10-Q 1 osbc-20160630x10q.htm 10-Q osbc-Current Folio_10Q

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 June 30, 2016

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 August 5, 2016, the Registrant had outstanding 29,554,716 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)

 

 

 

 

 

June 30, 

 

December 31, 

 

    

2016

    

2015

Assets

 

 

 

 

 

 

Cash and due from banks

 

$

32,806

 

$

26,975

Interest bearing deposits with financial institutions

 

 

7,525

 

 

13,363

Cash and cash equivalents

 

 

40,331

 

 

40,338

Securities available-for-sale, at fair value

 

 

764,551

 

 

456,066

Securities held-to-maturity, at amortized cost

 

 

 -

 

 

247,746

Federal Home Loan Bank and Federal Reserve Bank stock

 

 

7,918

 

 

8,518

Loans held-for-sale

 

 

5,589

 

 

2,849

Loans

 

 

1,161,151

 

 

1,133,715

Less: allowance for loan losses

 

 

15,822

 

 

16,223

Net loans

 

 

1,145,329

 

 

1,117,492

Premises and equipment, net

 

 

38,953

 

 

39,612

Other real estate owned

 

 

16,252

 

 

19,141

Mortgage servicing rights, net

 

 

4,698

 

 

5,847

Bank-owned life insurance (BOLI)

 

 

59,653

 

 

59,049

Deferred tax assets, net

 

 

57,738

 

 

64,552

Other assets

 

 

18,762

 

 

15,818

Total assets

 

$

2,159,774

 

$

2,077,028

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

Noninterest bearing demand

 

$

477,883

 

$

442,639

Interest bearing:

 

 

 

 

 

 

Savings, NOW, and money market

 

 

902,576

 

 

908,598

Time

 

 

401,666

 

 

407,849

Total deposits

 

 

1,782,125

 

 

1,759,086

Securities sold under repurchase agreements

 

 

43,138

 

 

34,070

Other short-term borrowings

 

 

50,000

 

 

15,000

Junior subordinated debentures

 

 

57,567

 

 

57,543

Subordinated debt

 

 

45,000

 

 

45,000

Notes payable and other borrowings

 

 

500

 

 

500

Other liabilities

 

 

13,823

 

 

9,900

Total liabilities

 

 

1,992,153

 

 

1,921,099

 

 

 

 

 

 

 

Stockholders’ Equity

 

 

 

 

 

 

Common stock

 

 

34,533

 

 

34,427

Additional paid-in capital

 

 

116,311

 

 

115,918

Retained earnings

 

 

121,080

 

 

114,209

Accumulated other comprehensive loss

 

 

(8,083)

 

 

(12,659)

Treasury stock

 

 

(96,220)

 

 

(95,966)

Total stockholders’ equity

 

 

167,621

 

 

155,929

Total liabilities and stockholders’ equity

 

$

2,159,774

 

$

2,077,028

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2016

 

December 31, 2015

 

 

Preferred

 

Common

 

Preferred

 

Common

 

    

Stock

    

Stock

    

Stock

    

Stock

Par value

 

$

1

 

$

1

 

$

1

 

$

1

Liquidation value

 

 

 -

 

 

N/A

 

 

 -

 

 

N/A

Shares authorized

 

 

300,000

 

 

60,000,000

 

 

300,000

 

 

60,000,000

Shares issued

 

 

 -

 

 

34,532,734

 

 

 -

 

 

34,427,234

Shares outstanding

 

 

 -

 

 

29,554,716

 

 

 -

 

 

29,483,429

Treasury shares

 

 

-

 

 

4,978,018

 

 

-

 

 

4,943,805

 

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

 

Six Months Ended

 

 

June 30, 

 

June 30, 

 

    

2016

    

2015

    

2016

    

2015

Interest and dividend income

 

 

 

 

 

 

 

 

 

 

 

 

Loans, including fees

 

$

13,039

 

$

13,467

 

$

26,097

 

$

26,685

Loans held-for-sale

 

 

39

 

 

72

 

 

67

 

 

115

Securities:

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

 

4,382

 

 

3,372

 

 

8,593

 

 

6,747

Tax exempt

 

 

220

 

 

163

 

 

399

 

 

304

Dividends from Federal Reserve Bank and Federal Home Loan Bank stock

 

 

84

 

 

77

 

 

168

 

 

154

Interest bearing deposits with financial institutions

 

 

15

 

 

19

 

 

34

 

 

31

Total interest and dividend income

 

 

17,779

 

 

17,170

 

 

35,358

 

 

