10-Q 1 osbc-20150930x10q.htm 10-Q osbc-Current Folio_10Q_2014Taxonomy

I  

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

 

 

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

 

THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2015

OR

 

 

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

 

Picture 2

(Exact name of Registrant as specified in its charter)

 

 

 

 

Delaware

 

36-3143493

(State or other jurisdiction

 

(I.R.S. Employer Identification Number)

of incorporation or organization)

 

 

 

37 South River Street, Aurora, Illinois     60507

(Address of principal executive offices)  (Zip Code)

 

(630) 892-0202

(Registrant’s telephone number, including area code)

 

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

Yes         No 

 

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  No 

 

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

 

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

Yes         No 

 

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 4, 2015, the Registrant had outstanding 29,483,429 shares of common stock, $1.00 par value per share.

 

 

 

 

 

 

 


 

2

 


 

 

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, 

 

    

2015

    

2014

Assets

 

 

 

 

 

 

Cash and due from banks

 

$

35,443

 

$

30,101

Interest bearing deposits with financial institutions

 

 

18,329

 

 

14,096

Cash and cash equivalents

 

 

53,772

 

 

44,197

Securities available-for-sale, at fair value

 

 

408,836

 

 

385,486

Securities held-to-maturity, at amortized cost

 

 

250,044

 

 

259,670

Federal Home Loan Bank and Federal Reserve Bank stock

 

 

8,271

 

 

9,058

Loans held-for-sale

 

 

3,899

 

 

5,072

Loans

 

 

1,132,912

 

 

1,159,332

Less: allowance for loan losses

 

 

16,613

 

 

21,637

Net loans

 

 

1,116,299

 

 

1,137,695

Premises and equipment, net

 

 

39,701

 

 

42,335

Other real estate owned

 

 

24,451

 

 

31,982

Mortgage servicing rights, net

 

 

5,470

 

 

5,462

Bank-owned life insurance (BOLI)

 

 

57,647

 

 

56,807

Deferred tax assets, net

 

 

65,150

 

 

70,141

Other assets

 

 

16,054

 

 

13,882

Total assets

 

$

2,049,594

 

$

2,061,787

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

Noninterest bearing demand

 

$

430,810

 

$

400,447

Interest bearing:

 

 

 

 

 

 

Savings, NOW, and money market

 

 

878,226

 

 

865,103

Time

 

 

411,443

 

 

419,505

Total deposits

 

 

1,720,479

 

 

1,685,055

Securities sold under repurchase agreements

 

 

27,074

 

 

21,036

Other short-term borrowings

 

 

35,000

 

 

45,000

Junior subordinated debentures

 

 

58,378

 

 

58,378

Subordinated debt

 

 

45,000

 

 

45,000

Notes payable and other borrowings

 

 

500

 

 

500

Other liabilities

 

 

9,520

 

 

12,655

Total liabilities

 

 

1,895,951

 

 

1,867,624

 

 

 

 

 

 

 

Stockholders’ Equity

 

 

 

 

 

 

Preferred stock

 

 

 -

 

 

47,331

Common stock

 

 

34,423

 

 

34,365

Additional paid-in capital

 

 

115,773

 

 

115,332

Retained earnings

 

 

110,376

 

 

100,697

Accumulated other comprehensive loss

 

 

(10,963)

 

 

(7,713)

Treasury stock

 

 

(95,966)

 

 

(95,849)

Total stockholders’ equity

 

 

153,643

 

 

194,163

Total liabilities and stockholders’ equity

 

$

2,049,594

 

$

2,061,787

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2015

 

December 31, 2014

 

 

Preferred

 

Common

 

Preferred

 

Common

 

    

Stock

    

Stock

    

Stock

    

Stock

Par value

 

$

1

 

$

1

 

$

1

 

$

1

Liquidation value

 

 

 -

 

 

n/a

 

 

1,000

 

 

n/a

Shares authorized

 

 

300,000

 

 

60,000,000

 

 

300,000

 

 

60,000,000

Shares issued

 

 

 -

 

 

34,422,234

 

 

47,331

 

 

34,364,734

Shares outstanding

 

 

 -

 

 

29,478,429

 

 

47,331

 

 

29,442,508

Treasury shares

 

 

-

 

 

4,943,805

 

 

-

 

 

4,922,226

 

See accompanying notes to consolidated financial statements.

