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 June 30, 2002

 

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For transition period from                         to              

 

Commission File Number 0 -10537

 

OLD SECOND BANCORP, INC.

(Exact name of Registrant as specified in its charter)

 

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  ý  No   o  

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date: As of August 1, 2002, the Registrant had outstanding 7,382,605 shares of common stock, $1.00 par value per share.

 

 

OLD SECOND BANCORP, INC.

 

Form 10-Q Quarterly Report

 

Table of Contents

 

PART I
Item 1.	Financial Statements
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
PART II
Item 1.	Legal Proceedings
Item 2.	Changes in Securities
Item 3.	Defaults Upon Senior Securities
Item 4.	Submission of Matters to a Vote of Security Holders
Item 5.	Other Information
Item 6.	Exhibits and Reports on Form 8-K
	Signatures

 

2

 

PART I – FINANCIAL INFORMATION

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Balance Sheets

(In thousands, except share data)

 

		(Unaudited) June 30, 2002			December 31, 2001
Assets
Cash and due from banks		$	44,788		$	40,666
Interest bearing balances with banks		59			81
Federal funds sold		67,425			—
Cash and cash equivalents		112,272			40,747
Securities available for sale		350,809			324,549
Loans held for sale		16,969			44,259
Loans		963,627			895,455
Allowance for loan losses		13,917			12,313
Net loans		949,710			883,142
Premises and equipment, net		27,331			24,362
Mortgage servicing rights, net		187			195
Goodwill, net		2,130			2,130
Core deposit intangible assets, net		1,598			1,776
Accrued interest and other assets		16,321			12,188
Total assets		$	1,477,327		$	1,333,348
Liabilities
Deposits:
Demand		$	180,094		$	165,538
Savings		654,368			534,641
Time		449,695			390,637
Total deposits		1,284,157			1,090,816
Securities sold under repurchase agreements		43,784			32,065
Other short-term borrowings		9,442			31,614
Notes payable		—			33,393
Accrued interest and other liabilities		13,970			20,514
Total liabilities		1,351,353			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 8,158,854 in 2002 and 8,157,107 in 2001; outstanding 7,403,605 in 2002 and 7,607,592 in 2001		8,159			8,157
Additional paid-in capital		10,139			10,092
Retained earnings		120,141			112,970
Accumulated other comprehensive income		4,841			4,726
Treasury stock, at cost, 755,249 shares in 2002, 549,515 shares in 2001		(17,306		)	(10,999		)
Total stockholders’ equity		125,974			124,946
Total liabilities and stockholders’ equity		$	1,477,327		$	1,333,348

 

See accompanying notes to consolidated financial statements.

 

3

 

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Income

(In thousands, except share data)

 

		(Unaudited) Three months ended June 30,						(Unaudited) Six months ended June 30,
		2002			2001			2002			2001
Interest income
Loans, including fees		$	16,413		$	15,844		$	32,135		$	31,373
Loans held for sale		218			422			558			785
Securities:
Taxable		3,433			3,844			6,997			7,882
Tax-exempt		673			693			1,332			1,364
Federal funds sold		173			584			246			1,006
Interest bearing deposits		—			1			—			2
Total interest income		20,910			21,388			41,268			42,412
Interest expense
Savings deposits		2,608			2,990			4,965			6,232
Time deposits		4,062			5,763			7,969			11,843
Repurchase agreements		165			303			303			591
Other short-term borrowings		36			69			212			143
Notes payable		1			270			11			482
Total interest expense		6,872			9,395			13,460			19,291
Net interest income		14,038			11,993			27,808			23,121
Provision for loan losses		775			690			1,605			1,270
Net interest income after provision for loan losses		13,263			11,303			26,203			21,851
Noninterest income
Trust income		1,288			1,273			2,612			2,516
Service charges on deposits		1,500			1,050			2,762			2,014
Secondary mortgage fees		272			222			517			473
Mortgage servicing income		11			16			26			36
Gain on sale of loans		1,398			1,917			3,141			3,484
Securities gains, net		77			139			80			322
Other income		807			689			1,798			1,392
Total noninterest income		5,353			5,306			10,936			10,237
Noninterest expense
Salaries and employee benefits		6,846			6,020			13,530			12,116
Occupancy expense, net		672			648			1,348			1,391
Furniture and equipment expense		1,123			1,072			2,094			2,029
Amortization of goodwill		—			111			—			221
Amortization of core deposit intangible assets		89			89			178			178
Other expense		2,617			2,057			5,153			4,085
Total noninterest expense		11,347			9,997			22,303			20,020
Income before income taxes		7,269			6,612			14,836			12,068
Provision for income taxes		2,476			2,303			5,064			4,127
Net income		$	4,793		$	4,309		$	9,772		$	7,941
Per share information:
Ending number of shares		7,403,605			7,670,125			7,403,605			7,670,125
Average number of shares		7,440,139			7,734,587			7,483,030			7,757,372
Diluted average number of shares		7,504,448			7,759,136			7,543,666			7,763,972
Basic earnings per share		$	0.64		$	0.56		$	1.31		$	1.02
Diluted earnings per share		$	0.64		$	0.56		$	1.30		$	1.02