34,036

Interest expense

 

 

 

 

 

 

 

 

 

 

 

 

Savings, NOW, and money market deposits

 

 

193

 

 

183

 

 

384

 

 

362

Time deposits

 

 

869

 

 

771

 

 

1,691

 

 

1,578

Other short-term borrowings

 

 

26

 

 

7

 

 

46

 

 

16

Junior subordinated debentures

 

 

1,083

 

 

1,071

 

 

2,167

 

 

2,143

Subordinated debt

 

 

243

 

 

202

 

 

482

 

 

399

Notes payable and other borrowings

 

 

2

 

 

 -

 

 

4

 

 

4

Total interest expense

 

 

2,416

 

 

2,234

 

 

4,774

 

 

4,502

Net interest and dividend income

 

 

15,363

 

 

14,936

 

 

30,584

 

 

29,534

Loan loss reserve release

 

 

 -

 

 

(2,300)

 

 

 -

 

 

(2,300)

Net interest and dividend income after release for loan losses

 

 

15,363

 

 

17,236

 

 

30,584

 

 

31,834

Noninterest income

 

 

 

 

 

 

 

 

 

 

 

 

Trust income

 

 

1,502

 

 

1,596

 

 

2,871

 

 

3,082

Service charges on deposits

 

 

1,646

 

 

1,779

 

 

3,205

 

 

3,320

Secondary mortgage fees

 

 

280

 

 

281

 

 

473

 

 

525

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

 

 

(311)

 

 

500

 

 

(931)

 

 

292

Net gain on sales of mortgage loans

 

 

1,642

 

 

1,695

 

 

2,854

 

 

3,318

Securities loss, net

 

 

 -

 

 

(12)

 

 

(61)

 

 

(121)

Increase in cash surrender value of bank-owned life insurance

 

 

319

 

 

299

 

 

604

 

 

779

Debit card interchange income

 

 

1,049

 

 

1,050

 

 

1,996

 

 

2,009

Other income

 

 

1,150

 

 

1,076

 

 

2,541

 

 

3,033

Total noninterest income

 

 

7,277

 

 

8,264

 

 

13,552

 

 

16,237

Noninterest expense

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

8,814

 

 

9,149

 

 

17,840

 

 

18,404

Occupancy expense, net

 

 

1,009

 

 

1,094

 

 

2,238

 

 

2,365

Furniture and equipment expense

 

 

1,078

 

 

1,065

 

 

2,036

 

 

2,066

FDIC insurance

 

 

362

 

 

377

 

 

565

 

 

650

General bank insurance

 

 

272

 

 

310

 

 

570

 

 

667

Advertising expense

 

 

435

 

 

353

 

 

782

 

 

558

Debit card interchange expense

 

 

620

 

 

400

 

 

823

 

 

752

Legal fees

 

 

191

 

 

420

 

 

352

 

 

643

Other real estate expense, net

 

 

879

 

 

2,388

 

 

1,617

 

 

3,740

Other expense

 

 

3,040

 

 

3,371

 

 

6,141

 

 

6,235

Total noninterest expense

 

 

16,700

 

 

18,927

 

 

32,964

 

 

36,080

Income before income taxes

 

 

5,940

 

 

6,573

 

 

11,172

 

 

11,991

Provision for income taxes

 

 

2,095

 

 

2,444

 

 

4,005

 

 

4,363

Net income

 

$

3,845

 

$

4,129

 

$

7,167

 

$

7,628

Preferred stock dividends and accretion of discount

 

 

 -

 

 

710

 

 

 -

 

 

1,534

Net income available to common stockholders

 

$

3,845

 

$

3,419

 

$

7,167

 

$

6,094

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

$

0.13

 

$

0.12

 

$

0.24

 

$

0.21

Diluted earnings per share

 

 

0.13

 

 

0.12

 

 

0.24

 

 

0.21

 

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

 

Six Months Ended

 

 

June 30, 

 

June 30, 

 

    

2016

    

2015

    

2016

    

2015

Net Income

 

$

3,845

 

$

4,129

 

$

7,167

 

$

7,628

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

8,076

 

 

(575)

 

 

5,767

 

 

346

Related tax (expense) benefit

 

 

(3,233)

 

 

228

 

 

(2,308)

 

 

(210)

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

 

 

4,843

 

 

(347)

 

 

3,459

 

 

136

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

Net realized losses

 

 

 -

 

 

(12)

 

 

(61)

 

 

(121)

Income tax benefit on net realized losses

 

 

 -

 

 

3

 

 

25

 

