0000357173-18-000051.txt : 20180807 0000357173-18-000051.hdr.sgml : 20180807 20180807134802 ACCESSION NUMBER: 0000357173-18-000051 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 94 CONFORMED PERIOD OF REPORT: 20180630 FILED AS OF DATE: 20180807 DATE AS OF CHANGE: 20180807 FILER: COMPANY DATA: COMPANY CONFORMED NAME: OLD SECOND BANCORP INC CENTRAL INDEX KEY: 0000357173 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 363143493 STATE OF INCORPORATION: DE FISCAL YEAR END: 1215 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-10537 FILM NUMBER: 18997278 BUSINESS ADDRESS: STREET 1: 37 S RIVER ST CITY: AURORA STATE: IL ZIP: 60507 BUSINESS PHONE: 6308920202 MAIL ADDRESS: STREET 1: 37 SOUTH RIVER STREET CITY: AURORA STATE: IL ZIP: 60507 10-Q 1 osbc-20180630x10q.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, 2018

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 3, 2018, the Registrant had 29,747,078 shares of common stock outstanding at $1.00 par value per share.

 

 

 

 

 

 

 


 

2

 


 

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This report and other publicly available documents of the Company, including the documents incorporated herein by reference, contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act, including, but not limited to, statements regarding management’s belief that we are positioned for future growth, expectations regarding future plans, strategies and financial performance, regulatory developments, industry and economic trends, and other matters.  Forward-looking statements, which may be based upon beliefs, expectations and assumptions of the Company's management and on information currently available to management, can be identified by the inclusion of such qualifications as “expects,” “intends,” “believes,” “may,” “will,” “would,” “could,” “should,” “plan,” “anticipate,” “estimate,” “seeks,” “possible,” “likely” or other indications that the particular statements are not historical facts and refer to future periods.  Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and may be outside of the Company’s control.  Actual events and results may differ significantly from those described in such forward-looking statements, due to numerous factors, including:

 

·

negative economic conditions that adversely affect the economy, real estate values, the job market and other factors nationally and in our market area, in each case that may affect our liquidity and the performance of our loan portfolio;

·

defaults and losses on our loan portfolio;

·

the anticipated benefits of the Company’s recent merger with Greater Chicago Financial Corp., including estimated cost savings and anticipated strategic gains, may be significantly harder or take longer to achieve than expected or may not be achieved in their entirety as a result of unexpected factors or events;

·

the integration of Greater Chicago Financial Corp.’s business and operations into the Company, which included conversion of Greater Chicago Financial Corp.’s operating systems and procedures, may have unanticipated adverse results relating to the Company’s existing businesses;

·

the Company’s ability to achieve anticipated results from the Greater Chicago Financial Corp. transaction is dependent on the state of the economic and financial markets going forward. Specifically, the Company may incur more credit losses than expected, cost savings may be less than expected and customer attrition may be greater than expected;

·

the financial success and viability of the borrowers of our commercial loans;

·

market conditions in the commercial and residential real estate markets in our market area;

·

changes in U.S. monetary policy, the level and volatility of interest rates, the capital markets and other market conditions that may affect, among other things, our liquidity and the value of our assets and liabilities;

·

competitive pressures in the financial services business;

·

any negative perception of our reputation or financial strength;

·

ability to raise additional capital on acceptable terms when needed;

·

ability to use technology to provide products and services that will satisfy customer demands and create efficiencies in operations;

·

adverse effects on our information technology systems resulting from failures, human error or cyberattacks;

·

adverse effects of failures by our vendors to provide agreed upon services in the manner and at the cost agreed, particularly our information technology vendors;

·

the impact of any claims or legal actions, including any effect on our reputation;

·

losses incurred in connection with repurchases and indemnification payments related to mortgages;

·

the soundness of other financial institutions;

·

changes in accounting standards, rules and interpretations and the impact on our financial statements;

·

our ability to receive dividends from our subsidiaries;

·

a decrease in our regulatory capital ratios;

·

legislative or regulatory changes, particularly changes in regulation of financial services companies;

·

increased costs of compliance, heightened regulatory capital requirements and other risks associated with changes in regulation and the current regulatory environment, including the Dodd-Frank Act;

·

the impact of heightened capital requirements; and

·

each of the factors and risks under the heading  “Risk Factors” in our 2017 Form 10-K and Form 10-Qs filed with the SEC.

