10-Q 1 osbc-20170630x10q.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, 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 August 4, 2017, the Registrant had 29,627,086 shares of common stock outstanding at $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, 

 

    

2017

    

2016

Assets

 

 

 

 

 

 

Cash and due from banks

 

$

32,614

 

$

33,805

Interest bearing deposits with financial institutions

 

 

18,483

 

 

13,529

Cash and cash equivalents

 

 

51,097

 

 

47,334

Securities available-for-sale, at fair value

 

 

568,227

 

 

531,838

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

 

 

8,593

 

 

7,918

Loans held-for-sale

 

 

5,440

 

 

4,918

Loans

 

 

1,539,647

 

 

1,478,809

Less: allowance for loan losses

 

 

15,836

 

 

16,158

Net loans

 

 

1,523,811

 

 

1,462,651

Premises and equipment, net

 

 

38,061

 

 

38,977

Other real estate owned

 

 

11,724

 

 

11,916

Mortgage servicing rights, net

 

 

6,528

 

 

6,489

Goodwill and core deposit intangible

 

 

8,968

 

 

9,018

Bank-owned life insurance ("BOLI")

 

 

61,041

 

 

60,332

Deferred tax assets, net

 

 

45,356

 

 

53,464

Other assets

 

 

14,595

 

 

16,333

Total assets

 

$

2,343,441

 

$

2,251,188

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

Noninterest bearing demand

 

$

546,463

 

$

513,688

Interest bearing:

 

 

 

 

 

 

Savings, NOW, and money market

 

 

971,715

 

 

950,849

Time

 

 

391,967

 

 

402,248

Total deposits

 

 

1,910,145

 

 

1,866,785

Securities sold under repurchase agreements

 

 

36,361

 

 

25,715

Other short-term borrowings

 

 

75,000

 

 

70,000

Junior subordinated debentures

 

 

57,615

 

 

57,591

Senior notes

 

 

44,008

 

 

43,998

Other liabilities

 

 

29,182

 

 

11,889

Total liabilities

 

 

2,152,311

 

 

2,075,978

 

 

 

 

 

 

 

Stockholders’ Equity

 

 

 

 

 

 

Common stock

 

 

34,626

 

 

34,534

Additional paid-in capital

 

 

117,186

 

 

116,653

Retained earnings

 

 

138,442

 

 

129,005

Accumulated other comprehensive loss

 

 

(2,668)

 

 

(8,762)

Treasury stock

 

 

(96,456)

 

 

(96,220)

Total stockholders’ equity

 

 

191,130

 

 

175,210

Total liabilities and stockholders’ equity

 

$

2,343,441

 

$

2,251,188

 

 

 

 

 

 

 

 

 

June 30, 2017

 

December 31, 2016

 

Common

 

Common

 

Stock

    

Stock

Par value

$

1.00

 

$

1.00

Shares authorized

 

60,000,000

 

 

60,000,000

Shares issued

 

34,625,734

 

 

34,534,234

Shares outstanding

 

29,627,086

 

 

29,556,216

Treasury shares

 

4,998,648

 

 

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)

 

(unaudited)

 

 

 

Quarters Ended June 30, 

 

Six Months Ended  June 30, 

 

    

2017

    

2016

    

2017

    

2016

    

Interest and dividend income

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans, including fees

 

$

17,385

 

$

13,039

 

$

33,994

 

$

26,097

 

Loans held-for-sale

 

 

37

 

 

39

 

 

61

 

 

67

 

Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

 

2,607

 

 

4,382

 

 

5,570

 

 

8,593

 

Tax exempt

 

 

1,975

 

 

220

 

 

3,040

 

 

399

 

Dividends from FHLBC and FRBC stock

 

 

92

 

 

84

 

 

177

 

 

168

 

Interest bearing deposits with financial institutions

 

 

31

 

 

15

 

 

54

 

 

34

 

Total interest and dividend income

 

 

22,127

 

 

17,779

 

 

42,896

 

 

35,358

 

Interest expense

 

 

 

 

 

 

 

 

 

 

 

 

 

Savings, NOW, and money market deposits

 

 

233

 

 

193

 

 

456

 

 

384

 

Time deposits

 

 

1,025

 

 

869

 

 

2,004

 

 

1,691

 

Other short-term borrowings

 

 

150

 

 

26

 

 

258

 

 

46

 

Junior subordinated debentures

 

 

1,059

 

 

1,083

 

 

2,143

 

 

2,167

 

Senior notes

 

 

672

 

 

