2002 Year End Letter to Stockholders
2002 was an exceptionally good year for Old Second Bancorp Inc. Our mortgage company and three banks exceeded unprecedented thresholds of banking activity, from performance to earnings. We are pleased with the growth and achievements of the past twelve months and would like to share the highlights with you. Assets and income, as well as loan and deposit volumes, were at all-time highs and included the following:
• Net income for the year was $20.1 million, up 16.97% from last year’s record income of $17.2 million.
• Basic earnings were $2.71 per share compared with $2.24 per share in 2001, restated for the four-for-three stock split, up 20.9% from 2001.
• Dividends were increased for the 36th consecutive year.
• Loans increased to $1.06 billion, an 18.6% increase.
• Deposits increased to $1.39 billion, a 27.4% increase.
• Return on equity was 15.84%, compared to 14.3% in 2001.
• Return on assets was at 1.39%, compared to 1.38% in 2001.
• Total assets of the holding company grew 20.6% to approximately $1.61 billion.
• Shareholders’ equity increased from $124.9 million to $133.0 million, with an equity to total assets ratio of 8.27%.
In 2002, the economy did face some fairly serious challenges; however, your company was able to maintain its history of low net charge-offs and a high quality loan portfolio. Net charge-offs for the year were $349,000, down $868,000 from 2001, while the allowance for loan and lease losses was increased to $15.8 million (1.49% of loans), an increase from last year’s level of $12.3 million (1.38% of loans). While nonperforming assets were $2.2 million above the year-end 2001 total, they declined by more than $5 million during the fourth quarter, ending the year at $5.6 million. In addition, although in the past year there were a number of Federal Reserve rate cuts, our net interest margin remained relatively stable; from 4.33% in 2001 to 4.28% for 2002. The last few quarters of last year, however, have shown declines in this area, and maintaining these margins represents one of our biggest challenges in the coming year.
A large part of our success in 2002 was following our “right size” strategy. This strategy blends the best of what large banks offer with the personal relationship of small banks. We offer the products, locations, convenience, and expertise of a large bank while continuing to offer quality service, local decision-makers, community involvement, and the helpful, friendly employees of a community bank.
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We continued to expand our presence in our market area during the year and now have twenty-two branches and four mortgage company locations. In 2002, we opened four new branches in St. Charles, Aurora (Orchard Road), Sandwich, and Naperville, and added one new mortgage office in Aurora on Farnsworth Avenue. In addition, we remodeled and expanded our Geneva location. For 2003, we currently have one new full-service location planned in the Sycamore/DeKalb area, which is expected to be open in April, and we are in the planning stages for a new full-service facility in Yorkville, which should open late summer or early fall. As always, we continue to look for new locations that meet the goal of our strategic plan of branch expansion within our market or other high growth areas.
Our mortgage company, Old Second Mortgage, changed its name from Maple Park Mortgage during the past year and is now a subsidiary of Old Second National Bank. We are pleased to report that the mortgage company closed over $466.0 million in mortgages for the year 2002.
This coming year, the names of Kane County Bank and Yorkville National Bank will be changed to Old Second Bank-Kane County and Old Second Bank-Yorkville. This change was done for marketing and public relations purposes, and the banks will still remain independent, under the same management, with the same Boards of Directors, and the same structure as before. Both banks will be state chartered.
In June of this past year, the Board declared a four-for-three stock split, effected in the form of a stock dividend. The dividend remained at $0.20 per share per quarter, which in effect, increased dividends by 33%. The price of the stock at year-end was at $37.00 compared to $29.56 as of December 31, 2001, an increase of 25.2%.
Our employee base continues to be stable. Of our nearly 600 full and part-time employees, 120 have been with us for 10 or more years. Our commitment to quality service is ongoing as is our continued involvement in non-profit and other community organizations in the Fox Valley area. Talent, time, and donations have come from all areas of our company. In addition, all employees understand our commitment to our sales culture: they receive training, coaching, and incentives to achieve positive growth results. We are proud of every one of their contributions to the success of Old Second.
As we look at the year ahead, we are conscious of the economic, global, and local indicators that may affect all of us. Our strength and continued success rest on the confidence you, as valued stockholders, have placed in us. We look forward to continuing to serve you.
Thank you again for your valued support and thanks to our loyal staff and Board of Directors. All of you are part of our success.
| |
James Benson |
Chairman |
|
| |
William B. Skoglund |
President and CEO |
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Old Second Bancorp Inc. and Subsidiaries
Financial Highlights
(In thousands, except share data)
| | 2002 | | 2001 | | 2000 | | 1999 | | 1998 | |
Balance sheet items at year-end | | | | | | | | | | | |
Total assets | | $ | 1,608,087 | | $ | 1,333,348 | | $ | 1,149,442 | | $ | 998,508 | | $ | 1,014,292 | |
Loans, net of allowance | | 1,046,098 | | 883,142 | | 720,042 | | 595,825 | | 542,189 | |
Deposits | | 1,390,661 | | 1,090,816 | | 996,478 | | 848,336 | | 826,331 | |
Notes payable | | — | | 33,393 | | 3,429 | | 9,467 | | 36,189 | |
Stockholders’ equity before other comprehensive income | | 127,700 | | 120,220 | | 111,491 | | 105,738 | | 99,103 | |
Stockholders’ equity | | 133,076 | | 124,946 | | 112,962 | | 103,761 | | 101,926 | |
| | | | | | | | | | | |
Results of operations | | | | | | | | | | | |
Net interest income | | $ | 57,482 | | $ | 49,501 | | $ | 41,325 | | $ | 37,835 | | $ | 35,910 | |
Provision for loan losses | | 3,805 | | 3,840 | | 1,380 | | 930 | | 1,213 | |
Net income | | 20,146 | | 17,223 | | 13,471 | | 12,408 | | 11,049 | |
| | | | | | | | | | | |
Per share data | | | | | | | | | | | |
Basic earnings per share | | $ | 2.71 | | $ | 2.24 | | $ | 1.72 | | $ | 1.53 | | $ | 1.36 | |
Diluted earnings per share | | 2.69 | | 2.23 | | 1.71 | | 1.53 | | 1.36 | |
Dividends declared | | 0.75 | | 0.56 | | 0.45 | | 0.44 | | 0.34 | |
Stockholders’ equity before other comprehensive income | | 17.27 | | 15.80 | | 14.34 | | 13.17 | | 12.18 | |
Stockholders’ equity | | 18.00 | | 16.42 | | 14.53 | | 12.93 | | 12.53 | |
| | | | | | | | | | | |
Weighted average shares outstanding | | 7,429,882 | | 7,695,225 | | 7,851,276 | | 8,109,693 | | 8,132,680 | |
Shares outstanding at year-end | | 7,393,104 | | 7,607,592 | | 7,776,125 | | 8,027,816 | | 8,136,483 | |
Note: The numbers of shares and per share amounts have been adjusted to reflect the 1999 two-for-one and May 22, 2002 four-for-three stock splits, both effected in the form of a stock dividend.
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Old Second Bancorp Inc. and Subsidiaries
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
Overview
Old Second Bancorp is a financial services company with its main headquarters located in Aurora, Illinois. The consolidated financial statements include Old Second Bancorp Inc. and its wholly owned subsidiaries: The Old Second National Bank of Aurora (“Old Second Bank”), Yorkville National Bank, Kane County Bank, Old Second Financial, Inc. and Old Second Mortgage, together referred to as the “Company.” Old Second Mortgage also does business as Maple Park Mortgage. The banking subsidiaries are referred to as the “Banks.” The Company provides financial services through its twenty-two banking locations and four mortgage banking offices located in Kane, Kendall, DeKalb, DuPage, Lake, and LaSalle counties in Illinois. Its primary deposit products are checking, savings, and certificates of deposit, and its primary lending products are residential and commercial mortgages, construction lending, commercial and installment loans. A major portion of loans are secured by various forms of collateral including real estate, business assets, consumer property, and other items, although borrower cash flow may also be a primary source of repayment. Old Second Mortgage provides mortgage-banking services, and Old Second Bank also engages in trust operations.
During the past few years, the Company simplified its organizational structure by eliminating a number of its subsidiary bank charters. The latest consolidation occurred during 2000 when Bank of Sugar Grove was merged into Old Second Bank and Burlington Bank was merged into Kane County Bank. The mergers qualified as tax-free reorganizations and were accounted for as internal reorganizations. During 2002, Old Second Mortgage became a wholly owned subsidiary of Old Second Bank. Inter-company transactions and balances are eliminated in consolidation.
Net income of $20.1 million or $2.69 diluted earnings per share was achieved in 2002, which compares with $17.2 million, or $2.23 per share in 2001, and $13.5 million, or $1.71 per share in 2000. Basic earnings per share were $2.71 in 2002, $2.24 in 2001, and $1.72 in 2000. Growth in net interest income was the primary cause of the increase in net income. Net interest income grew $7.9 million (16.1%) to $57.5 million in 2002, and grew $8.2 million (19.8%) to $49.5 million in 2001, due to an increase in earning assets in each year and a decrease in deposit rates. Year-end total assets were $1.61 billion as of December 31, 2002, an increase of $274.7 million from $1.33 billion as of December 31, 2001. Average assets were $1.45 billion, $1.24 billion, and $1.07 billion in 2002, 2001, and 2000, respectively.
Results of operations
Net interest income
Net interest income is the difference between interest income earned on earning assets and interest expense paid on interest bearing liabilities. As such, net interest income is affected by changes in the volume and yields on earning assets, and the volume and rates paid on interest bearing liabilities. Net interest margin is the ratio of tax-equivalent net interest income to average earning assets.
Net interest income was $57.5 million in 2002, $49.5 million in 2001, and $41.3 million in 2000. Average earning assets were $1.38 billion in 2002, an increase of $198.6 million (16.8%) from $1.18 billion in 2001. Average earning assets were $1.00 billion in 2000. Average loans increased $180.3 million (22.0%) from $820.9 million in 2001 to $1.00 billion in 2002. During 2001, average loans increased $150.5 million (22.4%) from $670.4 million in 2000. Average interest bearing liabilities were $1.14 billion in 2002, an increase of $178.3 million (18.5%) from $962.7 million in 2001. Average interest bearing liabilities were $822 million in 2000. The net interest margin was 4.28%, 4.33%, and 4.29%, in 2002, 2001, and 2000, respectively. Given the Company’s mix of interest bearing liabilities and interest earning assets on December 31, 2002, the net interest margin could be expected to decline in a falling interest rate environment and, conversely, to increase in a rising rate environment. During 2001, the Federal Open Market Committee (“FOMC”) lowered the target for the Federal Funds rate on eleven occasions, decreasing the rate from 6.50% on January 1, 2001 to 1.75% by December 31, 2001, a total of 475 basis points. These actions caused a corresponding decrease in the Banks’ prime rate from 9.50% to 4.75%. Due to the asset sensitive nature of the balance sheet, these rate decreases had an adverse impact on the Company’s net interest margin during 2001. This low rate environment continued to have an adverse effect on the
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Company’s net interest margin during 2002. In November of 2002, the FOMC lowered the Fed Funds target rate another .50% to 1.25%. The Banks’ prime rate was also lowered .50% to 4.25%, which had an additional adverse effect on the net interest margin due to the asset sensitivity of the balance sheet.
Application of Critical Accounting Policies
The Company’s consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States 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 financial statements and accompanying notes. These estimates, assumptions, and judgments are based on information available as of the date of the financial statements. Future changes in information may affect these estimates, assumptions, and judgments, which, in turn, may affect amounts reported in the financial statements.
Most accounting policies are not considered by management to be critical accounting policies. All significant accounting policies are presented in Note A to the consolidated financial statements. 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 financial statements and how those values are determined.
Management has determined that its accounting policies with respect to the allowance for loan losses is the accounting area requiring subjective or complex judgments that is most important to the Company’s financial position and results of operations, and therefore, is its only critical accounting policy. The allowance for loan losses represents management’s estimate of probable credit losses inherent in the loan portfolio. Determining the amount of the allowance for loan losses is considered a critical accounting estimate because it requires significant judgment and the use of estimates related to the amount and timing of expected future cash flows on impaired loans, estimated losses on pools of homogeneous loans based on historical loss experience, and consideration of current economic trends and conditions, all of which may be susceptible to significant change. The loan portfolio also represents the largest asset type on the consolidated statement of condition. The methodology used to determine the allowance for loan losses and a discussion of the factors driving changes in the amount of the allowance for loan losses is included in the Provision for Losses for Loans section that follows.
Provision for loan losses
The provision for loan losses was $3.8 million during 2002, $3.8 million during 2001, and $1.4 million during 2000. Provisions for loan losses are made to provide for probable and estimable losses on loans inherent in the portfolio. Net charge-offs were $349,000, $1.2 million, and $134,000 in 2002, 2001, and 2000, respectively. When compared with total loans, net charge-offs as a percent of total loans were 0.04%, 0.14%, and 0.02% in 2002, 2001, and 2000, respectively.
