SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [ ] For the quarterly period ended September 30, 1999 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 OLD SECOND BANCORP, INC. (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 X No --- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date: As of October 6, 1999, the Registrant had outstanding 6,059,362 shares of common stock, $1.00 par value per share.
OLD SECOND BANCORP, INC. Form 10-Q Quarterly Report Table of Contents PART I <TABLE> <CAPTION> Page Number <S> <C> Item 1. Financial Statements................................................................................3 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...................................................8 PART II Item 1. Legal Proceedings..............................................................................11 Item 2. Changes in Securities..........................................................................11 Item 3. Defaults Upon Senior Securities................................................................11 Item 4. Submission of Matters to a Vote of Security Holders............................................11 Item 5. Other Information..............................................................................11 Item 6. Exhibits and Reports on Form 8-K...............................................................11 </TABLE> Page 2
PART I - FINANCIAL INFORMATION OLD SECOND BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA) <TABLE> <CAPTION> September 30,1999 December 31,1998 ----------------- ---------------- <S> <C> <C> ASSETS Cash and due from banks, non-interest bearing $ 31,922 $ 42,202 Interest bearing deposits with banks 575 475 Federal funds sold 16,000 49,475 ------------- -------------- Total cash and cash equivalents 48,497 92,152 Available for sale securities 276,222 292,365 Loans held for sale 17,517 36,686 Loans 606,081 556,545 Less: Allowance for loan losses 8,275 7,823 ------------- -------------- Loans, net 597,806 548,722 Bank premises and equipment, net 20,701 20,950 Other assets 27,781 23,417 ------------- -------------- Total assets $ 988,524 $ 1,014,292 ============= ============== LIABILITIES Deposits: Demand $ 115,613 $ 119,972 Savings 380,678 360,321 Time 336,832 346,038 ------------- -------------- Total deposits 833,123 826,331 Securities sold under agreements to repurchase 20,512 32,590 Other short-term borrowings 4,449 4,517 Note payable 16,719 36,189 Other liabilities 10,671 12,739 ------------- -------------- Total liabilities 885,474 912,366 STOCKHOLDERS' EQUITY Preferred stock, $1.00 par value, 300,000 shares authorized, none issued Common stock, $1.00 par value, 10 million shares authorized; 6,059,362 shares outstanding at September 30, 1999; 15,875 15,875 6,102,362 shares outstanding at December 31, 1998 Retained earnings 89,783 83,228 Accumulated other comprehensive income (1,390) 2,823 Treasury Stock, 43,000 shares at September 30, 1999; (1,218) 0 Zero shares at December 31, 1998 ------------- -------------- Total stockholders' equity 103,050 101,926 ------------- -------------- Total liabilities and stockholders' equity $ 988,524 $1,014,292 ============= ============== </TABLE> See accompanying notes to consolidated financial statements. Page 3
OLD SECOND BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA) <TABLE> <CAPTION> Three Months Ended Nine Months Ended September 30 September 30 ------------------------- -------------------------- 1999 1998 1999 1998 ----------- ----------- ----------- ----------- <S> <C> <C> <C> <C> INTEREST INCOME Interest and fees on loans $ 12,387 $ 12,611 $ 36,586 $ 37,070 Interest and dividends on available-for-sale securities: Taxable 3,413 3,043 10,125 9,103 Exempt from federal income tax 674 747 1,978 2,287 Interest on federal funds sold 217 921 1,043 2,479 Interest on interest bearing deposits 7 7 28 21 ----------- ----------- ----------- ----------- Total interest income 16,698 17,329 49,760 50,960 INTEREST EXPENSE Savings deposits 2,509 2,406 6,968 6,808 Time deposits 4,248 5,033 13,196 15,374 Other short-term borrowings 459 724 1,501 2,047 ----------- ----------- ----------- ----------- Total interest expense 7,216 8,163 21,665 24,229 ----------- ----------- ----------- ----------- Net interest income 9,482 9,166 28,095 26,731 Provision for loan losses 264 307 711 1,007 ----------- ----------- ----------- ----------- Net interest income after provision for loan losses 9,218 8,859 27,384 25,724 ----------- ----------- ----------- ----------- OTHER INCOME Trust fees 1,050 1,005 3,379 3,139 Service charges on deposit accounts 858 798 2,420 2,338 