 -

 

 

1,345

 

 

 -

 

Subordinated debt

 

 

 -

 

 

243

 

 

 -

 

 

482

 

Notes payable and other borrowings

 

 

 -

 

 

 2

 

 

 -

 

 

 4

 

Total interest expense

 

 

3,139

 

 

2,416

 

 

6,206

 

 

4,774

 

Net interest and dividend income

 

 

18,988

 

 

15,363

 

 

36,690

 

 

30,584

 

Provision for loan losses

 

 

750

 

 

 -

 

 

750

 

 

 -

 

Net interest and dividend income after provision for loan losses

 

 

18,238

 

 

15,363

 

 

35,940

 

 

30,584

 

Noninterest income

 

 

 

 

 

 

 

 

 

 

 

 

 

Trust income

 

 

1,638

 

 

1,502

 

 

3,096

 

 

2,871

 

Service charges on deposits

 

 

1,615

 

 

1,646

 

 

3,233

 

 

3,205

 

Secondary mortgage fees

 

 

223

 

 

280

 

 

399

 

 

473

 

Mortgage servicing rights mark to market loss

 

 

(429)

 

 

(733)

 

 

(562)

 

 

(1,774)

 

Mortgage servicing income

 

 

444

 

 

422

 

 

879

 

 

843

 

Net gain on sales of mortgage loans

 

 

1,473

 

 

1,642

 

 

2,620

 

 

2,854

 

Securities loss, net

 

 

(131)

 

 

 -

 

 

(267)

 

 

(61)

 

Increase in cash surrender value of BOLI

 

 

350

 

 

319

 

 

709

 

 

604

 

Debit card interchange income

 

 

1,081

 

 

1,049

 

 

2,056

 

 

1,996

 

Gain (loss) on disposal and transfer of fixed assets, net

 

 

12

 

 

 -

 

 

10

 

 

(1)

 

Other income

 

 

1,041

 

 

1,150

 

 

2,172

 

 

2,542

 

Total noninterest income

 

 

7,317

 

 

7,277

 

 

14,345

 

 

13,552

 

Noninterest expense

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

10,545

 

 

8,814

 

 

21,118

 

 

17,840

 

Occupancy, furniture and equipment

 

 

1,462

 

 

1,346

 

 

3,028

 

 

2,927

 

Computer and data processing

 

 

1,112

 

 

1,063

 

 

2,202

 

 

1,988

 

FDIC insurance

 

 

165

 

 

362

 

 

313

 

 

565

 

General bank insurance

 

 

264

 

 

272

 

 

534

 

 

570

 

Amortization of core deposit intangible

 

 

25

 

 

 -

 

 

50

 

 

 -

 

Advertising expense

 

 

452

 

 

435

 

 

838

 

 

782

 

Debit card interchange expense

 

 

399

 

 

620

 

 

748

 

 

823

 

Legal fees

 

 

184

 

 

191

 

 

288

 

 

352

 

Other real estate expense, net

 

 

539

 

 

879

 

 

1,248

 

 

1,617

 

Other expense

 

 

2,839

 

 

2,718

 

 

5,673

 

 

5,500

 

Total noninterest expense

 

 

17,986

 

 

16,700

 

 

36,040

 

 

32,964

 

Income before income taxes

 

 

7,569

 

 

5,940

 

 

14,245

 

 

11,172

 

Provision for income taxes

 

 

2,112

 

 

2,095

 

 

4,216

 

 

4,005

 

Net income

 

$

5,457

 

$

3,845

 

$

10,029

 

$

7,167

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

$

0.19

 

$

0.13

 

$

0.34

 

$

0.24

 

Diluted earnings per share

 

 

0.18

 

 

0.13

 

 

0.33

 

 

0.24

 

 

See accompanying notes to consolidated financial statements.

4

 


 

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(unaudited)

 

(unaudited)

 

 

Quarters Ended June 30, 

 

Six Months Ended  June 30, 

 

    

2017

    

2016

    

2017

    

2016

Net Income

 

$

5,457

 

$

3,845

 

$

10,029

 

$

7,167

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

6,269

 

 

8,076

 

 

10,347

 

 

5,767

Related tax expense

 

 

(2,520)

 

 

(3,233)

 

 

(4,134)

 

 

(2,308)

Holding gains after tax on available-for-sale securities

 

 

3,749

 

 

4,843

 

 

6,213

 

 

3,459

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

Net realized losses

 

 

(131)

 

 

 -

 

 

(267)

 

 

(61)