The allowance for loan losses was $15.8 million or 1.49% of loans and 289.7% of nonperforming loans as of December 31, 2002. This compares with an allowance for loan losses of $12.3 million or 1.38% of total loans as of December 31, 2001, which was 369.7% of nonperforming loans. Nonperforming loans are defined as nonaccrual loans, restructured loans, and loans past due ninety days or more and still accruing.
While there can be no assurance that the allowance for loan losses will be adequate to cover all losses, management believes that the allowance for loan losses was adequate at December 31, 2002. The adequacy of the allowance for loan losses is determined by management based on factors that include the overall composition of the loan portfolio, types of loans, past loss experience, loan delinquencies, substandard and doubtful credits, and other factors that, in management’s judgment, deserve evaluation in estimating loan losses. Changes in economic conditions may also affect the collectibility of a portion of the loan portfolio. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses. Such agencies may require the Company to make additional provisions to the allowance based on their judgments about information available to them at the time of their examination.
Noninterest income
Noninterest income was $25.3 million in 2002, $22.3 million in 2001, and $16.6 million in 2000. The changes in noninterest income were primarily related to the change in mortgage banking income and service charges on deposits. Mortgage banking income, including secondary mortgage fees, mortgage servicing income, and gains on sales of loans totaled $10.4 million, $9.0 million, and $4.5 million in 2002, 2001, and 2000. Mortgage banking income is largely volume-driven and mortgage activity is susceptible to changes in interest rates and general economic conditions. The increase in 2002 was primarily due to the increase in residential mortgage originations as a result of the decrease in interest rates since December 31, 2000. Loans sold were $468.9 million in 2002, $396.6 million in 2001, and
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$210.7 million in 2000. In the first quarter of 2000, the majority of mortgage servicing rights were sold for a gain of $897,000 on the sale. Old Second Mortgage now sells mortgage loans on a servicing-released basis instead of retaining originated servicing rights, thereby reducing mortgage-servicing income.
Service charges on deposits were $5.9 million, $5.0 million, and $3.6 million in 2002, 2001, and 2000. The growth is directly related to increases in deposits, which were fueled by successful sales promotional campaigns, and new cash management products.
Trust income increased $19,000 to $5.1 million in 2002, compared to $5.0 million in 2001. Trust income declined $74,000 in 2001 from $5.1 million as of December 31, 2000. Assets under management were $591.3 million in 2002, $652.8 million in 2001, and $675.0 million in 2000.
Other income was $3.8 million for 2002, compared to $2.9 million in 2001 and $3.3 million for 2000. The $943,000 or 32.7% increase in 2002 was attributable to fee income of $301,000 from the new insurance agency subsidiary (Old Second Financial, Inc.), electronic funds transfer revenues of $327,000, fueled by higher Debit and ATM card usage and increases in merchant processing revenues of $152,000.
Noninterest expenses
Noninterest expenses were $48.1 million in 2002, $41.5 million in 2001, and $37.1 million in 2000. The efficiency ratio increased slightly to 57.0% in 2002, from 56.5% in 2001, which had improved from 62.3% in 2000. The efficiency ratio measures noninterest expenses as a percentage of tax-equivalent gross revenues. The decline in the ratio from the 2000 level reflected progressively greater cost-efficiency over this period of time. Because the largest expense is the cost of staffing, management of this cost has a significant impact on efficiency. Salaries and employee benefits were $29.4 million in 2002, $24.6 million in 2001 and $21.7 million in 2000. The increase was mainly due to the opening of four new branches and the increase in commissions related to the increased volume in mortgage loan originations.
A primary cause of the increase in noninterest expenses was an increase in expenses of Old Second Mortgage. Their business continues to increase as a result of decreased interest rates. Salaries and benefits, which account for a major portion of the noninterest expenses, increased $896,000 at Old Second Mortgage as a result of the expanded business. Occupancy expenses were $2.9 million in 2002, $2.8 million in 2001, and $2.6 million in 2000. Furniture and equipment expenses were $4.3 million in 2002, $4.1 million in 2001, and $3.3 million in 2000. The increase in furniture and equipment expense, in the past two years, is directly related to the opening of the four new branches and the new mortgage office.
Amortization of mortgage servicing rights, net of changes in the valuation allowance, was $7,000 in 2002, $5,000 in 2001, and $78,000 in 2000. The Old Second Mortgage subsidiary sold the majority of its mortgage servicing rights in 2000. Mortgage loans are now originated and sold on a servicing-released basis. Management anticipates that the cost and volatility of servicing rights amortization will be substantially reduced in the future.
Income taxes
The Company’s provision for Federal and State of Illinois income taxes was $10.8 million, $9.3 million, and $6.0 million during the years ended December 31, 2002, 2001, and 2000. The effective income tax rate for these years was 34.8%, 35.0%, and 30.7%. The effective tax rates in 2002 and 2001 are comparable. The increase in the 2001 effective tax rate was the result of tax-exempt income decreasing from $2.8 million in 2000 to $2.7 million in 2001, while taxable income increased from $16.6 million in 2000 to $23.8 million in 2001.
Financial condition
Total assets were $1.61 billion as of December 31, 2002, an increase of $274.7 million from December 31, 2001. A significant portion of this 20.6% increase was associated with an increase in loans from $895.5 million to $1.06 billion and an increase in securities available for sale from $324.5 million to $389.2 million during 2002. Deposits were $1.39 billion as of December 31, 2002, an increase of $299.8 million from December 31, 2001. At the same time, notes payable, which were used in 2001 to fund loans held for sale, decreased from $33.4 million to zero.
Investments
Securities increased $64.7 million during 2002, from $324.5 million as of December 31, 2001, to $389.2 million as of December 31, 2002. U.S. government agency securities were $282.4 million, an increase of $54.6 million from a year earlier. U.S. government agency securities comprised 72.6% of the portfolio as of December 31, 2002, and 70.2% of the portfolio as of December 31, 2001. Mortgage backed securities increased $17.0 million, from $25.5 million in 2001 to $42.5 million during 2002. These changes did not represent a change in investment policy. The net unrealized gains in the portfolio increased from $7.9 million as of December 31, 2001 to $8.9 million as of December 31, 2002.
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Loans
Total loans increased $166.4 million (18.6%) during 2002, from $895.5 million as of year-end 2001 to $1.06 billion as of year-end 2002. All of the major categories of loans increased, with the most significant changes occurring in commercial real estate loans, which increased $102.2 million from $310.3 million as of year-end 2001 to $412.5 million as of year-end 2002. Residential mortgages increased $46.7 million (21.6%) from $215.6 million to $262.3 million over the same period of time. Commercial and industrial loans increased from $186.4 million as of year-end 2001 to $208.7 million as of year-end 2002, an increase of $22.2 million or 11.9%.
The loan portfolio generally reflects the profile of the communities in which the Company operates. Because the Company is located in growing areas, real estate lending (including commercial, residential, and construction) is a significant portion of the portfolio. These categories comprised 74.8% of the portfolio as of December 31, 2002 and 71.2% of the portfolio as of December 31, 2001.
Nonperforming loans were $5.4 million as of December 31, 2002, up from $3.3 million as of December 31, 2001. Nonperforming loans include loans in nonaccrual status, renegotiated loans, and loans past due ninety days or more and still accruing. Asset quality has remained strong, with net charge-offs of $349,000 compared to $1.2 million in 2001. The provision for loan losses was $3.8 million for both 2002 and 2001. 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 1.49% as of December 31, 2002, compared to 1.38% as of December 31, 2001. In management’s judgment, an adequate allowance for estimated losses has been established; however, there can be no assurance that such losses will not exceed the estimated amounts in the future.
Along with other financial institutions, management shares a concern for the outlook of the economy during 2003. A slowdown in economic activity, beginning in 2001, severely impacted several major industries as well as the economy as a whole. Even though there are numerous indications of emerging strength, it is not certain that this strength is sustainable. In addition, consumer confidence may be negatively impacted by the recent substantial decline in equity prices. These events could still adversely affect cash flows for both commercial and individual borrowers, as a result of which, the Company could experience increases in problem assets, delinquencies and losses on loans.
Sources of funds
The Company’s primary source of funds is customer deposits. Total deposits grew $299.8 million during 2002, to $1.39 billion as of December 31, 2002. Most of the growth was in noninterest bearing checking accounts, certificate of deposit accounts, and money market accounts. Noninterest bearing accounts grew $31.3 million (18.9%), savings grew $7.7 million (7.8%) and money market accounts grew $97.2 million (36.3%) during 2002. At the same time, certificates of deposit of less than $100,000 increased $97.9 million (37.4%) and certificates of deposit of $100,000 or more increased $37.4 million (29.0%). Given the lower interest rate environment in which retail time deposits were maturing, pricing and sales strategies targeted growth in transactional deposit accounts and customer reinvestment of maturing time deposit balances in longer-term maturities. Successful selling efforts in these areas resulted in an increase in new account relationships and core funding sources.
The Company also utilizes repurchase agreements as a source of funds. Repurchase agreements, which are typically of short-term duration, were $60.8 million as of December 31, 2002, an increase of $28.7 million from $32.1 million as of December 31, 2001. Other short-term borrowings decreased from $31.6 million to $7.9 million primarily due to the decrease in federal funds purchased of $18.2 million. The Company also uses notes payable, primarily as a means of financing loans held for sale at the Old Second Mortgage Company subsidiary. In order to fund the significant growth in loans in 2001, notes payable increased to $33.4 million as of December 31, 2001. The note was paid during the first quarter of 2002 and there was no balance outstanding as of December 31, 2002. The Company is currently maintaining liquid assets and delivering consistent growth in core funding to provide funding for loan growth.
Capital
Total stockholders’ equity increased $8.1 million during 2002, from $124.9 million as of December 31, 2001, to $133.1 million as of December 31, 2002. Net income of $20.1 million, reduced by dividends of $5.6 million, contributed retained earnings of $14.5 million during 2002. During 2002, stockholders’ equity was increased by $650,000 in net unrealized securities gains and losses. In 2001, net income of $17.2 million, reduced by dividends of $4.3 million and enhanced by an increase in net unrealized gains and losses on securities of $3.3 million, increased stockholders’ equity by $16.2 million. The exercise of stock options and the related tax benefit contributed $800,000 to stockholders’ equity in 2002 and $307,000 in 2001.
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On May 21, 2002, the Board of Directors of the Company declared a four-for-three stock split effected in the form of a stock dividend payable on June 24, 2002 to shareholders of record on June 14, 2002. All historical share data and per share amounts have been restated to reflect this stock split.
On October 16, 2001, the Company announced that the Board of Directors had authorized the purchase of up to an additional 400,000 shares, bringing the total number of shares authorized for repurchase to 1,200,000. During 2002, the Company purchased 246,234 shares of its common stock, reducing outstanding shares from 7,607,592 as of year-end 2001 to 7,393,104 as of year-end 2002. This reduced stockholders’ equity by $7.9 million. It is anticipated that this action will enhance return on equity and earnings per share. Return on average equity was 15.84% in 2002, 14.43% in 2001, and 12.71% in 2000.
Bank regulatory bodies have adopted capital standards by which all banks and bank holding companies will be evaluated. Capital levels and minimum required levels:
| | Actual
at Year-End | | Minimum Required
for Capital
Adequacy Purposes | | Minimum Required
to be Well
Capitalized | |
| | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio | |
December 31, 2002: | | | | | | | | | | | | | |
Total capital to risk weighted assets | | | | | | | | | | | | | |
Consolidated | | $ | 138,563 | | 11.85 | % | $ | 93,545 | | 8.00 | % | $ | 116,931 | | 10.00 | % |
Old Second | | 98,633 | | 12.24 | | 64,466 | | 8.00 | | 80,583 | | 10.00 | |
Tier 1 capital to risk weighted assets | | | | | | | | | | | | | |
Consolidated | | 123,938 | | 10.60 | | 46,769 | | 4.00 | | 70,154 | | 6.00 | |
Old Second | | 88,553 | | 10.99 | | 32,230 | | 4.00 | | 48,346 | | 6.00 | |
Tier 1 capital to average assets | | | | | | | | | | | | | |
Consolidated | | 123,938 | | 7.79 | | 63,640 | | 4.00 | | 79,549 | | 5.00 | |
Old Second | | 88,553 | | 7.91 | | 44,780 | | 4.00 | | 55,975 | | 5.00 | |
| | | | | | | | | | | | | |
December 31, 2001: | | | | | | | | | | | | | |
Total capital to risk weighted assets | | | | | | | | | | | | | |
Consolidated | | $ | 128,432 | | 13.32 | % | $ | 77,136 | | 8.00 | % | $ | 96,420 | | 10.00 | % |
Old Second | | 86,430 | | 13.19 | | 52,422 | | 8.00 | | 65,527 | | 10.00 | |
Tier 1 capital to risk weighted assets | | | | | | | | | | | | | |
Consolidated | | 116,119 | | 12.04 | | 38,578 | | 4.00 | | 57,867 | | 6.00 | |
Old Second | | 78,352 | | 11.95 | | 26,227 | | 4.00 | | 39,340 | | 6.00 | |
Tier 1 capital to average assets | | | | | | | | | | | | | |
Consolidated | | 116,119 | | 8.86 | | 52,424 | | 4.00 | | 65,530 | | 5.00 | |
Old Second | | 78,352 | | 8.77 | | 35,736 | | 4.00 | | 44,670 | | 5.00 | |
The Company and its three subsidiary 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 December 31, 2002. The Company’s total capital ratio, tier 1 capital to risk weighted assets ratio, and tier 1 capital to average assets ratio were 11.85%, 10.60%, and 7.79%, respectively, as of December 31, 2002. Dividends declared during 2002 were $0.75, an increase of 33.9% from $0.56 in 2001. The dividend payout ratios were 27.66% and 25.13% during 2002 and 2001, respectively.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Liquidity and Market Risk
Liquidity is the Company’s ability to fund its operations, to meet depositor withdrawals, to provide for customer’s credit needs, and to meet maturing obligations and its existing commitments, to withstand fluctuations in deposit levels, to meet maturing obligations and existing commitments. 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.
