UNITED STATES
/* WordPerfect Structure - Footer A Beginning */ 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, 1999 Commission file No. 0-10537 Old Second Bancorp, Inc. (Exact name of registrant as specified in its charter) Delaware 36-3143493 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 37 South River Street, Aurora, Illinois 60507 (Address of principal executive offices) (Zip Code) (630) 892-0202 (Registrant's telephone number, including area code) (Former name, former address and former fiscal year, if changed since last report.) 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 91 days. Yes [X] No[ ] APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date. 3,051,181 shares of $1.00 par value common stock are outstanding as of May 5, 1999. There are no exhibits with this Form 10-Q. PAGE 1
Part I - Financial information Item 1 - Financial statements OLD SECOND BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (unaudited) (in thousands except per share data) March 31, 1999 December 31,1998 <TABLE> <CAPTION> <S> <C> <C> ASSETS Cash and due from banks, non-interest bearing $ 32,747 $42,202 Interest bearing deposits with banks 475 475 Federal funds sold 31,025 49,475 ---------- --------- Total cash and cash equivalents 64,247 92,152 Available for sale securities 279,763 292,365 Loans held for sale 34,913 36,686 Loans 561,718 556,772 Less: Allowance for loan losses 8,078 7,823 Unearned income 182 227 ----------- ---------- Loans, net 553,458 548,722 Bank premises and equipment, net 21,167 20,950 Other assets 23,217 23,417 ----------- ----------- TOTAL ASSETS $976,765 $1,014,292 ======= ======= LIABILITIES Deposits: Demand $111,638 $119,972 Savings 359,172 360,321 Time 344,887 346,038 ----------- ----------- Total deposits 815,697 826,331 Securities sold under agreements to repurchase 14,706 32,590 Other short-term borrowings 2,252 4,517 Note payable 27,022 36,189 Other liabilities 13,839 12,739 ----------- ---------- Total liabilities 873,516 912,366 STOCKHOLDERS' EQUITY Preferred stock, $1.00 par value, 300,000 shares authorized, none issued Common stock, $1.00 par value, 10 million shares authorized; 3,051,181 shares outstanding 15,875 15,875 Retained earnings 85,397 83,228 Accumulated other comprehensive income 1,977 2,823 ----------- --------- Total stockholders' equity 103,249 101,926 ---------- ---------- TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $976,765 $1,014,292 ======== ========= </TABLE> See accompanying notes. PAGE 2
OLD SECOND BANCORP, INC AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (unaudited) (in thousands except per share data) <TABLE> <CAPTION> Three Months Ended March 31, -------------------------- <S> <C> <C> 1999 1998 INTEREST INCOME: - -------------------------- Interest and fees on loans $12,031 $12,103 Interest and dividends on available-for-sale securities: Taxable 3,389 3,011 Exempt from federal income tax 644 777 Interest on federal funds sold 471 752 Interest on interest bearing deposits 7 7 ------------ ----------- Total interest income 16,542 16,650 ------------ ------------ INTEREST EXPENSE: Savings deposits 2,169 2,135 Time deposits 4,596 5,332 Other short-term borrowings 578 643 ------------ ----------- Total interest expense 7,343 8,110 ------------ ----------- Net interest income 9,199 8,540 Provision for loan losses 201 354 ----------- ---------- Net interest income after provision for loan losses 8,998 8,186 OTHER INCOME: Trust fees 1,227 1,109 Service charges on deposit accounts 749 724 Gain on sales of loans 1,842 2,081 Other income 1,150 804 ------------ ---------- Total other income 4,968 4,718 </TABLE> PAGE 3
<TABLE> <S> <C> <C> OTHER EXPENSES: Salaries and employee benefits 5,253 5,000 Net occupancy of bank premises 603 575 Furniture and equipment 1,000 979 FDIC insurance 24 34 Marketing 230 221 Stationery and supplies 308 226 Amortization of intangibles 203 351 Other 2,061 1,820 --------- ---------- Total other expenses 9,682 9,206 --------- ---------- Income before income taxes 4,284 3,698 Income tax expense 1,351 1,164 --------- --------- Net income $2,933 $2,534 ======== ======== Per share amounts: Basic earnings per share $0.96 $0.83 Diluted earnings per share $0.96 $0.83 Dividend declared $0.25 $0.20 Average shares outstanding 3,051,181 3,049,190 </TABLE> See accompanying notes. PAGE 4