Income tax benefit on net realized losses

 

 

52

 

 

 -

 

 

106

 

 

25

Net realized losses after tax

 

 

(79)

 

 

 -

 

 

(161)

 

 

(36)

Other comprehensive income  on available-for-sale securities

 

 

3,828

 

 

4,843

 

 

6,374

 

 

3,495

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 -

 

 

5,715

 

 

 -

 

 

5,939

Related tax expense

 

 

 -

 

 

(2,354)

 

 

 -

 

 

(2,446)

Other comprehensive income on held-to-maturity securities

 

 

 -

 

 

3,361

 

 

 -

 

 

3,493

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in fair value of derivatives used for cashflow hedges

 

 

(613)

 

 

(1,597)

 

 

(464)

 

 

(4,024)

Related tax benefit

 

 

245

 

 

640

 

 

184

 

 

1,612

Other comprehensive loss on cashflow hedges

 

 

(368)

 

 

(957)

 

 

(280)

 

 

(2,412)

 

 

 

 

 

 

 

 

 

 

 

 

 

Total other comprehensive income

 

 

3,460

 

 

7,247

 

 

6,094

 

 

4,576

Total comprehensive income

 

$

8,917

 

$

11,092

 

$

16,123

 

$

11,743

 

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, 

 

 

2017

    

2016

    

Cash flows from operating activities

 

 

 

 

 

 

 

Net income

 

$

10,029

 

$

7,167

 

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

 

 

 

 

 

 

 

Depreciation of fixed assets and amortization of leasehold improvements

 

 

1,193

 

 

1,097

 

Change in fair value of mortgage servicing rights

 

 

562

 

 

1,774

 

Loan loss reserve

 

 

750

 

 

 -

 

Provision for deferred tax expense

 

 

4,052

 

 

3,717

 

Originations of loans held-for-sale

 

 

(75,079)

 

 

(83,698)

 

Proceeds from sales of loans held-for-sale

 

 

76,649

 

 

83,324

 

Net gain on sales of mortgage loans

 

 

(2,620)

 

 

(2,854)

 

Net discount accretion of purchase accounting adjustment on loans

 

 

(850)

 

 

 -

 

Change in current income taxes (payable) receivable

 

 

(66)

 

 

259

 

Increase in cash surrender value of BOLI

 

 

(709)

 

 

(604)

 

Change in accrued interest receivable and other assets

 

 

1,665

 

 

(3,152)

 

Change in accrued interest payable and other liabilities

 

 

16,895

 

 

(185)

 

Net premium amortization/discount (accretion) on securities

 

 

293

 

 

(385)

 

Securities losses, net

 

 

267

 

 

61

 

Amortization of core deposit

 

 

50

 

 

 -

 

Amortization of junior subordinated debentures issuance costs

 

 

24

 

 

24

 

Amortization of senior notes issuance costs

 

 

52

 

 

 -

 

Stock based compensation

 

 

625

 

 

325

 

Net gain on sale of other real estate owned

 

 

(178)

 

 

(67)

 

Provision for other real estate owned losses

 

 

710

 

 

940

 

Net (gain) loss on disposal of fixed assets

 

 

(11)

 

 

 1

 

Loss on transfer of premises to other real estate owned

 

 

 1

 

 

 -

 

Net cash provided by operating activities

 

 

34,304

 

 

7,744

 

Cash flows from investing activities

 

 

 

 

 

 

 

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

 

 

78,564

 

 

25,687

 

Proceeds from sales of securities available-for-sale

 

 

100,856

 

 

44,993

 

Purchases of securities available-for-sale

 

 

(205,755)

 

 

(122,700)

 

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

 

 

 -

 

 

3,372

 

Net proceeds from (purchases) sales of FHLBC stock

 

 

(675)

 

 

600

 

Net change in loans

 

 

(64,585)

 

 

(28,805)

 

Improvements in other real estate owned

 

 

 -

 

 

(12)

 

Proceeds from sales of other real estate owned

 

 

3,280

 

 

2,996

 

Proceeds from disposition of premises and equipment

 

 

13

 

 

 -

 

Net purchases of premises and equipment

 

 

(375)

 

 

(439)

 

Net cash used in investing activities

 

 

(88,677)

 

 

(74,308)

 

Cash flows from financing activities

 

 

 

 

 

 

 

Net change in deposits

 

 

43,360

 

 

23,039

 

Net change in securities sold under repurchase agreements

 

 

10,646

 

 

9,068

 

Net change in other short-term borrowings

 

 

