XNAS:BUSE First Busey Corp Class A Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 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 6/30/2012

 

o                   Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

Commission File No. 0-15950

 

FIRST BUSEY CORPORATION

(Exact name of registrant as specified in its charter)

 

Nevada

 

37-1078406

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

 

 

100 W. University Ave.,

Champaign, Illinois

 

61820

(Address of principal

executive offices)

 

(Zip code)

 

Registrant’s telephone number, including area code:  (217) 365-4516

 

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 the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer o

 

Accelerated filer x

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

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

 

 

Class

 

Outstanding at August 7, 2012

 

 

Common Stock, $.001 par value

 

86,631,088

 

 

 

 



 

PART I - FINANCIAL INFORMATION

 

ITEM 1.  FINANCIAL STATEMENTS

 

2



 

FIRST BUSEY CORPORATION and Subsidiaries

CONSOLIDATED BALANCE SHEETS

June 30, 2012 and December 31, 2011

(Unaudited)

 

 

 

June 30, 2012

 

December 31, 2011

 

 

 

(dollars in thousands)

 

Assets

 

 

 

 

 

Cash and due from banks (interest-bearing 2012 $239,993; 2011 $219,879)

 

$

320,349

 

$

315,053

 

Securities available for sale

 

980,785

 

831,749

 

Loans held for sale

 

35,060

 

15,249

 

Loans (net of allowance for loan losses 2012 $50,866; 2011 $58,506)

 

1,936,005

 

1,977,589

 

Premises and equipment

 

70,119

 

69,398

 

Goodwill

 

20,686

 

20,686

 

Other intangible assets

 

14,364

 

16,018

 

Cash surrender value of bank owned life insurance

 

38,904

 

37,882

 

Other real estate owned (OREO)

 

7,783

 

8,452

 

Deferred tax asset, net

 

42,210

 

48,236

 

Other assets

 

58,458

 

61,810

 

Total assets

 

$

3,524,723

 

$

3,402,122

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

Liabilities

 

 

 

 

 

Deposits:

 

 

 

 

 

Non-interest-bearing

 

$

555,560

 

$

503,118

 

Interest-bearing

 

2,339,550

 

2,260,336

 

Total deposits

 

$

2,895,110

 

$

2,763,454

 

Securities sold under agreements to repurchase

 

119,115

 

127,867

 

Long-term debt

 

14,417

 

19,417

 

Junior subordinated debt owed to unconsolidated trusts

 

55,000

 

55,000

 

Other liabilities

 

26,234

 

27,117

 

Total liabilities

 

$

3,109,876

 

$

2,992,855

 

Stockholders’ Equity

 

 

 

 

 

Series C Preferred stock, $.001 par value, 72,664 shares authorized, issued and outstanding, $1,000.00 liquidation value

 

$

72,664

 

$

72,664

 

Common stock, $.001 par value, authorized 200,000,000 shares; shares issued — 88,287,132

 

88

 

88

 

Additional paid-in capital

 

594,364

 

594,009

 

Accumulated deficit

 

(234,343

)

(238,085

)

Accumulated other comprehensive income

 

14,421

 

13,124

 

Total stockholders’ equity before treasury stock and unearned ESOP shares

 

$

447,194

 

$

441,800

 

Common stock shares held in treasury at cost — 2012 1,636,044; 2011 1,646,726

 

(31,930

)

(32,116

)

Unearned ESOP shares — 20,000 shares

 

(417

)

(417

)

Total stockholders’ equity

 

$

414,847

 

$

409,267

 

Total liabilities and stockholders’ equity

 

$

3,524,723

 

$

3,402,122

 

 

 

 

 

 

 

Common shares outstanding at period end

 

86,631,088

 

86,620,406

 

 

See accompanying notes to unaudited consolidated financial statements.

 

3



 

FIRST BUSEY CORPORATION and Subsidiaries

CONSOLIDATED STATEMENTS OF INCOME

For the Six Months Ended June 30, 2012 and 2011

(Unaudited)

 

 

 

2012

 

2011

 

 

 

(dollars in thousands, except per share amounts)

 

Interest income:

 

 

 

 

 

Interest and fees on loans

 

$

50,038

 

$

59,681

 

Interest and dividends on investment securities:

 

 

 

 

 

Taxable interest income

 

7,605

 

7,712

 

Non-taxable interest income

 

1,678

 

1,382

 

Dividends

 

 

4

 

Total interest income

 

$

59,321

 

$

68,779

 

Interest expense:

 

 

 

 

 

Deposits

 

$

7,066

 

$

10,079

 

Securities sold under agreements to repurchase

 

154

 

211

 

Short-term borrowings

 

18

 

20

 

Long-term debt

 

446

 

982

 

Junior subordinated debt owed to unconsolidated trusts

 

665

 

1,299

 

Total interest expense

 

$

8,349

 

$

12,591

 

Net interest income

 

$

50,972

 

$

56,188

 

Provision for loan losses

 

9,500

 

10,000

 

Net interest income after provision for loan losses

 

$

41,472

 

$

46,188

 

Other income:

 

 

 

 

 

Trust fees

 

$

9,285

 

$

8,305

 

Commissions and brokers’ fees, net

 

1,070

 

920

 

Remittance processing

 

4,278

 

4,784

 

Service charges on deposit accounts

 

5,684

 

6,230

 

Other service charges and fees

 

2,824

 

2,622

 

Gain on sales of loans

 

5,669

 

4,467

 

Security gains (losses), net

 

64

 