OLD SECOND BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS) <TABLE> <CAPTION> For the three months Ended March 31, <S> <C> <C> 1999 1998 - -------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: - -------------------------- Interest received $17,119 $17,591 Interest paid (7,525) (8,140) Paid to suppliers and employees (7,398) (5,336) Trust fees received 1,227 1,109 Service charges received on deposit accounts 749 724 Mortgage loan originations and purchases (165,560) (141,174) Mortgage loans sold to secondary market 169,175 143,838 Other income received 1,150 804 ---------- ----------- Net cash provided by operating activities 8,937 9,416 ---------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: - -------------------------------------- Net loan (charged off) recovered 55 (43) Net increase in loans (4,992) (3,123) Purchases of available for sale securities (19,961) (23,894) Proceeds from sales and maturities of available for sale securities 31,014 33,102 Capital expenditures (768) (706) Net proceeds on purchases of mortgage servicing rights (1,160) (1,157) Other, net (280) (393) ---------- ---------- Net cash provided by investing activities 3,908 3,786 ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: - -------------------------------------- Net increase (decrease) in deposits (10,634) 845 Net decrease in other short-term borrowings (20,150) (8,092) Payments of notes payable (9,167) (2,719) Dividends paid (762) (915) Other, net (37) (61) ---------- ----------- Net cash used in financing activities (40,750) (10,942) ---------- ------------ Net increase (decrease) in cash & cash equivalents (27,905) 2,260 Cash & cash equivalents at beginning of year 92,152 87,025 ---------- ---------- Cash & cash equivalents at end of period $64,247 $89,285 ======= ======= </TABLE> PAGE 5
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES: <TABLE> <CAPTION> <S> <C> <C> Net income $2,933 $2,534 Adjustments to reconcile net income to net Cash provided by operating activities: Depreciation 551 599 Provision for possible loan losses 201 354 Increase in taxes payable 1,351 1,164 Net decrease in mortgage loans held for sale 1,773 583 Decrease in interest receivable 410 766 Decrease in interest payable (183) (30) Premium amortization and discount accretion on investments 167 176 Amortization of intangibles 203 351 Increase in accrued expenses 1,384 3,018 (Increase) decrease in prepaid expenses 147 (99) ---------- ----------- Total adjustments 6,004 6,882 ---------- ----------- Net cash provided by operating activities $8,937 $9,416 ====== ======= </TABLE> See accompanying notes. PAGE 6
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accounting policies followed in the preparation of interim financial statements are consistent with those used in the preparation of annual financial information. The interim financial statements reflect all adjustments, which are normal and recurring in nature, necessary in the opinion of management for a fair statement of results for the interim periods presented. Results for the three months ended March 31, 1999 are not necessarily indicative of the results that may be expected for the year ended December 31, 1999. NOTE 2 - ACCOUNTING FOR EARNINGS PER SHARE In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard (SFAS) No. 128 "Earnings Per Share" which required adoption for periods ending after December 31, 1997 and prescribes the calculation of earnings per share for both interim and annual financial statements. The following table sets forth the computation of basic and diluted earnings per share for March 31, (share and per share data not in thousands): <TABLE> <CAPTION> 1999 1998 ------ ------ <S> <C> <C> Numerator for basic and diluted earnings per share - net income $2,933 $2,534 ====== ====== Denominator for basic earnings per share - weighted average shares outstanding 3,051,181 3,049,190 Effect of dilutive securities - employee stock options 6,103 10,601 ---------- --------- Denominator for diluted earnings per share - adjusted weighted average shares outstanding 3,057,284 3,059,791 ========== ========= Earnings per share - basic $ 0.96 $ 0.83 Earnings per share - diluted $ 0.96 $ 0.83 </TABLE> NOTE 3 -STOCK DIVIDEND DECLARED At the April 13, 1999 meeting, the Board of Directors of Old Second Bancorp, Inc., declared a 2-for-1 stock split effected in the form of a stock dividend payable on May 17, 1999 to shareholders of record on May 10, 1999. NOTE 4 - REPORTING COMPREHENSIVE INCOME As of January 1, 1998, the Corporation adopted SFAS No. 130, "Reporting Comprehensive Income". SFAS No. 130 establishes new rules for the reporting and display of comprehensive income and its components; however, the adoption of this Statement had no impact on the Corporation's net income or shareholders' equity. SFAS No. 130 requires unrealized gains or losses on the Corporation's available-for-sale securities, which prior to adoption were reported separately in shareholders' equity to be included in other comprehensive income. During the first quarter, total comprehensive income amounted to $2,086,951 for 1999 and $3,001,341 for 1998. NOTE 5 - SEGMENTS REPORTING In June 1997, the Financial Accounting Standards Board issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" which addresses the reporting of financial information from operating segments in annual and interim financial statements. Management believes that it operates under one segment as defined by SFAS No. 131 and additional disclosure is not required. PAGE 7