Net cash inflows from operations were $13.1 million during 2002. Net cash outflows from investing activities were $239.6 million in 2002, as a result of $166.8 million in net
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principal disbursed on loans. Cash inflows from the proceeds from the sale of securities available for sale of $216.2 million were offset by cash outflows of $281.3 million for the purchases of securities available for sale. Net cash inflows for financing activities were $258.8 million in 2002, which included a net increase in deposits of $299.8 million, enhanced by increases in repurchase agreements and short-term borrowings of an aggregate $28.7 million, offset by a decrease in cash outflows for notes payable and other short-term borrowings of $57.1 million.
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 operations were $500,000 during 2001. Net cash outflows from investing activities were $171.4 million in 2001, as a result of $166.9 million in net principal disbursed on loans. Net cash inflows from financing activities were $156.0 million in 2001, which included a net increase in deposits of $94.3 million, enhanced by increases in repurchase agreements, short-term borrowings, and notes payable of an aggregate $69.9 million.
Interest Rate Risk
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.
Effects of Inflation
In management’s opinion, changes in interest rates affect the financial condition of a financial institution to a far greater degree than changes in the inflation rate. While interest rates are greatly influenced by changes in the inflation rate, they do not change at the same rate or in the same magnitude as the inflation rate. Rather, interest rate volatility is based on changes in the expected rate of inflation, as well as on changes in monetary and fiscal policies. A financial institution’s ability to be relatively unaffected by changes in interest rates is a good indicator of its capability to perform in today’s volatile economic environment. The Company seeks to insulate itself from interest rate volatility by ensuring that rate sensitive assets and rate sensitive liabilities respond to changes in interest rates in a similar time frame and to a similar degree.
35
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 | |
2002 | | | | | | | | | | | | | | | |
Interest-earning Assets | | | | | | | | | | | | | | | |
Interest-bearing deposit with banks | | $ | 58 | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 58 | |
Average interest rate | | 1.03 | % | | | | | | | | | | | 1.03 | % |
| | | | | | | | | | | | | | | |
Federal funds sold | | $ | 23,350 | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 23,350 | |
Average interest rate | | 1.14 | % | | | | | | | | | | | 1.14 | % |
| | | | | | | | | | | | | | | |
Securities | | $ | 54,005 | | $ | 50,160 | | $ | 76,490 | | $ | 29,871 | | $ | 53,684 | | $ | 125,006 | | $ | 389,216 | |
Average interest rate | | 5.50 | % | 4.33 | % | 3.14 | % | 4.47 | % | 3.68 | % | 4.21 | % | 4.14 | % |
| | | | | | | | | | | | | | | |
Fixed rate loans | | $ | 148,891 | | $ | 72,310 | | $ | 59,163 | | $ | 181,774 | | $ | 78,867 | | $ | 58,610 | | $ | 599,615 | |
Average interest rate | | 5.49 | % | 7.61 | % | 7.61 | % | 7.19 | % | 7.10 | % | 6.72 | % | 6.39 | % |
| | | | | | | | | | | | | | | |
Adjustable rate loans | | $ | 137,630 | | $ | 43,600 | | $ | 35,673 | | $ | 65,784 | | $ | 28,193 | | $ | 200,030 | | $ | 510,910 | |
Average interest rate | | 5.17 | % | 4.18 | % | 4.18 | % | 4.38 | % | 4.38 | % | 4.98 | % | 5.38 | % |
Total | | $ | 363,934 | | $ | 166,070 | | $ | 171,326 | | $ | 277,429 | | $ | 160,744 | | $ | 383,646 | | $ | 1,523,149 | |
| | | | | | | | | | | | | | | |
Interest-bearing Liabilities | | | | | | | | | | | | | | | |
Interest-bearing deposit with banks | | $ | 757,811 | | $ | 107,920 | | $ | 45,301 | | $ | 21,030 | | $ | 25,706 | | $ | 236,020 | | $ | 1,193,788 | |
Average interest rate | | 2.16 | % | 3.63 | % | 3.85 | % | 4.76 | % | 4.01 | % | 0.50 | % | 2.16 | % |
` | | | | | | | | | | | | | | | |
Short-term borrowings | | $ | 68,644 | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 68,644 | |
Average interest rate | | 1.12 | % | | | | | | | | | | | 1.12 | % |
| | | | | | | | | | | | | | | |
Notes payable | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | |
Average interest rate | | | | | | | | | | | | | | | |
Total | | $ | 826,455 | | $ | 107,920 | | $ | 45,301 | | $ | 21,030 | | $ | 25,706 | | $ | 236,020 | | $ | 1,262,432 | |
| | | | | | | | | | | | | | | |
Period gap | | $ | (462,521 | ) | $ | 58,150 | | $ | 126,025 | | $ | 256,399 | | $ | 135,038 | | $ | 147,626 | | $ | 260,717 | |
Cumulative gap | | (462,521 | ) | (404,371 | ) | (278,346 | ) | (21,947 | ) | 113,091 | | 260,717 | | | |
| | | | | | | | | | | | | | | |
2001 | | | | | | | | | | | | | | | |
Interest-earning Assets | | | | | | | | | | | | | | | |
Interest-bearing deposit with banks | | $ | 81 | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 81 | |
Average interest rate | | 1.29 | % | | | | | | | | | | | 5.01 | % |
| | | | | | | | | | | | | | | |
Federal funds sold | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | |
Average interest rate | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Securities | | $ | 57,800 | | $ | 61,747 | | $ | 46,735 | | $ | 31,212 | | $ | 19,317 | | $ | 107,738 | | $ | 324,549 | |
Average interest rate | | 5.40 | % | 5.53 | % | 5.84 | % | 5.78 | % | 5.56 | % | 5.27 | % | 5.49 | % |
| | | | | | | | | | | | | | | |
Fixed rate loans | | $ | 108,998 | | $ | 96,109 | | $ | 78,635 | | $ | 131,534 | | $ | 57,184 | | $ | 36,037 | | $ | 508,497 | |
Average interest rate | | 7.56 | % | 7.87 | % | 7.87 | % | 7.94 | % | 7.83 | % | 7.29 | % | 7.17 | % |
| | | | | | | | | | | | | | | |
Adjustable rate loans | | $ | 164,697 | | $ | 18,958 | | $ | 15,511 | | $ | 36,691 | | $ | 15,726 | | $ | 179,634 | | $ | 431,217 | |
Average interest rate | | 5.24 | % | 3.90 | % | 3.90 | % | 3.45 | % | 3.45 | % | 5.87 | % | 5.97 | % |
Total | | $ | 331,576 | | $ | 176,814 | | $ | 140,881 | | $ | 199,437 | | $ | 92,227 | | $ | 323,409 | | $ | 1,264,344 | |
| | | | | | | | | | | | | | | |
Interest-bearing Liabilities | | | | | | | | | | | | | | | |
Interest-bearing deposit with banks | | $ | 598,329 | | $ | 67,556 | | $ | 27,923 | | $ | 8,001 | | $ | 18,836 | | $ | 204,633 | | $ | 925,278 | |
Average interest rate | | 2.86 | % | 4.67 | % | 4.57 | % | 5.63 | % | 4.92 | % | 81.00 | % | 2.66 | % |
| | | | | | | | | | | | | | | |
Short-term borrowings | | $ | 63,679 | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 63,679 | |
Average interest rate | | 1.07 | % | | | | | | | | | | | 1.07 | % |
| | | | | | | | | | | | | | | |
Notes payable | | $ | 33,393 | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 33,393 | |
Average interest rate | | 3.00 | % | | | | | | | | | | | 3.00 | % |
Total | | $ | 695,401 | | $ | 67,556 | | $ | 27,923 | | $ | 8,001 | | $ | 18,836 | | $ | 204,633 | | $ | 1,022,350 | |
| | | | | | | | | | | | | | | |
Period gap | | $ | (363,825 | ) | $ | 109,258 | | $ | 112,958 | | $ | 191,436 | | $ | 73,391 | | $ | 118,776 | | $ | 241,994 | |
Cumulative gap | | (363,825 | ) | (254,567 | ) | (141,609 | ) | 49,827 | | 123,218 | | 241,994 | | | |
36
CONTROLS AND PROCEDURES
Based upon an evaluation within the 90 days prior to the filing date of this report, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective. There have been no significant changes in the Company’s internal controls or in other factors that could significantly affect the Company’s internal controls subsequent to the date of the evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Special Note Concerning Forward-Looking Statements
This document (including information incorporated by reference) contains, and future oral and written statements of the Company and its management may contain, forward-looking statements, within the meaning of such term in the Private Securities Litigation Reform Act of 1995, with respect to the financial condition, results of operations, plans, objectives, future performance and business of the Company. Forward-looking statements, which may be based upon beliefs, expectations, and assumptions of the Company’s management and on information currently available to management, are generally identifiable by the use of words such as “believe,” “expect,” “anticipate,” “plan,” “intend,” “estimate,” “may,” “will,” “would,” “could,” “should,” or other similar expressions. Additionally, all statements in this document, 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.
The Company’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors that could have a material adverse effect on the operations and future prospects of the Company and its subsidiaries include, but are not limited to, the following:
• The strength of the United States economy in general and the strength of the local economies in which the Company conducts its operations which may be less favorable than expected and may result in, among other things, a deterioration in the credit quality and value of the Company’s assets.
• The economic impact of past and any future terrorists attacks, acts of war or threats thereof and the response of the United States to any such threats and attacks.
• The effects of, and changes in, federal, state and local laws, regulations and policies affecting banking, securities, insurance, and monetary and financial matters.
• The effects of changes in interest rates (including the effects of changes in the rate of prepayments of the Company’s assets) and the policies of the Board of Governors of the Federal Reserve System.
• The ability of the Company to compete with other financial institutions as effectively as the Company currently intends due to increases in competitive pressures in the financial services sector.
• The inability of the Company to obtain new customers and to retain existing customers.
• The timely development and acceptance of products and services, including products and services offered through alternative delivery channels such as the Internet.
• Technological changes implemented by the Company and by other parties, including third party vendors, which may be more difficult or more expensive than anticipated or which may have unforeseen consequences to the Company and its customers.
• The ability of the Company to develop and maintain secure and reliable electronic systems.
• The ability of the Company to retain key executives and employees and the difficulty that the Company may experience in replacing key executives and employees in an effective manner.
• Consumer spending and saving habits which may change in a manner that affects the Company’s business adversely.
• Business combinations and the integration of acquired businesses which may be more difficult or expensive than expected.
• The costs, effects and outcomes of existing or future litigation.
• Changes in accounting policies and practices, as may be adopted by state and federal regulatory agencies and the Financial Accounting Standards Board.
• The ability of the Company to manage the risks associated with the foregoing as well as anticipated.
These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Additional information concerning the Company and its business, including other factors that could materially affect the Company’s financial results, is included in the Company’s filings with the Securities and Exchange Commission.
