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Old Second Bancorp Inc (OSBC) SEC Filing 10-Q Quarterly report for the period ending Sunday, June 30, 2019

Old Second Bancorp Inc

CIK: 357173 Ticker: OSBC

 

Picture 1

 

 

 

 

 

 

 

 

 

(NASDAQ:OSBC)

Exhibit 99.1

 

 

 

Contact:

Bradley S. Adams

For Immediate Release

 

Chief Financial Officer

July 24, 2019

 

(630) 906-5484

 

 

 

Old Second Reports Second Quarter 2019 Net Income of $9.3 million,

New Commercial Lending Additions

 

AURORA, IL, July 24, 2019 – Old Second Bancorp, Inc. (the “Company” or “Old Second”) (NASDAQ: OSBC), the parent company of Old Second National Bank (the “Bank”), today announced financial results for the second quarter of 2019.  The Company’s net income was $9.3 million, or $0.31 per diluted share, for the second quarter of 2019, compared to net income of $8.5 million, or $0.28 per diluted share, in the first quarter of 2019, and net income of $6.3 million, or $0.21 per diluted share, for the second quarter of 2018. 

Old Second is also pleased to announce the expansion of its commercial lending team with the addition of three new officers during the second quarter.  Louis L. Weinzelbaum joined the Bank as Group President, Senior Managing Director.  Louis was most recently with MB Financial Bank where he served as Group President of the Professional Services Group.  Alan H. Kohn joined the Bank as Group President, Senior Managing Director.  Alan was most recently with MB Financial Bank where he served as Group President for their Healthcare Banking Group. Donald J. Clark joined the Bank as Senior Vice President, Commercial Banking.  Don was most recently  with MB Financial Bank where he served as Managing Director/Senior Vice President with their Commercial Banking Group.  We are honored to announce these additions and we are extremely excited about the wealth of experience and knowledge they bring to our commercial team and our Chicago banking office.

Operating Results

·

Second quarter 2019 net income was $9.3 million, reflecting an increase in earnings of $809,000 from the first quarter of 2019, and an increase in earnings of $3.0 million from the second quarter of 2018.   Second quarter 2019 financial results were negatively impacted by a  $1.1 million mark to market loss on mortgage servicing rights (“MSRs”), of which $849,000 related solely to movements in interest rates, compared to a $819,000 loss in the first quarter of 2019, of which $642,000 related to movements in interest rates.

·

Adjusted net income, a non-GAAP financial measure, was $9.3 million, or $0.31 per diluted share, for the second quarter of 2019, compared to adjusted net income of $8.5 million, or $0.28 per diluted share, for the first quarter of 2019, and adjusted net income of $8.7 million, or $0.29 per diluted share, for the second quarter of 2018.  

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Second quarter 2018 adjusted net income excluded $2.5 million in costs, after tax, related to our acquisition of Greater Chicago Financial Corp. and its wholly owned subsidiary, ABC Bank, which was completed on April 20, 2018.

See the discussion entitled “Non-GAAP Presentations” below and the table on page 15 that provides a reconciliation of each non-GAAP measure to the most comparable GAAP equivalent.

·

Net interest and dividend income was $24.8 million for the second quarter of 2019, an increase of $718,000, or 3.0%, from $24.0 million for the first quarter of 2019, and an increase of $1.5 million, or 6.5%, from the second quarter of 2018.  Net interest and dividend income in the second quarter of 2019 was favorably impacted by loan growth over the past year, as well as the December 2018 increase in interest rates.

·

 Noninterest income was $8.1 million for the second quarter of 2019,  an increase of $1.7 million, or 25.6%, compared to $6.5 million for the first quarter of 2019, and a decrease of $390,000, or 4.6%, from $8.5 million for the second quarter of 2018.  Total noninterest income for the second quarter of 2019 was positively impacted by net security gains recorded of $986,000, as well as growth in trust income of $253,000, compared to the first quarter of 2019, and an increase in debit card interchange income of $180,000,

1

compared to the first quarter of 2019. The second quarter of 2019 was negatively impacted by a mark to market loss on MSRs of $1.1 million, compared to a mark to market loss on MSRs of $819,000 for the first quarter of 2019.  Noninterest income for the second quarter of 2019 decreased $390,000, compared to the second quarter of 2018, with increases in the second quarter of 2019 in securities gains, net, of $674,000 and service charges on deposits of $190,000, compared to the second quarter of 2018, which were more than offset by the mark to market loss on MSRs of $1.0 million in the second quarter of 2019, compared to the second quarter of 2018.  