(2

)

Other

 

4,776

 

1,959

 

Total other income

 

$

33,650

 

$

29,285

 

Other expense:

 

 

 

 

 

Salaries and wages

 

$

25,259

 

$

19,588

 

Employee benefits

 

6,018

 

5,265

 

Net occupancy expense of premises

 

4,361

 

4,551

 

Furniture and equipment expense

 

2,582

 

2,664

 

Data processing

 

4,798

 

4,280

 

Amortization of intangible assets

 

1,654

 

1,768

 

Regulatory expense

 

1,246

 

3,155

 

OREO expense

 

515

 

347

 

Other

 

10,548

 

9,232

 

Total other expense

 

$

56,981

 

$

50,850

 

Income before income taxes

 

$

18,141

 

$

24,623

 

Income taxes

 

5,610

 

8,066

 

Net income

 

$

12,531

 

$

16,557

 

Preferred stock dividends and discount accretion

 

1,816

 

3,059

 

Net income available to common stockholders

 

$

10,715

 

$

13,498

 

Basic earnings per common share

 

$

0.12

 

$

0.16

 

Diluted earnings per common share

 

$

0.12

 

$

0.16

 

Dividends declared per share of common stock

 

$

0.08

 

$

0.08

 

 

See accompanying notes to unaudited consolidated financial statements.

 

4



 

FIRST BUSEY CORPORATION and Subsidiaries

CONSOLIDATED STATEMENTS OF INCOME

For the Three Months Ended June 30, 2012 and 2011

(Unaudited)

 

 

 

2012

 

2011

 

 

 

(dollars in thousands, except per share amounts)

 

Interest income:

 

 

 

 

 

Interest and fees on loans

 

$

24,512

 

$

29,173

 

Interest and dividends on investment securities:

 

 

 

 

 

Taxable interest income

 

3,837

 

4,023

 

Non-taxable interest income

 

876

 

677

 

Total interest income

 

$

29,225

 

$

33,873

 

Interest expense:

 

 

 

 

 

Deposits

 

$

3,318

 

$

4,820

 

Securities sold under agreements to repurchase

 

76

 

100

 

Short-term borrowings

 

9

 

10

 

Long-term debt

 

220

 

486

 

Junior subordinated debt owed to unconsolidated trusts

 

328

 

616

 

Total interest expense

 

$

3,951

 

$

6,032

 

Net interest income

 

$

25,274

 

$

27,841

 

Provision for loan losses

 

4,500

 

5,000

 

Net interest income after provision for loan losses

 

$

20,774

 

$

22,841

 

Other income:

 

 

 

 

 

Trust fees

 

$

4,090

 

$

3,757

 

Commissions and brokers’ fees, net

 

564

 

479

 

Remittance processing

 

2,111

 

2,403

 

Service charges on deposit accounts

 

2,873

 

3,183

 

Other service charges and fees

 

1,443

 

1,340

 

Gain on sales of loans

 

3,256

 

1,835

 

Security gains, net

 

64

 

 

Other

 

1,369

 

749

 

Total other income

 

$

15,770

 

$

13,746

 

Other expense:

 

 

 

 

 

Salaries and wages

 

$

13,148

 

$

10,028

 

Employee benefits

 

3,122

 

2,506

 

Net occupancy expense of premises

 

2,156

 

2,136

 

Furniture and equipment expense

 

1,310

 

1,340

 

Data processing

 

2,639

 

2,170

 

Amortization of intangible assets

 

827

 

884

 

Regulatory expense

 

620

 

1,308

 

OREO expense

 

510

 

135

 

Other

 

5,447

 

4,678

 

Total other expense

 

$

29,779

 

$

25,185

 

Income before income taxes

 

$

6,765

 

$

11,402

 

Income taxes

 

1,877

 

3,955

 

Net income

 

$

4,888

 

$

7,447

 

Preferred stock dividends and discount accretion

 

908

 

1,283

 

Net income available to common stockholders

 

$

3,980

 

$

6,164

 

Basic earnings per common share

 

$

0.05

 

$

0.07

 

Diluted earnings per common share

 

$

0.05

 

$

0.07

 

Dividends declared per share of common stock

 

$

0.04

 

$

0.04

 

 

See accompanying notes to unaudited consolidated financial statements.

 

5



 

FIRST BUSEY CORPORATION and Subsidiaries

CONSOLIDATED STATEMENTS OF OTHER COMPREHENSIVE INCOME

For the Three and Six Months Ended June 30, 2012 and 2011

(Unaudited)

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

(dollars in thousands)

 

Net income

 

$

4,888

 

$

7,447

 

$

12,531

 

$

16,557

 

Other comprehensive income, before tax:

 

 

 

 

 

 

 

 

 

Unrealized net gains (losses) on securities:

 

 

 

 

 

 

 

 

 

Unrealized net holding gains arising during period

 

$

2,465

 

$

5,221

 

$

2,269

 

$

4,117

 

Reclassification adjustment for (gains) losses included in net income

 

(64

)

 

(64

)

2

 

Other comprehensive income, before tax

 

$

2,401

 

$

5,221

 

$

2,205

 

$

4,119

 

Income tax expense related to items of other comprehensive income

 

988

 

2,176

 

908

 

1,910

 

Other comprehensive income, net of tax

 

$

1,413

 

$

3,045

 

$

1,297

 

$

2,209

 

Comprehensive income

 

$

6,301

 

$

10,492

 

$

13,828

 

$

18,766

 

 

See accompanying notes to unaudited consolidated financial statements.