 

See accompanying notes to consolidated financial statements.

 

4

 

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

Six Months Ended June 30, 2002 and 2001

(In thousands)

 

		(Unaudited) 2002			(Unaudited) 2001
Cash flows from operating activities
Net income		$	9,772		$	7,941
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		945			941
Amortization of mortgage servicing rights		4			3
Origination of mortgage servicing rights		(9		)	(4		)
Provision for loan losses		1,605			1,270
Net change in mortgage loans held for sale		27,290			(17,420		)
Change in net income taxes payable		(801		)	294
Gain on sale of securities		(80		)	(322		)
Change in accrued interest and other assets		(4,133		)	3,279
Change in accrued interest and other liabilities		(6,160		)	872
Premium amortization and discount accretion on securities		312			155
Amortization of goodwill		—			221
Amortization of core deposit intangible assets		178			178
Tax benefit from stock options exercised		8			28
Net cash provided (used) by operating activities		28,931			(2,564		)
Cash flows from investing activities
Proceeds from sales and maturities of securities available for sale		77,918			75,159
Purchases of securities available for sale		(104,218		)	(90,874		)
Net principal disbursed on loans		(68,173		)	(60,672		)
Proceeds from sales of other real estate		—			357
Property and equipment expenditures		(3,914		)	(2,379		)
Sale of mortgage servicing rights		13
Net cash used by investing activities		(98,374		)	(78,409		)
Cash flows from financing activities
Net change in deposits		193,341			76,062
Net change in fed funds and repurchase agreements		11,719			30,953
Net change in other short-term borrowings		(22,172		)	6,014
Net change in notes payable		(33,393		)	13,702
Proceeds from exercise of incentive stock options		40			233
Dividends paid		(2,260		)	(1,748		)
Purchase of treasury stock		(6,307		)	(2,768		)
Net cash provided by financing activities		140,968			122,448
Net change in cash and cash equivalents		71,525			41,475
Cash and cash equivalents at beginning of period		40,747			56,579
Cash and cash equivalents at end of period		$	112,272		$	98,054
Supplemental cash flow information
Income taxes paid		$	5,793		$	4,496
Interest paid		15,707			16,424

 

See accompanying notes to consolidated financial statements.

 

5

 

OLD SECOND BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

The accounting policies followed in the preparation of interim financial statements are consistent with those used in the preparation of annual financial information. The interim financial statements reflect all normal and recurring adjustments, which are necessary, in the opinion of management, for a fair statement of results for the interim periods presented.  Results for the periods ended June 30, 2002 are not necessarily indicative of the results that may be expected for the year ending December 31, 2002.  Unless otherwise indicated, amounts in the tables contained in these Notes are in thousands.

 

On May 21, 2002, the Board of Directors of Old Second Bancorp, Inc. declared a 4-for-3 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.

 

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 has completed the initial impairment test for accounting for goodwill and other intangible assets in the second quarter of 2002 and will perform a similar test each year in the fourth quarter starting in 2002.

 

		Gross Carrying Amount			Accumulated Amortization
June 30, 2002:
Amortizing intangible assets:
Core deposit		$	3,501		$	1,903
Non-amortizing intangible assets:
Goodwill		2,130
		$	5,631
December 31, 2001:
Amortizing intangible assets:
Core deposit		$	3,501		$	1,725
Non-amortizing intangible assets:
Goodwill		2,130
		$	5,631

 

Amortization  expense for the first half of 2002 was $178.

The estimated amortization expense for the next five years will be $355 per year.