·

Noninterest expense was $20.1 million for the second quarter of 2019, an increase of $932,000, or 4.9%, compared to $19.2 million for the first quarter of 2019, and a decrease of $2.2 million, or 9.7%, from $22.3 million for the second quarter of 2018.  The increase in noninterest expense in the second quarter of 2019, compared to the first quarter of 2019, was primarily attributable to increases in salaries, computer and data processing expense, advertising expense, debit card interchange expense, OREO valuation reserves and other expense.  The decrease in noninterest expense in the second quarter of 2019, compared to the second quarter of 2018, was primarily attributable to our ABC Bank acquisition in April 2018, which resulted in higher salaries and employee benefits expense and computer and data processing expense due to the core data conversion in the second quarter of 2018. 

·

The provision for income taxes totaled $3.0 million for the second quarter of 2019, compared to $2.4 million for the first quarter of 2019 and $1.8 million for the second quarter of 2018.  The linked quarter increase of $638,000 was primarily due to an increase of $1.4 million in pretax income in the second quarter of 2019, compared to the first quarter of 2019, as well as income tax credits in the first quarter of 2019 stemming from vested stock awards.  The $1.3 million increase in provision for income taxes for the year over year quarter was primarily due to the $4.3 million increase in pretax income in the second quarter of 2019 compared to the second quarter of 2018.

·

On July 16, 2019, the Company’s Board of Directors declared a cash dividend of $0.01 per share payable on August 5, 2019, to stockholders of record as of July 26, 2019.

Capital Ratios

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 

 

March 31, 

 

June 30, 

 

Well-Capitalized  1

 

2019

 

2019

 

2018

The Company

 

 

 

 

 

 

 

 

 

 

 

Common equity tier 1 capital ratio

N/A

 

 

10.26

%

 

9.75

%

 

8.49

%

Total risk-based capital ratio

N/A

 

 

13.70

%

 

13.17

%

 

11.87

%

Tier 1 risk-based capital ratio

N/A

 

 

12.83

%

 

12.30

%

 

10.99

%

Tier 1 leverage ratio

N/A

 

 

10.85

%

 

10.44

%

 

9.37

%

 

 

 

 

 

 

 

 

 

 

 

 

The Bank

 

 

 

 

 

 

 

 

 

 

 

Common equity tier 1 capital ratio

6.50

%

 

13.96

%

 

13.60

%

 

12.62

%

Total risk-based capital ratio

10.00

%

 

14.83

%

 

14.47

%

 

13.51

%

Tier 1 risk-based capital ratio

8.00

%

 

13.96

%

 

13.60

%

 

12.62

%

Tier 1 leverage ratio

5.00

%

 

11.96

%

 

11.54

%

 

10.75

%

 

1 Represents ratios required to be considered well capitalized under prompt corrective action provisions. The prompt corrective action provisions are only applicable at the bank level.

 

·

The ratios shown above exceed levels required to be considered “well capitalized.”

Asset Quality & Earning Assets

 

·

Nonperforming loans totaled $12.7 million at June 30, 2019, compared to $14.9 million at March 31, 2019, and $11.9 million at June 30, 2018.  Credit metrics continue to be relatively stable regarding nonperforming loan levels, and management is carefully monitoring loans considered to be in a classified status.  Nonperforming loans as a percent of total loans were 0.7% at June 30, 2019, 0.8% at March 31, 2019, and 0.6%  at June 30, 2018.  Purchased credit impaired (“PCI”) loans acquired in our acquisition of ABC Bank totaled $10.8 million, net of purchase accounting adjustments, at June 30, 2019.  We do not consider PCI loans, which showed evidence of deteriorated credit quality at acquisition, to be nonperforming assets as long as their cash flows and the timing of such cash flows continue to be estimable and probable of collection.