3

 


 

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Income

(In thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(unaudited)

 

(unaudited)

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30, 

 

September 30, 

 

    

2015

    

2014

    

2015

    

2014

Interest and dividend income

 

 

 

 

 

 

 

 

 

 

 

 

Loans, including fees

 

$

13,353

 

$

13,362

 

$

40,038

 

$

39,346

Loans held-for-sale

 

 

38

 

 

38

 

 

153

 

 

92

Securities:

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

 

3,471

 

 

3,586

 

 

10,218

 

 

10,440

Tax exempt

 

 

122

 

 

110

 

 

426

 

 

376

Dividends from Federal Reserve Bank and Federal Home Loan Bank stock

 

 

76

 

 

78

 

 

230

 

 

232

Interest bearing deposits with financial institutions

 

 

12

 

 

25

 

 

43

 

 

60

Total interest and dividend income

 

 

17,072

 

 

17,199

 

 

51,108

 

 

50,546

Interest expense

 

 

 

 

 

 

 

 

 

 

 

 

Savings, NOW, and money market deposits

 

 

185

 

 

175

 

 

547

 

 

562

Time deposits

 

 

799

 

 

1,073

 

 

2,377

 

 

3,604

Other short-term borrowings

 

 

6

 

 

5

 

 

22

 

 

10

Junior subordinated debentures

 

 

1,072

 

 

1,072

 

 

3,215

 

 

3,847

Subordinated debt

 

 

205

 

 

199

 

 

604

 

 

593

Notes payable and other borrowings

 

 

1

 

 

4

 

 

5

 

 

12

Total interest expense

 

 

2,268

 

 

2,528

 

 

6,770

 

 

8,628

Net interest and dividend income

 

 

14,804

 

 

14,671

 

 

44,338

 

 

41,918

Loan loss reserve release

 

 

(2,100)

 

 

 -

 

 

(4,400)

 

 

(2,000)

Net interest and dividend income after provision for loan losses

 

 

16,904

 

 

14,671

 

 

48,738

 

 

43,918

Noninterest income

 

 

 

 

 

 

 

 

 

 

 

 

Trust income

 

 

1,444

 

 

1,483

 

 

4,526

 

 

4,619

Service charges on deposits

 

 

1,766

 

 

1,838

 

 

5,086

 

 

5,354

Secondary mortgage fees

 

 

190

 

 

174

 

 

715

 

 

441

Mortgage servicing (loss) gain, net of changes in fair value

 

 

(274)

 

 

252

 

 

18

 

 

269

Net gain on sales of mortgage loans

 

 

1,359

 

 

914

 

 

4,677

 

 

2,614

Securities (loss) gain, net

 

 

(57)

 

 

1,231

 

 

(178)

 

 

1,457

Increase in cash surrender value of bank-owned life insurance

 

 

203

 

 

304

 

 

840

 

 

1,028

Debit card interchange income

 

 

1,004

 

 

1,011

 

 

3,013

 

 

2,771

Loss on disposal and transfer of fixed assets

 

 

(1,143)

 

 

(121)

 

 

(1,143)

 

 

(121)

Other income

 

 

1,156

 

 

1,237

 

 

4,331

 

 

3,693

Total noninterest income

 

 

5,648

 

 

8,323

 

 

21,885

 

 

22,125

Noninterest expense

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

8,260

 

 

8,856

 

 

26,664

 

 

27,140

Occupancy expense, net

 

 

1,156

 

 

1,143

 

 

3,521

 

 

3,809

Furniture and equipment expense

 

 

1,110

 

 

989

 

 

3,176

 

 

2,956

FDIC insurance

 

 

373

 

 

649

 

 

1,023

 

 

1,555

General bank insurance

 

 

308

 

 

371

 

 

975

 

 

1,203

Amortization of core deposit

 

 

 -

 

 

154

 

 

 -

 

 

1,177

Advertising expense

 

 

434

 

 

291

 

 

992

 

 

1,053

Debit card interchange expense

 

 

379

 

 

418

 

 

1,131

 

 

1,208

Legal fees

 

 

279

 

 

