Net income for the first quarter of 2001 was $3,632,000, or 62 cents diluted earnings per share, compared to $3,460,000 or 58 cents per share in the first quarter of 2000. This was a 5% increase in earnings, or 7% on a per share basis. The increase in net income for the quarter was primarily a result of an increase in net interest income. Noninterest income increased $432,000 and noninterest expenses increased $1,081,000 from the first quarter of 2000 to the first quarter of 2001. The first quarter return on equity increased to 13.51% in the first quarter of 2001, from 12.70% in the same period of 2000.
Net interest income was $11.1 million and $ 9.8 million during the three months ended March 31, 2001 and 2000, an increase of 13.7%. The Company's net interest margin was 4.22% for the three months ended March 31, 2001, and 4.42% a year earlier. The decrease in the ratio is a result of a decrease in interest rates contributing to an increase in loan volume.
Noninterest income was $4,931,000 during the first quarter of 2001 and $4,499,000 in the first quarter of 2000, an increase of $432,000, or 9.6%. This increase was primarily due to the decrease in interest rates and the corresponding increase in residential mortgage originations. As a result of the gains on sales of mortgage loans increased to $1,567,000 in the first quarter of 2001, from $791,000 in the first quarter of 2000.
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. 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 $234,000 in the first quarter of 2000 to $20,000 in the first quarter of 2001.
Trust income was $38,000 lower in the first quarter of 2001 than in the first quarter of 2000. Other income was $385,000 lower in the first quarter of 2001. The first quarter 2000 included the gain on the sale of mortgage servicing rights. Excluding the gain, other income would have increased $380,000 over prior year.
Noninterest expenses were $10,023,000 during the first quarter of 2001, an increase of $1,081,000 from $8,942,000 in the first quarter of 2000. The increase in noninterest expenses is primarily the result of an increase in expenses of Maple Park Mortgage as this business has increased as a result of a decrease in interest rates. Salaries and benefits, which account for most of the noninterest expenses, increased $1,004,000, in part, due to higher expenses at Maple Park Mortgage.
FINANCIAL CONDITION
Loans
Total loans were $755.2 million as of March 31, 2001, an increase of $25.4 million for the three-month period, from $729.7 million as of December 31, 2000. The largest increases in loan classifications were in real estate loans both commercial and residential, which increased $16.3 million and $7.0 million, respectively and commercial and industrial loans, which increased $7.6 million. These changes reflect the continuing loan demand in the markets in which the Company operates.
Asset quality has improved, with nonperforming loans of $1.9 million as of March 31, 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 $580,000 in the first quarter of 2001 and $210,000 in the first quarter 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 1.35% as of March 31, 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 $1,035.5 million as of March 31, 2001, an increase of $39.0 million from $996.5 million as of December 31, 2000. The decrease in interest rates contributed to the increase in loans for the quarter. Savings deposits, which include money market accounts, increased $21.8 million during the first quarter and time deposits increased $22.7 million. Demand deposits declined from $148.6 million to $143.2 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 $23.1 million as of March 31, 2001. Other short-term borrowings, which primarily consists of treasury tax and loan notes, declined from $2.5 million to $2.3 million as of March 31, 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 $21.7 million as of March 31, 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. The purchase of approximately 26,500 shares in the first quarter of 2001, together with 190,236 and 81,500 shares purchased during 2000 and 1999 respectively, total approximately 298,236 shares repurchased. 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 but not purchased to approximately 401,000.
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 March 31, 2001. The accompanying table shows the capital ratios of the Company and Old Second National Bank as of March 31, 2001.