2

·

OREO assets totaled $5.7 million at June 30, 2019, compared to $6.4 million at March 31, 2019, $7.2 million at December 31, 2018, and $8.9 million at June 30, 2018.  Writedowns of $196,000 were recorded in the second quarter of 2019, compared to no writedowns in the first quarter of 2019, and $254,000 of valuation writedowns recorded in the second quarter of 2018.  Nonperforming assets, as a percent of total loans plus OREO, was 1.0% at June 30, 2019, 1.1% at both March 31, 2019 and June 30, 2018, and 1.2% at December 31, 2018.

·

Total loans were $1.90 billion at June 30, 2019, reflecting a slight decrease of $203,000 compared to March 31, 2019, an increase of  $5.9 million compared to December 31, 2018, and an increase of $53.8 million compared to June 30, 2018, due primarily to growth in the commercial, leases, and real estate-commercial portfolios.  Average loans (including loans held-for-sale) for the second quarter of 2019 were $1.90 billion, reflecting an increase of $1.8 million from the first quarter of 2019, and an increase of $88.2 million from the second quarter of 2018.  Growth in the year over year period is primarily due to our acquisition of ABC Bank on April 20, 2018, which included $227.6 million of loans recorded, net of purchase accounting adjustments, which did not yet have a full quarter of average impact in the second quarter of 2018.  In addition, the year over year period experienced organic growth in the commercial, leases, and real estate-commercial portfolios.

·

Available-for-sale securities totaled $492.1 million at June 30, 2019, compared to $509.1 million at March 31, 2019,  $541.2 million at December 31, 2018, and $543.6 million at June 30, 2018.  Pretax net security gains of $986,000 were recorded in the second quarter of 2019, compared to $27,000 of pretax net security gains recorded in the first quarter of 2019, and $312,000 of pretax net security gains recorded in the second quarter of 2018.  

Net Interest Income

ANALYSIS OF AVERAGE BALANCES,

TAX EQUIVALENT INCOME / EXPENSE AND RATES

(Dollars in thousands - unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarters Ended

 

June 30, 2019

 

March 31, 2019

 

June 30, 2018

 

Average

 

Income /

 

Rate

 

Average

 

Income /

 

Rate

 

Average

 

Income /

 

Rate

 

Balance

 

Expense

 

%

 

Balance

 

Expense

 

%

 

Balance

 

Expense

 

%

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest earning deposits with financial institutions

$

19,053

 

$

111

 

2.34

 

$

18,842

 

$

114

 

2.45

 

$

19,161

 

$

97

 

2.03

Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

229,263

 

 

2,223

 

3.89

 

 

236,882

 

 

2,414

 

4.13

 

 

268,591

 

 

2,392

 

3.57

Non-taxable (TE)

 

290,743

 

 

2,710

 

3.74

 

 

276,609

 

 

2,656

 

3.89

 

 

286,611

 

 

2,676

 

3.74

Total securities

 

520,006

 

 

4,933

 

3.80

 

 

513,491

 

 

5,070

 

4.00

 

 

555,202

 

 

5,068

 

3.66

Dividends from FHLBC and FRBC

 

11,317

 

 

156

 

5.53

 

 

11,463

 

 

149

 

5.27

 

 

8,619

 

 

111

 

5.17

Loans and loans held-for-sale 1, 2

 

1,897,324

 

 

24,958

 

5.28

 

 

1,895,512

 

 

24,126

 

5.16

 

 

1,809,077

 

 

22,552

 

5.00

Total interest earning assets

 

2,447,700

 

 

30,158

 

4.94

 

 

2,439,308

 

 

29,459

 

4.90

 

 

2,392,059

 

 

27,828

 

4.67

Cash and due from banks

 

33,618

 

 

 -

 

 -

 

 

33,749

 

 

 -

 

 -

 

 

36,720

 

 

 -

 

 -

Allowance for loan and lease losses

 

(19,435)

 

 

 -

 

 -

 

 

(19,235)

 

 

 -

 

 -

 

 

(18,494)

 

 

 -

 

 -

Other noninterest bearing assets

 

174,075

 

 

 -

 

 -

 

 

181,767

 

 

 -

 

 -

 

 

176,608

 

 

 -

 

 -

Total assets

$

2,635,958

 

 

 

 

 

 

$

2,635,589

 

 

 

 

 

 

$

2,586,893

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NOW accounts

$

442,430

 