 

Because the Company’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain, there can be no assurances that future actual results will correspond to any forward-looking statements and you should not rely on any forward-looking statements.  Additionally, all statements in this Form 10-Q, including forward-looking statements, speak only as of the date they are made, and the Company undertakes no obligation to update any statement in light of new information or future events.

3

 


 

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, 

 

    

2018

    

2017

Assets

 

 

 

 

 

 

Cash and due from banks

 

$

34,161

 

$

37,444

Interest bearing deposits with financial institutions

 

 

31,147

 

 

18,389

Cash and cash equivalents

 

 

65,308

 

 

55,833

Securities available-for-sale, at fair value

 

 

543,644

 

 

541,439

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

 

 

9,093

 

 

10,168

Loans held-for-sale

 

 

5,206

 

 

4,067

Loans

 

 

1,849,162

 

 

1,617,622

Less: allowance for loan and lease losses

 

 

19,321

 

 

17,461

Net loans

 

 

1,829,841

 

 

1,600,161

Premises and equipment, net

 

 

42,532

 

 

37,628

Other real estate owned

 

 

8,912

 

 

8,371

Mortgage servicing rights, net

 

 

7,812

 

 

6,944

Goodwill and core deposit intangible

 

 

22,074

 

 

8,922

Bank-owned life insurance ("BOLI")

 

 

61,159

 

 

61,764

Deferred tax assets, net

 

 

27,812

 

 

25,356

Other assets

 

 

26,355

 

 

22,776

Total assets

 

$

2,649,748

 

$

2,383,429

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

Noninterest bearing demand

 

$

620,807

 

$

572,404

Interest bearing:

 

 

 

 

 

 

Savings, NOW, and money market

 

 

1,058,295

 

 

967,750

Time

 

 

482,749

 

 

382,771

Total deposits

 

 

2,161,851

 

 

1,922,925

Securities sold under repurchase agreements

 

 

54,038

 

 

29,918

Other short-term borrowings

 

 

76,625

 

 

115,000

Junior subordinated debentures

 

 

57,662

 

 

57,639

Senior notes

 

 

44,108

 

 

44,058

Notes payable and other borrowings

 

 

23,496

 

 

 -

Other liabilities

 

 

22,154

 

 

13,539

Total liabilities

 

 

2,439,934

 

 

2,183,079

 

 

 

 

 

 

 

Stockholders’ Equity

 

 

 

 

 

 

Common stock

 

 

34,717

 

 

34,626

Additional paid-in capital

 

 

118,082

 

 

117,742

Retained earnings

 

 

157,796

 

 

142,959

Accumulated other comprehensive (loss) income

 

 

(4,487)

 

 

1,479

Treasury stock

 

 

(96,294)

 

 

(96,456)

Total stockholders’ equity

 

 

209,814

 

 

200,350

Total liabilities and stockholders’ equity

 

$

2,649,748

 

$

2,383,429

 

 

 

 

 

 

 

 

 

June 30, 2018

 

December 31, 2017

 

Common

 

Common

 

Stock

    

Stock

Par value

$

1.00

 

$

1.00

Shares authorized

 

60,000,000

 

 

60,000,000

Shares issued

 

34,716,589

 

 

34,625,734

Shares outstanding

 

29,747,078

 

 

29,627,086

Treasury shares

 

4,969,511

 

 

4,998,648

 

See accompanying notes to consolidated financial statements.

