10-Q 1 osbc-20170331x10q.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 March 31, 2017

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 the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of ‘‘large accelerated filer,’’ ‘‘accelerated filer,’’ ‘‘smaller reporting company,’’ and ‘‘emerging growth company’’ in Rule 12b–2 of the Exchange Act.

 

Large accelerated filerAccelerated filer

Non-accelerated filerSmaller reporting companyEmerging growth company

(Do not check if a smaller reporting company)

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

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

Yes ☐        No ☒

 

As of May 4, 2017, the Registrant had outstanding 29,580,430 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)

 

 

 

 

 

March 31, 

 

December 31, 

 

    

2017

    

2016

Assets

 

 

 

 

 

 

Cash and due from banks

 

$

41,332

 

$

33,805

Interest bearing deposits with financial institutions

 

 

19,347

 

 

13,529

Cash and cash equivalents

 

 

60,679

 

 

47,334

Securities available-for-sale, at fair value

 

 

611,054

 

 

531,838

Federal Home Loan Bank Chicago ("FHLBC") and Federal Reserve Bank Chicago ("FRBC") stock

 

 

8,593

 

 

7,918

Loans held-for-sale

 

 

3,933

 

 

4,918

Loans

 

 

1,488,021

 

 

1,478,809

Less: allowance for loan losses

 

 

15,741

 

 

16,158

Net loans

 

 

1,472,280

 

 

1,462,651

Premises and equipment, net

 

 

38,594

 

 

38,977

Other real estate owned

 

 

13,481

 

 

11,916

Mortgage servicing rights, net

 

 

6,608

 

 

6,489

Goodwill and core deposit intangible

 

 

8,993

 

 

9,018

Bank-owned life insurance ("BOLI")

 

 

60,691

 

 

60,332

Deferred tax assets, net

 

 

49,699

 

 

53,464

Other assets

 

 

18,708

 

 

16,333

Total assets

 

$

2,353,313

 

$

2,251,188

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

Noninterest bearing demand

 

$

559,666

 

$

513,688

Interest bearing:

 

 

 

 

 

 

Savings, NOW, and money market

 

 

991,700

 

 

950,849

Time

 

 

385,788

 

 

402,248

Total deposits

 

 

1,937,154

 

 

1,866,785

Securities sold under repurchase agreements

 

 

34,731

 

 

25,715

Other short-term borrowings

 

 

85,000

 

 

70,000

Junior subordinated debentures

 

 

57,603

 

 

57,591

Senior notes

 

 

43,982

 

 

43,998

Other liabilities

 

 

12,526

 

 

11,889

Total liabilities

 

 

2,170,996

 

 

2,075,978

 

 

 

 

 

 

 

Stockholders’ Equity

 

 

 

 

 

 

Common stock

 

 

34,570

 

 

34,534

Additional paid-in capital

 

 

116,938

 

 

116,653

Retained earnings

 

 

133,281

 

 

129,005

Accumulated other comprehensive loss

 

 

(6,128)

 

 

(8,762)

Treasury stock

 

 

(96,344)

 

 

(96,220)

Total stockholders’ equity

 

 

182,317

 

 

175,210

Total liabilities and stockholders’ equity

 

$

2,353,313

 

$

2,251,188

 

 

 

 

 

 

 

 

 

March 31, 2017

 

December 31, 2016

 

Common

 

Common

 

Stock

    

Stock

Par value

$

1.00

 

$

1.00

Shares authorized

 

60,000,000

 

 

60,000,000

Shares issued

 

34,569,734

 

 

34,534,234

Shares outstanding

 

29,580,430

 

 

29,556,216

Treasury shares

 

4,989,304

 

 

4,978,018

 

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)

 

 

 

Three Months Ended  March 31, 

 

 

    

2017

    

2016

    

Interest and dividend income

 

 

 

 

 

 

 

Loans, including fees

 

$

16,609

 

$

13,058

 

Loans held-for-sale

 

 

24

 

 