$

373

 

0.34

 

$

448,518

 

$

379

 

0.34

 

$

443,586

 

$

238

 

0.22

Money market accounts

 

288,698

 

 

262

 

0.36

 

 

299,305

 

 

270

 

0.37

 

 

317,775

 

 

193

 

0.24

Savings accounts

 

313,822

 

 

124

 

0.16

 

 

307,740

 

 

122

 

0.16

 

 

298,240

 

 

70

 

0.09

Time deposits

 

422,975

 

 

1,641

 

1.56

 

 

445,076

 

 

1,618

 

1.47

 

 

460,909

 

 

1,444

 

1.26

Interest bearing deposits

 

1,467,925

 

 

2,400

 

0.66

 

 

1,500,639

 

 

2,389

 

0.65

 

 

1,520,510

 

 

1,945

 

0.51

Securities sold under repurchase agreements

 

44,184

 

 

147

 

1.33

 

 

45,157

 

 

149

 

1.34

 

 

44,655

 

 

104

 

0.93

Other short-term borrowings

 

93,369

 

 

575

 

2.47

 

 

98,328

 

 

607

 

2.50

 

 

58,199

 

 

276

 

1.90

Junior subordinated debentures

 

57,704

 

 

931

 

6.47

 

 

57,692

 

 

927

 

6.52

 

 

57,657

 

 

927

 

6.45

Senior notes

 

44,196

 

 

672

 

6.10

 

 

44,171

 

 

672

 

6.17

 

 

44,096

 

 

672

 

6.11

Notes payable and other borrowings

 

13,101

 

 

107

 

3.28

 

 

15,273

 

 

116

 

3.08

 

 

19,795

 

 

95

 

1.92

Total interest bearing liabilities

 

1,720,479

 

 

4,832

 

1.13

 

 

1,761,260

 

 

4,860

 

1.12

 

 

1,744,912

 

 

4,019

 

0.92

Noninterest bearing deposits

 

645,580

 

 

 -

 

 -

 

 

625,423

 

 

 -

 

 -

 

 

618,765

 

 

 -

 

 -

Other liabilities

 

19,586

 

 

 -

 

 -

 

 

13,750

 

 

 -

 

 -

 

 

15,679

 

 

 -

 

 -

Stockholders' equity

 

250,313

 

 

 -

 

 -

 

 

235,156

 

 

 -

 

 -

 

 

207,537

 

 

 -

 

 -

Total liabilities and stockholders' equity

$

2,635,958

 

 

 

 

 

 

$

2,635,589

 

 

 

 

 

 

$

2,586,893

 

 

 

 

 

Net interest income (TE) 2

 

 

 

$

25,326

 

 

 

 

 

 

$

24,599

 

 

 

 

 

 

$

23,809

 

 

Net interest margin (TE)  2

 

 

 

 

 

 

4.15

 

 

 

 

 

 

 

4.09

 

 

 

 

 

 

 

3.99

Interest bearing liabilities to earning assets

 

70.29

%

 

 

 

 

 

 

72.20

%

 

 

 

 

 

 

72.95

%

 

 

 

 

 

3

1 Interest income from loans is shown on a tax equivalent basis, which is a non-GAAP financial measure as discussed in the table on page 15, and includes fees of $184,000 for the second quarter of 2019, $229,000 for the first quarter of 2019, and $233,000 for the second quarter of 2018. Nonaccrual loans are included in the above stated average balances.

2 Tax equivalent basis is calculated using a marginal tax rate of 21% in 2019 and 2018. See the discussion entitled “Non-GAAP Presentations” below and the table on page 15 that provides a reconciliation of each non-GAAP measure to the most comparable GAAP equivalent.