4

 


 

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Income

(In thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(unaudited)

 

(unaudited)

 

 

 

Three Months Ended  June 30, 

 

Six Months Ended  June 30, 

 

 

    

2018

    

2017

    

2018

    

2017

    

Interest and dividend income

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans, including fees

 

$

22,512

 

$

17,385

 

$

41,248

 

$

33,994

 

Loans held-for-sale

 

 

35

 

 

37

 

 

55

 

 

61

 

Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

 

2,392

 

 

2,607

 

 

4,562

 

 

5,570

 

Tax exempt

 

 

2,114

 

 

1,648

 

 

4,175

 

 

2,560

 

Dividends from FHLBC and FRBC stock

 

 

111

 

 

92

 

 

217

 

 

177

 

Interest bearing deposits with financial institutions

 

 

97

 

 

31

 

 

146

 

 

54

 

Total interest and dividend income

 

 

27,261

 

 

21,800

 

 

50,403

 

 

42,416

 

Interest expense

 

 

 

 

 

 

 

 

 

 

 

 

 

Savings, NOW, and money market deposits

 

 

501

 

 

233

 

 

845

 

 

456

 

Time deposits

 

 

1,444

 

 

1,025

 

 

2,619

 

 

2,004

 

Securities sold under repurchase agreements

 

 

104

 

 

 4

 

 

183

 

 

 6

 

Other short-term borrowings

 

 

276

 

 

146

 

 

605

 

 

252

 

Junior subordinated debentures

 

 

927

 

 

1,059

 

 

1,854

 

 

2,143

 

Senior notes

 

 

672

 

 

672

 

 

1,344

 

 

1,345

 

Notes payable and other borrowings

 

 

95

 

 

 -

 

 

95

 

 

 -

 

Total interest expense

 

 

4,019

 

 

3,139

 

 

7,545

 

 

6,206

 

Net interest and dividend income

 

 

23,242

 

 

18,661

 

 

42,858

 

 

36,210

 

Provision for loan and lease losses

 

 

1,450

 

 

750

 

 

728

 

 

750

 

Net interest and dividend income after provision for loan and lease losses

 

 

21,792

 

 

17,911

 

 

42,130

 

 

35,460

 

Noninterest income

 

 

 

 

 

 

 

 

 

 

 

 

 

Trust income

 

 

1,645

 

 

1,638

 

 

3,140

 

 

3,096

 

Service charges on deposits

 

 

1,769

 

 

1,615

 

 

3,361

 

 

3,233

 

Secondary mortgage fees

 

 

195

 

 

223

 

 

357

 

 

399

 

Mortgage servicing rights mark to market (loss) gain

 

 

(105)

 

 

(429)

 

 

200

 

 

(562)

 

Mortgage servicing income

 

 

627

 

 

444

 

 

1,079

 

 

879

 

Net gain on sales of mortgage loans

 

 

1,240

 

 

1,473

 

 

2,157

 

 

2,620

 

Securities gains (losses), net

 

 

312

 

 

(131)

 

 

347

 

 

(267)

 

Increase in cash surrender value of BOLI

 

 

351

 

 

350

 

 

599

 

 

709

 

Death benefit realized on bank-owned life insurance

 

 

 -

 

 

 -

 

 

1,026

 

 

 -

 

Debit card interchange income

 

 

1,132

 

 

1,081

 

 

2,144

 

 

2,056

 

Gain on disposal and transfer of fixed assets, net

 

 

 -

 

 

12

 

 

 -

 

 

10

 

Other income

 

 

1,366

 

 

1,041

 

 

2,627

 

 

2,172

 

Total noninterest income

 

 

8,532

 

 

7,317

 

 

17,037

 

 

14,345

 

Noninterest expense

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

12,355

 

 

10,545

 

 

22,562

 

 

21,118

 

Occupancy, furniture and equipment

 

 

1,652

 

 

1,462

 

 

3,210

 

 

3,028

 

Computer and data processing

 

 

2,741

 

 

1,112

 