332

 

 

922

 

 

998

Other real estate expense, net

 

 

977

 

 

2,007

 

 

4,717

 

 

4,665

Other expense

 

 

2,968

 

 

3,134

 

 

9,203

 

 

9,148

Total noninterest expense

 

 

16,244

 

 

18,344

 

 

52,324

 

 

54,912

Income before income taxes

 

 

6,308

 

 

4,650

 

 

18,299

 

 

11,131

Provision for income taxes

 

 

2,384

 

 

1,726

 

 

6,747

 

 

3,984

Net income

 

$

3,924

 

$

2,924

 

$

11,552

 

$

7,147

Preferred stock dividends and accretion of discount

 

 

339

 

 

1,065

 

 

1,873

 

 

3,985

Dividends waived upon preferred stock redemption

 

 

 -

 

 

 -

 

 

 -

 

 

(5,433)

Gain on preferred stock redemption

 

 

 -

 

 

 -

 

 

 -

 

 

(1,348)

Net income available to common stockholders

 

$

3,585

 

$

1,859

 

$

9,679

 

$

9,943

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

$

0.12

 

$

0.06

 

$

0.33

 

$

0.41

Diluted earnings per share

 

 

0.12

 

 

0.06

 

 

0.33

 

 

0.41

 

See accompanying notes to consolidated financial statements.

4

 


 

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Unaudited)

 

(Unaudited)

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30, 

 

September 30, 

 

    

2015

    

2014

    

2015

    

2014

Net Income

 

$

3,924

 

$

2,924

 

$

11,552

 

$

7,147

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

(5,191)

 

 

(2,224)

 

 

(4,845)

 

 

397

Related tax benefit (expense)

 

 

2,079

 

 

918

 

 

1,869

 

 

(161)

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

 

 

(3,112)

 

 

(1,306)

 

 

(2,976)

 

 

236

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

Net realized (losses) gains

 

 

(57)

 

 

1,231

 

 

(178)

 

 

1,457

Income tax benefit (expense) on net realized (losses) gains

 

 

23

 

 

(504)

 

 

71

 

 

(597)

Net realized (losses) gains after tax

 

 

(34)

 

 

727

 

 

(107)

 

 

860

Other comprehensive loss on available-for-sale securities

 

 

(3,078)

 

 

(2,033)

 

 

(2,869)

 

 

(624)

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

242

 

 

237

 

 

739

 

 

731

Related tax expense

 

 

(100)

 

 

(97)

 

 

(304)

 

 

(301)

Other comprehensive income on held-to-maturity securities

 

 

142

 

 

140

 

 

435

 

 

430

Changes in fair value of derivatives used for cashflow hedges

 

 

(816)

 

 

 -

 

 

(816)

 

 

 -

Total other comprehensive loss

 

 

(3,752)

 

 

(1,893)

 

 

(3,250)

 

 

(194)

Total comprehensive income

 

$

172

 

$

1,031

 

$

8,302

 

$

6,953

 

See accompanying notes to consolidated financial statements.

 

5

 


 

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(In thousands)

 

 

 

 

 

 

 

 

 

 

(Unaudited)

 

 

Nine Months Ended

 

 

September 30, 

 

 

2015

    

2014

Cash flows from operating activities

 

 

 

 

 

 

Net income

 

$

11,552

 

$

7,147

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

 

 

 

 

 

 

Depreciation and amortization of leasehold improvement

 

 

1,816

 

 

1,887

Change in fair value of mortgage servicing rights

 

 

1,201

 

 

761

Loan loss reserve release

 

 

(4,400)

 

 

(2,000)

Provision for deferred tax expense

 

 

6,485

 

 

4,063

Originations of loans held-for-sale

 

 

(153,990)

 

 

(85,172)

Proceeds from sales of loans held-for-sale

 

 

158,621

 

 

87,569

Net gain on sales of mortgage loans

 

 

(4,677)

 

 

(2,614)

Change in current income taxes receivable (payable)

 

 

11

 

 

(79)

Increase in cash surrender value of bank-owned life insurance

 

 

(840)

 

 

(1,028)

Change in accrued interest receivable and other assets

 

 

(2,161)

 

 

(3,633)

Change in accrued interest payable and other liabilities

 