Tax equivalent net interest income was $25.3 million for the quarter ended June 30, 2019, which reflects an increase of $726,000 compared to the first quarter of 2019, and an increase of $1.5 million compared to the second quarter of 2018.  The tax equivalent adjustment for the second quarter of 2019 was $572,000, compared to $563,000 for the first quarter of 2019, and $567,000 for the second quarter of 2018.  Growth in interest earning assets in the second quarter of 2019, compared to the first quarter of 2019, was primarily due to non-taxable securities growth and organic loan growth, while growth in both the second and first quarters of 2019 compared to the second quarter of 2018, was primarily due to our acquisition of ABC Bank on April 20, 2018, which resulted in the addition of $227.6 million of loans recorded, net of purchase accounting adjustments. Quarterly average earning assets increased $8.4 million to $2.45 billion for the quarter ended June 30, 2019,  compared to $2.44 billion for the first quarter of 2019, while the yield on average earning assets increased four basis points over the same period.  Average loan growth, including loans held-for-sale, was $1.8 million for the quarter ended June 30, 2019, compared to the quarter ended March 31, 2019, while the year over year growth in the second quarter average loans, including loans held-for-sale, was $88.2 million.   In addition to the ABC Bank acquisition in the second quarter of 2018, the year over year growth was also due to organic loan growth over the last twelve months, driven primarily by commercial loan and lease portfolio originations, as well as a home equity loan (“HELOC”) portfolio purchase of $20.7 million in the fourth quarter of 2018.  

Tax equivalent securities income decreased $137,000 in the second quarter of 2019 compared to the first quarter of 2019, due to a reduction in yields.  Tax equivalent securities income decreased by $135,000 in the second quarter of 2019, compared to the second quarter of 2018,  due primarily to a reduction in average balances.    Minimal security portfolio composition changes have occurred over the past year due to lack of relative value among possible investment sectors and consequent opportunities to shift allocation of investments from lower return sectors to those with higher returns.   This resulted in a lower security volume, but a higher yield overall in the year over year period.    Our overall yield on tax equivalent securities was 3.80% for the second quarter of 2019, 4.00% for the first quarter of 2019 and 3.66% for the second quarter of 2018. 

 The cost of interest bearing liabilities for the second quarter of 2019 increased by one basis point from the first quarter of 2019, and increased by 21 basis points from the second quarter of 2018.  Average interest bearing liabilities decreased $40.8 million in the second quarter of 2019, compared to the first quarter of 2019, primarily driven by a decrease in interest-bearing time, money market and NOW deposits.  In addition, interest bearing liabilities declined as average other short-term borrowings decreased $5.0 million in the second quarter of 2019, compared to the first quarter of 2019.  Total average interest bearing liabilities decreased $24.4 million in the second quarter of 2019, compared to the second quarter of 2018, due to the reduction in interest bearing deposits of $52.6 million.  Growth in average demand deposits over the linked quarter period of $20.2 million and in the year over year period of $26.8 million has assisted the Company in controlling its cost of funds stemming from average interest bearing deposits, which totaled 0.66% for the second quarter of 2019, compared to 0.65% in the first quarter of 2019 and 0.51% in the second quarter of 2018.       

 

For the quarter ended June 30, 2019, average other short-term borrowings, which consisted solely of FHLBC advances, totaled  $93.4 million, compared to $98.3 million for the quarter ended March 31, 2019, and $58.2 million for the quarter ended June 30, 2018.  Average rates paid on short-term FHLBC advances have increased from 1.90% in the second quarter of 2018 to 2.47% for the second quarter of 2019, reflecting the rising interest rate environment.  The Company’s junior subordinated debt issuances and senior debt issuance reflected no material change in rates or volume from the linked quarter or year over year periods. Finally, average notes payable and other borrowings included  long-term FHLBC advances acquired in our acquisition of ABC Bank of $13.1 million for the second quarter of 2019, $15.3 million for the first quarter of 2019, and $19.8 million for the second quarter of 2018.

 

The net interest margin (TE) increased six basis points to 4.15% for the second quarter of 2019 compared to 4.09% for the first quarter of 2019 due primarily to growth in loan yields impacted by the rising interest rate environment, which increased income from average earning assets more significantly than expenses related to average interest bearing liabilities, as well as growth in non-interest bearing deposits.   The net interest margin (TE) in the second quarter of 2019 was 16 basis points higher than the second quarter of 2018, due primarily to increases in total interest earning assets, as well as the rising interest rate environment, which increased income from average earning assets more significantly than expenses on average interest bearing liabilities.