 

4,085

 

 

2,202

 

FDIC insurance

 

 

165

 

 

165

 

 

321

 

 

313

 

General bank insurance

 

 

299

 

 

264

 

 

550

 

 

534

 

Amortization of core deposit intangible

 

 

97

 

 

25

 

 

118

 

 

50

 

Advertising expense

 

 

492

 

 

452

 

 

833

 

 

838

 

Debit card interchange expense

 

 

301

 

 

399

 

 

582

 

 

748

 

Legal fees

 

 

286

 

 

184

 

 

445

 

 

288

 

Other real estate expense, net

 

 

429

 

 

539

 

 

602

 

 

1,248

 

Other expense

 

 

3,469

 

 

2,839

 

 

6,332

 

 

5,673

 

Total noninterest expense

 

 

22,286

 

 

17,986

 

 

39,640

 

 

36,040

 

Income before income taxes

 

 

8,038

 

 

7,242

 

 

19,527

 

 

13,765

 

Provision for income taxes

 

 

1,777

 

 

2,096

 

 

3,777

 

 

4,192

 

Net income available to common stockholders

 

$

6,261

 

$

5,146

 

$

15,750

 

$

9,573

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

$

0.21

 

$

0.17

 

$

0.53

 

$

0.32

 

Diluted earnings per share

 

 

0.21

 

 

0.17

 

 

0.52

 

 

0.32

 

 

See accompanying notes to consolidated financial statements.

5

 


 

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(unaudited)

 

(unaudited)

 

 

Three Months Ended  June 30, 

 

Six Months Ended  June 30, 

 

    

2018

    

2017

    

2018

    

2017

Net Income

 

$

6,261

 

$

5,146

 

$

15,750

 

$

9,573

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

(1,391)

 

 

6,596

 

 

(10,199)

 

 

10,827

Related tax benefit (expense)

 

 

392

 

 

(2,650)

 

 

2,876

 

 

(4,325)

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

 

 

(999)

 

 

3,946

 

 

(7,323)

 

 

6,502

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

Net realized gains (losses)

 

 

312

 

 

(131)

 

 

347

 

 

(267)

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

 

 

(88)

 

 

52

 

 

(98)

 

 

106

Net realized gains (losses) after tax

 

 

224

 

 

(79)

 

 

249

 

 

(161)

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

 

 

(1,223)

 

 

4,025

 

 

(7,572)

 

 

6,663

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in fair value of derivatives used for cash flow hedges

 

 

515

 

 

(613)

 

 

1,794

 

 

(464)

Related tax (expense) benefit

 

 

(145)

 

 

245

 

 

(507)

 

 

184

Other comprehensive income on cash flow hedges

 

 

370

 

 

(368)

 

 

1,287

 

 

(280)

 

 

 

 

 

 

 

 

 

 

 

 

 

Total other comprehensive (loss) income

 

 

(853)

 

 

3,657

 

 

(6,285)

 

 

6,383

Total comprehensive income

 

$

5,408

 

$

8,803

 

$

9,465

 

$

15,956

 

See accompanying notes to consolidated financial statements.

 

6

 


 

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(In thousands)

 

 

 

 

 

 

 

 

 

(Unaudited)

 

Six Months Ended  June 30, 

 

 

2018

    

2017

    

Cash flows from operating activities

 

 

 

 

 

 

Net income

$

15,750

 

$

9,573

 

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

 

 

 

 

 

 

Depreciation of fixed assets and amortization of leasehold improvements

 

1,142

 

 

1,193

 

Change in fair value of mortgage servicing rights

 

(200)

 

 

562

 

Provision for loan and lease losses

 

728

 

 

750

 

Provision for deferred tax expense

 

3,468

 

 

4,052

 

Originations of loans held-for-sale

 

(72,820)

 

 

(75,079)

 

Proceeds from sales of loans held-for-sale

 

73,187

 

 

76,649

 

Net gains on sales of mortgage loans

 

