10-Q 1 osbc-20160930x10q.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 September 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 November 4, 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)

 

 

 

 

 

September 30, 

 

December 31, 

 

    

2016

    

2015

Assets

 

 

 

 

 

 

Cash and due from banks

 

$

29,203

 

$

26,975

Interest bearing deposits with financial institutions

 

 

160,744

 

 

13,363

Cash and cash equivalents

 

 

189,947

 

 

40,338

Securities available-for-sale, at fair value

 

 

531,057

 

 

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

 

 

3,750

 

 

2,849

Loans

 

 

1,202,852

 

 

1,133,715

Less: allowance for loan losses

 

 

14,983

 

 

16,223

Net loans

 

 

1,187,869

 

 

1,117,492

Premises and equipment, net

 

 

39,092

 

 

39,612

Other real estate owned

 

 

14,144

 

 

19,141

Mortgage servicing rights, net

 

 

5,075

 

 

5,847

Bank-owned life insurance (BOLI)

 

 

60,036

 

 

59,049

Deferred tax assets, net

 

 

55,536

 

 

64,552

Other assets

 

 

18,327

 

 

15,818

Total assets

 

$

2,112,751

 

$

2,077,028

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

Noninterest bearing demand

 

$

473,477

 

$

442,639

Interest bearing:

 

 

 

 

 

 

Savings, NOW, and money market

 

 

904,137

 

 

908,598

Time

 

 

399,768

 

 

407,849

Total deposits

 

 

1,777,382

 

 

1,759,086

Securities sold under repurchase agreements

 

 

46,606

 

 

34,070

Other short-term borrowings

 

 

 -

 

 

15,000

Junior subordinated debentures

 

 

57,579

 

 

57,543

Subordinated debt

 

 

45,000

 

 

45,000

Notes payable and other borrowings

 

 

500

 

 

500

Other liabilities

 

 

14,057

 

 

9,900

Total liabilities

 

 

1,941,124

 

 

1,921,099

 

 

 

 

 

 

 

Stockholders’ Equity

 

 

 

 

 

 

Common stock

 

 

34,533

 

 

34,427

Additional paid-in capital

 

 

116,468

 

 

115,918

Retained earnings

 

 

124,283

 

 

114,209

Accumulated other comprehensive loss

 

 

(7,437)

 

 

(12,659)

Treasury stock

 

 

(96,220)

 

 

(95,966)

Total stockholders’ equity

 

 

171,627

 

 

155,929

Total liabilities and stockholders’ equity

 

$

2,112,751

 

$

2,077,028

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 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

 

Nine Months Ended

 

 

September 30, 

 

September 30, 

 

    

2016

    

2015

    

2016

    

2015

Interest and dividend income

 

 

 

 

 

 

 

 

 

 

 

 

Loans, including fees

 

$

13,496

 

$

13,353

 

$

39,593

 

$

40,038

Loans held-for-sale

 

 

48

 

 

38

 

 

115

 

 

153

Securities:

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

 

3,954

 

 

3,471

 

 

12,547

 

 

10,218

Tax exempt

 

 

180

 

 

122

 

 

579

 

 

426

Dividends from Federal Reserve Bank and Federal Home Loan Bank stock

 

 

83

 

 

76

 

 

251

 

 

230

Interest bearing deposits with financial institutions

 

 

64

 

 

12

 

 

98

 

 

43

Total interest and dividend income

 

 

17,825

 

 

17,072

 

 

53,183

 

 

51,108

Interest expense

 

 

 

 

 

 

 

 

 

 

 

 

Savings, NOW, and money market deposits

 

 

193

 

 

185

 

 

577

 

 

547

Time deposits

 

 

931

 

 

799

 

 

2,622

 

 

2,377

Other short-term borrowings

 

 

23

 

 

6

 

 

69

 

 

22

Junior subordinated debentures

 

 

1,084

 

 

1,072

 

 

3,251

 

 

3,215

Subordinated debt

 

 

245

 

 

205

 

 

727

 

 

604

Notes payable and other borrowings

 

 

2

 

 

1

 

 

6

 

 

5

Total interest expense

 