28

 

Securities:

 

 

 

 

 

 

 

Taxable

 

 

2,963

 

 

4,211

 

Tax exempt

 

 

1,065

 

 

179

 

Dividends from FHLBC and FRBC stock

 

 

85

 

 

84

 

Interest bearing deposits with financial institutions

 

 

23

 

 

19

 

Total interest and dividend income

 

 

20,769

 

 

17,579

 

Interest expense

 

 

 

 

 

 

 

Savings, NOW, and money market deposits

 

 

223

 

 

191

 

Time deposits

 

 

979

 

 

822

 

Other short-term borrowings

 

 

108

 

 

20

 

Junior subordinated debentures

 

 

1,084

 

 

1,084

 

Senior notes

 

 

673

 

 

 -

 

Subordinated debt

 

 

 -

 

 

239

 

Notes payable and other borrowings

 

 

 -

 

 

 2

 

Total interest expense

 

 

3,067

 

 

2,358

 

Net interest and dividend income

 

 

17,702

 

 

15,221

 

Provision for loan losses

 

 

 -

 

 

 -

 

Net interest and dividend income after provision for loan losses

 

 

17,702

 

 

15,221

 

Noninterest income

 

 

 

 

 

 

 

Trust income

 

 

1,458

 

 

1,369

 

Service charges on deposits

 

 

1,618

 

 

1,559

 

Secondary mortgage fees

 

 

176

 

 

193

 

Mortgage servicing rights mark to market loss

 

 

(133)

 

 

(1,041)

 

Mortgage servicing income

 

 

435

 

 

421

 

Net gain on sales of mortgage loans

 

 

1,147

 

 

1,212

 

Securities loss, net

 

 

(136)

 

 

(61)

 

Increase in cash surrender value of BOLI

 

 

359

 

 

285

 

Debit card interchange income

 

 

975

 

 

947

 

Loss on disposal and transfer of fixed assets, net

 

 

(2)

 

 

(1)

 

Other income

 

 

1,131

 

 

1,392

 

Total noninterest income

 

 

7,028

 

 

6,275

 

Noninterest expense

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

10,573

 

 

9,026

 

Occupancy, furniture and equipment

 

 

1,566

 

 

1,581

 

Computer and data processing

 

 

1,090

 

 

925

 

FDIC insurance

 

 

148

 

 

203

 

General bank insurance

 

 

270

 

 

298

 

Amortization of core deposit intangible

 

 

25

 

 

 -

 

Advertising expense

 

 

386

 

 

347

 

Debit card interchange expense

 

 

349

 

 

203

 

Legal fees

 

 

104

 

 

161

 

Other real estate expense, net

 

 

709

 

 

738

 

Other expense

 

 

2,834

 

 

2,782

 

Total noninterest expense

 

 

18,054

 

 

16,264

 

Income before income taxes

 

 

6,676

 

 

5,232

 

Provision for income taxes

 

 

2,104

 

 

1,910

 

Net income

 

$

4,572

 

$

3,322

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

$

0.15

 

$

0.11

 

Diluted earnings per share

 

 

0.15

 

 

0.11

 

 

See accompanying notes to consolidated financial statements.

4

 


 

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

(Unaudited)

 

 

 

Three Months Ended  March 31, 

 

 

    

2017

    

2016

    

Net Income

 

$

4,572

 

$

3,322

 

 

 

 

 

 

 

 

 

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

 

 

4,078

 

 

(2,309)

 

Related tax (expense) benefit

 

 

(1,614)

 

 

925

 

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

 

 

2,464

 

 

(1,384)

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

Net realized losses

 

 

(136)

 

 

(61)

 

Income tax benefit on net realized losses

 

 

54

 

 

25

 

Net realized losses after tax

 

 

(82)

 

 

(36)

 

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

 

 

2,546

 

 

(1,348)

 

 

 

 

 

 

 

 

 

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

 

 

 -

 

 

224

 

Related tax expense

 

 