37
Old Second Bancorp Inc. and Subsidiaries
Consolidated Balance Sheets
December 31, 2002 and 2001
(In thousands, except share data)
| | 2002 | | 2001 | |
Assets | | | | | |
Cash and due from banks | | $ | 49,714 | | $ | 40,747 | |
Federal funds sold | | 23,350 | | — | |
Cash and cash equivalents | | 73,064 | | 40,747 | |
Securities available for sale | | 389,216 | | 324,549 | |
Loans held for sale | | 48,658 | | 44,259 | |
Loans | | 1,061,867 | | 895,455 | |
Allowance for loan losses | | 15,769 | | 12,313 | |
Net loans | | 1,046,098 | | 883,142 | |
Premises and equipment, net | | 29,743 | | 24,362 | |
Other real estate owned | | 131 | | — | |
Mortgage servicing rights, net | | 192 | | 195 | |
Goodwill, net | | 2,130 | | 2,130 | |
Core deposit intangible assets, net | | 1,421 | | 1,776 | |
Accrued interest and other assets | | 17,434 | | 12,188 | |
Total assets | | $ | 1,608,087 | | $ | 1,333,348 | |
| | | | | |
Liabilities | | | | | |
Deposits: | | | | | |
Demand | | $ | 196,873 | | $ | 165,538 | |
Savings | | 667,877 | | 534,641 | |
Time | | 525,911 | | 390,637 | |
Total deposits | | 1,390,661 | | 1,090,816 | |
Securities sold under repurchase agreements | | 60,774 | | 32,065 | |
Other short-term borrowings | | 7,870 | | 31,614 | |
Notes payable | | — | | 33,393 | |
Accrued interest and other liabilities | | 15,706 | | 20,514 | |
Total liabilities | | 1,475,011 | | 1,208,402 | |
| | | | | |
Stockholders’ Equity | | | | | |
Preferred stock, no par value; authorized 300,000 shares; none issued | | — | | — | |
Common stock, $1.00 par value; authorized 10,000,000 shares; issued 8,188,853 in 2002 and 8,157,107 in 2001 outstanding 7,393,104 in 2002 and 7,607,592 in 2001 | | 8,189 | | 8,157 | |
Additional paid-in capital | | 10,860 | | 10,092 | |
Retained earnings | | 127,547 | | 112,970 | |
Accumulated other comprehensive income | | 5,376 | | 4,726 | |
Treasury stock, at cost, 795,749 shares in 2002 and 549,515 shares in 2001 | | (18,896 | ) | (10,999 | ) |
Total stockholders’ equity | | 133,076 | | 124,946 | |
Total liabilities and stockholders’ equity | | $ | 1,608,087 | | $ | 1,333,348 | |
See accompanying notes to consolidated financial statements.
38
Old Second Bancorp Inc. and Subsidiaries
Consolidated Statements of Income
Years Ended December 31, 2002, 2001, and 2000
(In thousands, except share data)
| | 2002 | | 2001 | | 2000 | |
Interest income | | | | | | | |
Loans, including fees | | $ | 66,429 | | $ | 63,354 | | $ | 56,393 | |
Loans held for sale | | 1,911 | | 1,551 | | 602 | |
Securities: | | | | | | | |
Taxable | | 13,899 | | 15,574 | | 15,335 | |
Tax-exempt | | 2,587 | | 2,688 | | 2,818 | |
Federal funds sold | | 664 | | 1,621 | | 1,979 | |
Interest bearing deposits | | 1 | | 3 | | 14 | |
Total interest income | | 85,491 | | 84,791 | | 77,141 | |
| | | | | | | |
Interest expense | | | | | | | |
Savings deposits | | 10,111 | | 11,562 | | 12,416 | |
Time deposits | | 16,946 | | 21,563 | | 21,794 | |
Repurchase agreements | | 662 | | 1,069 | | 1,079 | |
Other short-term borrowings | | 277 | | 302 | | 305 | |
Notes payable | | 13 | | 794 | | 222 | |
Total interest expense | | 28,009 | | 35,290 | | 35,816 | |
Net interest income | | 57,482 | | 49,501 | | 41,325 | |
Provision for loan losses | | 3,805 | | 3,840 | | 1,380 | |
Net interest income after provision for loan losses | | 53,677 | | 45,661 | | 39,945 | |
| | | | | | | |
Noninterest income | | | | | | | |
Trust income | | 5,060 | | 5,041 | | 5,115 | |
Service charges on deposits | | 5,893 | | 4,951 | | 3,639 | |
Secondary mortgage fees | | 1,265 | | 1,110 | | 539 | |
Mortgage servicing income | | 62 | | 83 | | 379 | |
Gain on sale of loans | | 9,079 | | 7,771 | | 3,624 | |
Securities gains, net | | 89 | | 460 | | — | |
Other income | | 3,828 | | 2,885 | | 3,272 | |
Total noninterest income | | 25,276 | | 22,301 | | 16,568 | |
| | | | | | | |
Noninterest expense | | | | | | | |
Salaries and employee benefits | | 29,410 | | 24,606 | | 21,734 | |
Occupancy expense, net | | 2,855 | | 2,771 | | 2,581 | |
Furniture and equipment expense | | 4,326 | | 4,057 | | 3,331 | |
Amortization of goodwill | | — | | 433 | | 441 | |
Amortization of core deposit intangible assets | | 355 | | 355 | | 356 | |
Amortization of mortgage servicing rights, net | | 7 | | 5 | | 78 | |
Other expense | | 11,103 | | 9,249 | | 8,567 | |
Total noninterest expense | | 48,056 | | 41,476 | | 37,088 | |
Income before income taxes | | 30,897 | | 26,486 | | 19,425 | |
Provision for income taxes | | 10,751 | | 9,263 | | 5,954 | |
Net income | | $ | 20,146 | | $ | 17,223 | | $ | 13,471 | |
| | | | | | | |
Basic earnings per share | | $ | 2.71 | | $ | 2.24 | | $ | 1.72 | |
Diluted earnings per share | | 2.69 | | 2.23 | | 1.71 | |
See accompanying notes to consolidated financial statements.
39
Old Second Bancorp Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended December 31, 2002, 2001, and 2000
(In thousands)
| | 2002 | | 2001 | | 2000 | |
Cash flows from operating activities | | | | | | | |
Net income | | $ | 20,146 | | $ | 17,223 | | $ | 13,471 | |
Adjustments to reconcile net income to net cash provided (used) by operating activities: | | | | | | | |
Depreciation | | 2,173 | | 1,916 | | 1,845 | |
Amortization of mortgage servicing rights, net | | 7 | | 5 | | 78 | |
Origination of mortgage servicing rights | | (17 | ) | (13 | ) | (49 | ) |
Provision for loan losses | | 3,805 | | 3,840 | | 1,380 | |
Net change in mortgage loans held for sale | | (4,399 | ) | (32,720 | ) | (3,102 | ) |
Change in current income taxes payable | | 229 | | (2,948 | ) | (5,880 | ) |
Deferred taxes | | (1,385 | ) | (848 | ) | (461 | ) |
Change in accrued interest and other assets | | (5,246 | ) | 3,039 | | (1,561 | ) |
Change in accrued interest and other liabilities | | (4,419 | ) | 9,051 | | 7,606 | |
Premium amortization and discount accretion on securities | | 1,687 | | 628 | | 211 | |
Securities gains, net | | (89 | ) | (460 | ) | — | |
Amortization of goodwill | | — | | 433 | | 441 | |
Amortization of core deposit intangible assets | | 355 | | 355 | | 356 | |
Valuation reserve related to mortgage servicing rights | | — | | — | | (746 | ) |
Tax benefit from stock options exercised | | 251 | | 40 | | — | |
Net cash provided (used) by operating activities | | 13,098 | | (459 | ) | 13,589 | |
| | | | | | | |
Cash flows from investing activities | | | | | | | |
Proceeds from sales and maturities of securities available for sale | | 216,163 | | 161,703 | | 55,461 | |
Purchases of securities available for sale | | (281,348 | ) | (162,351 | ) | (91,201 | ) |
Net change in loans | | (166,761 | ) | (166,940 | ) | (125,597 | ) |
(Purchase) sales of other real estate | | (131 | ) | 357 | | (278 | ) |
Property and equipment expenditures | | (7,554 | ) | (4,123 | ) | (3,335 | ) |
Sale of mortgage servicing rights | | 13 | | — | | 8,188 | |
Net cash used by investing activities | | (239,618 | ) | (171,354 | ) | (156,762 | ) |
| | | | | | | |
Cash flows from financing activities | | | | | | | |
Net change in deposits | | 299,845 | | 94,338 | | 148,142 | |
Net change in fed funds purchased and repurchase agreements | | 28,709 | | 29,021 | | 3,955 | |
Net change in other short-term borrowings | | (23,744 | ) | 10,926 | | (7,833 | ) |
Net change in notes payable | | (33,393 | ) | 29,964 | | (6,038 | ) |
Proceeds from exercise of stock options | | 549 | | 267 | | 28 | |
Dividends paid | | (5,232 | ) | (4,047 | ) | (3,546 | ) |
Purchase of treasury stock | | (7,897 | ) | (4,488 | ) | (4,231 | ) |
Net cash provided by financing activities | | 258,837 | | 155,981 | | 130,477 | |
Net change in cash and cash equivalents | | 32,317 | | (15,832 | ) | (12,696 | ) |
Cash and cash equivalents at beginning of year | | 40,747 | | 56,579 | | 69,275 | |
Cash and cash equivalents at end of year | | $ | 73,064 | | $ | 40,747 | | $ | 56,579 | |
| | | | | | | |
Supplemental cash flow information | | | | | | | |
Income taxes paid | | $ | 12,082 | | $ | 9,895 | | $ | 7,132 | |
Interest paid | | 25,614 | | 32,841 | | 32,136 | |
See accompanying notes to consolidated financial statements.
40
Old Second Bancorp Inc. and Subsidiaries
Consolidated Statements of Changes in
Stockholders’ Equity
Years Ended December 31, 2002, 2001, and 2000
(In thousands, except share data)
| | Common
Stock | | Additional
Paid-In
Capital | | Retained
Earnings | | Accumulated
Other
Comprehensive
Income (Loss) | | Treasury
Stock | | Total
Stockholders’
Equity | |
Balance, December 31, 1999 | | $ | 8,136 | | $ | 9,773 | | $ | 90,109 | | $ | (1,977 | ) | $ | (2,280 | ) | $ | 103,761 | |
Net income | | — | | — | | 13,471 | | — | | — | | 13,471 | |
Change in net unrealized gain on securities held for sale | | — | | — | | — | | 3,448 | | — | | 3,448 | |
Total comprehensive income | | | | | | | | | | | | 16,919 | |
Dividend declared, $.45 per share | | — | | — | | (3,515 | ) | — | | — | | (3,515 | ) |
Stock options exercised | | 2 | | 26 | | | | | | | | 28 | |
Purchase of treasury stock | | — | | — | | — | | — | | (4,231 | ) | (4,231 | ) |
Balance, December 31, 2000 | | $ | 8,138 | | $ | 9,799 | | $ | 100,065 | | $ | 1,471 | | $ | (6,511 | ) | $ | 112,962 | |
Net income | | — | | — | | 17,223 | | — | | — | | 17,223 | |
Change in net unrealized gain on securities held for sale | | — | | — | | — | | 3,255 | | — | | 3,255 | |
Total comprehensive income | | | | | | | | | | | | 20,478 | |
Dividend declared, $.56 per share | | — | | — | | (4,313 | ) | — | | — | | (4,313 | ) |
Stock options exercised | | 19 | | 253 | | (5 | ) | | | | | 267 | |
Tax effect of stock options exercised | | — | | 40 | | — | | — | | — | | 40 | |
Purchase of treasury stock | | — | | — | | — | | — | | (4,488 | ) | (4,488 | ) |
Balance, December 31, 2001 | | $ | 8,157 | | $ | 10,092 | | $ | 112,970 | | $ | 4,726 | | $ | (10,999 | ) | $ | 124,946 | |
Net income | | — | | — | | 20,146 | | — | | — | | 20,146 | |
Change in net unrealized gain on securities held for sale | | — | | — | | — | | 650 | | — | | 650 | |
Total comprehensive income | | | | | | | | | | | | 20,796 | |
Dividend declared, $.75 per share | | — | | — | | (5,551 | ) | — | | — | | (5,551 | ) |
Cash dividend paid from stock split 4 for 3 on 5/22/02 | | — | | — | | (18 | ) | — | | — | | (18 | ) |
Stock options exercised | | 32 | | 517 | | — | | — | | — | | 549 | |
Tax effect of stock options exercised | | — | | 251 | | — | | — | | — | | 251 | |
Purchase of treasury stock | | — | | — | | — | | — | | (7,897 | ) | (7,897 | ) |
Balance, December 31, 2002 | | $ | 8,189 | | $ | 10,860 | | $ | 127,547 | | $ | 5,376 | | $ | (18,896 | ) | $ | 133,076 | |
See accompanying notes to consolidated financial statements.
