SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549
FORM 10-Q
For the quarterly period ended June 30, 2001
OR
For transition period from _________ to
Commission File Number 0 -10537
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 ý No o
Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date: As of August 1, 2001, the Registrant had outstanding 5,752,594 shares of common stock, $1.00 par value per share.
OLD SECOND BANCORP, INC.
Form 10-Q Quarterly Report
Table of Contents
PART I – FINANCIAL INFORMATION
Old Second Bancorp, Inc. and SubsidiariesConsolidated Balance Sheets(In thousands, except share data)
See accompanying notes to consolidated financial statements.
Old Second Bancorp, Inc. and SubsidiariesConsolidated Statements of Income(In thousands, except share data)
Old Second Bancorp, Inc. and SubsidiariesConsolidated Statements of Cash FlowsSix Months Ended June 30, 2001 and 2000(In thousands)
OLD SECOND BANCORP, INC. AND SUBSIDIARIESNOTES 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 six months ended June 30, 2001 are not necessarily indicative of the results that may be expected for the year ended December 31, 2001.
The company adopted Financial Accounting Standards Board Statement No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended, on January 1, 2001. Because of the Company’s minimal use of derivatives, the adoption of the Statement does not have a significant effect on earnings or the financial position of the Company.
NOTE 2 – SECURITIES
Securities available for sale are summarized as follows:
In September 2000, the FASB issued Statement No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” that replaces, in its entirety, FASB Statement No. 125. Although Statement No. 140 has changed many of the rules regarding securitizations, it continues to require an entity to recognize the financial and servicing assets it controls and the liabilities it has incurred and to derecognize financial assets when control has been surrendered in accordance with the criteria provided in the Statement. As required, the Company will apply the new rules prospectively to transactions beginning in the second quarter of 2001. Based on the current circumstances, the Company believes the application of the new rules will not have a material impact on its financial status.
In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets, effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill [and intangible assets deemed to have indefinite lives] will no longer be amortized but will be subject to annual impairment tests in accordance with the Statements. Other intangible assets will continue to be amortized over their useful lives. The Company will apply the new rules on accounting for goodwill and other intangible assets beginning in the first quarter of 2002.
NOTE 3 – LOANS
NOTE 4 – ALLOWANCE FOR LOAN LOSSES
NOTE 5 – NOTES PAYABLE
The Company has a $40 million line of credit available with Marshall & Ilsley Bank, under which $17.1 million was outstanding as of June 30, 2001 and $3.4 million was outstanding as of December 31, 2000. The note bears interest at the rate of 1% over the Federal Funds rate. This borrowing is for the purpose of funding loans held for sale at the Maple Park Mortgage subsidiary and other corporate purposes.
NOTE 6 – EARNINGS PER SHARE
Earnings per share were as follows (share data not in thousands):
NOTE 7 – COMPREHENSIVE INCOME
Comprehensive income was as follows:
OLD SECOND BANCORP, INC. AND SUBSIDIARIESMANAGEMENTS' DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Net income for the second quarter of 2001 was $4,309,000, or 74 cents earnings per share, compared to $3,434,000 or 58 cents per share in the second quarter of 2000. This was a 25.5% increase in earnings, or 27.4% on a per share basis. For the six months ended June 30, 2000 net income was $6,894,000, or $1.16 per share, compared to $7,941,000, or $1.36 per share during the first six months of 2001, a 17.2% increase in earnings per share. The increase in net income for the period was primarily a result of an increase in net interest income. Noninterest income increased $1,668,000 and noninterest expenses increased $1,949,000 from the first six months of 2000 to the first six months of 2001. The return on equity increased to 13.6% in the first half of 2001, from 13.4% for the same period of 2000.
Net interest income was $12.0 million and $10.3 million during the three months ended June 30, 2001 and 2000 respectively, an increase of 16.6%. The Company's net interest margin was 4.28% for the three months ended June 30, 2001, and 4.40% a year earlier. Net interest income was $23.1 million and $20.1 million during the six months ended June 30, 2001 and 2000, an increase of 15.2%. The Company's net interest margin was 4.25% for the six months ended June 30, 2001, and 4.41% a year earlier. The decline in the ratio is, primarily, the result of a higher cost of funds in the first half of 2001, when compared with the first half of 2000. The net interest margin was 4.28% for the three months ended June 30, 2000, compared with 4.17% in the fourth quarter of 2000, and 4.22% in the first quarter of 2001. The increase in the first and second quarter of 2001 is primarily due to a decline in the cost of funds.