 -

 

 

(92)

 

Other comprehensive income on held-to-maturity securities

 

 

 -

 

 

132

 

 

 

 

 

 

 

 

 

Changes in fair value of derivatives used for cashflow hedges

 

 

149

 

 

(2,427)

 

Related tax (expense) benefit

 

 

(61)

 

 

972

 

Other comprehensive income (loss) on cashflow hedges

 

 

88

 

 

(1,455)

 

 

 

 

 

 

 

 

 

Total other comprehensive income (loss)

 

 

2,634

 

 

(2,671)

 

Total comprehensive income

 

$

7,206

 

$

651

 

 

See accompanying notes to consolidated financial statements.

 

5

 


 

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

(Unaudited

 

 

 

Three Months Ended  March 31, 

 

 

 

2017

 

2016

 

Cash flows from operating activities

 

 

 

 

 

 

 

Net income

 

$

4,572

 

$

3,322

 

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

 

 

 

 

 

 

 

Depreciation and amortization of leasehold improvement

 

 

593

 

 

563

 

Change in fair value of mortgage servicing rights

 

 

133

 

 

1,041

 

Provision for deferred tax expense

 

 

2,036

 

 

1,827

 

Originations of loans held-for-sale

 

 

(30,401)

 

 

(34,630)

 

Proceeds from sales of loans held-for-sale

 

 

32,313

 

 

32,395

 

Net gain on sales of mortgage loans

 

 

(1,147)

 

 

(1,212)

 

Net discount accretion of purchase accounting adjustment on loans

 

 

(355)

 

 

 -

 

Change in current income taxes receivable (payable)

 

 

67

 

 

(17)

 

Increase in cash surrender value of BOLI

 

 

(359)

 

 

(285)

 

Change in accrued interest receivable and other assets

 

 

(2,407)

 

 

983

 

Change in accrued interest payable and other liabilities

 

 

719

 

 

(1,365)

 

Net premium amortization/discount (accretion) on securities

 

 

122

 

 

(201)

 

Securities losses, net

 

 

136

 

 

61

 

Amortization of core deposit

 

 

25

 

 

 -

 

Amortization of junior subordinated debentures issuance costs

 

 

12

 

 

12

 

Amortization of senior notes issuance costs

 

 

26

 

 

 -

 

Stock based compensation

 

 

321

 

 

169

 

Net gain on sale of other real estate owned

 

 

(74)

 

 

(42)

 

Provision for other real estate owned losses

 

 

318

 

 

451

 

Net loss on disposal of fixed assets

 

 

 2

 

 

 1

 

Net cash provided by operating activities

 

 

6,652

 

 

3,073

 

Cash flows from investing activities

 

 

 

 

 

 

 

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

 

 

15,005

 

 

5,366

 

Proceeds from sales of securities available-for-sale

 

 

64,388

 

 

35,574

 

Purchases of securities available-for-sale

 

 

(154,653)

 

 

(88,005)

 

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

 

 

 -

 

 

2,129

 

Net proceeds from sales/purchases of FHLBC stock

 

 

(675)

 

 

 -

 

Net change in loans

 

 

(12,690)

 

 

(5,482)

 

Improvements in other real estate owned

 

 

 -

 

 

(12)

 

Proceeds from sales of other real estate owned

 

 

1,607

 

 

1,381

 

Net purchases of premises and equipment

 

 

(212)

 

 

(103)

 

Net cash used in investing activities

 

 

(87,230)

 

 

(49,152)

 

Cash flows from financing activities

 

 

 

 

 

 

 

Net change in deposits

 

 

70,369

 

 

37,608

 

Net change in securities sold under repurchase agreements

 

 

9,016

 

 

(218)

 

Net change in other short-term borrowings

 

 

15,000

 

 

5,000

 

Payment of senior note issuance costs

 

 

(42)

 

 

 -

 

Dividends paid on common stock

 

 

(296)

 

 

 -

 

Purchase of treasury stock

 

 