4

 

Noninterest Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2nd Qtr 2019

 

Noninterest Income

 

Three Months Ended

 

Percent Change From

 

(dollars in thousands)

 

June 30, 

 

March 31, 

 

June 30, 

 

March 31, 

 

June 30, 

 

 

    

2019

    

2019

    

2018

    

2019

    

2018

 

Trust income

 

$

1,739

 

$

1,486

 

$

1,645

 

17.0

 

5.7

 

Service charges on deposits

 

 

1,959

 

 

1,862

 

 

1,769

 

5.2

 

10.7

 

Residential mortgage banking revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Secondary mortgage fees

 

 

203

 

 

136

 

 

195

 

49.3

 

4.1

 

Mortgage servicing rights mark to market (loss)

 

 

(1,137)

 

 

(819)

 

 

(105)

 

(38.8)

 

(982.9)

 

Mortgage servicing income

 

 

491

 

 

457

 

 

627

 

7.4

 

(21.7)

 

Net gain on sales of mortgage loans

 

 

1,163

 

 

762

 

 

1,240

 

52.6

 

(6.2)

 

Total residential mortgage banking revenue

 

 

720

 

 

536

 

 

1,957

 

34.3

 

(63.2)

 

Securities gain, net

 

 

986

 

 

27

 

 

312

 

N/M

 

216.0

 

Increase in cash surrender value of BOLI

 

 

320

 

 

458

 

 

351

 

(30.1)

 

(8.8)

 

Debit card interchange income

 

 

1,166

 

 

987

 

 

1,132

 

18.1

 

3.0

 

Other income

 

 

1,253

 

 

1,126

 

 

1,366

 

11.3

 

(8.3)

 

Total noninterest income

 

$

8,143

 

$

6,482

 

$

8,532

 

25.6

 

(4.6)

 

N/M - Not meaningful.

The $1.7 million increase in noninterest income in the second quarter of 2019, compared to the first quarter of 2019, was driven by aggregate increases of $1.8 million in trust income, service charges on deposits, total residential mortgage banking income, securities gains, net, debit card interchange income and other income which increased net income, which were partially offset by a decrease of $138,000 of income recorded related to the cash surrender value of BOLI.

The decrease in noninterest income for the year over year period of $389,000 was primarily driven by a $1.2 million reduction in total residential mortgage banking revenue stemming from rising interest rates and the resultant mark to market loss on MSRs in the second quarter of 2019.  These reductions were partially offset by aggregate increases of $992,000 resulting from growth in trust income, service charges on deposits, securities gains, net and debit card interchange income.  The decrease in other income for the second quarter of 2019, compared to the second quarter of 2018, was primarily attributable to a reduction in commercial interest rate swap fees of $255,000 and lease syndication fees of $39,000 partially offset by certain contract incentive fees of $80,000 recorded in the second quarter of 2019. 

Noninterest Expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2nd Qtr 2019

 

Noninterest Expense

 

Three Months Ended

 

Percent  Change From

 

(dollars in thousands)

 

June 30, 

 

March 31, 

 

June 30, 

 

March 31, 

 

June 30, 

 

 

    

2019

    

2019

    

2018

    

2019

    

2018

 

Salaries

 

$

9,004

 

$

8,634

 

$

9,703

 

4.3

 

(7.2)

 

Officers incentive

 

 

893

 

 

882

 

 

740

 

1.2

 

20.7

 

Benefits and other

 

 

1,690

 

 

2,096

 

 

1,912

 

(19.4)

 

(11.6)

 

Total salaries and employee benefits

 

 

11,587

 

 

11,612

 

 

12,355

 

(0.2)

 

(6.2)

 

Occupancy, furniture and equipment expense

 

 

1,925

 

 

1,989

 

 

1,652

 

(3.2)

 

16.5

 

Computer and data processing

 

 

1,524

 

 

1,332

 

 

2,741

 

14.4

 

(44.4)

 

FDIC insurance

 

 

116

 

 

174

 

 

165

 

(33.3)

 

(29.7)

 

General bank insurance

 

 

236

 

 

250

 

 

299

 

(5.6)

 

(21.1)

 

Amortization of core deposit intangible asset

 

 

121

 

 

132

 

 

97

 

(8.3)

 

24.7

 

Advertising expense

 

 

381

 

 

234

 

 

492

 

62.8

 

(22.6)

 

Debit card interchange expense

 

 

233

 

 

147

 

 

301

 

58.5

 

(22.6)

