UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant To Section 13 Or 15(d)
Of The Securities Exchange Act Of 1934
For the quarterly period ended September 30, 1998
Commission file No. 0-10537
Old Second Bancorp, Inc.
(Exact name of registrant as specified in its charter)
Delaware 36-3143493
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
37 South River Street, Aurora, Illinois 60507
(Address of principal executive offices) (Zip Code)
(630) 892-0202
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d)of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 91 days.
Yes [X] No[ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
3,050,056 shares of no par value common stock are outstanding as of
November 16, 1998.
There are no exhibits with this Form 10-Q.
Page 1
Part I - Financial Information
Item 1 - Financial Statements
OLD SECOND BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS EXCEPT SHARE DATA)
September 30, December 31,
1998 1997
-------------- -----------
ASSETS
- ------
Cash and Due from Banks, Non-Interest
Bearing $ 35,005 $ 40,625
Interest Bearing Deposits With Banks 475 350
Federal Funds Sold 72,850 46,050
-------- --------
Total Cash and Cash Equivalents 108,330 87,025
Available for Sale Securities 258,910 264,467
Loans Held for Sale 37,316 26,927
Loans 546,793 534,980
Less: Allowance For Possible Loan Losses 7,734 6,923
Unearned Income 265 348
-------- --------
Loans, Net 538,794 527,709
Bank Premises and Equipment, Net 20,840 20,805
Other Assets 22,127 21,438
-------- --------
TOTAL ASSETS $986,317 $948,371
======== ========
LIABILITIES
- -----------
Deposits:
Demand $116,351 $114,764
Savings 337,817 304,657
Time 352,633 369,508
-------- --------
Total Deposits 806,801 788,929
-------- --------
Securities Sold Under Agreements To Repurchase 29,162 22,926
Other Short-Term Borrowings 2,778 8,097
Note Payable 32,838 24,133
Other Liabilities 15,053 12,165
-------- --------
Total Liabilities 886,632 856,250
STOCKHOLDERS' EQUITY
- -----------------------------------
Preferred Stock, no par value, 300,000
shares authorized, none issued
Common Stock, no par value shares
authorized: 6,000,000
Issued:
Outstanding at Sept. 30, 1998: 3,050,056
Outstanding at Dec. 31, 1997: 3,049,190 15,874 15,844
Retained Earnings 81,008 74,924
Net Unrealized Gain on Investments 2,803 1,353
-------- --------
Total Stockholders' Equity 99,685 92,121
-------- --------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $986,317 $948,371
======== ========
See accompanying notes.
Page 2
OLD SECOND BANCORP, INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
Three Months Ended
September 30, 1998
--------------------------
1998 1997
--------------------------
INTEREST INCOME:
- ----------------
Interest and Fees on Loans $12,611 $12,020
Interest and Dividends on
Available-for-Sale Securities:
Taxable 3,043 3,223
Exempt From Federal Income Tax 747 819
Interest on Federal Funds Sold 921 723
Interest on Interest Bearing Deposits 7 6
-------- --------
Total Interest Income 17,329 16,791
-------- --------
INTEREST EXPENSE:
- -----------------
Savings Deposits 2,406 1,988
Time Deposits 5,033 5,645
Other Short-Term Borrowings 724 568
-------- --------
Total Interest Expense 8,163 8,201
-------- --------
Net Interest Income 9,166 8,590
Provision for Possible Loan Losses 307 356
-------- --------
Net Interest Income After Provision for
Possible Loan Losses 8,859 8,234
OTHER INCOME:
- -------------
Trust Fees 1,005 939
Service Charges on Deposit Accounts 798 821
Gain on Sales of Loans 2,409 1,283
Other Income 1,026 761
-------- --------
Total Other Income 5,238 3,804
OTHER EXPENSES:
- ---------------
Salaries and Employee Benefits 5,029 4,584
Net Occupancy of Bank Premises 607 570
Furniture and Equipment 1,010 826
FDIC Insurance 23 35
Marketing 236 294
Stationery and Supplies 253 252
Amortization of Intangible Assets 952 289
Other 1,815 1,584
--------- --------
Total Other Expenses 9,925 8,434
--------- --------
Income Before Income Taxes 4,172 3,604
Income Tax Expense 1,370 1,104
--------- --------
Net Income $2,802 $2,500
========= ========
Per Share Amounts:
- ------------------
Basic Earnings Per Share $0.92 $0.82
Diluted Earnings Per Share $0.91 $0.82
Dividends Declared 0.25 0.20
Average Shares Outstanding 3,050,056 3,049,190
See accompanying notes.