Gain on sales of loans 1,269 2,409 4,745 6,598 Other income 1,433 1,026 3,822 2,809 ----------- ----------- ----------- ----------- Total other income 4,610 5,238 14,366 14,884 OTHER EXPENSES Salaries and employee benefits 4,902 5,029 15,526 15,190 Net occupancy expense 642 607 1,840 1,749 Furniture and equipment 882 1,010 2,766 3,059 FDIC insurance 23 23 71 90 Marketing 341 236 850 746 Stationery and supplies 237 253 689 704 Amortization of intangibles 462 952 888 1,673 Other 1,806 1,815 5,697 5,507 ----------- ----------- ----------- ----------- Total other expenses 9,295 9,925 28,327 28,718 ----------- ----------- ----------- ----------- Income before income taxes 4,533 4,172 13,423 11,890 Income tax expense 1,440 1,370 4,281 3,824 ----------- ----------- ----------- ----------- Net income $ 3,093 $ 2,802 $ 9,142 $ 8,066 =========== =========== =========== =========== Per share amounts: Basic earnings per share $0.51 $0.46 $1.50 $1.32 Diluted earnings per share 0.51 0.46 1.50 1.32 Dividends declared 0.15 0.13 0.43 0.33 Average shares outstanding 6,078,112 6,100,112 6,094,190 6,099,110 </TABLE> See accompanying notes to consolidated financial statements. Page 4
OLD SECOND BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOW NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (IN THOUSANDS) <TABLE> <CAPTION> 1999 1998 ------------ ----------- <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES NET INCOME $ 9,142 $ 8,066 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 1,599 (1,774) Amortization of mortgage servicing rights (1,977) (2,262) Provision for loan losses 711 1,007 Net change in mortgage loans held for sale 19,169 (10,389) Change in net income taxes payable 3,268 (610) Change in accrued interest and other assets (3,237) 617 Change in accrued interest and other liabilities (2,775) 2,732 Premium amortization and discount accretion on securities 551 484 Amortization of goodwill 331 331 Amortization of core deposit intangible assets 267 266 ------------ ----------- Net cash provided by operating activities 27,049 2,016 CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from sales of securities available for sale 55,757 78,879 Purchases of securities available for sale (47,085) (71,439) Net principal disbursed on loans (49,795) (12,092) Proceeds from sales of other real estate 252 304 Property and equipment expenditures (1,350) (1,754) ------------ ----------- Net cash used in investing activities (42,221) (6,102) CASH FLOWS FROM FINANCING ACTIVITIES Net change in deposits 6,792 17,872 Net change in fed funds purchased and repurchase agreements (12,078) 6,236 Short term borrowing (68) (5,319) Payments on notes payable (19,470) 8,705 Proceeds from exercise of stock options 0 31 Dividends paid, net of dividend reinvestments (3,659) (2,134) ------------ ----------- Net cash (used) provided by financing activities (28,483) 25,391 ------------ ----------- Net change in cash & cash equivalents (43,655) 21,305 Cash & cash equivalents at beginning of period 92,152 87,025 ------------ ----------- Cash & cash equivalents at end of period $ 48,497 $ 108,330 ------------ ----------- </TABLE> See accompanying notes to consolidated financial statements. Page 5
OLD SECOND BANCORP, INC. AND SUBSIDIARIES NOTES TO 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 normal and recurring adjustments, which are necessary, in the opinion of management, for a fair statement of results for the interim periods presented. Results for the nine months ended September 30, 1999 are not necessarily indicative of the results that may be expected for the year ended December 31, 1999. NOTE 2 - LOANS Major classifications of loans are as follows: <TABLE> <CAPTION> September 30, December 31, 1999 1998 --------------- ------------- <S> <C> <C> Commercial & industrial $ 149,685 $ 143,047 Real estate - commercial 173,121 172,198 Real estate - construction 59,170 46,361 Real estate - residential 151,676 137,695 Consumer 72,536 57,471 --------------- ------------- 606,188 556,772 Unearned discount (107) (227) --------------- ------------- Total loans $ 606,081 $ 556,545 =============== ============= </TABLE> NOTE 3 - ALLOWANCE FOR LOAN LOSSES Activity in the allowance loan losses is summarized as follows: <TABLE> <CAPTION> Nine Months Ended September 30 --------------------------- 1999 1998 ----------- ------------ <S> <C> <C> Balance, January 1 $ 7,823 $ 6,923 Provision for loan losses 711 1,007 Loans charged off (484) (384) Recoveries 225 188 ----------- ------------ Balance, end of period $ 8,275 $ 7,734 =========== =========== </TABLE> NOTE 4 - EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share