(2,157)

 

 

(2,620)

 

Net premium amortization/discount (accretion) of purchase accounting adjustment on loans

 

(776)

 

 

(680)

 

Change in current income taxes receivable

 

197

 

 

(89)

 

Increase in cash surrender value of BOLI

 

(599)

 

 

(709)

 

Change in accrued interest receivable and other assets

 

(1,075)

 

 

1,665

 

Change in accrued interest payable and other liabilities

 

8,195

 

 

16,894

 

Net premium amortization/discount (accretion) on securities

 

1,388

 

 

773

 

Securities (gains) losses, net

 

(347)

 

 

267

 

Amortization of core deposit intangible

 

118

 

 

50

 

Amortization of junior subordinated debentures issuance costs

 

23

 

 

24

 

Amortization of senior notes issuance costs

 

50

 

 

52

 

Stock based compensation

 

1,098

 

 

625

 

Net gains on sale of other real estate owned

 

(104)

 

 

(178)

 

Provision for other real estate owned valuation losses

 

366

 

 

710

 

Net losses on disposal  and transfer of fixed assets

 

 -

 

 

(11)

 

Loss on transfer of premises to other real estate owned

 

 -

 

 

 1

 

Net cash provided by operating activities

 

27,632

 

 

34,474

 

Cash flows from investing activities

 

 

 

 

 

 

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

 

20,136

 

 

78,564

 

Proceeds from sales of securities available-for-sale

 

92,746

 

 

100,856

 

Purchases of securities available-for-sale

 

(54,550)

 

 

(205,755)

 

Net disbursements/proceeds from sales (purchases) of FHLBC stock

 

2,624

 

 

(675)

 

Net change in loans

 

(4,418)

 

 

(64,755)

 

Proceeds from claims on BOLI, net of premiums paid

 

1,204

 

 

 -

 

Improvements in other real estate owned

 

(59)

 

 

 -

 

Proceeds from sales of other real estate owned, net of participation purchase

 

2,068

 

 

3,280

 

Proceeds from disposition of premises and equipment

 

 -

 

 

13

 

Net purchases of premises and equipment

 

(710)

 

 

(375)

 

Cash paid for acquisition, net of cash and cash equivalents retained

 

(35,711)

 

 

 -

 

Net cash provided by (used in) investing activities

 

23,330

 

 

(88,847)

 

Cash flows from financing activities

 

 

 

 

 

 

Net change in deposits

 

(9,587)

 

 

43,360

 

Net change in securities sold under repurchase agreements

 

18,497

 

 

10,646

 

Net change in other short-term borrowings

 

(49,298)

 

 

5,000

 

Payment of senior note issuance costs

 

 -

 

 

(42)

 

Dividends paid on common stock

 

(594)

 

 

(592)

 

Purchase of treasury stock

 

(505)

 

 

(236)

 

Net cash (used in) provided by financing activities

 

(41,487)

 

 

58,136

 

Net change in cash and cash equivalents

 

9,475

 

 

3,763

 

Cash and cash equivalents at beginning of period

 

55,833

 

 

47,334

 

Cash and cash equivalents at end of period

$

65,308

 

$

51,097

 

 

7

 


 

 

 

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Cash Flows - Continued

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended  June 30, 

Supplemental cash flow information

    

2018

    

2017

Income taxes paid, net

 

$

100

 

$

230

Interest paid for deposits

 

 

3,295

 

 

2,448

Interest paid for borrowings

 

 

3,960

 

 

3,787

Non-cash transfer of loans to other real estate owned

 

 

2,380

 

 

3,525

Non-cash transfer of premises to other real estate owned

 

 

 -

 

 

95

 

See accompanying notes to consolidated financial statements.