 

6



 

FIRST BUSEY CORPORATION and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Six Months Ended June 30, 2012 and 2011

(Unaudited)

 

 

 

2012

 

2011

 

 

 

(dollars in thousands)

 

Cash Flows from Operating Activities

 

 

 

 

 

Net income

 

$

12,531

 

$

16,557

 

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

 

 

 

 

 

Stock-based and non-cash compensation

 

449

 

143

 

Depreciation and amortization

 

4,324

 

4,563

 

Provision for loan losses

 

9,500

 

10,000

 

Provision for deferred income taxes

 

5,118

 

7,116

 

Amortization of security premiums and discounts, net

 

4,618

 

2,822

 

Net security (gains) losses

 

(64

)

2

 

Gain on sales of loans, net

 

(5,669

)

(4,467

)

Net (gain) loss on sales of OREO properties

 

(216

)

178

 

Increase in cash surrender value of bank owned life insurance

 

(1,022

)

(802

)

Change in assets and liabilities:

 

 

 

 

 

Decrease in other assets

 

2,202

 

6,787

 

Decrease in other liabilities

 

(427

)

(4,296

)

Decrease in interest payable

 

(408

)

(1,068

)

Decrease in income taxes receivable

 

1,150

 

710

 

Net cash provided by operating activities before loan originations and sales

 

$

32,086

 

$

38,245

 

 

 

 

 

 

 

Loans originated for sale

 

(297,680

)

(195,648

)

Proceeds from sales of loans

 

283,538

 

224,919

 

Net cash provided by operating activities

 

$

17,944

 

$

67,516

 

 

 

 

 

 

 

Cash Flows from Investing Activities

 

 

 

 

 

Proceeds from sales of securities classified available for sale

 

17,308

 

6,633

 

Proceeds from maturities of securities classified available for sale

 

100,970

 

53,942

 

Purchase of securities classified available for sale

 

(269,663

)

(202,615

)

Decrease in loans

 

27,193

 

156,291

 

Proceeds from disposition of premises and equipment

 

19

 

946

 

Proceeds from sale of OREO properties

 

5,776

 

4,860

 

Purchases of premises and equipment

 

(3,410

)

(1,685

)

Net cash (used in) provided by investing activities

 

$

(121,807

)

$

18,372

 

 

(continued on next page)

 

7



 

FIRST BUSEY CORPORATION and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

For the Six Months Ended June 30, 2012 and 2011

(Unaudited)

 

 

 

2012

 

2011

 

 

 

(dollars in thousands)

 

Cash Flows from Financing Activities

 

 

 

 

 

Net decrease in certificates of deposit

 

$

(67,544

)

$

(140,145

)

Net increase in demand, money market and savings deposits

 

199,200

 

37,620

 

Cash dividends paid

 

(8,745

)

(9,624

)

Net decrease in securities sold under agreements to repurchase

 

(8,752

)

(12,186

)

Principal payments on long-term debt

 

(5,000

)

(23,325

)

Net cash provided by (used in) financing activities

 

$

109,159

 

$

(147,660

)

Net increase (decrease) in cash and due from banks

 

$

5,296

 

$

(61,772

)

Cash and due from banks, beginning

 

$

315,053

 

$

418,965

 

Cash and due from banks, ending

 

$

320,349

 

$

357,193

 

 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

 

 

 

 

 

 

 

 

 

 

 

Cash payments for:

 

 

 

 

 

Interest

 

$

8,757

 

$

13,659

 

Income taxes

 

$

70

 

$

906

 

Non-cash investing and financing activities:

 

 

 

 

 

Other real estate acquired in settlement of loans

 

$

4,891

 

$

2,733

 

Dividends accrued

 

$

924

 

$

768

 

Conversion of Series B Preferred stock to Common stock

 

$

 

$

31,862

 

 

See accompanying notes to unaudited consolidated financial statements.

 

8



 

FIRST BUSEY CORPORATION and Subsidiaries

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

Note 1:  Basis of Presentation

 

The accompanying unaudited consolidated interim financial statements of First Busey Corporation (the “Company”), a Nevada corporation, have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for Quarterly Reports on Form 10-Q and do not include certain information and footnote disclosures required by U.S. generally accepted accounting principles (“U.S. GAAP”) for complete annual financial statements. Accordingly, these financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.

 

The accompanying consolidated balance sheet as of December 31, 2011, which has been derived from audited financial statements, and the unaudited consolidated interim financial statements have been prepared in accordance with U.S. GAAP and reflect all adjustments that are, in the opinion of management, necessary for the fair presentation of the financial position and results of operations for the periods presented. All such adjustments are of a normal recurring nature. The results of operations for the three and six months ended June 30, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012.

 

The consolidated financial statements include the accounts of the Company and its subsidiaries. All material intercompany transactions and balances have been eliminated in consolidation. Certain prior year amounts have been reclassified to conform to the current presentation with no effect on net income or stockholders’ equity.

 

In preparing the accompanying consolidated financial statements, the Company’s management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses for the reporting period.  Actual results could differ from those estimates.  Material estimates which are particularly susceptible to significant change in the near term relate to the fair value of investment securities, the determination of the allowance for loan losses, including valuation of real estate and related loan collateral, and valuation allowance on the deferred tax asset.

 

The Company has evaluated subsequent events for potential recognition and/or disclosure through the date the consolidated financial statements included in this Quarterly Report on Form 10-Q were issued.  There were no significant subsequent events for the quarter ended June 30, 2012 through the issuance date of these financial statements that warranted adjustment to or disclosure in the consolidated financial statements, except as disclosed in Note 7.