(124)

 

 

 -

 

Net cash provided by financing activities

 

 

93,923

 

 

42,390

 

Net change in cash and cash equivalents

 

 

13,345

 

 

(3,689)

 

Cash and cash equivalents at beginning of period

 

 

47,334

 

 

40,338

 

Cash and cash equivalents at end of period

 

$

60,679

 

$

36,649

 

 

6

 


 

 

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Cash Flows - Continued

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended  March 31, 

Supplemental cash flow information

    

2017

    

2016

Income taxes paid, net

 

$

 -

 

$

100

Interest paid for deposits

 

 

1,247

 

 

1,019

Interest paid for borrowings

 

 

1,164

 

 

1,333

Non-cash transfer of loans to other real estate owned

 

 

3,416

 

 

382

 

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

 

Paid-In

 

Retained

 

Comprehensive

 

Treasury

 

Stockholders’

 

    

Stock

    

Capital

    

Earnings

    

Loss

    

Stock

    

Equity

Balance, December 31, 2015

 

$

34,427

 

$

115,918

 

$

114,209

 

$

(12,659)

 

$

(95,966)

 

$

155,929

Net income

 

 

 

 

 

 

 

 

3,322

 

 

 

 

 

 

 

 

3,322

Other comprehensive loss, net of tax

 

 

 

 

 

 

 

 

 

 

 

(2,671)

 

 

 

 

 

(2,671)

Stock based compensation

 

 

 

 

 

169

 

 

 

 

 

 

 

 

 

 

 

169

Balance, March 31, 2016

 

$

34,427

 

$

116,087

 

$

117,531

 

$

(15,330)

 

$

(95,966)

 

$

156,749

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2016

 

$

34,534

 

$

116,653

 

$

129,005

 

$

(8,762)

 

$

(96,220)

 

$

175,210

Net income

 

 

 

 

 

 

 

 

4,572

 

 

 

 

 

 

 

 

4,572

Other comprehensive gain, net of tax

 

 

 

 

 

 

 

 

 

 

 

2,634

 

 

 

 

 

2,634

Dividends declared and paid

 

 

 

 

 

 

 

 

(296)

 

 

 

 

 

 

 

 

(296)

Vesting of restricted stock

 

 

36

 

 

(36)

 

 

 

 

 

 

 

 

 

 

 

 -

Stock based compensation

 

 

 

 

 

321

 

 

 

 

 

 

 

 

 

 

 

321

Purchase of treasury stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(124)

 

 

(124)

Balance, March 31, 2017

 

$

34,570

 

$

116,938

 

$

133,281

 

$

(6,128)

 

$

(96,344)

 

$

182,317

 

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 March 31, 2017, are not necessarily indicative of the results that may be expected for the year ending December 31, 2017.  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, 2016.  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, 2016.  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 within noninterest income, as any interest income impact was not included in the scope of this final ASU pronouncement.

 

In February 2016, the FASB issued ASU No. 2016-02- “Leases (Topic 842).”  This ASU was issued to increase transparency and comparability among organizations by recognizing lease assets and liabilities on the balance sheet and disclosing key information about leasing arrangements.  One key revision from prior guidance was to include operating leases within assets and liabilities recorded; another revision was included which created a new model to follow for sale-leaseback transactions.  The impact of this pronouncement will affect lessees primarily, as virtually all of their assets will be recognized on the balance sheet, by recording a right of use asset and lease liability.  This pronouncement is effective for fiscal years beginning after December 15, 2018.  The Company is assessing the impact of ASU 2016-02 on its accounting and disclosures. 

 

In March 2016, the FASB issued ASU No. 2016-09 “Stock Compensation - Improvements to Employee Share-Based Payment Accounting (Topic 718).”  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, and interim periods within those fiscal years.  This standard was adopted by the Company effective January 2017; the adoption of this standard did not have a material effect on the Company’s operating results or financial condition. 