Page 3
OLD SECOND BANCORP, INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
Nine Months Ended
September 30,
--------------------------
1998 1997
--------------------------
INTEREST INCOME:
- ----------------
Interest and Fees on Loans $37,070 $34,057
Interest and Dividends on Available-for-Sale
Securities:
Taxable 9,103 9,788
Exempt From Federal Income Tax 2,287 2,502
Interest on Federal Funds Sold 2,479 1,610
Interest on Interest Bearing Deposits 21 13
-------- --------
Total Interest Income 50,960 47,970
-------- --------
INTEREST EXPENSE:
- -----------------
Savings Deposits 6,808 5,770
Time Deposits 15,374 16,197
Other Short-Term Borrowings 2,047 924
-------- --------
Total Interest Expense 24,229 22,891
-------- --------
Net Interest Income 26,731 25,079
Provision for Possible Loan Losses 1,007 901
--------- --------
Net Interest Income After Provision for
Possible Loan Losses 25,724 24,178
OTHER INCOME:
- -------------
Trust Fees 3,139 2,961
Service Charges on Deposit Accounts 2,338 2,326
Gain on Sales of Loans 6,598 2,426
Other Income 2,809 2,235
--------- --------
Total Other Income 14,884 9,948
OTHER EXPENSES:
- --------------
Salaries and Employee Benefits 15,190 13,364
Net Occupancy of Bank Premises 1,749 1,629
Furniture and Equipment 3,059 2,411
FDIC Insurance 90 149
Marketing 746 829
Stationery and Supplies 704 740
Amortization of Intangible Assets 1,673 848
Other 5,507 4,961
-------- --------
Total Other Expenses 28,718 24,931
-------- --------
Income Before Income Taxes 11,890 9,195
Income Tax Expense 3,824 2,926
-------- --------
Net Income $8,066 $6,269
======== ========
Per Share Amounts:
- ------------------
Basic Earnings Per Share $2.64 $2.06
Diluted Earnings Per Share $2.63 $2.05
Dividends Declared 0.65 0.59
Average Shares Outstanding 3,049,555 3,049,190
See accompanying notes.
Page 4
OLD SECOND BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
For the Nine Months
Ended September 30,
1998 1997
---------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
- -------------------------------------
Interest Received $51,933 $46,894
Interest Paid (24,557) (22,708)
Paid to Suppliers and Employees (22,260) (22,832)
Trust Fees Received 3,139 2,961
Income Taxes Paid (4,131) (2,441)
Service Charges Received on Deposit Accounts 2,338 2,326
Mortgage Loan Originations and Purchases (463,456) (182,595)
Mortgage Loans Sold to Secondary Market 459,665 170,997
Other Income Received 2,809 2,235
--------- --------
Net Cash Provided By (Used In) Operating Activities 5,480 (5,163)
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
- -------------------------------------
Net Increase in Loans (12,092) (44,582)
Purchases of Available for Sale Securities (71,414) (44,786)
Proceeds from Sales and Maturities of Available For
Sale Securities 78,879 63,752
Capital Expenditures (1,809) (120)
Net Proceeds on Purchases of Mortgage Servicing Rights (3,355) (2,960)
Other, Net 231 (431)
--------- --------
Net Cash Used In Investing Activities (9,560) (29,127)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
- ------------------------------------
Net Increase (Decrease) in Deposits 17,872 (9,089)
Net Increase in Other Short-term Borrowings 917 21,536
Additional Borrowings of Notes Payable 8,705 18,336
Dividends Paid (2,134) (2,079)
Other, Net 25 229
--------- --------
Net Cash Provided By Financing Activities 25,385 28,933
--------- --------
Net Increase (Decrease) in Cash & Cash Equivalents 21,305 (5,357)
Cash & Cash Equivalents at Beginning of Year 87,025 81,007
--------- --------
Cash & Cash Equivalents at End of Period $108,330 $75,650
========= ========
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Net Income $8,066 $6,269
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Depreciation 1,774 1,526
Provision for Possible Loan Losses 1,007 901
Increase (Decrease) in Taxes Payable (307) 796
Net Increase in Mortgage Loans Held for Sale (10,389) (14,024)
(Increase) Decrease in Interest Receivable 519 (1,508)
(Increase) Decrease in Interest Payable (328) 183
Premium Amortization and Discount Accretion
on Investments 453 431
Amortization of Intangibles 1,673 848
Increase (Decrease) in Accrued Expenses 3,555 (11)
(Increase) Decrease in Prepaid Expenses (543) (574)
-------- --------
Total Adjustments 2,586 (11,432)
-------- --------
Net Cash Provided by Operating Activities $5,480 ($5,163)
======== ========
See accompanying notes.
Page 5
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting policies followed in the preparation of interim financial
statements are consistent with those used in the preparation of annual
financial information. The interim financial statements reflect all
adjustments, which are normal and recurring in nature, necessary in the
opinion of management for a fair statement of results for the interim
periods presented. Results for the nine months ended September 30, 1998
are not necessarily indicative of the results that may be expected for the
year ended December 31, 1998.