 

2,478

 

 

2,268

 

 

7,252

 

 

6,770

Net interest and dividend income

 

 

15,347

 

 

14,804

 

 

45,931

 

 

44,338

Loan loss reserve release

 

 

 -

 

 

(2,100)

 

 

 -

 

 

(4,400)

Net interest and dividend income after release for loan losses

 

 

15,347

 

 

16,904

 

 

45,931

 

 

48,738

Noninterest income

 

 

 

 

 

 

 

 

 

 

 

 

Trust income

 

 

1,403

 

 

1,444

 

 

4,274

 

 

4,526

Service charges on deposits

 

 

1,756

 

 

1,766

 

 

4,961

 

 

5,086

Secondary mortgage fees

 

 

322

 

 

190

 

 

795

 

 

715

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

 

 

290

 

 

(274)

 

 

(641)

 

 

18

Net gain on sales of mortgage loans

 

 

2,177

 

 

1,359

 

 

5,031

 

 

4,677

Securities loss, net

 

 

(1,959)

 

 

(57)

 

 

(2,020)

 

 

(178)

Increase in cash surrender value of bank-owned life insurance

 

 

383

 

 

236

 

 

987

 

 

1,015

Debit card interchange income

 

 

1,013

 

 

1,004

 

 

3,009

 

 

3,013

Loss on disposal and transfer of fixed assets, net

 

 

 -

 

 

(1,143)

 

 

(1)

 

 

(1,143)

Other income

 

 

1,209

 

 

1,123

 

 

3,751

 

 

4,156

Total noninterest income

 

 

6,594

 

 

5,648

 

 

20,146

 

 

21,885

Noninterest expense

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

9,014

 

 

8,260

 

 

26,854

 

 

26,664

Occupancy expense, net

 

 

1,120

 

 

1,156

 

 

3,358

 

 

3,521

Furniture and equipment expense

 

 

1,144

 

 

1,110

 

 

3,180

 

 

3,176

FDIC insurance

 

 

228

 

 

373

 

 

793

 

 

1,023

General bank insurance

 

 

269

 

 

308

 

 

839

 

 

975

Advertising expense

 

 

430

 

 

434

 

 

1,212

 

 

992

Debit card interchange expense

 

 

363

 

 

379

 

 

1,186

 

 

1,131

Legal fees

 

 

242

 

 

279

 

 

594

 

 

922

Other real estate expense, net

 

 

426

 

 

977

 

 

2,043

 

 

4,717

Other expense

 

 

3,346

 

 

2,968

 

 

9,487

 

 

9,203

Total noninterest expense

 

 

16,582

 

 

16,244

 

 

49,546

 

 

52,324

Income before income taxes

 

 

5,359

 

 

6,308

 

 

16,531

 

 

18,299

Provision for income taxes

 

 

1,860

 

 

2,384

 

 

5,865

 

 

6,747

Net income

 

$

3,499

 

$

3,924

 

$

10,666

 

$

11,552

Preferred stock dividends and accretion of discount

 

 

 -

 

 

339

 

 

 -

 

 

1,873

Net income available to common stockholders

 

$

3,499

 

$

3,585

 

$

10,666

 

$

9,679

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

$

0.12

 

$

0.12

 

$

0.36

 

$

0.33

Diluted earnings per share

 

 

0.12

 

 

0.12

 

 

0.36

 

 

0.33

 

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, 

 

    

2016

    

2015

    

2016

    

2015

Net Income

 

$

3,499

 

$

3,924

 

$

10,666

 

$

11,552

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

(616)

 

 

(5,191)

 

 

5,151

 

 

(4,845)

Related tax benefit (expense)

 

 

237

 

 

2,079

 

 

(2,071)

 

 

1,869

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

 

 

(379)

 

 

(3,112)

 

 

3,080

 

 

(2,976)

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

Net realized losses

 

 

(1,959)

 

 

(57)

 

 

(2,020)

 

 

(178)

Income tax benefit on net realized losses

 

 

782

 

 

23

 

 

807

 

 

71

Net realized losses after tax

 

 

(1,177)

 

 

(34)