9

 


 

In June 2016, the FASB issued ASU No. 2016-13 “Measurement of Credit Losses on Financial Instruments (Topic 326).”  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.  The new methodology to be used should reflect expected credit losses based on relevant vintage historical information, supported by reasonable forecasts of projected loss given defaults, which will affect the collectability of the reported amounts.  This new methodology will also require available-for-sale debt securities to have a credit loss recorded through an allowance rather than write-downs.  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, and is in the process of accumulating data to support future risk assessments.

 

In March 2017, the FASB issued ASU No. 2017-08 “Receivables-Nonrefundable Fees and Other Costs – Premium Amortization on Purchased Callable Debt Securities (Subtopic 310-20).”  This ASU was issued to shorten the amortization period for the premium to the earliest call date on debt securities.  This premium will now be recorded as a reduction to net interest margin during the shorter yield to call period, as compared to prior practice of amortizing the premium as a reduction to net interest margin over the contractual life of the instrument.  This ASU does not change the current method of amortizing any discount over the contractual life of the debt security, and this pronouncement is effective for fiscal years beginning after December 15, 2018, with earlier adoption permitted.  The Company is assessing the impact of ASU 2017-08 on its accounting and disclosures, as this pronouncement will reduce net interest income over the period until the security’s call date, as compared to a net interest income reduction for all remaining premium as of the date of call if earlier than the date of maturity.

 

Subsequent Events

 

On April 18, 2017, the Company’s Board of Directors declared a cash dividend of 1 cent per share payable on May 8, 2017, to stockholders of record as of April 28, 2017.

 

On April 25, 2017, the Company announced Bradley S. Adams will start as Executive Vice President, Chief Financial Officer, effective May 2, 2017.  Mr. Adams will also serve as the Company’s principal financial officer and principal accounting officer.

 

Note 2 – Acquisitions

 

On October 28, 2016, the Bank acquired the Chicago branch of Talmer Bank and Trust, the banking subsidiary of Talmer Bancorp, Inc. (“Talmer”).  As a result of this transaction, the Bank recorded assets with a fair value of approximately $230.9 million, including approximately $221.0 million of loans, and assumed deposits with a fair value of approximately $48.9 million.  Goodwill of $8.4 million was included within the total assets recorded upon acquisition; net cash of $181.5 million was paid for the purchase. 

 

Note 3 – 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. 

 

FHLBC and FRBC stock are considered nonmarketable equity investments.  FHLBC stock was recorded at $3.8 million at March 31, 2017, and $3.1 million at December 31, 2016, and is necessary to maintain access to FHLBC advances, which are utilized as a component to meet the Bank’s daily funding needs.  FRBC stock was recorded at $4.8 million at March 31, 2017, and December 31, 2016. 

 

10

 


 

The following table summarizes the amortized cost and fair value of the securities portfolio at March 31, 2017, and December 31, 2016, and the corresponding amounts of gross unrealized gains and losses (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

March 31, 2017

    

Cost

    

Gains

    

Losses

    

Value

Securities available-for-sale

 

 

 

 

 

 

 

 

U.S. government agencies mortgage-backed

 

$

38,933

 

$

17

 

$

(392)

 

$

38,558

States and political subdivisions

 

 

219,223

 

 

856

 

 

(572)

 

 

219,507

Corporate bonds

 

 

12,807

 

 

47

 

 

(314)

 

 

12,540

Collateralized mortgage obligations

 

 

110,805

 

 

119

 

 

(2,600)

 

 

108,324

Asset-backed securities

 

 

146,103

 

 

196

 

 

(6,413)

 

 

139,886

Collateralized loan obligations

 

 

92,564

 

 

21

 

 

(346)

 

 

92,239

Total securities available-for-sale

 

$

620,435

 

$

1,256

 

$

(10,637)

 

$

611,054

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

December 31, 2016

    

Cost

    

Gains

    

Losses

    

Value

Securities available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agencies mortgage-backed

 

 

42,511

 

 

 -

 

 

(977)

 

 