 

Legal fees

 

 

243

 

 

126

 

 

286

 

92.9

 

(15.0)

 

Other real estate owned expense, net

 

 

248

 

 

50

 

 

429

 

396.0

 

(42.2)

 

Other expense

 

 

3,512

 

 

3,148

 

 

3,469

 

11.6

 

1.2

 

Total noninterest expense

 

$

20,126

 

$

19,194

 

$

22,286

 

4.9

 

(9.7)

 

Efficiency ratio (GAAP)1

 

 

61.91

%

 

62.35

%

 

69.16

%

 

 

 

 

Adjusted efficiency ratio (non-GAAP)2

 

 

60.66

%

 

60.98

%

 

57.88

%

 

 

 

 

 

5

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

2 The adjusted efficiency ratio shown in the table above is a non-GAAP financial measure calculated as noninterest expense, excluding OREO expenses, amortization of core deposits and acquisition related costs divided by the sum of net interest income on a fully tax equivalent basis, total noninterest income less net gains and losses on securities and includes a tax equivalent adjustment on the increase in cash surrender value of BOLI. See the discussion entitled “Non-GAAP Presentations” below and the table on page 16 that provides a reconciliation of each non-GAAP measure to the most comparable GAAP equivalent.

Noninterest expense for the second quarter of 2019 increased $932,000, or 4.9%, compared to the first quarter of 2019, and decreased $2.2 million, or 9.7%, compared to the second quarter of 2018.  The linked quarter increase is primarily attributable to a $192,000 increase in computer and data processing, a $147,000 increase in advertising expense, an $86,000 increase in debit card interchange expense, a $117,000 increase in legal fees, a $198,000 increase in other real estate owned expense due to valuation writedowns in the second quarter of 2019, and a $364,000 increase in other expense. Other expense increased in the second quarter of 2019, compared to the first quarter of 2019, due to external audit fees, commercial loan-related expenses, appraisal fees, and ATM operating expenses. These increases were partially offset by aggregate decreases of $133,000 in occupancy, furniture and equipment expense, FDIC insurance and amortization of core deposit intangible assets in the second quarter of 2019 compared to the first quarter of 2019.

The year over year decrease in noninterest expense is primarily attributable to our ABC Bank acquisition in the first quarter of 2018, which resulted in higher costs for the second quarter of 2018 due to conversion related expenses.  Salaries and employee benefits expense, computer and data processing and advertising expense decreased an aggregate of $2.1 million due to acquisition costs incurred; in addition, other real estate owned expense, net, decreased $181,000 in the second quarter of 2019, compared to the second quarter of 2018, due to a reduction in the balance of OREO held.  Partially offsetting the year over year decreases were increases to occupancy, furniture and equipment expense of $273,000 and amortization of core deposit intangibles of $24,000.

Earning Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2019

 

Loans

 

As of

 

Percent Change From

 

(dollars in thousands)

 

June 30, 

 

March 31, 

 

June 30, 

 

March 31, 

 

June 30, 

 

 

    

2019

    

2019

    

2018

    

2019

    

2018

 

Commercial

 

$

337,848

 

$

324,450

 

$

299,536

 

4.1

 

12.8

 

Leases

 

 

98,379

 

 

87,730

 

 

66,687

 

12.1

 

47.5

 

Real estate - commercial

 

 

825,091

 

 

835,904

 

 

808,264

 

(1.3)

 

2.1

 

Real estate - construction

 

 

93,079

 

 

94,787

 

 

115,486

 

(1.8)

 

(19.4)

 

Real estate - residential

 

 

393,547

 

 

399,866

 

 

404,908

 

(1.6)

 

(2.8)

 

Home equity line of credit "HELOC"

 

 

128,673

 

 

133,859

 

 

127,986

 

(3.9)

 

0.5

 

Other1  

 

 

13,533

 

 

14,018

 

 

13,969

 

(3.5)

 

(3.1)

 

Total loans, excluding deferred loan costs and PCI

 

 

1,890,150

 

 

1,890,614

 

 

1,836,836

 

(0.0)

 

2.9

 

Net deferred loan costs

 

 

1,959

 

 

1,681

 

 

1,112

 

16.5

 

76.2

 

Total loans, excluding PCI

 