 

6

 

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 six month period ended June 30, 2001, as if SFAS no. 142 had been adopted effective January 1, 2001:

 

		Six Months Ended June 30, 2001
Net income, as reported		$	7,941
Adjusted for goodwill amortization, net of tax		117
Net income, as adjusted		$	8,058
Basic earnings per share, as reported		$	1.02
Basic earnings per share, as adjusted		$	1.04
Diluted earnings per share, as reported		$	1.02
Diluted earnings per share, as adjusted		$	1.04

 

NOTE 2 – SECURITIES

 

Securities available for sale are summarized as follows:

 

		Amortized Cost			Gross Unrealized Gains			Gross Unrealized Losses			Fair Value
June 30, 2002:
U.S. Treasuries		$	2,502		$	39		$	—		$	2,541
U.S. Government agencies		238,707			5,311			10			244,008
States and political subdivisions		64,258			2,438			33			66,663
Mortgage backed securities		34,314			340			43			34,611
Other securities		2,986			—			—			2,986
		$	342,767		$	8,128		$	86		$	350,809
December 31, 2001:
U.S. Treasuries		$	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

 

7

 

NOTE 3 – LOANS

 

Major classifications of loans were as follows:

 

		June 30, 2002			December 31, 2001
Commercial and industrial		$	189,875		$	186,435
Real estate - commercial		364,784			310,297
Real estate - construction		111,366			112,206
Real estate - residential		232,400			215,639
Installment		66,385			71,780
		964,810			896,357
Unearned origination fees		(1,182		)	(899		)
Unearned discount		(1		)	(3		)
		$	963,627		$	895,455

 

NOTE 4 – ALLOWANCE FOR LOAN LOSSES

 

Changes in the allowance for loan losses as of June 30, are summarized as follows:

 

		2002			2001
Balance, January 1		$	12,313		$	9,690
Provision for loan losses		1,605			1,270
Loans charged-off		(479		)	(339		)
Recoveries		478			207
Balance, end of period		$	13,917		$	10,828

 

NOTE 5 – NOTES PAYABLE

 

The Company has a $20 million line of credit available with a third party bank under which there was no outstanding balance as of June 30, 2002 and $33.4 million was 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.  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 Company.

 

8

 

NOTE 6 – EARNINGS PER SHARE

 

Earnings per share were as follows (share data not in thousands):

 

		Three Months Ended June 30,						Six Months Ended June 30,
		2002			2001			2002			2001
Basic earnings per share:
Weighted-average common shares outstanding		7,440,139			7,734,587			7,483,030			7,757,372
Net income		$	4,793		$	4,309		$	9,772		$	7,941
Basic earnings per share		$	0.64		$	0.56		$	1.31		$	1.02
Diluted earnings per share:
Weighted-average common shares outstanding		7,440,139			7,734,587			7,483,030			7,757,372
Dilutive effect of stock options		64,309			24,549			60,636			6,600
Diluted average common shares outstanding		7,504,448			7,759,136			7,543,666			7,763,972
Net income		$	4,793		$	4,309		$	9,772		$	7,941
Diluted earnings per share		$	0.64		$	0.56		$	1.30		$	1.02

 

NOTE 7 – COMPREHENSIVE INCOME

 

Comprehensive income was as follows:

 

		Three Months Ended June 30,						Six Months Ended June 30,
		2002			2001			2002			2001
Unrealized holding gains on available for sale securities arising during the period		$	2,833		$	811		$	192		$	4,917
Related tax expense		1,128			323			77			1,957
Net unrealized gain		$	1,705		$	488		$	115		$	2,960
Net income		4,793			4,309			9,772			7,941
Other comprehensive income		$	6,498		$	4,797		$	9,887		$	10,901

 

9

 

OLD SECOND BANCORP, INC. AND SUBSIDIARIES

MANAGEMENTS’ 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.  It currently has nineteen banking locations and four mortgage banking offices located in Kane, Kendall, DeKalb, DuPage, Lake and LaSalle counties in Illinois.

 

RESULTS OF OPERATIONS

 

Net income for the second quarter of 2002 was $4,793,000, or 64 cents diluted earnings per share, compared to $4,309,000 or 56 cents diluted earnings per share in the second quarter of 2001.  This was an 11.23% increase in earnings, or 14.3% on a per shares basis.  Net income for the first half of 2002 was $9,772,000, or $1.30 diluted earnings per share compared to $7,941,000 or $1.02 diluted earnings per share in the first half of 2001. This was a 23.06% increase in earnings, or a 27.23% increase on a per share basis.   The return on equity increased to 15.77% in the first six months of 2002, from 13.64% for the same period of 2001.