 

 

(1,213)

 

 

(107)

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

 

 

798

 

 

(3,078)

 

 

4,293

 

 

(2,869)

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 -

 

 

242

 

 

5,939

 

 

739

Related tax expense

 

 

 -

 

 

(100)

 

 

(2,446)

 

 

(304)

Other comprehensive income on held-to-maturity securities

 

 

 -

 

 

142

 

 

3,493

 

 

435

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in fair value of derivatives used for cashflow hedges

 

 

(254)

 

 

(816)

 

 

(4,278)

 

 

(816)

Related tax benefit

 

 

102

 

 

 -

 

 

1,714

 

 

 -

Other comprehensive loss on cashflow hedges

 

 

(152)

 

 

(816)

 

 

(2,564)

 

 

(816)

 

 

 

 

 

 

 

 

 

 

 

 

 

Total other comprehensive income (loss)

 

 

646

 

 

(3,752)

 

 

5,222

 

 

(3,250)

Total comprehensive income

 

$

4,145

 

$

172

 

$

15,888

 

$

8,302

 

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, 

 

 

2016

    

2015

Cash flows from operating activities

 

 

 

 

 

 

Net income

 

$

10,666

 

$

11,552

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

 

 

 

 

 

 

Depreciation and amortization of leasehold improvement

 

 

1,682

 

 

1,816

Change in fair value of mortgage servicing rights

 

 

1,920

 

 

1,201

Loan loss reserve release

 

 

 -

 

 

(4,400)

Provision for deferred tax expense

 

 

5,476

 

 

6,485

Originations of loans held-for-sale

 

 

(147,186)

 

 

(153,990)

Proceeds from sales of loans held-for-sale

 

 

150,247

 

 

158,621

Net gain on sales of mortgage loans

 

 

(5,031)

 

 

(4,677)

Change in current income taxes receivable

 

 

300

 

 

11

Increase in cash surrender value of bank-owned life insurance

 

 

(987)

 

 

(624)

Change in accrued interest receivable and other assets

 

 

(2,659)

 

 

(2,413)

Change in accrued interest payable and other liabilities

 

 

(246)

 

 

(3,385)

Net discount (accretion)/premium amortization on securities

 

 

(517)

 

 

226

Securities losses, net

 

 

2,020

 

 

178

Amortization of junior subordinated debentures issuance costs

 

 

36

 

 

35

Stock based compensation

 

 

482

 

 

466

Net gain on sale of other real estate owned

 

 

(316)

 

 

(769)

Provision for other real estate owned losses

 

 

1,305

 

 

3,825

Net loss on disposal of fixed assets

 

 

1

 

 

4

Loss on transfer of premises to other real estate owned

 

 

 -

 

 

1,139

Net cash provided by operating activities

 

 

17,193

 

 

15,301

Cash flows from investing activities

 

 

 

 

 

 

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

 

 

62,868

 

 

33,035

Proceeds from sales of securities available-for-sale

 

 

271,374

 

 

70,176

Purchases of securities available-for-sale

 

 

(153,252)

 

 

(131,956)

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

 

 

3,372

 

 

10,689

Proceeds from sales of Federal Home Loan Bank stock

 

 

600

 

 

787

Net change in loans

 

 

(71,600)

 

 

18,403

Improvements in other real estate owned

 

 

(16)

 

 

 -

Proceeds from sales of other real estate owned

 

 

5,247

 

 

12,336

Net purchases of premises and equipment

 

 

(1,163)

 

 

(793)

Net cash provided by investing activities

 

 

117,430

 

 

12,677

Cash flows from financing activities

 

 

 

 

 

 

Net change in deposits

 

 

18,296

 

 

35,424

Net change in securities sold under repurchase agreements

 

 

12,536

 

 

6,038

Net change in other short-term borrowings

 

 

(15,000)

 

 

(10,000)

Redemption of preferred stock

 

 

 -

 

 

(47,331)

Dividends paid on preferred stock

 

 

 -

 

 

(2,417)

Dividends paid on common stock

 

 

(592)

 

 

 -

Purchase of treasury stock

 

 

(254)

 

 