 

48

Net realized losses after tax

 

 

 -

 

 

(9)

 

 

(36)

 

 

(73)

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

 

 

4,843

 

 

(338)

 

 

3,495

 

 

209

 

 

 

 

 

 

 

 

 

 

 

 

 

Accretion and reversal of net unrealized holding gains on held-to-maturity securities

 

 

5,715

 

 

254

 

 

5,939

 

 

497

Related tax expense

 

 

(2,354)

 

 

(104)

 

 

(2,446)

 

 

(204)

Other comprehensive income on held-to-maturity securities

 

 

3,361

 

 

150

 

 

3,493

 

 

293

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in fair value of derivatives used for cashflow hedges

 

 

(1,597)

 

 

 -

 

 

(4,024)

 

 

 -

Related tax benefit

 

 

640

 

 

 -

 

 

1,612

 

 

 -

Other comprehensive loss on cashflow hedges

 

 

(957)

 

 

 -

 

 

(2,412)

 

 

 -

 

 

 

 

 

 

 

 

 

 

 

 

 

Total other comprehensive income (loss)

 

 

7,247

 

 

(188)

 

 

4,576

 

 

502

Total comprehensive income

 

$

11,092

 

$

3,941

 

$

11,743

 

$

8,130

 

See accompanying notes to consolidated financial statements.

 

5

 


 

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(In thousands)

 

 

 

 

 

 

 

 

 

 

(Unaudited)

 

 

Six Months Ended

 

 

June 30, 

 

 

2016

    

2015

Cash flows from operating activities

 

 

 

 

 

 

Net income

 

$

7,167

 

$

7,628

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

 

 

 

 

 

 

Depreciation and amortization of leasehold improvement

 

 

1,097

 

 

1,216

Change in fair value of mortgage servicing rights

 

 

1,774

 

 

513

Loan loss reserve release

 

 

 -

 

 

(2,300)

Provision for deferred tax expense

 

 

3,717

 

 

4,206

Originations of loans held-for-sale

 

 

(83,698)

 

 

(114,718)

Proceeds from sales of loans held-for-sale

 

 

83,324

 

 

115,940

Net gain on sales of mortgage loans

 

 

(2,854)

 

 

(3,318)

Change in current income taxes receivable

 

 

259

 

 

27

Increase in cash surrender value of bank-owned life insurance

 

 

(604)

 

 

(392)

Change in accrued interest receivable and other assets

 

 

(3,152)

 

 

(2,167)

Change in accrued interest payable and other liabilities

 

 

(185)

 

 

(2,475)

Net premium (accretion)/amortization/discount on securities

 

 

(385)

 

 

154

Securities losses, net

 

 

61

 

 

121

Amortization of junior subordinated debentures issuance costs

 

 

24

 

 

24

Stock based compensation

 

 

325

 

 

344

Net gain on sale of other real estate owned

 

 

(67)

 

 

(337)

Provision for other real estate owned losses

 

 

940

 

 

2,697

Net cash provided by operating activities

 

 

7,743

 

 

7,163

Cash flows from investing activities

 

 

 

 

 

 

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

 

 

25,687

 

 

28,292

Proceeds from sales of securities available-for-sale

 

 

44,993

 

 

56,121

Purchases of securities available-for-sale

 

 

(122,700)

 

 

(98,806)

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

 

 

3,372

 

 

6,983

Proceeds from sales of Federal Home Loan Bank stock

 

 

600

 

 

787

Net change in loans

 

 

(28,805)

 

 

(7,582)

Improvements in other real estate owned

 

 

(12)

 

 

 -

Proceeds from sales of other real estate owned

 

 

2,996

 

 

4,673

Net purchases of premises and equipment

 

 

(438)

 

 

(577)

Net cash used in investing activities

 

 

(74,307)

 

 

(10,109)

Cash flows from financing activities

 

 

 

 

 

 

Net change in deposits

 

 

23,039

 

 

28,497

Net change in securities sold under repurchase agreements

 

 

9,068

 

 

11,379

Net change in other short-term borrowings

 

 

35,000

 

 

(25,000)

Redemption of preferred stock

 

 

 -

 

 

(15,778)

Dividends paid preferred stock

 

 

 -

 

 

(1,716)

Dividends paid common stock

 

 

(296)

 

 

 -

Purchase of treasury stock

 

 

(254)

 

 

(117)

Net cash provided by (used in) financing activities

 

 

66,557

 

 

(2,735)

Net change in cash and cash equivalents

 

 

(7)

 

 

(5,681)