 

The increase in net income for the period was primarily a result of an increase in net interest income.  Net interest income was $27.8 million and $23.1 million during the six months ended June 30, 2002 and 2001, an increase of 20.27%.  The Company’s net interest margin was 4.51% for the six months ended June 30, 2002 compared with 4.33% in the fourth quarter of 2001 and 4.25% a year earlier.  The increase in the ratio was primarily the result of a lower cost of funds in the first six months of 2002, when compared with the first six months of 2001, of 30.2%. The decline in the cost of funds began in the first quarter of 2001 and continued through June 2002.

 

The provision for loan losses amounted to $775,000 and $690,000 for the second quarters of 2002 and 2001, respectively.  The provision for loan losses amounted to $1,605,000 and $1,270,000 for the six-month periods ended June 30, 2002 and 2001, respectively.  These provisions reflected a number of factors, including the size of the loan portfolio, the amount of past due accruing loans (90 days or more), the amount of non-accrual loans and management’s overall view on current credit quality.

 

Noninterest income was $5,353,000 during the second quarter of 2002 and $5,306,000 in the second quarter of 2001, an increase of $47,000, or 0.89%.  Noninterest income was $10,936,000 during the first half of 2002 and $10,237,000 in the first half of 2001, an increase of $699,000, or 6.83%.  The increase was due to the increase in service charges and other related fees.

 

Noninterest expense was $11,347,000 during the second quarter of 2002, an increase of $1,350,000 or 13.50%, from $9,997,000 in the second quarter of 2001. Noninterest expense was $22,303,000 during the first half of 2002, an increase of $2,283,000, or 11.40%, from $20,020,000 in the first half of 2001.  Salaries and benefits, which is the largest component of noninterest expenses, increased $1,414,000 due to higher salaries, insurance premiums and retirement benefits.

 

10

 

Goodwill amortization expense for the first half 2001 was $221,000.  After adoption of the new rules on accounting for goodwill, there was no goodwill amortization expense for the first half of 2002.

 

The Company’s provision for Federal and State of Illinois income taxes was $5,064,000 and $4,127,000 during the first halves of 2002 and 2001 respectively. The average effective income tax rate for 2002 and 2001 was 34.1% and 34.2% respectively.

 

FINANCIAL CONDITION

 

Assets

 

Total assets were $1.48 billion at June 30, 2002, an increase of $144.0 million, from $1.33 billion at December 31, 2001.

 

Loans

 

Total loans were $963.6 million as of June 30, 2002, an increase of $68.2 million for the six-month period, from $895.5 million as of December 31, 2001. The largest increases in loan classifications were in real estate loans, which increased $70.5 million, or 11.0 %. These changes reflected the continuing loan demand in the markets in which the Company operates.

 

Nonperforming loans of $4.9 million as of June 30, 2002, were 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.  Nonaccrual loans increased from $2.6 million as of December 31, 2001 to $3.8 million as of June 30, 2002. The increase is primarily related to commercial lending activities. All loans in nonaccrual status are well collateralized and many carry Small Business Administration guarantees. Management does not expect material losses from these loans.

 

The provision for loan losses was $1,605,000 for the first six months of 2002 and $1,270,000 for the first six months of 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 1.44% as of June 30, 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 loss 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 the remainder of 2002.  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.

 

11

 

Securities

 

Securities totaled $350.8 million as of June 30, 2002, an increase of $26.3 million from $324.5 million as of December 31, 2001.  The net unrealized gains, net of deferred taxes, in the portfolio increased from  $4.7 million as of December 31, 2001 to $4.8 million as of June 30, 2002.

 

Deposits and Borrowing

 

Total deposits were $1.28 billion as of June 30, 2002, an increase of $193.4 million from $1.09 billion as of December 31, 2001. Savings deposits, which include money market accounts, increased $119.7 million during the first half from $534.6 million to $654.3 million and time deposits increased $59.1 million from $390.6 million to $449.7 million during the same period.

 

Securities sold under repurchase agreements, which are typically of short-term duration, increased from $32.1 million as of December 31, 2001, to $43.8 million as of June 30, 2002. Other short-term borrowings decreased from $31.6 million to $9.4 million 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 did not retain a balance as of June 30, 2002.