NOTE 2 - ACCOUNTING FOR EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard (SFAS) No. 128 "Earnings Per Share" which
required adoption for periods ending after December 31, 1997 and prescribes
the calculation of earnings per share for both interim and annual financial
statements.
The following table sets forth the computation of basic and diluted earnings
per share for the quarter ended September 30, (share and per share data not
in thousands):
1998 1997
------ ------
Numerator for basic and diluted earnings per
share - net income $2,802 $2,500
====== ======
Denominator for basic earnings per share -
weighted average shares outstanding 3,050,056 3,049,190
Effect of dilutive securities - employee
stock options 8,076 4,160
--------- ---------
Denominator for diluted earnings per share -
adjusted weighted average shares
outstanding 3,058,132 3,053,350
========= =========
Earnings per share - basic $ 0.92 $ 0.82
Earnings per share - diluted $ 0.91 $ 0.82
The following table sets forth the computation of basic and diluted earnings
per share year-to-date for the period ended September 30, (share and per
share data not in thousands):
1998 1997
------ ------
Numerator for basic and diluted earnings
per share - net income $8,066 $6,269
====== ======
Denominator for basic earnings per share -
weighted average shares outstanding 3,049,555 3,049,190
Effect of dilutive securities - employee
stock options 9,398 3,673
--------- ---------
Denominator for diluted earnings per
share - adjusted weighted average shares
outstanding 3,058,953 3,052,863
========= =========
Earnings per share - basic $ 2.64 $ 2.06
Earnings per share - diluted $ 2.63 $ 2.05
Page 6
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - continued
NOTE 3 - BUSINESS COMBINATIONS
On May 13, 1997 Old Second issued 111,706 shares of common stock to acquire
100% of the outstanding common stock of Maple Park Bancshares, Inc. The
acquisition of Maple Park Bancshares, Inc. was accounted for as a
pooling-of-interest; accordingly, the previously reported financial
statements have been restated to include the accounts and results of
operation of Maple Park Bancshares, Inc.
NOTE 4 - REPORTING COMPREHENSIVE INCOME
As of January 1, 1998, the Corporation adopted SFAS No. 130, "Reporting
Comprehensive Income". SFAS No. 130 establishes new rules for the reporting
and display of comprehensive income and its components; however, the
adoption of this Statement had no impact on the Corporation's net income
or shareholders' equity. SFAS No. 130 requires unrealized gains or losses
on the Corporation's available-for-sale securities, which prior to adoption
were reported separately in shareholders' equity to be included in other
comprehensive income. Prior year financial statements have been reclassified
to conform to the requirements of SFAS No. 130.
During the third quarter, total comprehensive income amounted to $4,287,055
for 1998 and $3,003,425 for 1997. For September 30, 1998 and 1997, year to
date comprehensive income totaled $9,514,634 and $7,032,931, respectively.
NOTE 5 - SEGMENTS REPORTING
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information" which
addresses the reporting of financial information from operating segments
in annual and interim financial statements. Management believes that it
operates under one segment as defined by SFAS No. 131 and additional
disclosure is not required.
NOTE 6 - IMPACT OF YEAR 2000
The Corporation is currently in the process of addressing the potential
problem that faces all users of automated systems including information
systems. Many computer systems process transactions based on two digits
representing the year of transaction, rather than a full four digits. These
computer systems may not operate properly when the last two digits become
"00", as will occur on January 1, 2000. The problem could effect a wide
variety of automated information systems, such as mainframe applications,
personal computers, communications systems, environmental systems and other
information systems.
The Corporation has identified areas of operation critical for the delivery
of its products and services. The majority of the programs/applications used
in the Corporation's operations are purchased from outside vendors. The
vendors providing the software are responsible for maintenance of the systems
and modifications to enable uninterruped usage after December 31, 1999. The
Corporation's plan includes identification of the problems by performing an
inventory of all software applications, obtaining certification of compliance
from third parties and testing all of the impacted applications (both
internally developed and third-party provided). The Corporation's goal is to
have the plan complete and to be fully compliant by December 31, 1998. The
vendor of the Corporation's core operating system has already provided
certification of compliance with the year 2000 issue. Testing of the system
will occur during 1998. Contingency plans, if any are needed, will be
developed during 1998 to address potential problems that are identified. The
Corporation's plan also includes reviewing any potential risks associated
with the loan and investment portfolios due to the year 2000 issue.
Based on currently available information, Management does not anticipate that
the cost to address year 2000 issues will have a materially adverse impact on
the Corporation's financial condition or results of operations.
Page 7
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - continued
NOTE 7 - ACCOUNTING FOR DERIVATIVES
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities", which is
required to be adopted in years beginning after June 15, 1999. Because of
the Corporation's minimal use of derivatives, management does not anticipate
that the adoption of the new Statement will have a material effect on the
Corporation's financial condition or results of operations.