Cash and cash equivalents at beginning of period

 

 

40,338

 

 

44,197

Cash and cash equivalents at end of period

 

$

40,331

 

$

38,516

 

6

 


 

 

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Cash Flows - Continued

(In thousands)

 

 

 

 

 

 

 

 

 

 

(Unaudited)

 

 

Six Months Ended

 

 

June 30, 

Supplemental cash flow information

    

2016

    

2015

Income taxes paid, net

 

$

100

 

$

130

Interest paid for deposits

 

 

2,053

 

 

1,993

Interest paid for borrowings

 

 

2,665

 

 

2,564

Non-cash transfer of loans to other real estate owned

 

 

968

 

 

7,015

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

 

 

244,823

 

 

 -

Change in dividends accrued and declared but not paid

 

 

 -

 

 

(182)

 

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, 2014

 

$

34,365

 

$

47,331

 

$

115,332

 

$

100,697

 

$

(7,713)

 

$

(95,849)

 

$

194,163

Net income

 

 

 

 

 

 

 

 

 

 

 

7,628

 

 

 

 

 

 

 

 

7,628

Other comprehensive gain, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

502

 

 

 

 

 

502

Change in restricted stock

 

 

58

 

 

 

 

 

(58)

 

 

 

 

 

 

 

 

 

 

 

 -

Tax effect from vesting of restricted stock

 

 

 

 

 

 

 

 

33

 

 

 

 

 

 

 

 

 

 

 

33

Stock based compensation

 

 

 

 

 

 

 

 

344

 

 

 

 

 

 

 

 

 

 

 

344

Purchase of treasury stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(117)

 

 

(117)

Redemption of preferred stock

 

 

 

 

 

(15,778)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(15,778)

Preferred stock accretion and declared dividends

 

 

 

 

 

 

 

 

 

 

 

(1,534)

 

 

 

 

 

 

 

 

(1,534)

Balance, June 30, 2015

 

$

34,423

 

$

31,553

 

$

115,651

 

$

106,791

 

$

(7,211)

 

$

(95,966)

 

$

185,241

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2015

 

$

34,427

 

$

 -

 

$

115,918

 

$

114,209

 

$

(12,659)

 

$

(95,966)

 

$

155,929

Net income

 

 

 

 

 

 

 

 

 

 

 

7,167

 

 

 

 

 

 

 

 

7,167

Other comprehensive gain, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4,576

 

 

 

 

 

4,576

Dividends declared and paid, $0.01 per share

 

 

 

 

 

 

 

 

 

 

 

(296)

 

 

 

 

 

 

 

 

(296)

Change in restricted stock

 

 

106

 

 

 

 

 

(106)

 

 

 

 

 

 

 

 

 

 

 

 -

Tax effect from vesting of restricted stock

 

 

 

 

 

 

 

 

174

 

 

 

 

 

 

 

 

 

 

 

174

Stock based compensation

 

 

 

 

 

 

 

 

325

 

 

 

 

 

 

 

 

 

 

 

325

Purchase of treasury stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(254)

 

 

(254)

Balance, June 30, 2016

 

$

34,533

 

$

 -

 

$

116,311

 

$

121,080

 

$

(8,083)

 

$

(96,220)

 

$

167,621

 

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 June 30, 2016, are not necessarily indicative of the results that may be expected for the year ending December 31, 2016.  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, 2015.  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, 2015.  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.  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 of ASU 2014-09 for an additional year.  ASU 2015-14 will be effective for annual reporting periods beginning after December 15, 2017.  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.  In March 2016, the FASB issued ASU 2016-08 “Revenue from Contracts with Customers (TOPIC 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net).” and in April 2016, the FASB issued ASU 2016-10 “Revenue from Contracts with Customers (TOPIC 606): Identifying Performance Obligations and Licensing.”  ASU 2016-08 requires the entity to determine if it is acting as a principal with control over the goods or services it is contractually obligated to provide, or an agent with no control over specified goods or services provided by another party to a customer.  ASU 2016-10 was issued to further clarify ASU 2014-09 implementation regarding identifying performance obligation materiality, identification of key contract components, and scope.  The Company is assessing the impact of ASU 2014-09 and other related ASUs as noted above on its accounting and disclosures.

 

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 is effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years.  The adoption of this standard did not have a material effect to the Company’s operating results or financial condition.  This standard was adopted by the Company effective January 2016.