 

(3,386)

 

 

(22,108)

Net premium amortization/discount (accretion) on securities

 

 

226

 

 

(1,408)

Securities losses (gains), net

 

 

178

 

 

(1,457)

Amortization of core deposit

 

 

 -

 

 

1,177

Stock based compensation

 

 

466

 

 

189

Net gain on sale of other real estate owned

 

 

(769)

 

 

(610)

Provision for other real estate owned losses

 

 

3,825

 

 

2,781

Net loss on disposal of fixed assets

 

 

4

 

 

 -

Loss on transfer of premises to other real estate owned

 

 

1,139

 

 

121

Net cash provided by (used in) operating activities

 

 

15,301

 

 

(14,414)

Cash flows from investing activities

 

 

 

 

 

 

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

 

 

33,035

 

 

15,430

Proceeds from sales of securities available-for-sale

 

 

70,176

 

 

264,502

Purchases of securities available-for-sale

 

 

(131,956)

 

 

(268,639)

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

 

 

10,689

 

 

5,934

Purchases of securities held-to-maturity

 

 

 -

 

 

(11,212)

Proceeds from sales of Federal Home Loan Bank stock

 

 

787

 

 

1,234

Net change in loans

 

 

18,403

 

 

(53,037)

Improvements in other real estate owned

 

 

 -

 

 

(637)

Proceeds from sales of other real estate owned

 

 

12,336

 

 

12,746

Proceeds from disposition of premises and equipment

 

 

 -

 

 

1

Net purchases of premises and equipment

 

 

(793)

 

 

(721)

Net cash provided by (used in) investing activities

 

 

12,677

 

 

(34,399)

Cash flows from financing activities

 

 

 

 

 

 

Net change in deposits

 

 

35,424

 

 

(25,373)

Net change in securities sold under repurchase agreements

 

 

6,038

 

 

6,878

Net change in other short-term borrowings

 

 

(10,000)

 

 

35,000

Redemption of preferred stock

 

 

(47,331)

 

 

(24,321)

Proceeds from the issuance of common stock

 

 

 -

 

 

64,395

Dividends paid on preferred stock

 

 

(2,417)

 

 

(11,323)

Purchase of treasury stock

 

 

(117)

 

 

(46)

Net cash (used in) provided by financing activities

 

 

(18,403)

 

 

45,210

Net change in cash and cash equivalents

 

 

9,575

 

 

(3,603)

Cash and cash equivalents at beginning of period

 

 

44,197

 

 

47,660

Cash and cash equivalents at end of period

 

$

53,772

 

$

44,057

 

6

 


 

 

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Cash Flows - Continued

(In thousands)

 

 

 

 

 

 

 

 

(Unaudited)

 

Nine Months Ended

 

September 30, 

Supplemental cash flow information

2015

    

2014

Income taxes paid

$

250

 

$

 -

Interest paid for deposits

 

2,964

 

 

4,412

Interest paid for borrowings

 

3,848

 

 

21,425

Non-cash transfer of loans to other real estate owned

 

7,393

 

 

11,460

Non-cash transfer of premises to other real estate owned

 

468

 

 

2,160

Change in dividends accrued

 

(544)

 

 

(9,123)

Accretion on preferred stock discount

 

 -

 

 

58

 

See accompanying notes to consolidated financial statements.

 

 

7

 


 

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Changes in

Stockholders’ Equity

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

Other

 

 

 

 

Total

 

 

Common

 

Preferred

 

Paid-In

 

Retained

 

Comprehensive

 

Treasury

 

Stockholders’

 

    

Stock

    

Stock

    

Capital

    

Earnings

    

Loss

    

Stock

    

Equity

Balance, December 31, 2013

 

$

18,830

 

$

72,942

 

$

66,212

 

$

92,549

 

$

(7,038)

 

$

(95,803)

 

$

147,692

Net income

 

 

 

 

 

 

 

 

 

 

 

7,147

 

 

 

 

 

 

 

 

7,147

Other comprehensive loss, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(194)

 

 

 

 

 

(194)

Change in restricted stock

 

 

10

 

 

 

 

 

(10)

 

 

 

 

 

 

 

 

 

 

 

 -

Tax effect from vesting of restricted stock

 