 

Note 2:  Recent Accounting Pronouncements

 

FASB ASC Topic 210, “Disclosures about Offsetting Assets and Liabilities.” New authoritative accounting guidance (Accounting Standards Update No. 2011-11) under ASC Topic 210 requires enhanced disclosure about offsetting and related arrangements to enable users of an issuer’s financial statements to understand the effect of those arrangements on its financial position.  This update will be effective for the annual periods beginning after January 1, 2013, and is not expected to have a significant impact on the Company’s financial statements.

 

FASB ASC Topic 220, “Presentation of Comprehensive Income.” New authoritative accounting guidance (Accounting Standards Update No. 2011-05) under ASC Topic 220 amends Topic 220, “Comprehensive Income,” to require all nonowner changes in stockholders’ equity to be presented in a single continuous statement of comprehensive income or in two separate but consecutive statements.  This update became effective for annual periods beginning after December 15, 2011, and resulted in a change to the presentation of comprehensive income in the Company’s financial statements.

 

FASB ASC Topic 820, “Amendments to Achieve Common Fair Value Measurements and Disclosure Requirements in U.S. GAAP and IFRSs.” New authoritative accounting guidance (Accounting Standards Update No. 2011-04) under ASC Topic 820 amends Topic 820 to converge the fair value measurement guidance in U.S. generally accepted accounting principles and International Financial Reporting Standards.  The guidance clarifies the application of existing fair value measurement requirements, changes certain principles in Topic 820 and requires additional disclosures.  This update became effective for annual periods beginning after December 15, 2011 and new disclosures are included in this Quarterly Report.

 

9



 

Note 3:  Securities

 

The amortized cost, unrealized gains and losses and fair values of securities classified available for sale are summarized as follows:

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

 

 

Cost

 

Gains

 

Losses

 

Value

 

 

 

(dollars in thousands)

 

June 30, 2012:

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

 

$

86,714

 

$

1,440

 

$

 

$

88,154

 

Obligations of U.S. government corporations and agencies

 

381,565

 

7,431

 

 

388,996

 

Obligations of states and political subdivisions

 

225,530

 

5,890

 

(167

)

231,253

 

Residential mortgage-backed securities

 

257,174

 

8,473

 

 

265,647

 

Corporate debt securities

 

2,451

 

91

 

 

2,542

 

 

 

953,434

 

23,325

 

(167

)

976,592

 

Mutual funds and other equity securities

 

2,837

 

1,356

 

 

4,193

 

 

 

 

 

 

 

 

 

 

 

 

 

$

956,271

 

$

24,681

 

$

(167

)

$

980,785

 

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

 

 

Cost

 

Gains

 

Losses

 

Value

 

 

 

(dollars in thousands)

 

December 31, 2011:

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

 

$

45,550

 

$

485

 

$

 

$

46,035

 

Obligations of U.S. government corporations and agencies

 

339,983

 

9,083

 

(35

)

349,031

 

Obligations of states and political subdivisions

 

149,368

 

5,193

 

(124

)

154,437

 

Residential mortgage-backed securities

 

271,787

 

6,374

 

(46

)

278,115

 

Corporate debt securities

 

2,532

 

73

 

(22

)

2,583

 

 

 

809,220

 

21,208

 

(227

)

830,201

 

Mutual funds and other equity securities

 

219

 

1,329

 

 

1,548

 

 

 

 

 

 

 

 

 

 

 

 

 

$

809,439

 

$

22,537

 

$

(227

)

$

831,749

 

 

The amortized cost and fair value of debt securities available for sale as of June 30, 2012, by contractual maturity, are shown below. Mutual funds and other equity securities do not have stated maturity dates and therefore are not included in the following maturity summary. Mortgages underlying the residential mortgage-backed securities may be called or prepaid without penalties; therefore, actual maturities could differ from the contractual maturities. All residential mortgage-backed securities were issued by U.S. government agencies and corporations.

 

 

 

Amortized

 

Fair

 

 

 

Cost

 

Value

 

 

 

(dollars in thousands)

 

Due in one year or less

 

$

116,947

 

$

118,173

 

Due after one year through five years

 

499,202

 

508,670

 

Due after five years through ten years

 

263,988

 

272,494

 

Due after ten years

 

73,297

 

77,255

 

 

 

$

953,434

 

$

976,592

 

 

10



 

Realized gains and losses related to sales of securities are summarized as follows:

 

 

 

Three Months Ended June 30,

 

 

 

2012

 

2011

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

Gross security gains

 

$

64

 

$

 

Gross security (losses)

 

 

 

Net security (losses) gains

 

$

64

 

$

 

 

 

 

Six Months Ended June 30,

 

 

 

2012

 

2011

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

Gross security gains

 

$

64

 

$

 

Gross security (losses)

 

 

(2

)

Net security (losses) gains

 

$

64

 

$

(2

)

 

The tax provision for these net realized gains and losses was insignificant for the three and six months ended June 30, 2012 and 2011.

 

Investment securities with carrying amounts of $437.6 million and $359.9 million on June 30, 2012 and December 31, 2011, respectively, were pledged as collateral for public deposits, securities sold under agreements to repurchase and for other purposes as required or permitted by law.