41,534

States and political subdivisions

 

 

68,718

 

 

258

 

 

(273)

 

 

68,703

Corporate bonds

 

 

10,957

 

 

 9

 

 

(336)

 

 

10,630

Collateralized mortgage obligations

 

 

174,352

 

 

374

 

 

(3,799)

 

 

170,927

Asset-backed securities

 

 

146,391

 

 

341

 

 

(8,325)

 

 

138,407

Collateralized loan obligations

 

 

102,504

 

 

29

 

 

(896)

 

 

101,637

Total securities available-for-sale

 

$

545,433

 

$

1,011

 

$

(14,606)

 

$

531,838

 

The fair value, amortized cost and weighted average yield of debt securities at March 31, 2017, 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

 

$

23,410

 

2.39

%

 

$

23,483

 

Due after one year through five years

 

 

4,923

 

3.10

 

 

 

4,912

 

Due after five years through ten years

 

 

18,267

 

2.98

 

 

 

18,089

 

Due after ten years

 

 

185,430

 

3.68

 

 

 

185,563

 

 

 

 

232,030

 

3.48

 

 

 

232,047

 

Mortgage-backed and collateralized mortgage obligations

 

 

149,738

 

2.32

 

 

 

146,882

 

Asset-backed securities

 

 

146,103

 

2.23

 

 

 

139,886

 

Collateralized loan obligations

 

 

92,564

 

3.90

 

 

 

92,239

 

Total securities available-for-sale

 

$

620,435

 

2.97

%

 

$

611,054

 

 

At March 31, 2017, the Company’s investments include $119.0 million of asset-backed securities that are backed by student loans originated under the Federal Family Education Loan program (“FFEL”).  Under the FFEL, private lenders made federally guaranteed student loans to parents and students and packaged and sold them as asset-backed securities.  While the program was modified several times before elimination in 2010, not less than 97% of the outstanding principal amount of the loans made under FFEL are guaranteed by the U.S. Department of Education.  In addition to the U.S. Department of Education guarantee, total added credit enhancement in the form of overcollateralization and/or subordination amounted to $13.0 million, or 10.01%, of outstanding principal. 

11

 


 

Securities with unrealized losses at March 31, 2017, and December 31, 2016, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, were as follows (in thousands except for number of securities):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less than 12 months

 

12 months or more

 

 

 

 

 

 

 

 

March 31, 2017

 

in an unrealized loss position

 

in an unrealized loss position

 

Total

 

 

Number of

 

Unrealized

 

Fair

 

Number of

 

Unrealized

 

Fair

 

Number of

 

Unrealized

 

Fair

Securities available-for-sale

    

Securities

   

Losses

   

Value

   

Securities

   

Losses

   

Value

   

Securities

   

Losses

   

Value

U.S. government agencies mortgage-backed

 

10

 

$

369

 

$

23,831

 

 1

 

$

23

 

$

890

 

11

 

$

392

 

$

24,721

States and political subdivisions

 

24

 

 

572

 

 

76,287

 

 -

 

 

 -

 

 

 -

 

24

 

 

572

 

 

76,287

Corporate bonds

 

 1

 

 

169

 

 

4,831

 

 2

 

 

145

 

 

5,203

 

 3

 

 

314

 

 

10,034

Collateralized mortgage obligations

 

13

 

 

2,388

 

 

88,320

 

 4

 

 

212

 

 

11,660

 

17

 

 

2,600

 

 

99,980

Asset-backed securities

 

 1

 

 

266

 

 

4,287

 

15

 

 

6,147

 

 

125,035

 

16

 

 

6,413

 

 

129,322

Collateralized loan obligations

 

 2

 

 

 4

 

 

9,977

 

 8

 

 

342

 

 

57,306

 

10

 

 

346

 

 

67,283

Total securities available-for-sale

 

51

 

$

3,768

 

$

207,533

 

30

 

$

6,869

 

$

200,094

 

81

 

$

10,637

 

$

407,627