 30, 2013 and December 31, 2012 and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive loss (in thousands):

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

September 30, 2013:

 

Cost

 

Gains

 

Losses

 

Value

 

Securities Available-for-Sale

 

 

 

 

 

 

 

 

 

U.S. Treasury

 

$

1,554

 

$

-

 

$

(6)

 

$

1,548

 

U.S. government agencies

 

1,745

 

-

 

(52)

 

1,693

 

States and political subdivisions

 

19,275

 

731

 

(165)

 

19,841

 

Corporate bonds

 

22,889

 

75

 

(764)

 

22,200

 

Collateralized mortgage obligations

 

51,619

 

182

 

(3,676)

 

48,125

 

Asset-backed securities

 

272,236

 

1,575

 

(4,827)

 

268,984

 

Collateralized debt obligations

 

17,173

 

-

 

(6,086)

 

11,087

 

Total Securities Available-for-Sale

 

$

386,491

 

$

2,563

 

$

(15,576)

 

$

373,478

 

Securities Held-to-Maturity

 

 

 

 

 

 

 

 

 

U.S. government agency mortgage-backed

 

$

35,241

 

$

547

 

$

-

 

$

35,788

 

Collateralized mortgage obligations

 

222,860

 

1,773

 

-

 

224,633

 

Total Securities Held-to-Maturity

 

$

258,101

 

$

2,320

 

$

-

 

$

260,421

 

 

 

 

 

 

 

 

 

 

 

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

 

Total Securities Available-for-Sale

 

$

582,141

 

$

7,899

 

$

(10,154)

 

$

579,886

 

 

The fair value, amortized cost and weighted average yield of debt securities at September 30, 2013, by contractual maturity, were as follows in the table below.  Securities not due at a single maturity date, primarily mortgage-backed securities (“MBS”), asset-backed securities, and collateralized debt obligations are shown separately (in thousands):

 

10



Table of Contents

 

 

 

 

 

Weighted

 

 

 

 

 

Amortized

 

Average

 

Fair

 

Securities Available-for-Sale

 

Cost

 

Yield

 

Value

 

Due in one year or less

 

$

772

 

3.58%

 

$

789

 

Due after one year through five years

 

4,425

 

2.35%

 

4,510

 

Due after five years through ten years

 

29,271

 

3.04%

 

28,885

 

Due after ten years

 

10,995

 

4.31%

 

11,098

 

 

 

45,463

 

3.29%

 

45,282

 

Collateralized mortgage obligations

 

51,619

 

2.62%

 

48,125

 

Asset-back securites

 

272,236

 

1.67%

 

268,984

 

Collateralized debt obligations

 

17,173

 

1.62%

 

11,087

 

 

 

$

386,491

 

1.99%

 

$

373,478

 

Securities Held-to-Maturity

 

 

 

 

 

 

 

Mortgage-backed securities

 

$

258,101

 

3.07%

 

$

260,421

 

 

Securities with unrealized losses at September 30, 2013, and December 31, 2012, 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

 

Greater than 12 months

 

 

 

September 30, 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 Available-for-Sale

 

Securities

 

Losses

 

Value

 

Securities

 

Losses

 

Value

 

Securities

 

Losses

 

Value

 

U.S. Treasury

 

1

 

$

6

 

$

1,548

 

-

 

$

-

 

$

-

 

1

 

$

6

 

1,548

 

U.S. government agencies

 

1

 

52

 

1,693

 

-

 

-

 

-

 

1

 

52

 

1,693

 

States and political subdivisions

 

7

 

165

 

6,195

 

-

 

-

 

-

 

7

 

165

 

6,195

 

Corporate bonds

 

5

 

717

 

13,009

 

2

 

47

 

2,162

 

7

 

764

 

15,171

 

Collateralized mortgage obligations

 

3

 

3,676

 

35,471

 

-

 

-

 

-

 

3

 

3,676

 

35,471

 

Asset-backed securities

 

18

 

4,784

 

162,705

 

1

 

43

 

3,791

 

19

 

4,827

 

166,496

 

Collateralized debt obligations

 

-

 

-

 

-

 

2

 

6,086

 

11,087

 

2

 

6,086

 

11,087

 

 

 

35

 

$

9,400

 

$

220,621

 

5

 

$

6,176

 

$

17,040

 

40

 

$

15,576

 

$

237,661

 

 

 

 

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 Available-for-Sale

 

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 nine months ended September 30, 2013, or the year ended December 31, 2012.  The changes in fair values related primarily to interest rate fluctuations and were not related to credit quality deterioration.  Further to this point as shown in tables below, the amount of deferrals and defaults in the pooled collateralized debt obligations (“CDOs”) decreased in the period from December 31, 2012, to September 30, 2013.

 

Uncertainty in the financial markets in the periods presented has resulted in reduced liquidity for certain investments, particularly the CDOs.  In the case of the CDOs fair value measurement, management included a risk premium adjustment as of September 30, 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 September 30, 2013.  As of September 30, 2013, management did 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

 

Rating 1

 

Issuance

 

Amount

 

Collateral %

 

Amount

 

Collateral %

 

September 30, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Class A1

 

$

8,157

 

$

5,619

 

$

(2,538)

 

BB+

 

63

 

$

207,000

 

27.6%

 

$

227,472

 

30.3%

 

Class A2A

 

9,016

 

5,468

 

(3,548)

 

B+

 

63

 

207,000

 

27.6%

 

130,472

 

17.4%

 

 

 

$

17,173

 

$

11,087

 

$

(6,086)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 upgraded to Baa1 and Baa3, respectively, as of September 30, 2013, compared to Baa2 and Ba2 at December 31, 2012.  The Fitch ratings for class A1 and A2A were also upgraded to A and BBB, respectively, as of September 30, 2013, compared to BBB and B at December 31, 2012.