 

Information pertaining to securities with gross unrealized losses at June 30, 2012 and December 31, 2011 aggregated by investment category and length of time that individual securities have been in a continuous loss position follows:

 

 

 

Less than 12 months

 

Greater than 12 months

 

Total

 

 

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

 

 

Value

 

Losses

 

Value

 

Losses

 

Value

 

Losses

 

 

 

(dollars in thousands)

 

June 30, 2012:

 

 

 

 

 

 

 

 

 

 

 

 

 

Obligations of states and political subdivisions(1)

 

$

37,010

 

$

167

 

$

145

 

$

 

$

37,155

 

$

167

 

Corporate debt securities(1)

 

189

 

 

 

 

189

 

 

Total temporarily impaired securities

 

$

37,199

 

$

167

 

$

145

 

$

 

$

37,344

 

$

167

 

 


(1)Unrealized loss was less than one thousand dollars.

 

 

 

Less than 12 months

 

Greater than 12 months

 

Total

 

 

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

 

 

Value

 

Losses

 

Value

 

Losses

 

Value

 

Losses

 

 

 

(dollars in thousands)

 

December 31, 2011:

 

 

 

 

 

 

 

 

 

 

 

 

 

Obligations of U.S. government corporations and agencies

 

$

15,615

 

$

35

 

$

 

$

 

$

15,615

 

$

35

 

Obligations of states and political subdivisions

 

21,037

 

124

 

 

 

21,037

 

124

 

Residential mortgage-backed securities

 

16,428

 

46

 

 

 

16,428

 

46

 

Corporate debt securities

 

455

 

22

 

 

 

 

 

455

 

22

 

Total temporarily impaired securities

 

$

53,535

 

$

227

 

$

 

$

 

$

53,535

 

$

227

 

 

11



 

The total number of securities in the investment portfolio in an unrealized loss position as of June 30, 2012 was 108, and represented a loss of 0.45% of the aggregate carrying value. Based upon a review of unrealized loss circumstances, the unrealized losses resulted from changes in market interest rates and liquidity, not from changes in the probability of receiving the contractual cash flows. The Company does not intend to sell the securities and it is more-likely-than-not that the Company will recover the amortized cost prior to being required to sell the securities.  Full collection of the amounts due according to the contractual terms of the securities is expected; therefore, the Company does not consider these investments to be other-than-temporarily impaired at June 30, 2012.

 

Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation.  Consideration is given to the length of time and extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, and whether the Company has the intent to sell the security and it is more-likely-than-not we will have to sell the security before recovery of its cost basis.

 

Note 4:  Loans

 

Geographic distributions of loans were as follows:

 

 

 

June 30, 2012

 

 

 

Illinois

 

Florida

 

Indiana

 

Total

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

362,325

 

$

12,640

 

$

21,489

 

$

396,454

 

Commercial real estate

 

753,879

 

135,852

 

54,592

 

944,323

 

Real estate construction

 

68,975

 

15,252

 

23,161

 

107,388

 

Retail real estate

 

435,560

 

114,802

 

9,040

 

559,402

 

Retail other

 

13,816

 

426

 

122

 

14,364

 

Total

 

$

1,634,555

 

$

278,972

 

$

108,404

 

$

2,021,931

 

 

 

 

 

 

 

 

 

 

 

Less held for sale(1)

 

 

 

 

 

 

 

35,060

 

 

 

 

 

 

 

 

 

$

1,986,871

 

 

 

 

 

 

 

 

 

 

 

Less allowance for loan losses

 

 

 

 

 

 

 

50,866

 

Net loans

 

 

 

 

 

 

 

$

1,936,005

 

 


(1)Loans held for sale are included in retail real estate.

 

 

 

December 31, 2011

 

 

 

Illinois

 

Florida

 

Indiana

 

Total

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

375,238

 

$

10,830

 

$

21,787

 

$

407,855

 

Commercial real estate

 

793,769

 

135,360

 

51,087

 

980,216

 

Real estate construction

 

72,569

 

16,186

 

16,110

 

104,865

 

Retail real estate

 

410,844

 

120,190

 

9,112

 

540,146

 

Retail other

 

17,547

 

581

 

134

 

18,262

 

Total

 

$

1,669,967

 

$

283,147

 

$

98,230

 

$

2,051,344

 

 

 

 

 

 

 

 

 

 

 

Less held for sale(1)

 

 

 

 

 

 

 

15,249

 

 

 

 

 

 

 

 

 

$

2,036,095

 

 

 

 

 

 

 

 

 

 

 

Less allowance for loan losses

 

 

 

 

 

 

 

58,506

 

Net loans

 

 

 

 

 

 

 

$

1,977,589

 

 


(1) Loans held for sale are included in retail real estate.

 

12



 

Net deferred loan origination costs included in the tables above were $0.7 million as of both June 30, 2012 and December 31, 2011.

 

The Company believes that sound loans are a necessary and desirable means of employing funds available for investment. Recognizing the Company’s obligations to its stockholders, depositors, and to the communities it serves, authorized personnel are expected to seek to develop and make sound, profitable loans that resources permit and that opportunity affords. The Company maintains lending policies and procedures designed to focus lending efforts on the types, locations and duration of loans most appropriate for its business model and markets.  While not specifically limited, the Company attempts to focus its lending on short to intermediate-term (0-7 years) loans in geographies within 125 miles of its lending offices.  The Company makes attempts to utilize government assisted lending programs, such as the Small Business Administration and United States Department of Agriculture lending programs, where prudent. Generally, loans are collateralized by assets, primarily real estate, of the borrowers and guaranteed by individuals.  The loans are expected to be repaid from cash flows of the borrowers or from proceeds from the sale of selected assets of the borrowers.