Page 8
PART 1 - FINANCIAL INFORMATION
ITEM 2
OLD SECOND BANCORP, INC. AND SUBSIDIARIES
MANAGEMENTS' DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion analyzes the consolidated financial condition and
results of operations of Old Second Bancorp, Inc. and its subsidiaries.
FINANCIAL CONDITION
Total Assets at September 30, 1998 were $986 million, an increase of $38
million from the 1997 year-end total of $948 million. Net Loans of $539
million and Loans Held for Sale of $37 million were up $21 million (3.8%).
Total Deposits were $807 million compared to the 1997 year-end total of
$789 million. Savings Deposits were up $33 million (10.9%), while Time
Deposits decreased $17 million (4.6%). Securities Sold Under Agreement to
Repurchase and Other Short Term Borrowings were substantially the same for
both periods. Total Stockholders' Equity of $99.7 million are 10.1% of total
assets at September 30, up from $92 million at year end
RESULTS OF OPERATIONS
Operating results include Net Income for Old Second Bancorp, Inc. and its
subsidiaries for the three and nine months ended September 30, 1998 and 1997,
respectively.
For the three months ending September 30, 1998, Net Interest Income of
$9,166,000 was up $576,000 (6.7%) over the like period in 1997. Total
Interest Income for the three months was up $538,000 while Total Interest
Expense decreased $38,000 over the same period a year ago.
Total Other Income for the quarter ending September 30, 1998 of $5,238,000
was up $1,434,00 from the same period a year ago. The increase is primarily
due to higher volume in mortgage banking activities resulting in higher Gain
on Sales of Loans reported as $2,409,000, an increase of $1,126,000 over the
quarter ended September 30, 1997. Total Other Expenses of $9,925,000
increased $1,491,000 from the same period in 1997. A portion of the increase
in the Salaries and Other categories of Other Expenses results from expenses
related to higher volume in mortgage banking activities. During the third
quarter of 1998, the amortization of intangibles includes an adjustment to the
book value of mortgage servicing rights.
Net Interest Income for the nine months ending September 30, 1998 of
$26,731,000 was up $1,652,000 (6.6%) over the same period in 1997. Total
Interest Income for the nine months of 1998 was higher than 1997 by
$2,990,000 (6.2%), while Total Interest Expense was up in 1998 by $1,338,000
(5.8%).
Total Other Income for the nine months ending September 30, 1998 of
$14,884,000 was up $4,936,000 due primarily to higher gain on sales of loans.
Total Other Expenses for the nine months ending September 30, 1998 increased
$3,787,000 from the same period in 1997.
Page 9
LIQUIDITY
Liquidity is generally defined as the ability to meet cash flow requirements.
For a bank, meeting cash flow requirements means having funds available to
satisfy customer credit needs as well as having funds available to meet
depositor withdrawal requests. For the Corporation, liquidity means having
funds available to pay cash dividends, debt service and operating expenses.
Liquid assets consist primarily of non-interest bearing and interest bearing
deposits, overnight federal funds sold and unpledged investment securities.
The Consolidated Statements of Cash Flows included with the financial
statements herein set forth the cash flows from operating, investing and
financing activities for the various time periods.
Net cash provided by operating activities for the nine months ended September
30, 1998 was $5,480,000; net cash used by operating activities for the nine
months ended September 30, 1997 was $5,163,000.
Net cash used by investing activities was $9,560,000 for the nine months in
1998; while $29,127,000 was reported in 1997. The primary components of cash
flows from investing activities are funding and repayment of customer
loans and purchases and sales of investment securities. For 1998, net
increases in loans resulted in cash outflows of $12,092,000 and net
investment securities activity resulted in cash inflows of $7,465,000.
During 1997, net increases in loans resulted in cash outflows of $44,582,000
and net investment securities activity resulted in cash inflows of
$18,966,000.
Cash flows from financing activities are primarily attributable to changes in
deposit levels, short-term borrowing, notes payable and the payment of
dividends to stockholders. For the nine months ending September 30, 1998, net
cash provided in financing activities was $25,385,000; in 1997 net cash
provided in financing activities totaled $28,933,000. For 1998, an increase
in deposits generated cash inflows of $17,872,000 and an increase in
Short-term Borrowing generated cash inflows of $917,000. In 1997 a decrease
in deposits generated cash outflows of $9,089,000 and an increase in
Short-term Borrowings resulted in cash inflows of $21,536,000.
Page 10
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits
Exhibit 27. Financial Data Schedule
B. Reports on Form 8-K
No reports on Form 8-K have been filed during the quarter because of
the absence of conditions under which they are required.
Page 11
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
OLD SECOND BANCORP, INC.
By: Jean A. Pooley
Chief Financial Officer
Date: November 16, 1998
Page 12