 

Note 3 – Loans

 

Major classifications of loans were as follows:

 

 

 

September 30, 2013

 

December 31, 2012

 

Commercial

 

$

86,822

 

$

86,941

 

Real estate - commercial

 

554,874

 

579,687

 

Real estate - construction

 

30,996

 

42,167

 

Real estate - residential

 

376,859

 

414,543

 

Consumer

 

2,570

 

3,101

 

Overdraft

 

544

 

994

 

Lease financing receivables

 

11,204

 

6,060

 

Other

 

13,236

 

16,451

 

 

 

1,077,105

 

1,149,944

 

Net deferred loan fees

 

535

 

106

 

 

 

$

1,077,640

 

$

1,150,050

 

 

It is the policy of the Company to review each prospective credit in order to determine if 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 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 89.3% and 90.1% of the portfolio at September 30, 2013, and December 31, 2012, respectively.  The Company has been and remains committed to overseeing and managing its loan portfolio to reduce its real estate credit concentrations.  Previously, this was done in accordance with the requirements of the Stipulation and Consent to the Issuance of a Consent Order the Bank entered into with the Office of the Controller of the Currency (the “OCC”) on May 16, 2011 (the “Consent Order”), which was terminated on October 17, 2013.  Regulatory and Capital matters affecting the Company, 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, 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

 

$

69

 

$

132

 

$

-

 

$

201

 

$

97,796

 

$

29

 

$

98,026

 

$

-

 

Real estate - commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied general purpose

 

165

 

-

 

-

 

165

 

109,584

 

3,497

 

113,246

 

-

 

Owner occupied special purpose

 

650

 

227

 

-

 

877

 

162,435

 

5,947

 

169,259

 

-

 

Non-owner occupied general purpose

 

-

 

-

 

-

 

-

 

128,084

 

7,273

 

135,357

 

-

 

Non-owner occupied special purpose

 

-

 

-

 

-

 

-

 

75,595

 

438

 

76,033

 

-

 

Retail properties

 

-

 

-

 

-

 

-

 

39,829

 

5,056

 

44,885

 

-

 

Farm

 

-

 

-

 

-

 

-

 

16,094

 

-

 

16,094

 

-

 

Real estate - construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Homebuilder

 

-

 

-

 

-

 

-

 

4,563

 

168

 

4,731

 

-

 

Land

 

-

 

-

 

-

 

-

 

4,640

 

209

 

4,849

 

-

 

Commercial speculative

 

-

 

-

 

-

 

-

 

8,811

 

3,534

 

12,345

 

-

 

All other

 

-

 

-

 

-

 

-

 

8,323

 

748

 

9,071

 

-

 

Real estate - residential

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investor

 

213

 

-

 

-

 

213

 

122,031

 

8,307

 

130,551

 

-

 

Owner occupied

 

625

 

-

 

-

 

625

 

112,515

 

5,858

 

118,998

 

-

 

Revolving and junior liens

 

522

 

75

 

45

 

642

 

124,170

 

2,498

 

127,310

 

45

 

Consumer

 

-

 

-

 

-

 

-

 

2,570

 

-

 

2,570

 

-

 

All other

 

-

 

-

 

-

 

-

 

14,315

 

-

 

14,315

 

-

 

 

 

$

2,244

 

$

434

 

$

45

 

$

2,723

 

$

1,031,355

 

$

43,562

 

$

1,077,640

 

$

45

 

 

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 September 30, 2013 and December 31, 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.  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.

 

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Table of Contents

 

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, 2013

 

Pass

 

Special
Mention

 

Substandard 1

 

Doubtful

 

Total

 

Commercial

 

$

89,051

 

$

8,711

 

$

264

 

$

-

 

$

98,026

 

Real estate - commercial

 

 

 

 

 

 

 

 

 

 

 

Owner occupied general purpose

 

97,309

 

8,560

 

7,377

 

-

 

113,246

 

Owner occupied special purpose

 

159,678

 

1,480

 

8,101

 

-

 

169,259

 

Non-owner occupied general purpose

 

118,741

 

1,574

 

15,042

 

-

 

135,357

 

Non-owner occupied special purpose

 

61,874

 

9,893

 

4,266

 

-

 

76,033

 

Retail Properties

 

35,833

 

3,006

 

6,046

 

-

 

44,885

 

Farm

 

14,607

 

1,487

 

-

 

-

 

16,094

 

Real estate - construction

 

 

 

 

 

 

 

 

 

 

 

Homebuilder

 

1,216

 

1,770

 

1,745

 

-

 

4,731

 

Land

 

4,640

 

-

 

209

 

-

 

4,849

 

Commercial speculative

 

5,232

 

3,579

 

3,534

 

-

 

12,345

 

All other

 

8,289

 

34

 

748

 

-

 

9,071

 

Real estate - residential

 

 

 

 

 

 

 

 

 

 

 

Investor

 

116,627

 

3,282

 

10,642

 

-

 

130,551

 

Owner occupied

 

111,323

 

383

 

7,292

 

-

 

118,998

 

Revolving and junior liens

 

123,435

 

200

 

3,675

 

-

 

127,310

 

Consumer

 

2,569

 

-

 

1

 

-

 

2,570

 

All other

 

14,315

 

-

 

-

 

-

 

14,315

 

Total

 

$

964,739

 

$

43,959

 

$

68,942

 

$

-

 

$

1,077,640

 

 

December 31, 2012

 

Pass

 

Special
Mention

 

Substandard 1

 

Doubtful

 

Total

 

Commercial

 

$

88,071

 

$