 

 

8

 


 

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

    

Income (Loss)

    

Stock

    

Equity

Balance, December 31, 2016

 

$

34,534

 

$

116,653

 

$

129,005

 

$

(8,762)

 

$

(96,220)

 

$

175,210

Net income

 

 

 

 

 

 

 

 

9,573

 

 

 

 

 

 

 

 

9,573

Other comprehensive income, net of tax

 

 

 

 

 

 

 

 

 

 

 

6,383

 

 

 

 

 

6,383

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

 

$

137,986

 

$

(2,379)

 

$

(96,456)

 

$

190,963

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2017

 

$

34,626

 

$

117,742

 

$

142,959

 

$

1,479

 

$

(96,456)

 

$

200,350

Net income

 

 

 

 

 

 

 

 

15,750

 

 

 

 

 

 

 

 

15,750

Other comprehensive loss, net of tax

 

 

 

 

 

 

 

 

 

 

 

(6,285)

 

 

 

 

 

(6,285)

Dividends declared and paid

 

 

 

 

 

 

 

 

(594)

 

 

 

 

 

 

 

 

(594)

Vesting of restricted stock

 

 

91

 

 

(758)

 

 

 

 

 

 

 

 

667

 

 

 -

Reclassification of stranded tax effects

 

 

 

 

 

 

 

 

(319)

 

 

319

 

 

 

 

 

 -

Stock based compensation

 

 

 

 

 

1,098

 

 

 

 

 

 

 

 

 

 

 

1,098

Purchase of treasury stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(505)

 

 

(505)

Balance, June 30, 2018

 

$

34,717

 

$

118,082

 

$

157,796

 

$

(4,487)

 

$

(96,294)

 

$

209,814

 

See accompanying notes to consolidated financial statements.

 

 

 

9

 


 

 

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollar 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, 2018, are not necessarily indicative of the results that may be expected for the year ending December 31, 2018.  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, 2017.  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.

 

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, 2017.  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.

 

In addition to the significant accounting policies presented in our Form 10-K, as noted above, as a result of our acquisition of Greater Chicago Financial Corp. (“(GCFC”), and its wholly-owned subsidiary, ABC Bank, that closed in the second quarter of 2018, the Company has implemented accounting policies regarding purchased loans.   Loans purchased as a result of a business combination are recorded at estimated fair value on the acquisition date, with no carryover of the related allowance for loan and lease losses recorded by the acquiree at the time of purchase.  These loans are segregated into two classifications upon purchase:

 

1)

purchased non-credit impaired (“non-PCI”) loans, accounted for in accordance with FASB ASC Subtopic 310-20 “Nonrefundable Fees and Costs” (“ASC 310-20”), which have a discount attributable in part to credit quality.   Premiums and discounts created when ASC 310-20 loans are recorded at their fair values at acquisition are amortized over the remaining terms of the loans as an adjustment to the related loan’s yield; and

2)

purchased credit impaired (“PCI”) loans, accounted for under FASB ASC Subtopic 310-30, “Loans and Debt Securities Acquired with Deteriorated Credit Quality” (“ASC 310-30”) as they display signs of credit deterioration.  Interest income, through accretion of the difference between the carrying value of the loans and the expected cash flows, is recognized on the acquired loans accounted for under ASC 310-30.

 

Recent Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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,” which deferred the effective date of ASU 2014-09 for an additional year.  ASU 2015-14 was effective for annual reporting periods beginning after December 15, 2017.  The amendments could 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 was 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. 

 

10

 


 

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollar amounts in thousands, except per share data, unaudited)

The Company performed an analysis of the impact of adoption of this ASU, reviewing revenue recorded from service charges on deposit accounts, asset management fees, gains (losses) on other real estate owned, and debit card interchange fees.  Certain revenue received, such as service charges on deposit accounts and interchange fees, is recorded immediately or as the service is performed.  Asset management fees recorded by the Company take the form of wealth management income and brokerage income, and both types of fees are recorded after services are rendered, with no contractual requirement of refund to a customer based on non-achievement of fund performance objectives.  Finally, the methodology used to record revenue from gains (losses) due to the sale of other real estate owned is not anticipated to change, as the Company currently records income or expense only upon consummation of the sale, and any revenue recorded stemming from seller financed transactions is reviewed for deferral, as appropriate.  The Company adopted ASU 2014-09 and related issuances on January 1, 2018, with no cumulative effect adjustment to opening retained earnings required upon implementation of this standard.