41
Old Second Bancorp Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2002, 2001, and 2000
(Table amounts in thousands, except per share data)
Note A: Summary of Significant Accounting Policies
Nature of Operations and Principles of Consolidation: The consolidated financial statements include Old Second Bancorp Inc. and its wholly-owned subsidiaries; The Old Second National Bank of Aurora (“Old Second Bank”), Yorkville National Bank, Kane County Bank, Old Second Financial, Inc. and Old Second Mortgage Company, together referred to as the “Company.” Old Second Mortgage Company also does business as Maple Park Mortgage. The banking subsidiaries are referred to herein as the “Banks.” Inter-company transactions and balances are eliminated in consolidation.
During the past few years, the Company simplified its organizational structure by eliminating a number of its bank charters. In 1999, Old Second Community Bank of North Aurora and Old Second Community Bank of Aurora were merged into The Old Second Bank. During 2000, the Company eliminated two more bank charters. Bank of Sugar Grove was merged into Old Second Bank and Burlington Bank was merged into Kane County Bank. The mergers qualified as tax-free reorganizations and were accounted for as internal reorganizations. During 2002, Old Second Mortgage became a wholly owned subsidiary of Old Second Bank. Inter-company transactions and balances are eliminated in consolidation.
The Company provides financial services through its offices located in Kane, Kendall, DeKalb, DuPage, and LaSalle counties in Illinois. Its primary deposit products are checking, savings, and certificates of deposit, and its primary lending products are residential and commercial mortgages, construction lending, commercial and installment loans. A major portion of loans are secured by various forms of collateral including real estate, business assets, consumer property, and other items, although borrower cash flow may also be a primary source of repayment. Old Second Mortgage provides mortgage-banking services and Old Second Bank also engages in trust operations.
Use of Estimates: To prepare financial statements in conformity with generally accepted accounting principles, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and future results could differ.
Statement of Cash Flows: For purposes of the statement of cash flows, the Company considers cash and due from banks and federal funds sold to be cash and cash equivalents. Generally, federal funds are sold for one-day periods.
Securities: Securities are classified as held to maturity and carried at amortized cost when management has the positive intent and ability to hold them to maturity. Securities are classified as available for sale when they might be sold before maturity. Securities available for sale are carried at fair value, with unrealized holding gains and losses reported in accumulated other comprehensive income. Interest income includes amortization of purchase premium or discount. Realized gains and losses are determined based on the amortized cost of the specific security sold.
Loans Held for Sale: Old Second Mortgage originates residential mortgage loans that are sold in the secondary market. Loans held for sale are carried at the lower of aggregate cost or fair value.
Loans: Loans are reported at the principal balance outstanding, net of unearned interest, deferred loan fees and costs, and an allowance for loan losses. Interest income is reported on the interest method and includes amortization of net deferred loan fees and costs over the loan term. The accrual of interest income is discontinued when full loan repayment is in doubt. Payments received on such loans are reported as principal reductions.
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Allowance for Loan Losses: The allowance for loan losses is a valuation allowance for credit losses, increased by the provision for loan losses and decreased by charge-offs less recoveries. Management estimates the allowance balance required using past loan loss experience, known and inherent risks in the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged-off. A loan is considered impaired when it is probable all contractual principal and interest due will not be received according to the terms of the loan agreement. The value of the loan is determined based on the present value of the future cash flows, discounted at the loan’s original effective interest rate or the fair value of underlying collateral, if the loan is collateral dependent. There were no material impaired loans as of December 31, 2002 or December 31, 2001.
Premises and Equipment: Premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is computed over estimated useful lives of ten to forty years for premises and five to seven years for furniture and equipment principally by the use of straight-line depreciation methods for book purposes, while accelerated depreciation is used for income tax purposes. When property is retired or otherwise disposed of, the stated amount, net of sale proceeds in the event of a sale of assets, is recognized as a gain or loss at the time of disposal. Expenditures for maintenance and repairs are expensed as incurred, and expenditures for major renovations are capitalized.
Other Real Estate Owned: Real estate acquired in settlement of loans is recorded at fair value when acquired, less estimated costs to sell. The difference between the net book value and fair value at the foreclosure date is charged to the allowance for loan losses. If fair value declines after acquisition, the reported amount is reduced to the lower of the initial amount or fair value less costs to sell.
Mortgage Servicing Rights: Servicing rights are recognized as assets for purchased rights and for the allocated value of servicing rights retained on loans sold. Servicing rights are expensed in proportion to, and over the period of estimated net servicing revenues. Impairment is evaluated based on the fair value of the rights, using groupings of the underlying loans as to interest rates and then, secondarily, as to geographic and prepayment characteristics. Any impairment of a grouping is reported as an adjustment to the valuation allowance.
Core Deposit Intangibles and Goodwill: The core deposit intangibles are being amortized using the straight-line method over 10 years. Goodwill is the excess of purchase price over identified net assets acquired in an acquisition. Until January 1, 2002, when the Company adopted the new rules for the Financial Accounting Standards Board (“FASB”) Nos. 141 and 142, goodwill was amortized on the straight-line method over 15 years. Under the new rules, goodwill is no longer amortized but is subject to an annual impairment test in accordance with the Statements.
Long-term Assets: These assets, including intangibles, are reviewed for impairment when events indicate their carrying amount may not be recoverable from future undiscounted cash flows. If impaired, the assets are recorded at discounted amounts.
Trust Assets and Fees: Assets held in fiduciary or agency capacities are not included in the consolidated balance sheets because such amounts are not assets of the Company. Income from trust fees is recorded on the cash basis, which does not result in a material difference from the accrual basis.
Retirement Plan Costs: The Company uses the “projected unit credit” actuarial method for financial reporting purposes and the entry age cost method for the funding of the qualified plan.
Long-term Incentive Plan: No expense for stock options is recorded, as the grant price equals the market price of the stock at grant date. Pro-forma disclosures (included in Note M) show the effect on income and earnings per share had the option’s fair value been recorded as compensation, using an option-pricing model.
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The following pro forma information presents net income and earnings per share had the fair value method of Statement of Financial Accounting Standards (“SFAS”) No. 123 been used to measure compensation cost for stock option plans.
| | 2002 | | 2001 | | 2000 | |
Net income as reported | | $ | 20,146 | | $ | 17,223 | | $ | 13,471 | |
Pro forma net income | | 17,835 | | 15,850 | | 12,743 | |
Basic earnings per share as reported | | 2.71 | | 2.24 | | 1.72 | |
Pro forma basic earnings per share | | 2.40 | | 2.06 | | 1.62 | |
Diluted earnings per share as reported | | 2.69 | | 2.23 | | 1.71 | |
Pro forma diluted earnings per share | | 2.38 | | 2.06 | | 1.62 | |
| | | | | | | | | | |
The pro forma effects were computed using option-pricing models with the following assumptions:
| | 2002 | | 2001 | | 2000 | |
Risk free interest rate | | 4.05 | % | 4.45 | % | 5.50 | % |
Expected option life, in years | | 10 | | 10 | | 10 | |
Expected stock price volatility | | 24.7 | % | 24.3 | % | 17.9 | % |
Dividend yield | | 2.00 | % | 2.00 | % | 2.00 | % |
Advertising Costs: All advertising costs incurred by the Company are expensed in the period in which they are incurred.
Common Stock Splits: In May 1999, the board of directors of the Company declared a two-for-one stock split, in the form of a stock dividend. On May 21, 2002, the board of directors declared a four-for-three stock split effected in the form of a stock dividend payable on June 24, 2002 to stockholders of record on June 14, 2002. All references to the number of common shares and per share amounts in the consolidated financial statements and related footnotes have been restated as appropriate to reflect the effect of the stock splits for all periods presented.
Income Taxes: Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying amounts and tax basis of assets and liabilities, computed using enacted tax rates.
Earnings Per Share: Basic earnings per share are net income divided by the weighted-average number of common shares outstanding during the year. Diluted earnings per share include the dilutive effects of additional potential common shares issuable under stock options. Earnings and dividends per share are restated for all stock splits and dividends through the date of issue of the consolidated financial statements.
Segment Reporting: Beginning January 1, 1998, Statement of Financial Accounting Standards No. 131, “Disclosures about Segments of an Enterprise and Related Information,” requires reporting of information regarding reportable operating segments. The Company has one reportable segment – banking. As such, disclosure of additional segment information is not required. The Company offers the following products and services to external customers: deposits, loans and trust services. Revenues for each of these products and services are disclosed in the Consolidated Statements of Income.
Dividend Restriction: Banking regulations require maintaining certain capital levels and may limit the dividends paid by the Banks to the Company or by the Company to stockholders.
New Accounting Pronouncements: In June 2001, the FASB 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
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longer be amortized but will be subject to annual impairment tests in accordance with FAS No. 142. Other identified intangible assets will continue to be amortized over their useful lives. The Company adopted the new rules on accounting for goodwill and other intangible assets beginning January 1, 2002. The impact of the application of the new is described in further detail in Note C.
FASB Statement No. 144, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of,” was issued in October, 2001 and addresses how and when to measure impairment on long-lived assets and how to account for long-lived assets that an entity plans to dispose of either through the sale, abandonment, exchange, or distribution to owners. The new provisions supersede FAS No. 121, which addressed asset impairment, and certain provisions of APB Opinion 30 related to reporting the effects of the disposal of a business segment and requires expected future operating losses from discontinued operations to be recorded in the period in which the losses are incurred rather than the measurement date. Under FAS No. 144, more dispositions may qualify for discontinued operations treatment in the income statement. The provisions of FAS No. 144 became effective for the Company on January 1, 2002, and had no impact on the Company’s financial position or results of operations.
In November 2002, the Financial Accounting Standards Board issued Interpretation No. 45 (“FIN No. 45”), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” This interpretation expands the disclosure to be made by a guarantor in its financial statements about its obligations under certain guarantees and requires the guarantor to recognize a liability for the fair value of an obligation assumed under a guarantee. The interpretation also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The disclosure requirements of FIN No. 45 are effective for the Company as of December 31, 2002. The recognition requirements of FIN No. 45 are to be applied prospectively to guarantees issued or modified after December 31, 2002. The Company does not expect the requirements of FIN No. 45 to have a material impact on the results of operations, financial position, or liquidity.
In January 2003, the FASB issued FASB Interpretation No. 46 (“FIN No. 46”), “Consolidation of Variable Interest Entities.” The objective of this interpretation is to provide guidance on how to identify a Variable Interest Entity (“VIE”) and determine when the assets, liabilities, noncontrolling interest, and results of operations of a VIE need to be included in a company’s consolidated financial statements. Because the Company does not have interest in any VIE’s, the Company does not expect the adoption of FIN No. 46 to have a material impact on results of operations, financial position, or liquidity.
In December 2002, SFAS No. 148 was issued and provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, the Statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosure in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on the reported results. This Statement is effective for Old Second Bancorp Inc. beginning with the fiscal period ending December 31, 2002. Because the Company plans to continue its accounting for stock-based employee compensation under APB No. 25, the adoption of SFAS No. 148 is not expected to have a material impact on results of operations or financial position.
Note B: Cash and Due from Banks
Old Second Bank and Yorkville National Bank are required to maintain reserve balances with the Federal Reserve Bank. In accordance with Federal Reserve Bank requirements, average reserve balances were $10,118,000 and $486,000 for Old Second Bank and Yorkville National Bank during 2002.
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Note C: Securities
Year-end securities available for sale were summarized as follows:
| | Amortized
Cost | | Gross
Unrealized
Gains | | Gross
Unrealized
Losses | | Fair
Value | |
2002 | | | | | | | | | |
U.S. Treasury | | $ | 1,501 | | $ | 8 | | $ | — | | $ | 1,509 | |
U.S. Government agencies | | 276,069 | | 6,380 | | 14 | | 282,435 | |
States and political subdivisions | | 57,412 | | 2,307 | | 47 | | 59,672 | |
Mortgage backed securities | | 42,180 | | 416 | | 120 | | 42,476 | |
Other securities | | 3,124 | | — | | — | | 3,124 | |
| | $ | 380,286 | | $ | 9,111 | | $ | 181 | | $ | 389,216 | |
2001 | | | | | | | | | |
U.S. Treasury | | $ | 2,505 | | $ | 85 | | $ | — | | $ | 2,590 | |
U.S. Government agencies | | 221,785 | | 6,147 | | 170 | | 227,762 | |
States and political subdivisions | | 64,215 | | 1,725 | | 133 | | 65,807 | |
Mortgage backed securities | | 25,273 | | 421 | | 225 | | 25,469 | |
Other securities | | 2,921 | | — | | — | | 2,921 | |
| | $ | 316,699 | | $ | 8,378 | | $ | 528 | | $ | 324,549 | |
| | Amortized
Cost | | Fair
Value | |
Due in one year or less | | $ | 53,026 | | $ | 54,006 | |
Due after one year through five years | | 204,747 | | 210,192 | |
Due after five years through ten years | | 51,936 | | 53,257 | |
Due after ten years | | 28,397 | | 29,285 | |
| | 338,106 | | 346,740 | |
Mortgage-backed securities | | 42,180 | | 42,476 | |
| | $ | 380,286 | | $ | 389,216 | |
Securities with fair value of approximately $241.2 million and $193.9 million at December 31, 2002, and 2001, were pledged to secure public deposits and securities sold under repurchase agreements and for other purposes required or permitted by law.