(117)

Net cash provided by (used in) financing activities

 

 

14,986

 

 

(18,403)

Net change in cash and cash equivalents

 

 

149,609

 

 

9,575

Cash and cash equivalents at beginning of period

 

 

40,338

 

 

44,197

Cash and cash equivalents at end of period

 

$

189,947

 

$

53,772

 

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

    

2016

    

2015

Income taxes paid, net

 

$

160

 

$

250

Interest paid for deposits

 

 

3,142

 

 

2,964

Interest paid for borrowings

 

 

4,021

 

 

3,848

Non-cash transfer of loans to other real estate owned

 

 

1,223

 

 

7,393

Non-cash transfer of premises to other real estate owned

 

 

 -

 

 

468

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

 

 

244,823

 

 

 -

Change in dividends accrued and declared but not paid

 

 

 -

 

 

(544)

 

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

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2015

 

$

34,427

 

$

 -

 

$

115,918

 

$

114,209

 

$

(12,659)

 

$

(95,966)

 

$

155,929

Net income

 

 

 

 

 

 

 

 

 

 

 

10,666

 

 

 

 

 

 

 

 

10,666

Other comprehensive gain, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5,222

 

 

 

 

 

5,222

Dividends declared and paid

 

 

 

 

 

 

 

 

 

 

 

(592)

 

 

 

 

 

 

 

 

(592)

Change in restricted stock

 

 

106

 

 

 

 

 

(106)

 

 

 

 

 

 

 

 

 

 

 

 -

Tax effect from vesting of restricted stock

 

 

 

 

 

 

 

 

174

 

 

 

 

 

 

 

 

 

 

 

174

Stock based compensation

 

 

 

 

 

 

 

 

482

 

 

 

 

 

 

 

 

 

 

 

482

Purchase of treasury stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(254)

 

 

(254)

Balance, September 30, 2016

 

$

34,533

 

$

 -

 

$

116,468

 

$

124,283

 

$

(7,437)

 

$

(96,220)

 

$

171,627

 

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, 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 ASU 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.

 

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

9

 


 

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 October 18, 2016, the Company’s Board of Directors declared a cash dividend of 1 cent per share payable on November 7, 2016, to stockholders of record as of October 28, 2016.

 

On October 28, 2016, the bank completed its previously announced acquisition of the Chicago branch of Talmer Bank and Trust, the banking subsidiary of Talmer Bancorp, Inc. (“Talmer”).  As a result of the transaction, the Bank acquired approximately $48.9 million of deposits and $223.4 million of loans. 

 

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 at net book value was approved by the Board of Directors, and will preclude any holdings of securities held-to-maturity for a two year period. 

 

In the third quarter of 2016, approximately $233.5 million of securities available-for-sale were sold to satisfy anticipated funding requirements for the acquisition of the Talmer branch.  Securities losses of $2.0 million pretax were realized upon these sales.

 

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 September 30, 2016, and $3.7 million at December 31, 2015.  Reserve Bank stock was recorded at $4.8 million at September 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 September 30, 2016, and December 31, 2015, and the corresponding amounts of gross unrealized gains and losses (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

September 30, 2016

    

Cost

    

Gains

    

Losses

    

Value

Securities available-for-sale

 

 

 

 

 

 

 

 

U.S. government agencies

 

$

1,661

 

$

 -

 

$

(158)

 

$

1,503

U.S. government agencies mortgage-backed

 

 

42,899

 

 

824

 

 

 -

 

 

43,723

States and political subdivisions

 

 

21,489

 

 

765

 

 

 -

 

 

22,254

Corporate bonds

 

 

10,958

 

 

 -

 

 

(228)

 

 

10,730

Collateralized mortgage obligations

 

 

202,670

 

 

2,478

 

 

(758)

 

 

204,390

Asset-backed securities

 

 

149,394

 

 

431

 

 

(9,652)

 

 

140,173

Collateralized loan obligations

 

 

109,468

 

 

 -

 

 

(1,184)

 

 

108,284

Total securities available-for-sale

 

$

538,539

 

$

4,498

 

$

(11,980)

 

$

531,057