 

In January 2016, the FASB issued ASU No. 2016-01 “Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.”  The objective of the issuance is to provide users of financial statements with more decision–useful information, by making targeted improvements to GAAP.  These targeted improvements included revisions to the methodology of accounting for equity investments, eliminating certain disclosures on fair value assumptions for financial instruments measured at amortized cost, and requiring public business entities to use the exit price notion, as defined in ASC 820, for the measurement of the fair value of financial instruments.  This standard was effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years.  The Company adopted this standard as of January 1, 2018.  Adoption of this standard resulted in the Company’s use of an exit price rather than an entrance price to determine the fair value of loans and deposits not already measured at fair value on a non-recurring basis in the consolidated balance sheet disclosures; see Note 14–Fair Value of Financial Instruments  for further information regarding the valuation processes.

 

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 in the process of identifying all lease arrangements, methodology of tracking, and practical expedients that may be applied, such as the cumulative effect adjustment in equity upon adoption as of January 1, 2019, compared to a retroactive adoption.  We will continue to assess the impact of ASU 2016-02 on our accounting and disclosures. 

 

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 historical data by loan pools and collateral classifications, and completing model option evaluations 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 is required to 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 adopted ASU 2017-08 as a change in accounting principle in the third quarter of 2017 on a modified retrospective basis, which required the Company to reflect its adoption effective January 1, 2017.  The effect of amortizing the premium over a shorter period will continue to decrease future quarterly net interest income over the call period until the premium is fully amortized.  As a result of management’s analysis, the impact of the change in accounting principle as a result of ASU 2017-08 to adjust beginning of year retained earnings was considered insignificant and, accordingly, the impact was adjusted through 2017 earnings.  Net interest income, net income and diluted earnings per share (“EPS”) were previously reported as $22.1 million, $5.5 million, and $0.18 for the quarter ended June 30, 2017, and $42.9 million, $10.0 million, and $0.33 for the six months ended June 30, 2017.  The effect of the adoption of ASU 2017-08 resulted in the currently reported totals of net interest income, net income and diluted EPS of $21.8 million, $5.1 million, and $0.17 for the quarter ended June 30, 2017, and $42.4 million, $9.6 million, and $0.32 for the six months ended June 30, 2017.

11

 


 

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollar amounts in thousands, except per share data, unaudited)

In August 2017, the FASB issued ASU No. 2017-12, “Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities”. The purpose of this updated guidance is to better align a company’s financial reporting for hedging activities with the economic objectives of those activities. ASU 2017-12 is effective for public business entities for fiscal years beginning after December 15, 2018, with early adoption, including adoption in an interim period, permitted.  The Company adopted ASU 2017-12 on January 1, 2018, on a modified retrospective basis.  FASB ASC 815, Derivatives and Hedging (“ASC 815”), provides the disclosure requirements for derivatives and hedging activities with the intent to provide users of financial statements with an enhanced understanding of: (a) how and why an entity uses derivative instruments, (b) how the entity accounts for derivative instruments and related hedged items, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. Further, qualitative disclosures are required that explain the Company’s objectives and strategies for using derivatives, as well as quantitative disclosures about the fair value of and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative instruments.

 

As required by ASC 815, the Company records all derivatives on the balance sheet at fair value.  The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Derivatives may also be designated as hedges of the foreign currency exposure of a net investment in a foreign operation. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge.  The Company may enter into derivative contracts that are intended to economically hedge certain of its risk, even though hedge accounting does not apply or the Company elects not to apply hedge accounting.