Note D: Loans
Major classifications of loans at year-end were as follows:
| | 2002 | | 2001 | |
Commercial and industrial | | $ | 208,681 | | $ | 186,435 | |
Real estate - commercial | | 412,482 | | 310,297 | |
Real estate - construction | | 120,899 | | 112,206 | |
Real estate - residential | | 262,304 | | 215,639 | |
Installment | | 59,007 | | 71,780 | |
| | 1,063,373 | | 896,357 | |
Unearned origination fees | | (1,506 | ) | (899 | ) |
Unearned discount | | — | | (3 | ) |
| | $ | 1,061,867 | | $ | 895,455 | |
Past due and nonaccrual loans were as follows:
| | 2002 | | 2001 | | 2000 | |
Nonaccrual loans | | $ | 4,803 | | $ | 2,560 | | $ | 1,582 | |
Interest income recorded on nonaccrual loans | | 6 | | 137 | | 79 | |
Interest income which would have been accrued on nonaccrual loans | | 287 | | 203 | | 86 | |
Loans 90 days or more past due and still accruing interest | | 641 | | 771 | | 532 | |
| | | | | | | | | | |
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Loans to principal officers, directors, and their affiliates, which were made in the ordinary course of business, in 2002 and 2001, were as follows:
| | 2002 | | 2001 | |
Beginning balance | | $ | 21,614 | | $ | 29,686 | |
New loans | | 59,155 | | 47,242 | |
Repayments | | (55,864 | ) | (50,936 | ) |
Other changes - new directors | | 1,434 | | (4,378 | ) |
Ending balance | | $ | 26,339 | | $ | 21,614 | |
Other changes for 2002 included increases for new directors and changes in affiliations of current directors. It is the policy of the Company to review each prospective credit in order to determine an adequate level of security or collateral to obtain prior to making a loan. The type of collateral, when required, will vary in ranges from liquid assets to real estate. The Company’s access to collateral, in the event of borrower default, is assured through adherence to state lending laws and the Company’s lending standards and credit monitoring procedures. The Banks generally make loans within their market areas. There are no significant concentrations of loans where the customers’ ability to honor loan terms are dependent upon a single economic sector.
Note E: Allowance for Loan Losses
Changes in the allowance for loan losses were as follows:
| | 2002 | | 2001 | | 2000 | |
Balance at beginning of year | | $ | 12,313 | | $ | 9,690 | | $ | 8,444 | |
Provision for loan losses | | 3,805 | | 3,840 | | 1,380 | |
Loans charged-off | | (1,160 | ) | (1,502 | ) | (702 | ) |
Recoveries | | 811 | | 285 | | 568 | |
Balance at end of year | | $ | 15,769 | | $ | 12,313 | | $ | 9,690 | |
Note F: Premises and Equipment
Year-end premises and equipment were as follows:
| | December 31, 2002 | | December 31, 2001 | |
| | Cost | | Accumulated
Depreciation | | Net Book
Value | | Cost | | Accumulated
Depreciation | | Net Book
Value | |
Land | | $ | 7,097 | | $ | — | | $ | 7,097 | | $ | 6,000 | | $ | — | | $ | 6,000 | |
Premises | | 26,858 | | 11,480 | | 15,378 | | 22,857 | | 10,772 | | 12,085 | |
Furniture and equipment | | 21,499 | | 14,231 | | 7,268 | | 19,148 | | 12,871 | | 6,277 | |
| | $ | 55,454 | | $ | 25,711 | | $ | 29,743 | | $ | 48,005 | | $ | 23,643 | | $ | 24,362 | |
Note G: Intangible Assets
In June 2001, the FASB 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. In accordance with the new rules on accounting for goodwill and other intangible assets, the Company is no longer amortizing goodwill. The Company completed the initial impairment test for goodwill and other intangible assets as of January 1, 2002 and the annual impairment test as of November 30, 2002 and determined that no impairment existed.
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| | Cost | | Accumulated
Amortization | | Net Book
Value | |
December 31, 2002: | | | | | | | |
Amortizing intangible assets: | | | | | | | |
Core deposit | | $ | 3,505 | | $ | 2,084 | | $ | 1,421 | |
Non-amortizing intangible assets: | | | | | | | |
Goodwill | | 6,561 | | 4,431 | | 2,130 | |
| | $ | 10,066 | | $ | 6,515 | | $ | 3,551 | |
| | | | | | | |
December 31, 2001: | | | | | | | |
Amortizing intangible assets: | | | | | | | |
Core deposit | | $ | 3,505 | | $ | 1,729 | | $ | 1,776 | |
Non-amortizing intangible assets: | | | | | | | |
Goodwill | | 6,561 | | 4,431 | | 2,130 | |
| | $ | 10,066 | | $ | 6,160 | | $ | 3,906 | |
Amortization expense for the year ended December 31, 2002 was $355,000. The estimated amortization expense for the next five years will be $355,000 per year.
As required by SFAS No. 142, the results of operations for the periods prior to adoption have not been restated. The following is a reconciliation of net income and earnings per share, as reported, to net income and earnings per share, as adjusted, for the year ended December 31, 2001, as if SFAS no. 142 had been adopted effective January 1, 2001:
| | Year-ended
12/31/01 | | Year-ended
12/31/00 | |
Net income, as reported | | $ | 17,223 | | $ | 13,471 | |
Adjusted for goodwill amortization, net of tax | | 282 | | 288 | |
Net income, as adjusted | | $ | 17,505 | | $ | 13,759 | |
| | | | | |
Basic earnings per share, as reported | | $ | 2.24 | | $ | 1.72 | |
Basic earnings per share, as adjusted | | $ | 2.27 | | $ | 1.75 | |
| | | | | |
Diluted earnings per share, as reported | | $ | 2.23 | | $ | 1.71 | |
Diluted earnings per share, as adjusted | | $ | 2.27 | | $ | 1.75 | |
Note H: Mortgage Servicing Rights
Activity for capitalized mortgage servicing rights were as follows:
| | 2002 | | 2001 | | 2000 | |
Balance at beginning of year | | $ | 213 | | $ | 205 | | $ | 8,422 | |
Origination of mortgage servicing rights | | 17 | | 13 | | 49 | |
Sale of mortgage servicing rights | | — | | — | | (8,188 | ) |
Amortization | | (7 | ) | (5 | ) | (78 | ) |
Balance at end of year | | $ | 223 | | $ | 213 | | $ | 205 | |
| | | | | | | |
Changes in the valuation for servicing assets were as follows: | | | | | | | |
Balance at beginning of year | | $ | 18 | | $ | 18 | | $ | 764 | |
Provisions for impairment | | 13 | | — | | — | |
Reversal of previous valuation allowance | | — | | — | | (746 | ) |
Recoveries | | — | | — | | — | |
Balance at end of year | | $ | 31 | | $ | 18 | | $ | 18 | |
Net balance | | $ | 192 | | $ | 195 | | $ | 187 | |
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Note I: Deposits
Major classifications of deposits at December 31 were as follows:
| | 2002 | | 2001 | |
Noninterest bearing | | $ | 196,873 | | $ | 165,538 | |
Savings | | 106,319 | | 98,646 | |
NOW accounts | | 196,593 | | 168,180 | |
Money market accounts | | 364,965 | | 267,815 | |
Certificates of deposit of less than $100,000 | | 359,909 | | 262,001 | |
Certificates of deposit of $100,000 or more | | 166,002 | | 128,636 | |
| | $ | 1,390,661 | | $ | 1,090,816 | |
At year-end 2002, scheduled maturities of time deposits were as follows:
2003 | | $ | 276,725 | |
2004 | | 154,199 | |
2005 | | 45,301 | |
2006 | | 21,030 | |
2007 and thereafter | | 28,656 | |
Total | | $ | 525,911 | |
Note J: Borrowings
The Company has a $20 million line of credit available with a loan issued by Marshall & Isley under which there was no outstanding balance as of December 31, 2002 and $33.4 million outstanding as of December 31, 2001. The note bears interest at the rate of 1% over the previous month average (Federal Reserve targeted rate) federal funds rate. A Revolving Business Note dated April 30, 2002 secures the note and is guaranteed by the Company. This borrowing is for the purpose of funding loans held for sale at the Old Second Mortgage Company subsidiary and other corporate purposes. Old Second Mortgage Company also does business as Maple Park Mortgage.
At December 31, 2002 and 2001, respectively, short-term borrowings totaled $68.6 million at a weighted average rate of 1.5% and $63.7 million at a weighted average rate of 3.3%.
The Company enters into sales of securities under agreements to repurchase (repurchase agreements). Fixed-coupon repurchase agreements are treated as financings, and the obligations to repurchase securities sold are reflected as borrowed funds in the consolidated balance sheet. The dollar amounts of securities underlying the agreements remain in the asset accounts. Securities sold under agreements to repurchase consisted of U.S. government agencies at December 31, 2002 and 2001.
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Note K: Income Taxes
Income tax expense (benefit) was as follows:
| | 2002 | | 2001 | | 2000 | |
Current federal | | $ | 9,893 | | $ | 9,022 | | $ | 5,854 | |
Current state | | 1,567 | | 1,088 | | 561 | |
Deferred federal | | (517 | ) | (694 | ) | (378 | ) |
Deferred state | | (192 | ) | (153 | ) | (83 | ) |
| | $ | 10,751 | | $ | 9,263 | | $ | 5,954 | |
The following were the components of the deferred tax assets and liabilities as of December 31:
| | 2002 | | 2001 | |
Allowance for loan losses | | $ | 6,255 | | $ | 4,884 | |
Pension | | 26 | | 227 | |
Other assets | | 1,144 | | 896 | |
Deferred tax assets | | $ | 7,425 | | $ | 6,007 | |
| | | | | |
Accumulated depreciation | | (1,640 | ) | (1,070 | ) |
Accretion on securities | | (105 | ) | (19 | ) |
Other liabilities | | (665 | ) | (612 | ) |
Deferred tax liabilities | | $ | (2,410 | ) | $ | (1,701 | ) |
| | 5,015 | | 4,306 | |
Tax effect of net unrealized gain on investments | | (3,542 | ) | (3,114 | ) |
Net deferred tax asset | | $ | 1,473 | | $ | 1,192 | |
The components of the provision for deferred income taxes were as follows:
| | 2002 | | 2001 | | 2000 | |
Provision for loan losses | | $ | (1,371 | ) | $ | (1,040 | ) | $ | (597 | ) |
Depreciation | | 569 | | 147 | | 130 | |
Pension expense | | 201 | | 62 | | (64 | ) |
Net premiums and discounts on securities | | 86 | | (190 | ) | (40 | ) |
Other, net | | (194 | ) | 174 | | 110 | |
| | $ | (709 | ) | $ | (847 | ) | $ | (461 | ) |
Effective tax rates differ from federal statutory rates applied to financial statement income due to the following:
| | 2002 | | 2001 | | 2000 | |
Tax at statutory federal income tax rate | | $ | 10,814 | | $ | 9,270 | | $ | 6,799 | |
Nontaxable interest income, net of disallowed interest deduction | | (928 | ) | (946 | ) | (922 | ) |
Goodwill amortization | | — | | 151 | | 155 | |
State income taxes, net of federal benefit | | 894 | | 608 | | 311 | |
Other, net | | (29 | ) | 180 | | (389 | ) |
Tax at effective tax rate | | $ | 10,751 | | $ | 9,263 | | $ | 5,954 | |
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Note L: Retirement Plans
The Company has a tax-qualified noncontributory defined benefit retirement plan covering substantially all full-time and regular part-time employees of the Company. Generally, benefits are based on years of service and compensation. Certain participants in the defined benefit plan are also covered by an unfunded supplemental retirement plan. The purpose of the supplemental retirement plan is to extend full retirement benefits to individuals without regard to statutory limitations under tax-qualified plans. The following table sets forth the plans’ status and amounts recognized in the these financial statements:
| | 2002 | | 2001 | | 2000 | |
Accumulated benefit obligation | | $ | 8,737 | | $ | 7,483 | | $ | 6,317 | |
Change in the projected benefit obligation | | | | | | | |
Projected benefit obligation at beginning of year | | $ | 10,581 | | $ | 8,450 | | $ | 7,560 | |
Service cost | | 783 | | 572 | | 470 | |
Interest cost | | 696 | | 610 | | 545 | |
Actuarial loss | | 1,664 | | 1,591 | | 382 | |
Benefits paid | | (543 | ) | (642 | ) | (507 | ) |
Benefit obligation at end of year | | $ | 13,181 | | $ | 10,581 | | $ | 8,450 | |
Change in plan assets | | | | | | | |
Fair value of plan assets at beginning of year | | $ | 7,482 | | $ | 8,351 | | $ | 8,117 | |
Actual return on plan assets | | (603 | ) | (282 | ) | 275 | |
Employer contributions | | 1,699 | | 55 | | 466 | |
Benefits paid | | (543 | ) | (642 | ) | (507 | ) |
Fair value of the asset at end of year | | $ | 8,035 | | $ | 7,482 | | $ | 8,351 | |
Accrued pension cost | | | | | | | |
Funded status | | $ | (5,145 | ) | $ | (3,099 | ) | $ | (98 | ) |
Unrecognized net actuarial loss (gain) | | 4,641 | | 1,779 | | (718 | ) |
Unrecognized prior service cost | | 149 | | 172 | | 194 | |
Unrecognized net transition asset | | (86 | ) | (172 | ) | (258 | ) |
Accrued benefit cost cost | | $ | (441 | ) | $ | (1,320 | ) | $ | (880 | ) |
Net periodic pension cost | | | | | | | |
Service cost | | $ | 783 | | $ | 572 | | $ | 470 | |
Interest cost | | 696 | | 610 | | 545 | |
Expected return on assets | | (618 | ) | (633 | ) | (654 | ) |
Amortization of unrecognized: | | | | | | | |
Net loss (gain) | | 23 | | 10 | | (44 | ) |
Prior service cost | | 22 | | 22 | | 22 | |
Net asset | | (86 | ) | (86 | ) | (86 | ) |
Net periodic pension cost | | $ | 820 | | $ | 495 | | $ | 253 | |
Amounts applicable to the supplemental retirement plan | | | | | | | |
Projected benefit obligation | | $ | 839 | | $ | 775 | | $ | 545 | |
Accumulated benefit obligation | | 461 | | 384 | | 262 | |
Key assumptions: | | | | | | | |
Discount rate | | 6.25 | % | 6.75 | % | 7.50 | % |
Long-term rate of return on assets | | 7.50 | % | 8.00 | % | 8.50 | % |
Salary increases | | 5.00 | % | 5.00 | % | 5.00 | % |
The Company maintains tax-qualified contributory and non-contributory profit sharing plans covering substantially all full-time and regular part-time employees. The expense of these plans was $1,635,000 in 2002, $1,074,000 in 2001, and $825,000 in 2000.