 

Management reviews and approves the Company’s lending policies and procedures on a routine basis.  Management routinely (at least quarterly) reviews the Company’s allowance for loan losses and reports related to loan production, loan quality, concentrations of credit, loan delinquencies and non-performing and potential problem loans.  The Company’s underwriting standards are designed to encourage relationship banking rather than transactional banking.  Relationship banking implies a primary banking relationship with the borrower that includes, at a minimum, an active deposit banking relationship in addition to the lending relationship.  The integrity and character of the borrower are significant factors in the Company’s loan underwriting.  As a part of underwriting, tangible positive or negative evidence of the borrower’s integrity and character are sought out.  Additional significant underwriting factors beyond location, duration, a sound and profitable cash flow basis and the borrower’s character are the quality of the borrower’s financial history, the liquidity of the underlying collateral and the reliability of the valuation of the underlying collateral.

 

Total borrowing relationships, including direct and indirect debt, are generally limited to $20 million, which is significantly less than the Company’s regulatory lending limit.  Borrowing relationships exceeding $20 million are reviewed by the Company’s board of directors at least annually and more frequently by management.  At no time is a borrower’s total borrowing relationship permitted to exceed the Company’s regulatory lending limit. Loans to related parties, including executive officers and the Company’s various directorates, are reviewed for compliance with regulatory guidelines and by the Company’s board of directors at least annually.

 

The Company maintains an independent loan review department that reviews the loans for compliance with the Company’s loan policy on a periodic basis.  In addition to compliance with this policy, the loan review process reviews the risk assessments made by the Company’s credit department, lenders and loan committees. Results of these reviews are presented to management and the audit committee at least quarterly.

 

The Company’s lending can be summarized into five primary areas: commercial loans, commercial real estate loans, real estate construction, retail real estate loans, and other retail loans.  A description of each of the lending areas can be found in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.  The significant majority of the lending activity occurs in the Company’s Illinois and Indiana markets, with the remainder in the Florida market.  Due to the small scale of the Indiana loan portfolio and its geographical proximity to the Illinois portfolio, the Company believes that quantitative or qualitative segregation between Illinois and Indiana is not material or warranted.

 

The Company utilizes a loan grading scale to assign a risk grade to all of its loans.  Loans are graded on a scale of 1 through 10 with grades 2, 4 & 5 unused.  A description of the general characteristics of the grades is as follows:

 

·                  Grades 1, 3, 6 — These grades include loans which are all considered strong credits, with grade 1 being investment or near investment grade.  A grade 3 loan is comprised of borrowers that exhibit credit fundamentals that exceed industry standards and loan policy guidelines. A grade 6 loan is comprised of borrowers that exhibit acceptable credit fundamentals.

 

·                  Grade 7- This grade includes loans on management’s “Watch List” and is intended to be utilized on a temporary basis for a pass grade borrower where a significant risk-modifying action is anticipated in the near future.

 

13



 

·                  Grade 8- This grade is for “Other Assets Especially Mentioned” loans that have potential weaknesses which may, if not checked or corrected, weaken the asset or inadequately protect the Company’s credit position at some future date.

 

·                  Grade 9- This grade includes “Substandard” loans, in accordance with regulatory guidelines, for which the accrual of interest has not been stopped.  Assets so classified must have well-defined weakness or weaknesses that jeopardize the liquidation of the debt.  They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.

 

·                  Grade 10- This grade includes “Doubtful” loans that have all the characteristics of a substandard loan with additional factors that make collection in full highly questionable and improbable. Such loans are placed on non-accrual status and may be dependent on collateral having a value that is difficult to determine.

 

All loans are graded at the inception of the loan.  All commercial and commercial real estate loans above $0.5 million with a grading of 7 are reviewed annually and grade changes are made as necessary.  All real estate construction loans above $0.5 million, regardless of the grade, are reviewed annually and grade changes are made as necessary.  Interim grade reviews may take place if circumstances of the borrower warrant a more timely review.  All loans above $0.5 million which are graded 8 are reviewed quarterly.  Further, all loans graded 9 or 10 are reviewed at least quarterly.

 

The following table presents weighted average risk grades segregated by class of loans (excluding held-for-sale, non-posted and clearings):

 

 

 

June 30, 2012

 

 

 

Weighted Avg.
Risk Grade

 

Grades
1,3,6

 

Grade
7

 

Grade
8

 

Grade
9

 

Grade
10

 

 

 

(dollars in thousands)

 

Illinois/Indiana

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

5.16

 

$

286,395

 

$

64,393

 

$

15,569

 

$

13,574

 

$

3,884

 

Commercial real estate

 

5.69

 

609,459

 

87,720

 

60,188

 

38,819

 

12,285

 

Real estate construction

 

7.24

 

42,850

 

9,757

 

18,925

 

14,519

 

6,086

 

Retail real estate

 

3.69

 

380,758

 

9,981

 

8,097

 

7,370

 

3,053

 

Retail other

 

3.13

 

13,247

 

272

 

 

419

 

 

Total Illinois/Indiana

 

 

 

$

1,332,709

 

$

172,123

 

$

102,779

 

$

74,701

 

$

25,308

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Florida

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

4.98

 

$

7,903

 

$

3,613

 

$

742

 

$

192

 

$

189

 

Commercial real estate

 

6.41

 

76,946

 

19,767

 

16,747

 

17,386

 

5,006

 

Real estate construction

 