 

Capital

 

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 June 30, 2002. The accompanying table shows the capital ratios of the Company and Old Second National Bank, the Company’s lead subsidiary bank, as of June 30, 2002.

 

12

 

Capital levels and minimum required levels:

 

		Actual					Minimum Required for Capital Adequacy Purposes					Minimum Required to be Well Capitalized
		Amount			Ratio		Amount			Ratio		Amount			Ratio
June 30, 2002
Total capital to risk weighted assets																%
Consolidated		$	130,626		12.34	%	$	84,685		8.00	%	$	105,856		10.00
Old Second National Bank		93,952			12.83		58,583			8.00		73,228			10.00
Tier 1 capital to risk weighted assets
Consolidated		117,385			11.09		42,339			4.00		63,509			6.00
Old Second National Bank		84,801			11.58		29,292			4.00		43,938			6.00
Tier 1 capital to average assets
Consolidated		117,385			8.59		54,661			4.00		68,327			5.00
Old Second National Bank		84,801			8.90		38,113			4.00		47,641			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 National 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 National 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 National Bank		78,352			8.77		35,736			4.00		44,670			5.00

 

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 to 1,200,000.  The purchase of an additional 205,734 shares during 2002, together with 549,515 shares purchased through 2001, totaled 755,249 shares repurchased.

 

Liquidity

 

Liquidity measures the ability of the Company to meet maturing obligations and its existing commitments, to withstand fluctuations in deposit levels, to fund its operations, and to provide for customers’ credit needs. The liquidity of the Company principally depends on cash flows from operating activities, investment in and maturity of assets, changes in balances of deposits and borrowings, and its ability to borrow funds in the money or capital markets.

 

Net cash inflow from operating activities was $28.9 million in the first six months of 2002 compared to the net cash outflow of $2.6 million in the first six months of 2001. The increase in inflows was directly related to the decreased loans held for sale by Old Second Mortgage Company.  Interest received net of interest paid was the principal source of operating cash inflows in both periods reported.  Management of investing and financing activities, and market conditions, determine the level and the stability of net interest cash flows.  Management’s policy is to mitigate the impact of changes in market interest rates to the extent possible, so that balance sheet growth is the principle determinant of growth in net interest cash flows.

 

13

 

Net cash outflows from investing activities were $98.4 million in the six months ended June 30, 2002, compared to $78.4 million a year earlier. In the first six months of 2002, securities transactions aggregated a net outflow of $104.2 million, and net principal disbursed on loans accounted for net outflows of $68.2 million. In the first six months of 2001, securities transactions aggregated a net outflow of $90.9 million, and net principal disbursed on loans accounted for net outflows of $60.7 million.

 

Cash inflows from financing activities included an increase in deposits of $193.3 million in the first six months of 2002 offset by $33.4 million outflows for reduction of the note payable and $22.2 million for reduction of other short-term borrowings.  This compares with a net cash inflow of $122.4 million associated with an increase in deposits of $76.1 million, an increase of fed funds purchased of $31.0 million, and an increase to the notes payable of  $13.7 million in the first six months of 2001.

 

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.

 

14

 

Expected Maturity of Interest-Earning Assets and Interest-Bearing Liabilities

 