 

1,892,109

 

 

1,892,295

 

 

1,837,948

 

(0.0)

 

2.9

 

PCI loans, net of purchase accounting adjustments

 

 

10,834

 

 

10,851

 

 

11,214

 

(0.2)

 

(3.4)

 

Total loans

 

$

1,902,943

 

$

1,903,146

 

$

1,849,162

 

(0.0)

 

2.9

 

 

1 Other class includes consumer and overdrafts.

 

Total loans decreased by $203,000 for the second quarter of 2019 compared to March 31, 2019,  and increased $53.8 million for the year over year period.  The majority of the year over year increase is due to organic growth in commercial loans, leases, and real estate-commercial loans.

6

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2019

 

Securities

 

As of

 

Percent Change From

 

(dollars in thousands)

 

June 30, 

 

March 31, 

 

June 30, 

 

March 31, 

 

June 30, 

 

 

    

2019

    

2019

    

2018

    

2019

    

2018

 

Securities available-for-sale, at fair value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury

 

$

4,025

 

$

3,960

 

$

3,876

 

1.6

 

3.8

 

U.S. government agencies

 

 

9,812

 

 

10,360

 

 

12,216

 

(5.3)

 

(19.7)

 

U.S. government agency mortgage-backed

 

 

16,999

 

 

15,306

 

 

13,407

 

11.1

 

26.8

 

States and political subdivisions

 

 

251,295

 

 

281,172

 

 

276,112

 

(10.6)

 

(9.0)

 

Corporate bonds

 

 

 -

 

 

 -

 

 

700

 

 -

 

(100.0)

 

Collateralized mortgage obligations

 

 

64,867

 

 

64,330

 

 

61,432

 

0.8

 

5.6

 

Asset-backed securities

 

 

82,725

 

 

70,811

 

 

109,263

 

16.8

 

(24.3)

 

Collateralized loan obligations

 

 

62,357

 

 

63,151

 

 

66,638

 

(1.3)

 

(6.4)

 

Total securities available-for-sale

 

$

492,080

 

$

509,090

 

$

543,644

 

(3.3)

 

(9.5)

 

 

The investment portfolio was $492.1 million as of June 30, 2019, a decrease of $17.0 million from $509.1 million as of March 31, 2019, and a decrease of $51.6 million from June 30, 2018.  The portfolio composition has remained relatively static over the past year, with exceptions noted in states and political subdivisions and asset-backed securities due to sales, calls or maturities in those portfolios.   The largely consistent portfolio composition is due to lack of relative value among possible investment sectors and consequent opportunities to shift allocation of investments from lower return sectors to those with higher returns.  Security sales recorded in the second quarter of 2019 resulted in net securities gains of $986,000, compared to $27,000 of net securities gains in the first quarter of 2019, and $312,000 of net security gains in the second quarter of 2018.

 

Asset Quality

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2019

Nonperforming assets

 

As of

 

Percent Change From

(dollars in thousands)

 

June 30, 

 

March 31, 

 

June 30, 

 

March 31, 

 

June 30, 

 

  

2019

  

2019

  

2018

  

2019

 

2018

Nonaccrual loans

 

$

11,089

 

$

13,383

 

$

9,421

 

(17.1)

 

17.7

Performing troubled debt restructured loans accruing interest

 

 

1,570

 

 

1,550

 

 

1,300

 

1.3

 

20.8

Loans past due 90 days or more and still accruing interest

 

 

 -

 

 

 4

 

 

1,153

 

(100.0)

 

(100.0)

Total nonperforming loans

 

 

12,659

 

 

14,937

 

 

11,874

 

(15.3)

 

6.6

Other real estate owned

 

 

5,668

 

 

6,365

 

 

8,912

 

(11.0)

 

(36.4)

Total nonperforming assets

 

$

18,327

 

$

21,302

 

$

20,786

 

(14.0)

 

(11.8)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

PCI loans, net of purchase accounting adjustments

 

$

10,834

 

$

10,851

 

$

11,214

 

(0.2)

 

(3.4)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

30-89 days past due loans

 

$

8,888

 

$

7,544

 

$

9,617

 

 

 

 

Nonaccrual loans to total loans

 

 

0.6

%

 

0.7

%

 

0.5

%