7.33

 

1,576

 

7,500

 

4,571

 

969

 

635

 

Retail real estate

 

4.03

 

85,670

 

2,515

 

18,341

 

3,402

 

2,622

 

Retail other

 

2.48

 

426

 

 

 

 

 

Total Florida

 

 

 

$

172,521

 

$

33,395

 

$

40,401

 

$

21,949

 

$

8,452

 

Total

 

 

 

$

1,505,230

 

$

205,518

 

$

143,180

 

$

96,650

 

$

33,760

 

 

14



 

 

 

December 31, 2011

 

 

 

Weighted Avg.
Risk Grade

 

Grades
1,3,6

 

Grade
7

 

Grade
8

 

Grade
9

 

Grade
10

 

 

 

(dollars in thousands)

 

Illinois/Indiana

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

5.12

 

$

298,332

 

$

43,566

 

$

28,172

 

$

17,884

 

$

9,071

 

Commercial real estate

 

5.75

 

617,247

 

95,553

 

69,185

 

54,670

 

8,201

 

Real estate construction

 

7.65

 

22,002

 

7,998

 

34,374

 

18,841

 

5,464

 

Retail real estate

 

3.67

 

378,355

 

8,581

 

3,561

 

4,041

 

4,768

 

Retail other

 

3.17

 

16,506

 

676

 

 

428

 

71

 

Total Illinois/Indiana

 

 

 

$

1,332,442

 

$

156,374

 

$

135,292

 

$

95,864

 

$

27,575

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Florida

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

6.32

 

$

5,471

 

$

4,329

 

$

191

 

$

271

 

$

568

 

Commercial real estate

 

6.44

 

73,021

 

21,296

 

18,677

 

17,124

 

5,242

 

Real estate construction

 

7.97

 

1,417

 

341

 

12,352

 

840

 

1,236

 

Retail real estate

 

4.14

 

89,195

 

2,227

 

20,071

 

4,470

 

3,719

 

Retail other

 

2.41

 

580

 

 

1

 

 

 

Total Florida

 

 

 

$

169,684

 

$

28,193

 

$

51,292

 

$

22,705

 

$

10,765

 

Total

 

 

 

$

1,502,126

 

$

184,567

 

$

186,584

 

$

118,569

 

$

38,340

 

 

Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due.  Loans are placed on non-accrual status when, in management’s opinion, the borrower may be unable to meet payment obligations as they become due, as well as when required by regulatory provisions.  Loans may be placed on non-accrual status regardless of whether or not such loans are considered past due.  When interest accrual is discontinued, all unpaid accrued interest is reversed.  Interest income is subsequently recognized only to the extent cash payments are received in excess of the principal due.  Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

 

An age analysis of past due loans still accruing and non-accrual loans is as follows:

 

 

 

June 30, 2012

 

 

 

Loans past due, still accruing

 

Non-accrual

 

 

 

30-59 Days

 

60-89 Days

 

90+Days

 

Loans

 

 

 

(dollars in thousands)

 

Illinois/Indiana

 

 

 

 

 

 

 

 

 

Commercial

 

$

316

 

$

100

 

$

57

 

$

3,884

 

Commercial real estate

 

294

 

1,176

 

 

12,285

 

Real estate construction

 

 

 

 

6,086

 

Retail real estate

 

1,092

 

443

 

 

3,053

 

Retail other

 

1

 

 

 

 

Total Illinois/Indiana

 

$

1,703

 

$

1,719

 

$

57

 

$

25,308

 

 

 

 

 

 

 

 

 

 

 

Florida

 

 

 

 

 

 

 

 

 

Commercial

 

$

 

$

 

$

 

$

189

 

Commercial real estate

 

590

 

 

 

5,006

 

Real estate construction

 

 

 

 

635

 

Retail real estate

 

210

 

18

 

 

2,622

 

Retail other

 

 

 

 

 

Total Florida

 

$

800

 

$

18

 

$

 

$

8,452

 

Total

 

$

2,503

 

$

1,737

 

$

57

 

$

33,760

 

 

15



 

 

 

December 31, 2011

 

 

 

Loans past due, still accruing

 

Non-accrual

 

 

 

30-59 Days

 

60-89 Days

 

90+Days

 

Loans

 

 

 

(dollars in thousands)

 

Illinois/Indiana

 

 

 

 

 

 

 

 

 

Commercial

 

$

131

 

$

44

 

$

48

 

$

9,071

 

Commercial real estate

 

1,384

 

 

73

 

8,201

 

Real estate construction

 

 

 

 

5,464

 

Retail real estate

 

2,051

 

242

 

52

 

4,768

 

Retail other

 

23

 

2

 

 

71

 

Total Illinois/Indiana

 

$

3,589

 

$

288

 

$

173

 

$

27,575

 

 

 

 

 

 

 

 

 

 

 

Florida

 

 

 

 

 

 

 

 

 

Commercial

 

$

 

$

 

$

 

$

568

 

Commercial real estate

 

606

 

 

 

5,242

 

Real estate construction

 

 

 

 

1,236

 

Retail real estate

 

179

 

 

 

3,719

 

Retail other

 

 

50

 

 

 

Total Florida

 

$

785

 

$

50

 

$

 

$

10,765

 

Total

 

$

4,374

 

$

338

 

$

173

 

$

38,340

 

 

A loan is impaired when, based on current information and events, it is probable the Company will be unable to collect scheduled payments of principal and interest payments when due according to the terms of the loan agreement.  Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due.  Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired.  Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.  The following loans are assessed for impairment by the Company: loans 60 days or more past due and over $0.25 million, loans graded 8 over $0.5 million and loans graded 9 or below.