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 6 - IMPACT OF YEAR 2000 The Corporation is currently in the process of addressing a potential problem that faces all users of automated systems including information systems. Many computer systems process transactions based on two digits representing the year of transaction, rather than a full four digits. These computer systems may not operate properly when the last two digits become "00", as will occur on January 1, 2000. The problem could effect a wide variety of automated information systems, such as mainframe applications, personal computers, communications and environmental systems. The Corporation has identified areas of operations critical for the delivery of its products and services. The majority of the programs and applications used in the Corporation's operations are purchased from outside vendors. The vendors providing the software are responsible for maintenance of the systems and modifications to enable uninterrupted usage after December 31, 1999. The Corporation's plan included identifying potential problems by performing an inventory of all software applications and obtaining certification of compliance from third parties. This phase of the plan was completed by December 31, 1998. The vendor of the Corporation's core operating system has provided certification of compliance with the year 2000 issue and testing of the core operating system was completed in April 1999. Contingency plans and testing of other affected applications, both internally developed and third-party provided, are expected to be completed by June 1999. The Corporation's plan also includes reviewing any potential risks associated with the loan and investment portfolios due to the year 2000 issue. As noted above, the Corporation has not yet completed all phases of its plan to address year 2000 issues. Since certification and testing of the core operating system was completed during 1998, Management believes that core business services can be delivered without interruption after December 31, 1999. In the event that core services cannot be delivered, the Corporation could be subject to litigation and the amount of potential liability cannot be reasonably estimated. Based on currently available information, the Corporation believes that all costs to address year 2000 issues were incurred during 1998 and were not considered to be material. Consequently, unanticipated future costs to address year 2000 issues should not have a materially adverse impact on the Corporation's financial condition or results of operations. NOTE 7 - ACCOUNTING FOR DERIVATIVES In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", which is required to be adopted in years beginning after June 15, 1999. Because of the Corporation's minimal use of derivatives, management does not anticipate that the adoption of the new Statement will have a material effect on the Corporation's financial condition or results of operations. PAGE 8
PART 1 - FINANCIAL INFORMATION ITEM 2 OLD SECOND BANCORP, INC. AND SUBSIDIARIES MANAGEMENTS' DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion analyzes the consolidated financial condition and results of operations of Old Second Bancorp, Inc. and its subsidiaries. PERFORMANCE SUMMARY Net income for the first quarter 1999 increased 15.7% to $2.9 million or $.96 per share from last year's total of $2.5 million or $.83 per share. Return on average assets and average equity were 1.22% and 11.9%, respectively, for the first quarter of 1999 compared to 1.09% and 11.3% a year ago. Total equity of $103 million at March 31, 1999 represented 10.6% of total assets, which were $977 million. Dividends declared per share increased to $.25 during the first quarter 1999 from $.20 for the same period a year ago. RESULTS OF OPERATIONS For the three months ending March 31, 1999, net interest income of $9.2 million was up $659,000 (7.7%) over the like period in 1998. The net interest margin on a tax equivalent basis increased to 4.24% for the first three months in 1999 from 4.11% for the same period in 1998. Non-interest income for the quarter ending March 31, 1999 of $5.0 million was up $250,000 from the same period a year ago. Higher trust fees and other income, which were up $118,000 and $346,000, respectively, were offset by a decline of $239,000 in gains on sales of loans. Loans sold on the secondary market of $169 million during the first quarter of 1999 were up from $144 million for the same period last year although a decrease in the margins resulted in a lower gain on sale of these