Noninterest income was $5,306,000 during the second quarter of 2001 and $4,070,000 in the second quarter of 2000, an increase of $1,236,000, or 30.4%. Noninterest income was $10,237,000 during the six month ended June 30, 2001 and $8,569,000 during the six-month ended June 30, 2000, an increase of $1,668,000 or 19.5%. This increase was primarily due to the decrease in interest rates and the corresponding increase in residential mortgage originations. Gains on sales of mortgage loans increased to $1,917,000 in the second quarter of 2001 from $944,000 in the second quarter of 2000 and from $1,735,000 to $3,484,000 for the six-month period ended 2000 and 2001, respectively.
During the first quarter of 2000, Maple Park Mortgage entered into an agreement to sell the majority of its mortgage servicing rights. A gain of $765,000 was recorded at the time of the sale and was included in other income. A portion of the sale amount was retained to compensate the buyer for short-term prepayments. The final portion of the retained amount was included in the other income for second quarter of 2000, bringing the total gain to $844,000. Maple Park Mortgage now sells mortgage loans on a servicing-released basis instead of retaining originated servicing rights. As a result, mortgage-servicing income declined from $320,000 in the first six months of 2000 to $36,000 in the first six months of 2001. Other income was $558,000 lower in the first half of 2001 due primarily to the gain on the sale of mortgage servicing rights. Excluding the gain, other income would have increased $286,000 over prior year due to increased miscellaneous fee revenues.
Noninterest expenses were $9,997,000 during the second quarter of 2001, an increase of $868,000 from $9,129,000 in the second quarter of 2000. Noninterest expenses were $20,020,000 for the first six months of 2001, an increase of $1,949,000 from $18,071,000 in 2000. The increase in noninterest expenses is primarily the result of an increase in expenses of Maple Park Mortgage as their business has increased as a result of a decrease in interest rates. Salaries and benefits, which account for most of the noninterest expenses, increased $1,651,000 and corresponding increase in mortgage originations and sales, in part, due to higher commissions paid by Maple Park Mortgage.
FINANCIAL CONDITION
Loans
Total loans were $790.3 million as of June 30, 2001, an increase of $60.5 million for the six-month period, from $729.7 million as of December 31, 2000. The largest increases in loan classifications were in real estate loans, which increased $47.5 million, and commercial and industrial loans, which increased $15.0 million. These changes reflect the continuing loan demand in the markets in which the Company operates.
Asset quality has improved, with nonperforming loans of $1.8 million as of June 30, 2001, down from $2.5 million as of December 31, 2000. Nonperforming loans include loans in nonaccrual status, renegotiated loans, and loans past due ninety days or more and still accruing.The provision for loan losses was $1,270,000 for the first six months of 2001 and $530,000 for the first six months of 2000. 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 June 30, 2001, compared to 1.33% as of December 31, 2000. In management's judgment, an adequate allowance for estimated losses has been established.
Deposits and Borrowing
Total deposits were $1,072.5 million as of June 30, 2001, an increase of $76.1 million from $996.5 million as of December 31, 2000. Savings deposits, which include money market accounts, increased $68.0 million during the second quarter and time deposits increased $10.0 million. Demand deposits declined from $2.0 million to $146.6 million during this period.
Securities sold under repurchase agreements, which are typically of short-term duration, increased from $21.2 million as of December 31, 2000, to $52.2 million as of June 30, 2001. Other short-term borrowings, which primarily consists of treasury tax and loan notes, increased from $2.5 million to $8.5 million as of June 30, 2001. The Company also uses notes payable, primarily as a means of financing loans held for sale at the Maple Park Mortgage subsidiary. In order to fund the significant growth in loans, notes payable increased from $3.4 million as of December 31, 2000, to $17.1 million as of June 30, 2001.
Capital
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. On April 19, 2000, the Company announced that the board of directors had authorized the purchase of up to an additional 300,000 shares, bringing the total number of shares authorized to 600,000. The purchase of 91,500 shares in the first half of 2001, together with 190,236 and 81,500 shares purchased during 2000 and 1999 respectively, total 363,236 shares repurchased.
The Company and its three 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 June 30, 2001. The accompanying table shows the capital ratios of the Company and Old Second National Bank as of June 30, 2001.