 

In accordance with the FASB’s fair value measurement guidance in ASU 2011-04, the Company made an accounting policy election to measure the credit risk of its derivative financial instruments that are subject to master netting agreements on a net basis by counterparty portfolio.  As the Company does not currently have any derivative financial instruments subject to master netting agreements, there was no impact to the balance sheet. 

 

In February 2018, the FASB issued ASU No. 2018-02, “Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.”  This ASU was issued in response to the enactment of tax bill H.R.1 “Tax Cuts and Jobs Act”, which resulted in “stranding” the tax effects of items within accumulated other comprehensive income related to the adjustment of deferred taxes due to the reduction of the federal corporate income tax rate.  The amendments proposed allow the reclassification of these stranded tax effects to retained earnings, and were effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years.  Early adoption is permitted, and should be applied either in the period of adoption or retrospectively to each period in which the effect of the change in the U.S. federal corporate tax rate is recognized.  The Company adopted ASU 2018-02 as of January 1, 2018, and a reclassification of $319,000, net, was recorded, which increased accumulated other comprehensive income and reduced retained earnings with the adoption of the accounting standard.

 

Subsequent Events

 

On July 17, 2018, the Company’s Board of Directors declared a cash dividend of $0.01 per share payable on August 6, 2018, to stockholders of record as of July 27, 2018; dividends of $297,000 were paid to stockholders on August 6, 2018.

 

Note 2 – Acquisitions

 

On April 20, 2018, the Company acquired Greater Chicago Financial Corp. (“GCFC”), and its wholly owned subsidiary, ABC Bank, which operates four branches in the Chicago metro area.  In addition to the acquisition price of $41.1 million, the Company retired the convertible and nonconvertible debentures held by GCFC upon acquisition, which totaled $6.6 million, including interest due.  The purchase and the debentures’ retirement were funded with the Company’s cash on hand, and all GCFC common stock was retired and cancelled simultaneous with the close of the transaction. The Company acquired $227.6 million of loans, net of purchase accounting adjustments, and $248.5 million of deposits, net of purchase accounting adjustments for time deposits. Purchase accounting adjustments recorded in the second quarter of 2018 include a loan valuation mark of $11.2 million, a core deposit intangible of $3.1 million, a fixed asset valuation adjustment of $1.5 million, and goodwill of $9.9 million.  In addition, a deferred tax asset of $3.5 million was recorded as of the date of acquisition based on analysis of the fair value of assets acquired, less liabilities assumed.  None of the $9.9 million recorded as goodwill is expected to be deductible for tax purposes.  Acquisition related costs incurred by the

12

 


 

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollar amounts in thousands, except per share data, unaudited)

Company for the six months ended June 30, 2018, totaled $3.4 million, pretax, and included $1.2 million of salaries and employee benefits related expenses, and $1.8 million of data processing, computer and ATM related conversion costs.

 

The assets and liabilities associated with the acquisition of GCFC were recorded in the Consolidated Balance Sheets at estimated fair value as of the acquisition date. In many cases the determination of these fair values required management to make estimates about discount rates, future expected cash flows, market conditions and other future events that are highly subjective in nature and subject to change, as noted below.  The following allocation is based on the information that was available to make preliminary estimates of the fair value and may change as additional information becomes available and additional analyses are completed. While the Company believes that information provided a reasonable basis for estimating the fair values, it expects that it could obtain additional information and evidence during the measurement period that may result in changes to the estimated fair value amounts. This measurement period ends on the earlier of one year after the acquisition date or the date we receive the information about the facts and circumstances that existed at the acquisition date. Subsequent adjustments are, and if necessary, will be  prospectively reflected in future filings, and may impact loans, other assets, notes payable and other borrowings, deferred tax assets, net, and goodwill.

 

The below table summarizes the assets acquired, less the liabilities assumed, related to the GCFC/ABC Bank acquisition.  All amounts are listed at their estimated fair values as of date of acquisition, and have been accounted for under the acquisition method of accounting.