loans. Asset quality continued to show further improvement with nonperforming loans of $1.4 million down from $2.9 million a year ago and $2.7 million at year end 1998. The allowance for loan losses as a percent of net loans was 1.46% at March 31, 1999, up from 1.35% a year ago and 1.43% at December 31, 1998. Net recoveries of $55,000 were realized during the first quarter 1999 compared to net charge-offs of $43,000 for the year ago quarter. For the first quarter of 1999, the provision for loan loss of $201,000 in 1999 was down from $354, 000 for the first quarter 1998. The productivity ratio which is defined as net interest income plus non-interest income divided by non-interest expense improved to 146% for the first quarter in 1999 compared to 144% for the same period in 1998. LIQUIDITY Liquidity is generally defined as the Corporation's ability to meet depositor withdrawal requests, provide for acceptable credit needs of customers and take advantage of earnings enhancement opportunities. In addition to normal growth in core deposits together with maturities of loans and investments, the Corporation has provided for liquidity needs by holding adequate balances in money market assets and maintaining various short-term borrowing sources. The parent company's liquidity which provides funds for the payment of dividends to stockholders and for other corporate purposes is generally provided by dividends from its subsidiaries. Management believes that funds available from subsidiaries are sufficient to meet future cash needs. As of March 31, 1999, federal funds sold and investment securities maturing within 30 days were $46.7 million or 4.8% of total assets. Additionally, unpledged investment securities not maturing within 30 days were $208 million or 21.3% of total assets. The investment portfolio at March 31, 1999 includes $10 million, 3.6%, of U.S. Treasuries and $171 million, 61.0%, of U.S. Government agency securities. PAGE 9
PART II - OTHER INFORMATION Item 1. Submission of Matters to a Vote of Security Holders A. The annual meeting of stockholders of Old Second Bancorp, Inc was held on March 9, 1999. B. The following matters were voted upon at this annual meeting and the results of such votes are provided below: Ratification and approval of the selection of Ernst & Young LLP as the Corporation's independent auditors for the year of 1999. For 2,642,693 Against 4,937 Abstentions 12,188 The election of five directors to serve for a term of three years each. James Benson For 2,631,989 Against 14,855 Abstentions 12,974 Marvin Fagel For 2,631,843 Against 15,001 Abstentions 12,974 Joanne Hansen For 2,538,201 Against 108,643 Abstentions 12,974 Kenneth Lindgren For 2,638,633 Against 8,211 Abstentions 12,974 Jesse Maberry For 2,636,908 Against 9,936 Abstentions 12,974 The election of two directors to serve for a term of one year each. Gerald Palmer For 2,538,016 Against 108,828 Abstentions 12,974 James Schmitz For 2,638,859 Against 7,985 Abstentions 12,974 The total number of shares of all classes of stock were changed as follows: 10,000,000 shares of Common Stock with a par value of $1.00 per share, and 300,000 shares of Preferred Stock with a par value of $1.00 per share. For 2,572,936 Against 68,471 Abstentions 18,411 Item 2. Exhibits and Reports on Form 8-K A. Exhibits Exhibit 27. Financial Data Schedule B. Reports on Form 8-K No reports on Form 8-K have been filed during the quarter because of the absence of conditions under which they are required. PAGE 10
SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. OLD SECOND BANCORP, INC. /s/ Jean Pooley -------------------------------- By: Jean A. Pooley Vice-President and Controller Date: May 10, 1999 PAGE 11
[TYPE] EX-27 [ARTICLE] 9 <TABLE> <S> <C> [PERIOD-TYPE] 3-MOS [FISCAL-YEAR-END] DEC-31-1999 [PERIOD-END] MAR-31-1999 [CASH] 32747 [INT-BEARING-DEPOSITS] 475 [FED-FUNDS-SOLD] 31025 [TRADING-ASSETS] 0 [INVESTMENTS-HELD-FOR-SALE] 279763 [INVESTMENTS-CARRYING] 0 [INVESTMENTS-MARKET] 0 [LOANS] 596449 [ALLOWANCE] 8078 [TOTAL-ASSETS] 976765 [DEPOSITS] 815697 [SHORT-TERM] 43980 [LIABILITIES-OTHER] 13839 [LONG-TERM] 0 [COMMON] 15875 [PREFERRED-MANDATORY] 0 [PREFERRED] 0 [OTHER-SE] 85397 [TOTAL-LIABILITIES-AND-EQUITY] 976765 [INTEREST-LOAN] 12031 [INTEREST-INVEST] 4033 [INTEREST-OTHER] 478 [INTEREST-TOTAL] 16542 [INTEREST-DEPOSIT] 6765 [INTEREST-EXPENSE] 7343 [INTEREST-INCOME-NET] 9199 [LOAN-LOSSES] 201 [SECURITIES-GAINS] 0 [EXPENSE-OTHER] 9682 [INCOME-PRETAX] 4284 [INCOME-PRE-EXTRAORDINARY] 2933 [EXTRAORDINARY] 0 [CHANGES] 0 [NET-INCOME] 2933 [EPS-PRIMARY] 0.96 [EPS-DILUTED] 0.96 [YIELD-ACTUAL] 0 [LOANS-NON] 0 [LOANS-PAST] 0 [LOANS-TROUBLED] 0 [LOANS-PROBLEM] 0 [ALLOWANCE-OPEN] 0 [CHARGE-OFFS] 0 [RECOVERIES] 0 [ALLOWANCE-CLOSE] 0 [ALLOWANCE-DOMESTIC] 0 [ALLOWANCE-FOREIGN] 0 [ALLOWANCE-UNALLOCATED] 0 </TABLE>