Capital levels and minimum required levels:
| | | | Minimum Required | Minimum Required |
| | | | for Capital | to be Well |
| | Actual
| Adequacy Purposes
| Capitalized
|
| | Amount
| Ratio
| Amount
| Ratio
| Amount
| Ratio
|
| March 31, 2001: | | | | | | |
| Total capital to risk weighted assets | | | | | | |
| Consolidated | $119,120 | 13.24% | $71,976 | 8.00% | $89,970 | 10.00% |
| Old Second | 79,789 | 14.21 | 44,920 | 8.00 | 56,150 | 10.00 |
| Tier 1 capital to risk weighted assets | | | | | | |
| Consolidated | 108,899 | 12.10 | 36,000 | 4.00 | 54,000 | 6.00 |
| Old Second | 72,942 | 12.99 | 22,461 | 4.00 | 33,691 | 6.00 |
| Tier 1 capital to average assets | | | | | | |
| Consolidated | 108,899 | 9.33 | 46,688 | 4.00 | 58,360 | 5.00 |
| Old Second | 72,942 | 9.28 | 31,441 | 4.00 | 39,301 | 5.00 |
| | | | | | | |
| December 31, 2000: | | | | | | |
| Total capital to risk weighted assets | | | | | | |
| Consolidated | $118,599 | 14.86% | $63,849 | 8.00% | $79,811 | 10.00% |
| Old Second | 77,886 | 14.52 | 42,912 | 8.00 | 53,640 | 10.00 |
| Tier 1 capital to risk weighted assets | | | | | | |
| Consolidated | 108,909 | 13.65 | 31,915 | 4.00 | 47,872 | 6.00 |
| Old Second | 71,424 | 13.31 | 21,465 | 4.00 | 32,197 | 6.00 |
| Tier 1 capital to average assets | | | | | | |
| Consolidated | 108,909 | 9.66 | 45,097 | 4.00 | 56,371 | 5.00 |
| Old Second | 71,424 | 9.39 | 30,426 | 4.00 | 38,032 | 5.00 |
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 $11.2 million in the first three months of 2001 compared to the net cash inflow of $2.8 million in the first three 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 $765,000 for the first quarter 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 $4.7 million in the three months ended March 31, 2001, compared to $37.9 million a year earlier. In the first three months of 2001, net principal disbursed on loans accounted for net outflows of $25.1 million, and securities transactions aggregated a net inflow of $20.4 million. In the first three months of 2000, net principal disbursed on loans accounted for a net outflow of $25.9 million, and securities transactions resulted in net outflows of $19.3 million. The sale of mortgage servicing rights resulted in net cash inflows of $8.1 million.
Cash inflows from financing activities included an increase in deposits of $39.0 million in the first three months of 2001. This compares with a net inflow associated with deposits of $33.6 million during the first quarter of 2000. Short-term borrowing resulted in net cash outflows of $231,000 in the three months of 2001, and outflows of $9.0 million in the three months of 2000. Net cash inflows associated with notes payable totaled $18.2 million in the first three months of 2001 compared to outflows of $4.4 million in the first three 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
| | | | | | | | |
| | Expected Maturity Dates
| |
| | 1 Year | 2 Years | 3 Years | 4 Years | 5 Years | Thereafter | Total |
| Interest-earning Assets | | | | | | | |
| Deposit with banks | $79 | $- | $- | $- | $- | $- | $79 |
| Average interest rate | 5.28% | | | | | | 5.28% |
| | | | | | | | |
| Federal funds sold | $64,300 | $- | $- | $- | $- | $- | $64,300 |
| Average interest rate | 5.19% | | | | | | 5.19% |
| | | | | | | | |
| Securities | $37,852 | $53,663 | $55,127 | $48,006 | $17,713 | $90,122 | $302,483 |
| Average interest rate | 5.95% | 5.93% | 5.94% | 6.46% | 6.79% | 5.85% | 6.05% |
| | | | | | | | |
| Fixed rate loans | $97,472 | $93,800 | $76,746 | $124,989 | $55,673 | $38,440 | $487,120 |
| Average interest rate | 8.30% | 8.12% | 8.12% | 8.26% | 7.95% | 7.20% | 7.67% |
| | | | | | | | |
| Adjustable rate loans | $96,372 | $14,835 | $12,137 | $22,451 | $9,622 | $143,790 | $299,207 |
| Average interest rate | 8.55%
| 5.07%
| 5.07%
| 2.58%
| 2.58%
| 7.86%
| 8.07%
|
| Total | $296,075
| $162,298
| $144,010
| $195,446
| $83,008
| $272,352
| $1,153,189
|
| | | | | | | | |
| Interest-bearing Liabilities | | | | | | | |
| Interest-bearing deposits | $596,140 | $67,016 | $23,485 | $5,186 | $8,556 | $191,948 | $892,331 |
| Average interest rate | 4.83% | 5.48% | 5.43% | 5.31% | 5.76% | 1.37% | 4.17% |
| | | | | | | | |
| Short-term borrowing | $25,401 | $- | $- | $- | $- | $- | $25,401 |
| Average interest rate | 4.97% | - | - | - | - | - | 4.97% |
| | | | | | | | |
| Notes payable | $21,666 | $- | $- | $- | $- | $- | $21,666 |
| Average interest rate | 7.50%
| -
| -
| -
| -
| -
| 7.50%
|
| Total | $643,207
| $67,016
| $23,485
| $5,186
| $8,556
| $191,948
| $939,398
|
| | | | | | | | |
| Period gap | $(347,132) | $95,282 | $120,525 | $190,260 | $74,452 | $80,404 | $213,791 |
| Cumulative gap | (347,132) | (251,850) | (131,325) | 58,935 | 133,387 | 213,791 | |
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.
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 |
| | Senior Vice President and Chief Financial Officer |
| Date:May 9, 2001 | |