51
Note M: Long-Term Incentive Plan
The Long-Term Incentive Plan (the “Incentive Plan”) authorizes the issuance of up to 250,000 shares of the Company’s common stock, including the granting of qualified stock options (“Incentive Stock Options”), nonqualified stock options, restricted stock and stock appreciation rights. Stock based awards may be granted to selected directors and officers or employees at the discretion of the board of directors. The Incentive Plan requires the exercise price of any incentive stock option issued to an employee to be at least equal to the fair market value of Company common stock on the date the option is granted. All stock options are granted for a maximum term of ten years, with vesting occurring over the first three years.
Nonqualified stock options may be granted to directors based upon a formula. These and other awards under the Incentive Plan may be granted subject to a vesting requirement and would become fully vested upon a merger or change in control of the Company. Since December 31, 1998, there have been no nonqualified stock options, stock appreciation rights, or restricted stock issued under the Incentive Plan.
A summary of activity in the Incentive Plan and options outstanding as of year-end was as follows:
| | 2002 | | 2001 | | 2000 | |
| | Shares | | Weighted
Average
Exercise
Price | | Shares | | Weighted
Average
Exercise
Price | | Shares | | Weighted
Average
Exercise
Price | |
Beginning outstanding | | 242,533 | | $ | 20.926 | | 224,400 | | $ | 18.463 | | 183,024 | | $ | 18.572 | |
Granted | | 54,000 | | 37.610 | | 52,000 | | 29.475 | | 43,333 | | 17.813 | |
Exercised | | 32,133 | | 17.070 | | (18,667 | ) | 14.309 | | (1,957 | ) | 14.155 | |
Expired | | — | | — | | (15,200 | ) | 21.941 | | | | | |
Ending outstanding | | 328,666 | | $ | 23.290 | | 242,533 | | $ | 20.926 | | 224,400 | | $ | 18.463 | |
| | | | | | | | | | | | | |
At year-end: | | | | | | | | | | | | | |
Options exercisable | | 264,401 | | $ | 22.98 | | 145,480 | | $ | 18.50 | | 135,999 | | $ | 18.00 | |
Weighted average contractual life in years | | 7.4 | | | | 9.2 | | | | 9.0 | | | |
Weighted average fair value of options granted during the year | | | | $ | 11.48 | | | | $ | 9.24 | | | | $ | 5.30 | |
Note N: Earnings per Share
| | 2002 | | 2001 | | 2000 | |
Basic Earnings Per Share: | | | | | | | |
Weighted-average common shares outstanding | | 7,429,882 | | 7,695,225 | | 7,851,276 | |
Net income available to common stockholders | | $ | 20,146 | | $ | 17,223 | | $ | 13,471 | |
Basic earnings per share | | $ | 2.71 | | $ | 2.24 | | $ | 1.72 | |
| | | | | | | |
Diluted Earnings Per Share: | | | | | | | |
Weighted-average common shares outstanding | | 7,429,882 | | 7,695,225 | | 7,851,276 | |
Dilutive effect of stock options | | 57,826 | | 26,173 | | 10,556 | |
Diluted average common shares outstanding | | 7,487,708 | | 7,721,398 | | 7,861,832 | |
Net income available to common stockholders | | $ | 20,146 | | $ | 17,223 | | $ | 13,471 | |
Diluted earnings per share | | $ | 2.69 | | $ | 2.23 | | $ | 1.71 | |
52
Note O: Other Comprehensive Income
The following table summarizes the related income tax effect for the components of Other Comprehensive Income as of December 31:
| | 2002 | | 2001 | | 2000 | |
Unrealized holding gains on available for sale securities arising during the period | | $ | 1,080 | | $ | 5,406 | | $ | 5,719 | |
Related tax expense | | (430 | ) | (2,151 | ) | (2,271 | ) |
Net unrealized gain | | $ | 650 | | $ | 3,255 | | $ | 3,448 | |
| | | | | | | |
Less: Reclassification adjustment for the net gains realized during the period | | | | | | | |
Realized net gains | | $ | 89 | | $ | 460 | | $ | — | |
Related tax expense | | (31 | ) | $ | (161 | ) | $ | — | |
Net realized gains | | $ | 58 | | $ | 299 | | $ | — | |
Total other comprehensive income | | $ | 708 | | $ | 3,554 | | $ | 3,448 | |
Note P: Commitments
In the normal course of business, there are outstanding commitments that are not reflected in the financial statements. Commitments include financial instruments that involve, to varying degrees, elements of credit, interest rate, and liquidity risk. In management’s opinion, these do not represent unusual risks and management does not anticipate significant losses as a result of these transactions. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. Standby letters of credit outstanding at December 31, 2002 were approximately $14,555,000. Firm commitments to fund loans in the future were approximately $264,314,000 as of December 31, 2002. As of December 31, 2002, there were other commitments and contingent liabilities arising in the normal course of business that, in management’s opinion, will not have a material effect on future financial results.
Note Q: Capital
The Company and the Banks are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and prompt corrective action regulations involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action.
Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and plans for capital restoration are required. Actual and required capital amounts (in thousands) and ratios are presented on page 29.
As of the Company’s and the Banks’ most recent regulatory notification, the Company and the Banks were categorized as well capitalized. Management is not aware of any conditions or events since the most recent regulatory notification that would change the Company’s or the Banks’ categories.
53
Capital levels and minimum required levels at year-end:
| | Actual
at year-end | | Minimum Required
for Capital
Adequacy Purposes | | Minimum Required
to be Well
Capitalized | |
| | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio | |
2002 : | | | | | | | | | | | | | |
Total capital to risk weighted assets | | | | | | | | | | | | | |
Consolidated | | $ | 138,563 | | 11.85 | % | $ | 93,545 | | 8.00 | % | $ | 116,931 | | 10.00 | % |
Old Second Bank | | 98,633 | | 12.24 | | 64,466 | | 8.00 | | 80,583 | | 10.00 | |
Tier 1 capital to risk weighted assets | | | | | | | | | | | | | |
Consolidated | | 123,938 | | 10.60 | | 46,769 | | 4.00 | | 70,154 | | 6.00 | |
Old Second Bank | | 88,553 | | 10.99 | | 32,230 | | 4.00 | | 48,346 | | 6.00 | |
Tier 1 capital to average assets | | | | | | | | | | | | | |
Consolidated | | 123,938 | | 7.79 | | 63,640 | | 4.00 | | 79,549 | | 5.00 | |
Old Second Bank | | 88,553 | | 7.91 | | 44,780 | | 4.00 | | 55,975 | | 5.00 | |
| | | | | | | | | | | | | |
2001 : | | | | | | | | | | | | | |
Total capital to risk weighted assets | | | | | | | | | | | | | |
Consolidated | | $ | 128,432 | | 13.32 | % | $ | 77,136 | | 8.00 | % | $ | 96,420 | | 10.00 | % |
Old Second Bank | | 86,430 | | 13.19 | | 52,422 | | 8.00 | | 65,527 | | 10.00 | |
Tier 1 capital to risk weighted assets | | | | | | | | | | | | | |
Consolidated | | 116,119 | | 12.04 | | 38,578 | | 4.00 | | 57,867 | | 6.00 | |
Old Second Bank | | 78,352 | | 11.95 | | 26,227 | | 4.00 | | 39,340 | | 6.00 | |
Tier 1 capital to average assets | | | | | | | | | | | | | |
Consolidated | | 116,119 | | 8.86 | | 52,424 | | 4.00 | | 65,530 | | 5.00 | |
Old Second Bank | | 78,352 | | 8.77 | | 35,736 | | 4.00 | | 44,670 | | 5.00 | |
National and state bank regulations and capital guidelines limit the amount of dividends that may be paid by the Banks without prior regulatory approval. At January 1, 2003, approximately $22,478,000 was available for the payment of dividends by the Banks to the Company.
Note R: Fair Values of Financial Instruments
The estimated fair value approximates carrying amount for all items except those described on the following page. Fair values of loans were estimated for portfolios of loans with similar financial characteristics, such as type and fixed or variable interest rate terms. Cash flows were discounted using current rates at which similar loans would be made to borrowers with similar ratings and for similar maturities. The fair value of time deposits is estimated using discounted future cash flows at current rates offered for deposits of similar remaining maturities. The fair values of borrowings were estimated based on interest rates available to the Company for debt with similar terms and remaining maturities.