		Expected Maturity Dates
		1 Year			2 Years			3 Years			4 Years			5 Years			Thereafter			Total
Interest-earning Assets
Deposit with banks		$	59		$	—		$	—		$	—		$	—		$	—		$	59
Average interest rate		1.68		%	0.00		%	0.00		%	0.00		%	0.00		%	0.00		%	1.68		%
Federal funds sold		$	67,425		$	—		$	—		$	—		$	—		$	—		$	67,425
Average interest rate		1.18		%	0.00		%	0.00		%	0.00		%	0.00		%	0.00		%	1.81		%
Securities		$	62,209		$	52,608		$	40,850		$	16,160		$	53,527		$	125,455		$	350,809
Average interest rate		5.46		%	5.22		%	5.27		%	5.27		%	4.61		%	4.43		%	4.90		%
Fixed rate loans		$	89,997		$	83,018		$	67,924		$	166,301		$	72,702		$	45,522		$	525,464
Average interest rate		6.90		%	7.80		%	7.80		%	7.54		%	7.39		%	7.08		%	7.26		%
Adjustable rate loans		$	162,562		$	24,283		$	19,868		$	54,230		$	23,241		$	170,948		$	455,132
Average interest rate		5.50		%	3.59		%	3.59		%	3.95		%	3.95		%	6.09		%	5.83		%
Total		$	382,252		$	159,909		$	128,642		$	236,691		$	149,470		$	341,925		$	1,398,889
Interest-bearing Liabilities
Interest-bearing deposits		$	631,988		$	174,431		$	41,235		$	13,701		$	19,050		$	223,658		$	1,104,063
Average interest rate		2.49		%	4.10		%	4.23		%	5.15		%	4.34		%	1.09		%	2.60		%
Short-term borrowing		$	53,226		$	—		$	—		$	—		$	—		$	—		$	53,226
Average interest rate		1.54		%	0.00		%	0.00		%	0.00		%	0.00		%	0.00		%	1.54		%
Notes payable		$	—		$	—		$	—		$	—		$	—		$	—		$	—
Average interest rate		0.00		%	0.00		%	0.00		%	0.00		%	0.00		%	0.00		%	0.00		%
Total		$	685,214		$	174,431		$	41,235		$	13,701		$	19,050		$	223,658		$	1,157,289
Period gap		$	(302,962	)	$	(14,522	)	$	87,407		$	222,990		$	130,420		$	118,267		$	241,600
Cumulative gap		(302,962		)	(317,484		)	(230,077		)	(7,087		)	123,333			241,600

 

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.

 

15

 

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 the terrorist attacks that occurred on September 11^th, as well as any future threats and attacks, 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.

 

16

 

•                                         Business combinations and the integration of acquired businesses that 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.

 

17

 

PART II – OTHER INFORMATION

 

Item 1.                    Legal Proceedings

 

There are no material pending legal proceedings to which the Company or its subsidiaries are a party other than ordinary routine litigation incidental to their respective businesses.

 

Item 2.                    Changes in Securities and Use of Proceeds

 

None.

 

Item 3.                    Defaults Upon Senior Securities

 

None.

 

Item 4.                    Submission of Matters to a Vote of Security Holders

 

The Annual Meeting of Stockholders of the Company was held on April 16, 2002. At the meeting, stockholders voted to elect four nominees to the board of directors, to approve the adoption of the Old Second Bancorp, Inc. 2002 Long-Term Incentive Plan and to ratify the appointment of Ernst & Young LLP as the Company’s independent auditors for 2002.  At the meeting, the stockholders elected Marvin Fagel, William Kane, Kenneth Lindgren and Jesse Marberry as directors to serve until their terms expire in 2005.  James E. Benson, D. Chet McKee, Gerald Palmer, James Carl Schmitz will continue as directors with their terms expiring in 2003.  Walter Alexander, Edward Bonifas, William Meyer and William B. Skoglund will also continue as directors with their terms expiring in 2004.  The stockholders also approved the stock incentive plan and ratified the selection of Ernst & Young LLP to serve as the company’s independent auditors.  The matters approved by stockholders at the meeting and the number of votes cast for, against or withheld (as well as the number of abstentions) as to each matter are set forth below:

 

1.                                       The election of directors for a three-year term expiring in 2005.

 

 

18

 

2.                                       The approval of the adoption of the Old Second Bancorp, Inc. 2002 Long-Term Incentive Plan.

 

 

3.                                       The ratification of Ernst & Young, LLP, as the auditors for the year ending December 31, 2002.

 

 

Item 5.                    Other Information

 

None.

 

Item 6.                    Exhibits and Reports on Form 8-K

 

Exhibit 99.1 Certificate of Chief Executive Officer

 

Exhibit 99.2 Certificate of Chief Financial Officer

 

Reports on Form 8-K

 

A report on Form 8-K was filed on May 22, 2002, under Item 5, which reported, in the form of a press release, that the Company’s board of directors had declared a four-for-three stock split of its common stock, affected in the form of a dividend.

 

A report on Form 8-K was filed on June 19,2002, under Item 5, which reported, in the form of a press release, that the Company’s board of directors had declared a cash dividend of 20 cents per share.

 

A report on Form 8-K was filed on July 12, 2002, under Item 5, which reported the Company’s second quarter financial information in the form of a press release.

 

19

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

		OLD SECOND BANCORP, INC.
		(Registrant)
		/s/ William B. Skoglund
		William B. Skoglund
		President and Chief Executive Officer
		/s/ J. Douglas Cheatham
		J. Douglas Cheatham
		Senior Vice President and Chief Financial Officer
Date:	August 9, 2002

 

20