for the period presented (share data not in thousands): <TABLE> <CAPTION> Three Months Ended Nine Months Ended September 30 September 30 ------------------------- -------------------------- 1999 1998 1999 1998 ----------- ----------- ----------- ----------- <S> <C> <C> <C> <C> Basic Earnings Per Share: Weighted average common shares outstanding 6,078,112 6,100,112 6,094,190 6,099,110 Net income available to common stockholders $ 3,093 $ 2,802 $ 9,142 $ 8,066 Basic earnings per share $ 0.51 $ 0.46 $ 1.50 $ 1.33 Diluted Earnings Per Share: Weighted average common shares outstanding 6,078,112 6,100,112 6,094,190 6,199,110 Dilutive effect of stock options 10,826 8,076 8,593 9,398 ----------- ----------- ----------- ----------- Diluted average common shares outstanding 6,088,938 6,108,188 6,086,705 6,109,510 Net income available to common stockholders $ 3,093 $ 2,802 $ 9,142 $ 8,066 Diluted earnings per share $ 0.51 $ 0.46 $ 1.50 $ 1.32 </TABLE> Page 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 5 -STOCK DIVIDEND DECLARED On April 13, 1999, 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 6 - REPORTING COMPREHENSIVE INCOME SFAS No. 130 requires unrealized gains or losses on the Company's available-for-sale securities to be included in other comprehensive income. Total comprehensive income was $4,286,500 during the third quarter of 1999 and $3,521,100 during the third quarter of 1998. For the nine months ended September 30, comprehensive income was $9,514,300 and $6,318,700 in 1999 and 1998, respectively. NOTE 7 - SEGMENT 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. The Company operates under one segment as defined by SFAS No. 131 and additional disclosure is not required. NOTE 8 - YEAR 2000 READINESS DISCLOSURE The Company 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 Company has identified areas of operations critical for the delivery of its products and services. The majority of the programs and applications used in the Company'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 Company'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 Company's core operating system has provided certification of compliance with the year 2000 issue and testing of the core operating system was completed in June 1999. Contingency plans and testing of other affected applications, both internally developed and third-party provided, were completed before June 1999, and indicate year 2000 compliance. The Company's plan also includes reviewing any potential risks associated with the loan and investment portfolios due to the year 2000 issue. Based on currently available information, the Company believes that all significant 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 Company's financial condition or results of operations. NOTE 9 - 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 by January 1, 2001. Because of the Company's minimal use of derivatives, management does not anticipate that the adoption of the new Statement will have a material effect on the Company's financial condition or results of operations. Page 7
OLD SECOND BANCORP, INC. AND SUBSIDIARIES MANAGEMENTS' DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Net income for the third quarter of 1999 was $3,093,000, or diluted earnings per share of 51 cents, a 10.4% increase in net income compared to $2,802,000, or 46 cents per share, in the third quarter of 1998. For the nine months ended September 30, 1999, net income was $9,142,000, or $1.50 per share, compared to $8,066,000, or $1.32 per share during the first nine months of 1998, a 13.3% increase in net income. The increase in net income for the quarter and the year to date was primarily a result of an increase in net interest income. Expenses decreased for the year to date period and declined in the third quarter compared to a year earlier. As a result, the return on equity increased from 11.36% in the third quarter of 1998, to 11.90% in the same period of 1999. Net interest income was $9.5 million and $9.2 million during the three months ended September 30, 1999 and 1998, an increase of 3.3%. The Company's net interest margin was 4.28% for the three months ended September 30, 1999, and 4.17% a year earlier. Net interest income was $28.1 million and $26.7 million during the nine months ended September 30, 1999 and 1998, an increase of 5.2%. The Company's net interest margin was 4.26% for the nine months ended September 30, 1999, and 4.17% a year earlier. The increase in this ratio has primarily resulted from a decline in the average cost of funds. The average yield on earning assets declined from 7.77% in the third quarter of 1998, to 7.45% in