 

 

 

 

 

 

 

29

 

 

 

 

 

 

 

 

 

 

 

29

Stock based compensation

 

 

 

 

 

 

 

 

189

 

 

 

 

 

 

 

 

 

 

 

189

Purchase of treasury stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(46)

 

 

(46)

Redemption of preferred stock

 

 

 

 

 

(25,669)

 

 

 

 

 

1,348

 

 

 

 

 

 

 

 

(24,321)

Common stock offering

 

 

15,525

 

 

 

 

 

48,870

 

 

 

 

 

 

 

 

 

 

 

64,395

Preferred stock accretion and declared dividends

 

 

 

 

 

58

 

 

 

 

 

(2,258)

 

 

 

 

 

 

 

 

(2,200)

Balance, September 30, 2014

 

$

34,365

 

$

47,331

 

$

115,290

 

$

98,786

 

$

(7,232)

 

$

(95,849)

 

$

192,691

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2014

 

$

34,365

 

$

47,331

 

$

115,332

 

$

100,697

 

$

(7,713)

 

$

(95,849)

 

$

194,163

Net income

 

 

 

 

 

 

 

 

 

 

 

11,552

 

 

 

 

 

 

 

 

11,552

Other comprehensive loss, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(3,250)

 

 

 

 

 

(3,250)

Change in restricted stock

 

 

58

 

 

 

 

 

(58)

 

 

 

 

 

 

 

 

 

 

 

 -

Tax effect from vesting of restricted stock

 

 

 

 

 

 

 

 

33

 

 

 

 

 

 

 

 

 

 

 

33

Stock based compensation

 

 

 

 

 

 

 

 

466

 

 

 

 

 

 

 

 

 

 

 

466

Purchase of treasury stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(117)

 

 

(117)

Redemption of preferred stock

 

 

 

 

 

(47,331)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(47,331)

Preferred stock accretion and declared dividends

 

 

 

 

 

 

 

 

 

 

 

(1,873)

 

 

 

 

 

 

 

 

(1,873)

Balance, September 30, 2015

 

$

34,423

 

$

 -

 

$

115,773

 

$

110,376

 

$

(10,963)

 

$

(95,966)

 

$

153,643

 

See accompanying notes to consolidated financial statements.

 

 

 

8

 


 

 

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 consolidated financial statements are consistent with those used in the preparation of the annual financial information.  The interim consolidated financial statements reflect all normal and recurring adjustments that 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, 2015, are not necessarily indicative of the results that may be expected for the year ending December 31, 2015.  These interim consolidated financial statements are unaudited and 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, 2014.  Unless otherwise indicated, amounts in the tables contained in the notes to the consolidated financial statements 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 principles (“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 consolidated 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, 2014.  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 May 2014, the FASB issued ASU No. 2014-09 "Revenue from Contracts with Customers (Topic 606)."  The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services.  ASU 2014-09 was to be effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period.  The amendments can be applied retrospectively to each prior reporting period or retrospectively with the cumulative effect of initially applying this update recognized at the date of initial application.  Early application is not permitted.  The Company is assessing the impact of ASU 2014-09 on its accounting and disclosures.  In August 2015, the FASB issued ASU 2015-14 “Revenue from Contracts with Customers (Topic 606) Deferral of the Effective Date.”  This accounting standards update defers the effective date for an additional year.  ASU 2015-14 will be effective for annual reporting periods beginning after December 15, 2017.

 

In April 2015, the FASB issued ASU No. 2015-03 “Simplifying the Presentation of Debt Issuance Costs.”  ASU 2015-03 amended prior guidance to simplify the presentation of debt issuance costs.  The amendments in this ASU require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts.  ASU 2015-03 will be effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within fiscal years.  The adoption of this standard will not have a material effect to the Company’s operating results or financial condition.

 

Note 2 – Securities

 

Investment Portfolio Management

 

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

 

Portfolio size and composition will be adjusted from time to time.  While a significant portion of the portfolio consists of readily marketable securities to address liquidity, other parts of the portfolio may reflect funds invested pending future loan demand or to maximize interest income without undue interest rate risk.