54
The carrying amount and estimated fair values of financial instruments were as follows:
| | 2002 | | 2001 | |
| | Carrying
Amount | | Fair
Value | | Carrying
Amount | | Fair
Value | |
Financial assets: | | | | | | | | | |
Cash and cash equivalents | | $ | 73,064 | | $ | 73,064 | | $ | 40,747 | | $ | 40,747 | |
Securities available for sale | | 389,216 | | 389,216 | | 324,549 | | 324,549 | |
Loans held for sale | | 48,658 | | 48,658 | | 44,259 | | 44,259 | |
Loans, net | | 1,046,098 | | 1,106,144 | | 883,142 | | 913,779 | |
| | $ | 1,557,036 | | $ | 1,617,082 | | $ | 1,292,697 | | $ | 1,323,334 | |
Financial liabilities: | | | | | | | | | |
Deposits | | $ | 1,390,661 | | $ | 1,399,778 | | $ | 1,090,816 | | $ | 1,097,860 | |
Federal funds purchased and repurchase agreements | | 60,774 | | 60,774 | | 32,065 | | 32,065 | |
Other short-term borrowing | | 7,870 | | 7,870 | | 31,614 | | 31,614 | |
Notes payable | | — | | — | | 33,393 | | 33,393 | |
| | $ | 1,459,305 | | $ | 1,468,422 | | $ | 1,187,888 | | $ | 1,194,932 | |
Note S: Summary of Quarterly Financial Information (unaudited)
The following represents unaudited quarterly financial information for the periods indicated:
| | 2002 | | 2001 | |
| | 4th | | 3rd | | 2nd | | 1st | | 4th | | 3rd | | 2nd | | 1st | |
Interest income | | $ | 22,446 | | $ | 21,777 | | $ | 20,910 | | $ | 20,358 | | $ | 21,137 | | $ | 21,242 | | $ | 21,388 | | $ | 21,024 | |
Interest expense | | 7,120 | | 7,429 | | 6,872 | | 6,588 | | 7,367 | | 8,632 | | 9,395 | | 9,896 | |
Net interest income | | 15,326 | | 14,348 | | 14,038 | | 13,770 | | 13,770 | | 12,610 | | 11,993 | | 11,128 | |
Provision for loan losses | | 1,490 | | 710 | | 775 | | 830 | | 1,815 | | 755 | | 690 | | 580 | |
Income before taxes | | 8,043 | | 8,018 | | 7,269 | | 7,567 | | 7,317 | | 7,101 | | 6,612 | | 5,456 | |
Net income | | 5,148 | | 5,226 | | 4,793 | | 4,979 | | 4,723 | | 4,559 | | 4,309 | | 3,632 | |
Basic earnings per share | | 0.70 | | 0.71 | | 0.64 | | 0.66 | | 0.62 | | 0.59 | | 0.56 | | 0.47 | |
Diluted earnings per share | | 0.69 | | 0.70 | | 0.64 | | 0.66 | | 0.62 | | 0.59 | | 0.56 | | 0.47 | |
Dividends paid | | 0.20 | | 0.20 | | 0.20 | | 0.15 | | 0.15 | | 0.15 | | 0.15 | | 0.11 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Note T: Parent Company Condensed Financial Information
Condensed Balance Sheets as of December 31 were as follows:
| | 2002 | | 2001 | |
Assets | | | | | |
Noninterest-bearing deposit with bank subsidiary | | $ | 4,112 | | $ | 3,873 | |
Loan to subsidiary | | — | | 36,141 | |
Investment in subsidiaries, at equity | | 129,934 | | 118,620 | |
Securities available for sale | | 154 | | 156 | |
Other assets | | 426 | | 846 | |
| | $ | 134,626 | | $ | 159,636 | |
| | | | | |
Liabilities and Stockholders’ Equity | | | | | |
Other liabilities | | $ | 1,550 | | $ | 34,690 | |
Stockholders’ equity | | 133,076 | | 124,946 | |
| | $ | 134,626 | | $ | 159,636 | |
55
Condensed Statements of Income for the years ended December 31 were as follows:
| | 2002 | | 2001 | | 2000 | |
Operating Income | | | | | | | |
Cash dividends received from subsidiaries | | $ | 10,369 | | $ | 7,782 | | $ | 4,642 | |
Interest income | | 8 | | 1,065 | | 623 | |
| | 10,377 | | 8,847 | | 5,265 | |
Operating Expenses | | | | | | | |
Other expenses | | 456 | | 1,099 | | 489 | |
| | 456 | | 1,099 | | 489 | |
Income before income taxes and equity in undistributed net income of subsidiaries | | 9,921 | | 7,748 | | 4,776 | |
Income tax benefit | | (160 | ) | (13 | ) | 44 | |
Income before equity in undistributed net income of subsidiaries | | 10,081 | | 7,761 | | 4,732 | |
Equity in undistributed net income of subsidiaries | | 10,065 | | 9,462 | | 8,739 | |
Net income | | $ | 20,146 | | $ | 17,223 | | $ | 13,471 | |
Condensed Statements of Cash Flows for the years ended December 31 were as follows:
| | 2002 | | 2001 | | 2000 | |
Cash Flows from Operating Activities | | | | | | | |
Net income | | $ | 20,146 | | $ | 17,223 | | $ | 13,471 | |
Adjustments to reconcile net income to net cash from operating activities: | | | | | | | |
Equity in undistributed net income of subsidiaries | | (10,065 | ) | (9,462 | ) | (8,739 | ) |
Increase in taxes payable | | 1 | | 2 | | 89 | |
Change in other assets | | (224 | ) | (56 | ) | (27 | ) |
Change in notes payable | | (33,486 | ) | 29,964 | | 3,429 | |
Tax benefit from exercise of stock options | | 251 | | 40 | | | |
Other, net | | (252 | ) | 301 | | (156 | ) |
Net cash from operating activities | | (23,629 | ) | 38,012 | | 8,067 | |
| | | | | | | |
Cash Flows from Investing Activities | | | | | | | |
Proceeds from sales and maturities of available for sale securities | | — | | — | | — | |
Investment in subsidiaries | | 36,197 | | (27,498 | ) | (674 | ) |
Net cash from investing activities | | 36,197 | | (27,498 | ) | (674 | ) |
| | | | | | | |
Cash Flows from Financing Activities | | | | | | | |
Dividends paid | | (5,232 | ) | (4,047 | ) | (3,546 | ) |
Treasury stock purchased | | (7,897 | ) | (4,488 | ) | (4,231 | ) |
Proceeds from exercise of stock options | | 800 | | 267 | | 28 | |
Net cash from financing activities | | (12,329 | ) | (8,268 | ) | (7,749 | ) |
Net change in cash and cash equivalents | | 239 | | 2,246 | | (356 | ) |
Cash and cash equivalents at beginning of year | | 3,873 | | 1,627 | | 1,983 | |
Cash and cash equivalents at end of year | | $ | 4,112 | | $ | 3,873 | | $ | 1,627 | |
Note U: Stockholders’ Rights Plan
On September 17, 2002, the Company’s Board of Directors adopted a Stockholders’ Rights Plan. The Plan provided for the distribution of one right on October 10, 2002, for each share of the Company’s outstanding common stock as of September 27, 2002. The rights have no immediate economic value to stockholders because they cannot be exercised unless and until a person, group or entity acquires 15% or more of the Company’s common stock or announces a tender offer. The Plan also permits the Company’s Board of Directors to redeem each right for one cent under various circumstances. In general, the Plan provides that if a person, group or entity acquires a 15% or larger stake in the Company or announces a tender offer, and the Company’s Board chooses not to redeem the rights, all holders of rights, other than the 15% stockholder or the tender offer or, will be able to purchase a certain amount of the Company’s common stock for half of its market price.
56
Report of Independent Auditors
[ERNST & YOUNG LETTER HEAD]
Report of Independent Auditors
Stockholders and Board of Directors
Old Second Bancorp, Inc.
We have audited the accompanying consolidated balance sheets of Old Second Bancorp, Inc. and Subsidiaries as of December 31, 2002 and 2001, and the related consolidated statements of income, changes in stockholders’ equity, and cash flows for the three years in the period ended December 31, 2002. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. These standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes accessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Old Second Bancorp, Inc. and Subsidiaries as of December 31, 2002 and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
January 24, 2003
57
Old Second Bancorp Inc. and Subsidiaries
Corporate Information
Corporate Office
37 River Street
Aurora, Illinois 60506-4172
(630) 892-0202
www.02bancorp.com
Market for the Company’s Common Stock
The Company’s common stock trades on The Nasdaq Stock Market under the symbol “OSBC.” As of December 31, 2002, the Company had approximately 1,200 stockholders of record of its common stock. The following table sets forth the range of prices during each quarter for 2002 and 2001.
| | 2002 | | 2001 | |
| | High | | Low | | High | | Low | |
First quarter | | $ | 41.25 | | $ | 38.21 | | $ | 26.19 | | $ | 23.38 | |
Second quarter | | 36.82 | | 28.87 | | 33.57 | | 24.30 | |
Third quarter | | 42.32 | | 34.61 | | 38.77 | | 31.25 | |
Fourth quarter | | 39.72 | | 36.60 | | 40.10 | | 32.35 | |
| | | | | | | | | | | | | |
Form 10-K and Other Information
We maintain a Web site at http://www.o2bancorp.com. We make available free of charge on or through our Web site, our annual report on Form 10K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission. We will also provide copies of our filings free of charge upon written request to: J. Douglas Cheatham, Senior Vice President and Chief Financial Officer, Old Second Bancorp Inc., 37 South River Street, Aurora, Illinois 60506-4172.
Transfer Agent/ Stockholder Services
Inquires related to stockholders records, stock transfers, changes of ownership, change of address and dividend payments should be sent to the transfer agent at the following address:
Old Second Bancorp Inc.
c/o Robin Hodgson, VP Administration
37 River Street
Aurora, Illinois 60506-4172
(630) 906-5480
www.rhodgson@02bancorp.com
58
Old Second Bancorp Inc. and Subsidiaries
Consolidated Balance Sheet
December 31, 2002
(In thousands)
| | Consolidated
The Old Second
National Bank
of Aurora | | Yorkville
National
Bank | | Kane
County
Bank | | Old Second
Financial,
Inc. | | Old Second
Bancorp, Inc.
Parent Only | | Consolidating
Adjustments | | Old Second
Bancorp Inc.
Consolidated | |
Assets | | | | | | | | | | | | | | | |
Cash and due from banks | | $ | 27,675 | | $ | 13,621 | | $ | 8,374 | | $ | 266 | | $ | 4,112 | | $ | (4,334 | ) | $ | 49,714 | |
Federal funds sold | | 23,000 | | 125 | | 1,225 | | — | | — | | (1,000 | ) | 23,350 | |
Cash and cash equivalents | | 50,675 | | 13,746 | | 9,599 | | 266 | | 4,112 | | (5,334 | ) | 73,064 | |
Securities available for sale | | 296,479 | | 31,126 | | 61,457 | | — | | 154 | | — | | 389,216 | |
Loans held for sale | | 47,411 | | 777 | | 470 | | — | | — | | — | | 48,658 | |
Loans | | 713,402 | | 184,676 | | 163,789 | | — | | — | | | | 1,061,867 | |
Allowance for loan losses | | 10,703 | | 2,663 | | 2,403 | | — | | — | | — | | 15,769 | |
Net loans | | 702,699 | | 182,013 | | 161,386 | | — | | — | | — | | 1,046,098 | |
Premises and equipment, net | | 21,782 | | 2,553 | | 5,312 | | — | | 96 | | — | | 29,743 | |
Other real estate owned | | 131 | | — | | — | | — | | — | | — | | 131 | |
Mortgage servicing rights, net | | 192 | | — | | — | | — | | — | | — | | 192 | |
Goodwill, net | | — | | — | | 2,130 | | — | | — | | — | | 2,130 | |
Core deposit intangible assets, net | | — | | 1,421 | | — | | — | | — | | — | | 1,421 | |
Investment in subsidiaries | | — | | — | | — | | — | | 129,838 | | (129,838 | ) | — | |
Accrued interest and other assets | | 12,181 | | 2,620 | | 2,884 | | (2 | ) | 426 | | (675 | ) | 17,434 | |
Total assets | | $ | 1,131,550 | | $ | 234,256 | | $ | 243,238 | | $ | 264 | | $ | 134,626 | | $ | (135,847 | ) | $ | 1,608,087 | |
| | | | | | | | | | | | | | | |
Liabilities | | | | | | | | | | | | | | | |
Deposits: | | | | | | | | | | | | | | | |
Demand | | $ | 151,749 | | $ | 25,316 | | $ | 24,142 | | $ | — | | $ | — | | $ | (4,334 | ) | $ | 196,873 | |
Savings | | 465,758 | | 94,198 | | 107,921 | | — | | — | | — | | 667,877 | |
Time | | 343,112 | | 92,247 | | 90,552 | | — | | — | | — | | 525,911 | |
Total deposits | | 960,619 | | 211,761 | | 222,615 | | — | | — | | (4,334 | ) | 1,390,661 | |
Securities sold under repurchase agreements | | 58,997 | | 1,777 | | — | | — | | — | | — | | 60,774 | |
Other short-term borrowings | | 7,202 | | 1,213 | | 455 | | — | | — | | (1,000 | ) | 7,870 | |
Notes payable | | — | | — | | — | | — | | — | | — | | — | |
Accrued interest and other liabilities. | | 12,156 | | 1,225 | | 1,212 | | 238 | | 1,550 | | (675 | ) | 15,706 | |
Total liabilities | | 1,038,974 | | 215,976 | | 224,282 | | 238 | | 1,550 | | (6,009 | ) | 1,475,011 | |
| | | | | | | | | | | | | | | |
Stockholders’ Equity | | | | | | | | | | | | | | | |
Common stock | | 2,160 | | 525 | | 1,000 | | 25 | | 8,189 | | (3,710 | ) | 8,189 | |
Surplus | | 14,068 | | 2,025 | | 12,033 | | — | | 10,860 | | (28,126 | ) | 10,860 | |
Retained earnings | | 72,344 | | 15,111 | | 5,171 | | 1 | | 127,547 | | (92,627 | ) | 127,547 | |
Accumulated other comprehensive income | | 4,004 | | 619 | | 752 | | — | | 5,376 | | (5,375 | ) | 5,376 | |
Treasury stock | | — | | — | | — | | — | | (18,896 | ) | — | | (18,896 | ) |
Total stockholders’ equity | | 92,576 | | 18,280 | | 18,956 | | 26 | | 133,076 | | (129,838 | ) | 133,076 | |
Total liabilities and stockholders’ equity | | $ | 1,131,550 | | $ | 234,256 | | $ | 243,238 | | $ | 264 | | $ | 134,626 | | $ | (135,847 | ) | $ | 1,608,087 | |
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60