the third quarter of 1999. At the same time, the average cost of funds has declined from 3.60% in the third quarter of 1998 to 3.16% in the third quarter of 1999. Non-interest income was $4,610,000 during the third quarter of 1999 and $5,238,000 in the third quarter of 1998, a decrease of $628,000, or 11.99%. Non-interest income was $14,366,000 during the nine months ended September 30, 1999 and $14,884,000 during the nine months ended September 30, 1998, a decrease of $518,000, or 3.48%. This decrease was primarily due to the increase in interest rates and the corresponding decrease in residential mortgage originations. Gains on sales of mortgage loans declined to $1,269,000 in the third quarter of 1999, and $4,745,000 in the nine months ended of 1999, from $2,409,000 in the third quarter of 1998, and $6,598,000 in the same period of 1998. Trust income was $45,000 higher in the third quarter of 1999, and $240,000 higher for the nine month period. Other income was $407,000 higher for the third quarter of 1999 and $1,013,000 higher for the year to date. Other income in the accompanying financial statements includes mortgage subsidiary income of $652,000 during the third quarter of 1999 and $2,178,000 for the nine months ended September 30, 1999. This compares with other income of the mortgage subsidiary of $646,000 during the third quarter of 1998 and $1,791,000 for the nine months ended September 30, 1998. Non-interest expenses were $9,295,000 during the third quarter of 1999, a decline of $630,000 (6.35%) from $9,925,000 in the third quarter of 1998. Non-interest expenses were $28,327,000 during the first nine months of 1999, a decrease of $391,000 (1.36%) from $28,718,000 during the same period of 1998. The decrease in non-interest expenses is primarily the result of a decrease in the amortization of mortgage servicing rights as a result of the increase in interest rates. Salaries and benefits, which account for over half of non-interest expenses in all periods presented, decreased 2.53% in the third quarter and increased 2.21% in the nine month period, when comparing 1999 to 1998 results. Amortization of intangibles declined from $952,000 in the third quarter of 1998 to $462,000 in the third quarter of 1999, and declined from $1,673,000 in the nine month period of 1998 to $888,000 in the same period of 1999. FINANCIAL CONDITION LOANS Total loans were $606.1 million as of September 30, 1999, an increase of $49.5 million (8.90%) for the nine month period, from $556.5 million as of December 31, 1998. Loans have increased $60.28 million (11.03%) from September 30, 1998, to September 30, 1999. The largest increases in loan classifications were in residential real estate, which increased $31.5 million, and other consumer loans, which increased $15.1 million in the third quarter of 1999. These changes reflect the continuing loan demand in the markets in which the Company operates. Asset quality has improved, with nonperforming loans of $2.05 million down from $2.08 million a year ago and $2.68 million at year-end 1998. Nonperforming loans include loans in nonaccrual status, renegotiated loans, and loans past Page 8
due ninety days or more and still accruing. Net charge offs of $301,000 were up during the third quarter of 1999 compared to net charge-offs of $54,000 a year earlier. Net charge-offs were $258,000 during the nine months ended September 30, 1999, compared to net charge-offs of $196,000 during the nine months ended September 30, 1998. As a consequence of improved loan quality and charge-off experience, the provision for loan losses was reduced compared to prior periods. Provisions for loan losses were $264,000 in the third quarter of 1999 and $307,000 in the third quarter of 1998. Provisions for loan losses were $711,000 in the nine months ended September 30, 1999 and $1,007,000 in the nine months ended September 30, 1998. One measure of the adequacy of the allowance for loan losses is the ratio of the allowance to total loans. The allowance for loan losses as a percentage of total loans was 1.37% as of September 30, 1999, down from 1.42% a year ago and 1.41% at December 31, 1998. In management's judgment, an adequate allowance for possible future losses has been established. DEPOSITS AND BORROWING Total deposits were $833.1 million as of September 30, 1999, an increase of $6.8 million from $826.3 million as of December 31, 1998, and an increase of $26.3 million from September 30, 1998. Savings accounts increased $20.4 million from December 31, 1998 to September 30, 1999. During the nine months of 1999, there was a significant movement of deposit funds from time deposits to savings