 

9

 


 

Investments are comprised of debt securities and non-marketable equity investments.  Securities available-for-sale are carried at fair value.  Unrealized gains and losses, net of tax, 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.

 

Securities held-to-maturity are carried at amortized cost and the discount or premium created in the 2013 transfer from available-for-sale securities or at the time of purchase thereafter is accreted or amortized to the maturity or expected payoff date but not an earlier call.  In accordance with GAAP, the Company has the positive intent and ability to hold the securities to maturity.

 

Nonmarketable equity investments include Federal Home Loan Bank of Chicago (“FHLBC”) stock and Federal Reserve Bank of Chicago (“Reserve Bank”) stock.  FHLBC stock was recorded at $3.5 million at September 30, 2015, and $4.3 million at December 31, 2014.  Reserve Bank stock was recorded at $4.8 million at September 30, 2015, and December 31, 2014.  Our FHLBC stock is necessary to maintain access to FHLBC advances.

 

The following table summarizes the amortized cost and fair value of the securities portfolio at September 30, 2015, and December 31, 2014, and the corresponding amounts of gross unrealized gains and losses (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

September 30, 2015:

    

Cost

    

Gains

    

Losses

    

Value

Securities Available-for-Sale

 

 

 

 

 

 

 

 

U.S. Treasury

 

$

1,514

 

$

1

 

$

 -

 

$

1,515

U.S. government agencies

 

 

1,690

 

 

 -

 

 

(113)

 

 

1,577

U.S. government agencies mortgage-backed

 

 

2,049

 

 

 -

 

 

(15)

 

 

2,034

States and political subdivisions

 

 

22,918

 

 

401

 

 

(149)

 

 

23,170

Corporate bonds

 

 

30,160

 

 

 -

 

 

(580)

 

 

29,580

Collateralized mortgage obligations

 

 

72,015

 

 

53

 

 

(1,191)

 

 

70,877

Asset-backed securities

 

 

195,100

 

 

49

 

 

(8,053)

 

 

187,096

Collateralized loan obligations

 

 

94,265

 

 

 -

 

 

(1,278)

 

 

92,987

Total Securities Available-for-Sale

 

$

419,711

 

$

504

 

$

(11,379)

 

$

408,836

Securities Held-to-Maturity

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agency mortgage-backed

 

$

36,746

 

$

2,442

 

$

 -

 

$

39,188

Collateralized mortgage obligations

 

 

213,298

 

 

5,746

 

 

(24)

 

 

219,020

Total Securities Held-to-Maturity

 

$

250,044

 

$

8,188

 

$

(24)

 

$

258,208

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

December 31, 2014:

    

Cost

    

Gains

    

Losses

    

Value

Securities Available-for-Sale

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury

 

$

1,529

 

$

 -

 

$

(2)

 

$

1,527

U.S. government agencies

 

 

1,711

 

 

 -

 

 

(87)

 

 

1,624

States and political subdivisions

 

 

21,682

 

 

432

 

 

(96)

 

 

22,018

Corporate bonds

 

 

31,243

 

 

309

 

 

(567)

 

 

30,985

Collateralized mortgage obligations

 

 

65,728

 

 

31

 

 

(2,132)

 

 

63,627

Asset-backed securities

 

 

175,565

 

 

199

 

 

(2,268)

 

 

173,496

Collateralized loan obligations

 

 

94,236

 

 

176

 

 

(2,203)

 

 

92,209

Total Securities Available-for-Sale

 

$

391,694

 

$

1,147

 

$

(7,355)

 

$

385,486

Securities Held-to-Maturity

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agency mortgage-backed

 

$

37,125

 

$

2,030

 

$

 -

 

$

39,155

Collateralized mortgage obligations

 

 

222,545

 

 

3,005

 

 

(1,439)

 

 

224,111

Total Securities Held-to-Maturity

 

$

259,670

 

$

5,035

 

$

(1,439)

 

$

263,266

 

10

 


 

The fair value, amortized cost and weighted average yield of debt securities at September 30, 2015, by contractual maturity, were as follows in the table below.  Securities not due at a single maturity date are shown separately.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

Amortized

 

Average

 

 

Fair

 

Securities Available-for-Sale

    

Cost

    

Yield

 

    

Value

  

Due in one year or less

 

$

12,136

 

1.52