 

Impairment is measured on a loan-by-loan basis for commercial and construction loans by either the present value of the expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price, or the fair value of the collateral if the loan is collateral dependent.  Large groups of smaller balance homogenous loans are collectively evaluated for impairment.  Accordingly, the Company does not separately identify individual consumer and residential loans for impairment disclosures unless such loans are the subject of a restructuring agreement.

 

The gross interest income that would have been recorded in the three and six months ended June 30, 2012 if impaired loans had been current in accordance with their original terms was $0.8 million and $2.1 million, respectively.  The amount of interest collected on those loans and recognized on a cash basis that was included in interest income was insignificant for the three and six months ended June 30, 2012.

 

The Company’s loan portfolio includes certain loans that have been modified in a troubled debt restructuring (TDR), where concessions have been granted to borrowers who have experienced financial difficulties. The Company will restructure loans for its customers who appear to be able to meet the terms of their loan over the long term, but who may be unable to meet the terms of the loan in the near term due to individual circumstances.

 

16



 

The Company considers the customer’s past performance, previous and current credit history, the individual circumstances surrounding the current difficulties and their plan to meet the terms of the loan in the future prior to restructuring the terms of the loan.  Generally, all five primary areas of lending are restructured through short-term interest rate relief, short-term principal payment relief, short-term principal and interest payment relief, or forbearance (debt forgiveness).  Once a restructured loan has gone 90+ days past due or is placed on non-accrual status, it is included in the non-performing loan totals. A summary of restructured loans as of June 30, 2012 and December 31, 2011 is as follows:

 

 

 

June 30,
2012

 

December 31,
2011

 

 

 

(dollars in thousands)

 

Restructured loans:

 

 

 

 

 

In compliance with modified terms

 

$

20,564

 

$

32,380

 

30 — 89 days past due

 

209

 

1,257

 

Included in non-performing loans

 

13,176

 

12,601

 

Total

 

$

33,949

 

$

46,238

 

 

All TDRs are considered to be impaired for purposes of assessing the adequacy of the allowance for loan losses and for financial reporting purposes.  When the Company modifies a loan in a TDR, it evaluates any possible impairment similar to other impaired loans based on present value of the expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price, or the fair value of the collateral if the loan is collateral dependent.  If the Company determines that the value of the TDR is less than the recorded investment in the loan, impairment is recognized through an allowance estimate in the period of the modification and in periods subsequent to the modification.

 

Performing loans classified as TDRs during the three and six months ended June 30, 2012, segregated by class, are shown below:

 

 

 

Three Months Ended
June 30, 2012

 

Six Months Ended
June 30, 2012

 

 

 

Number of
contracts

 

Recorded
investment

 

Number of
contracts

 

Recorded
investment

 

 

 

(dollar in thousands)

 

(dollar in thousands)

 

Illinois/Indiana

 

 

 

 

 

 

 

 

 

Commercial

 

3

 

$

790

 

5

 

$

2,070

 

Commercial real estate

 

 

 

 

 

Real estate construction

 

3

 

310

 

4

 

3,329

 

Retail real estate

 

11

 

1,914

 

11

 

1,914

 

Retail other

 

 

 

 

 

Total Illinois/Indiana

 

17

 

$

3,014

 

20

 

$

7,313

 

 

 

 

 

 

 

 

 

 

 

Florida

 

 

 

 

 

 

 

 

 

Commercial

 

 

$

 

 

$

 

Commercial real estate

 

 

 

 

 

 

Real estate construction

 

 

 

 

 

 

Retail real estate

 

2

 

706

 

2

 

706

 

Retail other

 

 

 

 

 

 

Total Florida

 

2

 

$

706

 

2

 

$

706

 

Total

 

19

 

$

3,720

 

22

 

$

8,019

 

 

17



 

The commercial TDRs for the three months ended June 30, 2012 consisted of one modification for short-term interest rate relief totaling $0.2 million and two modifications for short-term principal payment relief totaling $0.6 million.  The commercial TDRs for the six months ended June 30, 2012 consisted of one modification for short-term interest rate relief totaling $0.2 million and four modifications for short-term principal payment relief totaling $1.9 million.  The three real estate construction TDRs totaling $0.3 million for the three months ended June 30, 2012 involve short-term principal payment relief.  The real estate construction TDRs for the six months ended June 30, 2012 consisted of three modifications for short-term principal payment relief totaling $0.3 million and one modification of a forbearance agreement totaling $3.0 million.  The retail real estate TDRs for the three and six months ended June 30, 2012 consisted of four modifications for short-term interest rate relief totaling $1.0 million and nine modifications for short-term principal payment relief totaling $1.6 million.

 

The gross interest income that would have been recorded in the three and six months ended June 30, 2012 if performing TDRs had been in accordance with their original terms instead of modified terms was insignificant.

 

TDRs that were classified as non-performing and had payment defaults (a default occurs when a loan is 90 days or more past due or transferred to non-accrual) during the three and six months ended June 30, 2012, segregated by class, are shown below:

 

 

 

Three Months Ended
June 30, 2012

 

Six Months Ended
June 30, 2012

 

 

 

Number of
contracts

 

Recorded
investment

 

Number of
contracts

 

Recorded
investment

 

 

 

(dollar in thousands)

 

(dollar in thousands)

 

Illinois/Indiana