deposits. During this time, demand accounts decreased $4.4 million and time deposits declined $9.2 million. The promotion of a money market savings account during this time, coupled with the inclination of consumers to seek shorter maturities, contributed to this movement. Securities sold under repurchase agreements, which are typically of short-term durations, declined from $32.6 million as of December 31, 1998, to $20.5 million as of September 30, 1999. The Company also uses notes payable, primarily as a means of financing loans held for sale at the Maple Park Mortgage subsidiary. Notes payable declined from $36.2 million as of December 31, 1998, to $16.7 million as of September 30, 1999. This $19.5 million decline is primarily related to the $19.2 million decline in loans held for sale over the same period of time. CAPITAL The Company completed a two-for-one split of its common stock during the second quarter of 1999. The split was in the form of a stock dividend and was payable on May 17, 1999, to the stockholders of record at the close of business on May 10, 1999. In June 1999, the Company announced that the board of directors had authorized the repurchase of up to 300,000 shares of the Company's common stock, or 4.9% of the company's 6,102,362 shares outstanding. The Company and its five subsidiary banks (the "Banks") are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines provide for five classifications, the highest of which is well capitalized. The Company and the Banks were categorized as well capitalized as of September 30, 1999. As of September 30, 1999, the Company's ratio of total capital to risk weighted assets was 15.47%, the ratio of Tier 1 capital to risk weighted assets was 14.27%, and the ratio of Tier 1 capital to average assets was 10.11%. LIQUIDITY Liquidity measures the ability of the Company to meet maturing obligations and its existing commitments, to withstand fluctuations in deposit levels, to fund its operations, and to provide for customers' credit needs. The liquidity of the Company principally depends on cash flows from operating activities, investment in and maturity of assets, changes in balances of deposits and borrowings, and its ability to borrow funds in the money or capital markets. Net cash flows from operating activities were $27 million in the first nine months of 1999 and $2 million in the first nine months of 1998. Interest received net of interest paid was the principal source of operating cash inflows in both periods reported. Management of investing and financing activities, and market conditions, determine the level and the stability of net interest cash flows. Management's policy is to mitigate the impact of changes in market interest rates to the extent possible, so that balance sheet growth is the principal determinant of growth in net interest cash flows. Net cash outflows from investing activities were $42.2 mllion in the nine months ended September 30, 1999, compared to $6.1 million a year earlier. In the first nine months of 1999, net principal disbursed on loans accounted for net outflows of $49.8 million, and securities transactions aggregated a net inflow of $8.7 million. In the first nine months of 1998, net principal disbursed on loans accounted for a net outflow of $12.1 million, and securities transactions resulted in net inflows of $7.4 million. Page 9
Cash inflows from financing activities included an increase in deposits of $6.8 million in the first nine months of 1999. This compares with a net inflow associated with deposits of $17.9 million for the same period in 1998. Short-term borrowing resulted in net cash outflows of $68,000 in the nine months of 1999, and outflows of $5.3 million in the nine months of 1998. Payments on notes payable totaled $19.5 million in the first nine months of 1999 compared to inflows of $8.7 million in the first nine months of 1998. Page 10
PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS There are no material pending legal proceedings to which the Company or its subsidiaries are a party other than ordinary routine litigation incidental to their respective businesses. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K Exhibits 27. Financial Data Schedule Reports on Form 8-K None. Page 11
SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED THEREUNTO DULY AUTHORIZED. OLD SECOND BANCORP, INC. (REGISTRANT) /S/ WILLIAM B. SKOGLUND ---------------------------------------- WILLIAM B. SKOGLUND PRESIDENT AND CHIEF EXECUTIVE OFFICER /S/ J. DOUGLAS CHEATHAM ---------------------------------------- J. DOUGLAS CHEATHAM VICE PRESIDENT AND CHIEF FINANCIAL OFFICER DATE: NOVEMBER 12, 1999