5,000

 

 

35,000

 

Payment of senior note issuance costs

 

 

(42)

 

 

 -

 

Dividends paid on common stock

 

 

(592)

 

 

(296)

 

Purchase of treasury stock

 

 

(236)

 

 

(254)

 

Net cash provided by financing activities

 

 

58,136

 

 

66,557

 

Net change in cash and cash equivalents

 

 

3,763

 

 

(7)

 

Cash and cash equivalents at beginning of period

 

 

47,334

 

 

40,338

 

Cash and cash equivalents at end of period

 

$

51,097

 

$

40,331

 

 

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

    

2017

    

2016

Income taxes paid, net

 

$

230

 

$

100

Interest paid for deposits

 

 

2,448

 

 

2,053

Interest paid for borrowings

 

 

3,787

 

 

2,665

Non-cash transfer of loans to other real estate owned

 

 

3,525

 

 

968

Non-cash transfer of premises to other real estate owned

 

 

95

 

 

 -

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

 

 

 -

 

 

244,823

 

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

 

 

 

 

 

 

 

 

7,167

 

 

 

 

 

 

 

 

7,167

Other comprehensive gain, net of tax

 

 

 

 

 

 

 

 

 

 

 

4,576

 

 

 

 

 

4,576

Dividends declared and paid

 

 

 

 

 

 

 

 

(296)

 

 

 

 

 

 

 

 

(296)

Vesting of 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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2016

 

$

34,534

 

$

116,653

 

$

129,005

 

$

(8,762)

 

$

(96,220)

 

$

175,210

Net income

 

 

 

 

 

 

 

 

10,029

 

 

 

 

 

 

 

 

10,029

Other comprehensive gain, net of tax

 

 

 

 

 

 

 

 

 

 

 

6,094

 

 

 

 

 

6,094

Dividends declared and paid

 

 

 

 

 

 

 

 

(592)

 

 

 

 

 

 

 

 

(592)

Vesting of restricted stock

 

 

92

 

 

(92)

 

 

 

 

 

 

 

 

 

 

 

 -

Stock based compensation

 

 

 

 

 

625

 

 

 

 

 

 

 

 

 

 

 

625

Purchase of treasury stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(236)

 

 

(236)

Balance, June 30, 2017

 

$

34,626

 

$

117,186

 

$

138,442

 

$

(2,668)

 

$

(96,456)

 

$

191,130

 

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, 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.  Adoption of this ASU is expected to affect the methodology used to record certain recurring revenue streams within trust and asset management fees, but this impact is not anticipated to be significant to the Company’s financial statements.  The Company will adopt ASU 2015-14 and related issuances on January 1, 2018, with a cumulative effect adjustment to opening retained earnings, if an adjustment is deemed to be material.

 

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

9

 


 

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. 

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 and evaluating model options 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.  As the Company has a significant unamortized premium on tax exempt debt securities, management has determined that early adoption will be implemented under a modified retrospective basis.  Adoption of ASU 2017-08 is expected to reduce the net interest margin by approximately 10 basis points a quarter going forward as the premium amortization recorded will increase over current levels.

 

Subsequent Events

 

On July 18, 2017, the Company’s Board of Directors declared a cash dividend of $0.01 per share payable on August 7, 2017, to stockholders of record as of July 28, 2017; dividends of $296,000 were paid to stockholders on August 7, 2017.

 

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 June 30, 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 June 30, 2017, and December 31, 2016. 

 

10

 


 

The following table summarizes the amortized cost and fair value of the securities portfolio at June 30, 2017, and December 31, 2016, and the corresponding amounts of gross unrealized gains and losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

June 30, 2017

    

Cost

    

Gains

    

Losses

    

Value

Securities available-for-sale

 

 

 

 

 

 

 

 

U.S. government agencies mortgage-backed

 

$

21,039

 

$

 6

 

$

(199)

 

$

20,846

States and political subdivisions

 

 

222,098

 

 

4,472

 

 

(1,052)

 

 

225,518

Corporate bonds

 

 

12,807

 

 

58

 

 

(249)

 

 

12,616

Collateralized mortgage obligations

 

 

102,717

 

 

159

 

 

(1,963)

 

 

100,913

Asset-backed securities

 

 

144,812

 

 

557

 

 

(4,984)

 

 

140,385

Collateralized loan obligations

 

 

67,735

 

 

305

 

 

(91)

 

 

67,949

Total securities available-for-sale

 

$

571,208

 

$

5,557

 

$

(8,538)

 

$

568,227