Capital levels and minimum required levels:
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 outflow from operating activities was $2.6 million in the first six months of 2001 compared to the net cash inflow of $9.9 million in the first six months of 2000. The increase in outflows is directly related to the increased loan activity of Maple Park Mortgage. Interest received net of interest paid was the principal source of operating cash inflows in both periods reported. In addition, the sale of mortgage servicing rights resulted in a gain $844,000 for the first half of 2000. 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 principle determinant of growth in net interest cash flows.
Net cash outflows from investing activities were $78.4 million in the six months ended June 30, 2001, compared to $74.0 million a year earlier. In the first six months of 2001, net principal disbursed on loans accounted for net outflows of $60.7 million, and securities transactions aggregated a net outflow of $15.7 million. In the first six months of 2000, net principal disbursed on loans accounted for a net outflow of $54.0 million, and securities transactions resulted in net outflows of $26.4 million. The sale of mortgage servicing rights resulted in net cash inflows of $9.0 million.
Cash inflows from financing activities included an increase in deposits of $76.1 million in the first six months of 2001. This compares with a net inflow associated with deposits of $78.7 million during the first half of 2000. Short-term borrowing resulted in net cash inflows of $6.0 in the six months of 2001, and outflows of $6.7 million in the six months of 2000. Net cash inflows associated with notes payable totaled $13.7 million in the first six months of 2001 compared to outflows of $6.9 million in the first six months of 2000.
The impact of movements in general market interest rates on a financial institution’s financial condition, including capital adequacy, earnings, and liquidity, is known as interest rate risk. Interest rate risk is the Company’s primary market risk. As a financial institution, accepting and managing this risk is an inherent aspect of the Company’s business. However, safe and sound management of interest rate risk requires that it be maintained at prudent levels.
The Company analyzes interest rate risk by examining the extent to which assets and liabilities are interest rate sensitive. The interest sensitivity gap is defined as the difference between the amount of interest earning assets maturing or repricing within a specific time period and the amount of interest-bearing liabilities maturing or repricing within that time period. A gap is considered positive when the amount of interest sensitive assets exceeds the amount of interest sensitive liabilities. A gap is considered negative when the amount of interest sensitive liabilities exceeds the amount of interest sensitive assets. During a period of rising interest rates, a negative gap would tend to result in a decrease in net interest income while a positive gap would tend to positively affect net interest income. The Company's policy is to manage the balance sheet such that fluctuations in the net interest margin are minimized regardless of the level of interest rates.
The accompanying table does not necessarily indicate the future impact of general interest rate movements on the Company's net interest income because the repricing of certain assets and liabilities is discretionary and is subject to competitive and other pressures. As a result, assets and liabilities indicated as repricing within the same period may in fact reprice at different times and at different rate levels. Assets and liabilities are reported in the earliest time frame in which maturity or repricing may occur. Although securities available for sale are reported in the earliest time frame in which maturity or repricing may occur, these securities may be sold in response to changes in interest rates or liquidity needs.
Expected Maturity of Interest-Earning Assets and Interest-Bearing Liabilities
Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995.
This quarterly report contains certain forward looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Reform Act of 1995, and we are including this statement for purposes of these safe harbor provisions. Forward-looking statements, which are based on certain assumptions and describe future plans, strategies and expectations, are generally identifiable by use of the words "believe," "expect," "intend," "anticipate," "estimate," "project" or similar expressions. Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse affect on the operations and future prospects of the Company and the subsidiary include, but are not limited to, changes in: interest rates, general economic conditions, legislative/regulatory changes, monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Federal Reserve Board, the quality or composition of the loan or investment portfolios, demand for loan products, deposit flows, competition, demand for financial services in our market area, our implementation of new technologies, our ability to develop and maintain secure and reliable electronic systems and accounting principles, policies and guidelines. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Further information concerning us and our business, including additional factors that could materially affect our financial results, is included in our filings with the Securities and Exchange Commission.
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
Item 4. Submission of f to a Vote of Security Holders
Meeting of Stockholders.
The Annual Meeting of Stockholders was held April 17, 2001
Election of Directors.
Walter Alexander, Edward Bonifas, William Meyers, and William B. Skoglund were elected to serve as directors of the Company for a term ending at the Annual Meeting in 2004.
Matters Voted Upon at the Meeting.
In addition to the election of Directors, stockholders ratified the adoption of Ernst & Young LLP as independent public accountants for the Company for the year ending December 31,2001. The voting on each item at the Annual Meeting was as follows:
Election of Directors
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Exhibits
None
Reports on Form 8-K
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.