 

In March 2016, the FASB issued ASU No. 2016-09 “Improvements to Employee Share-Based Payment Accounting:”  FASB issued this AS U as part of the Simplification Initiative.  This ASU involves several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liability, and classification on the statement of cash flows.  ASU 2016-09 is effective for financial statements issued for fiscal years beginning after December 15, 2016.  The Company is assessing the impact of ASU 2016-09 on its accounting and disclosures.

 

9

 


 

In June 2016, the FASB issued ASU No. 2016-13 “Measurement of Credit Losses on Financial Instruments:”  ASU 2016-13 was issued to provide financial statement users with more useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date to enhance the decision making process.  ASU 2016-13 is effective for financial statements issued for fiscal years beginning after December 15, 2019.  The Company is assessing the impact of ASU 2016-13 on its accounting and disclosures.

 

 

Subsequent Events

 

On July 19, 2016, the Company’s Board of Directors declared a cash dividend of 1 cent per share payable on August 9, 2016, to stockholders of record as of July 29, 2016.

 

On August 1, 2016, the Company announced the Bank has agreed to acquire the Chicago branch of Talmer Bank and Trust, the banking subsidiary of Talmer Bancorp, Inc. (“Talmer”), including approximately $82 million of deposits and $237 million of loans.  The acquisition is expected to close in the fourth quarter of 2016, subject to regulatory approval, the completion of Talmer’s pending merger with Chemical Financial Corporation and other customary closing conditions.

 

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 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.

 

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.

 

In the second quarter of 2016, the securities held-to-maturity portfolio was reclassified to available-for-sale to allow for portfolio restructuring and to fund loan growth.  This transfer of $244.8 million was approved by the Board of Directors, and will preclude any holdings of securities held-to-maturity for a two year period. 

 

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 $3.2 million at June 30, 2016, and $3.7 million at December 31, 2015.  Reserve Bank stock was recorded at $4.8 million at June 30, 2016, and December 31, 2015.  Our FHLBC stock is necessary to maintain access to FHLBC advances.

 

10

 


 

The following table summarizes the amortized cost and fair value of the securities portfolio at June 30, 2016, and December 31, 2015, and the corresponding amounts of gross unrealized gains and losses (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

June 30, 2016

    

Cost

    

Gains

    

Losses

    

Value

Securities available-for-sale

 

 

 

 

 

 

 

 

U.S. government agencies

 

$

1,668

 

$

 -

 

$

(146)

 

$

1,522

U.S. government agencies mortgage-backed

 

 

42,780

 

 

868

 

 

(2)

 

 

43,646

States and political subdivisions

 

 

41,830

 

 

791

 

 

 -

 

 

42,621

Corporate bonds

 

 

30,505

 

 

227

 

 

(524)

 

 

30,208

Collateralized mortgage obligations

 

 

284,538

 

 

5,414

 

 

(727)

 

 

289,225

Asset-backed securities

 

 

262,625

 

 

568

 

 

(12,234)

 

 

250,959

Collateralized loan obligations

 

 

109,430

 

 

76

 

 

(3,136)

 

 

106,370

Total securities available-for-sale

 

$

773,376

 

$

7,944

 

$

(16,769)

 

$

764,551

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

December 31, 2015

    

Cost

    

Gains

    

Losses

    

Value

Securities available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury

 

$

1,509

 

$

 -

 

$

 -

 

$

1,509

U.S. government agencies

 

 

1,683

 

 

 -

 

 

(127)

 

 

1,556

U.S. government agencies mortgage-backed

 

 

2,040

 

 

 

 

 

(44)

 

 

1,996

States and political subdivisions

 

 

30,341

 

 

285

 

 

(100)

 

 

30,526

Corporate bonds

 

 

30,157

 

 

 -

 

 

(757)

 

 

29,400

Collateralized mortgage obligations

 

 

68,743

 

 

24

 

 

(1,847)

 

 

66,920

Asset-backed securities

 

 

241,872

 

 

74

 

 

(10,038)

 

 

231,908

Collateralized loan obligations

 

 

94,374

 

 

 -

 

 

(2,123)

 

 

92,251

Total securities available-for-sale

 

$

470,719

 

$

383

 

$

(15,036)

 

$

456,066

Securities held-to-maturity

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agency mortgage-backed

 

$

36,505

 

$

1,592

 

$

 -

 

$

38,097

Collateralized mortgage obligations

 

 

211,241

 

 

3,302

 

 

(965)

 

 

213,578

Total securities held-to-maturity

 

$

247,746

 

$

4,894

 

$

(965)

 

$

251,675

 

The fair value, amortized cost and weighted average yield of debt securities at June 30, 2016, 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