Washington, D.C. 20549

 

FORM 10-Q

 

ý		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the quarterly period ended September 30, 2004
		OR
o		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)

 

Delaware		36-3143493
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)
37 South River Street, Aurora, Illinois    60507
(Address of principal executive offices) (Zip Code)
(630) 892-0202
(Registrant’s telephone number, including area code)

 

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 by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).  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 October 15, 2004, the Registrant had outstanding 13,417,680 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
Item 3.		Quantitative and Qualitative Disclosures about Market Risk
Item 4.		Controls and Procedures
		PART II
Item 1.		Legal Proceedings
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds
Item 3.		Defaults Upon Senior Securities
Item 4.		Submission of Matters to a Vote of Security Holders
Item 5.		Other Information
Item 6.		Exhibits
		Signatures

 

2

 

PART I - FINANCIAL INFORMATION

 

Item 1.  Financial Statements

 

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Balance Sheets

(In thousands, except share data)

 

		(Unaudited) September 2004				December 31, 2003
Assets
Cash and due from banks		$		58,609		$	54,999
Interest bearing balances with banks		62				169
Federal funds sold		45,000				—
Cash and cash equivalents		103,671				55,168
Securities available for sale		437,685				411,035
Loans held for sale		18,463				14,756
Loans		1,454,344				1,319,538
Allowance for loan losses		18,170				18,301
Net loans		1,436,174				1,301,237
Premises and equipment, net		33,645				33,033
Other real estate owned		—				663
Goodwill, net		2,130				2,130
Core deposit intangible assets, net		799				1,066
Accrued interest and other assets		42,092				19,756
Total assets		$	2,074,659			$			1,838,844
Liabilities
Deposits:
Demand		$	242,578			$		214,439
Savings		847,491				737,838
Time		759,361				572,357
Total deposits		1,849,430				1,524,634
Securities sold under repurchase agreements		36,066				47,848
Other short-term borrowings		1,269				106,046
Junior subordinated debentures		30,216				30,216
Notes payable		2,700				500
Accrued interest and other liabilities		25,588				12,606
Total liabilities		1,945,269				1,721,850
Stockholders’ Equity
Preferred stock, no par value; authorized 300,000 shares; none issued		—				—
Common stock, $1.00 par value; authorized 20,000,000 shares; issued 16,489,908 in 2004 and 16,442,508 in 2003; outstanding 13,417,680 in 2004 and 13,370,280 in 2003		16,490				16,460
Additional paid-in capital		12,373				11,940
Retained earnings		149,228				135,927
Accumulated other comprehensive income		1,637				3,005
Treasury stock, at cost, 3,072,228 shares in 2004 and 2003		(50,338			)	(50,338				)
Total stockholders’ equity		129,390				116,994
Total liabilities and stockholders’ equity		$	2,074,659			$		1,838,844

 

See accompanying notes to unaudited consolidated financial statements.

 

3

 

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Income

(In thousands, except share data)

 

		(Unaudited) Three Months Ended September 30,						(Unaudited) Nine Months Ended September 30,
		2004			2003			2004			2003
Interest income
Loans, including fees		$	20,919		$	18,286		$	60,543		$	53,164
Loans held for sale		178			852			541			2,004
Securities:
Taxable		2,590			2,431			7,970			8,066
Tax-exempt		823			604			2,304			1,802
Federal funds sold		42			20			49			90
Interest bearing deposits		2			1			3			1
Total interest income		24,554			22,194			71,410			65,127
Interest expense
Savings deposits		1,748			1,421			4,389			4,815
Time deposits		4,882			4,107			13,170			12,885
Repurchase agreements		102			93			275			417
Other short-term borrowings		135			183			885			361
Notes payable		15			11			23			11
Junior subordinated debentures		617			617			1,869			617
Total interest expense		7,499			6,432			20,611			19,106
Net interest income		17,055			15,762			50,799			46,021
Provision for loan losses		—			828			—			2,546
Net interest income after provision for loan losses		17,055			14,934			50,799			43,475
Noninterest income
Trust income		1,458			1,403			4,322			4,048
Service charges on deposits		2,058			1,852			5,590			5,090
Secondary mortgage fees		181			570			649			1,492
Gain on sale of loans		1,286			2,967			4,183			9,456
Securities gains, net		88			96			477			135
Other income		1,605			1,137			4,093			3,142
Total noninterest income		6,676			8,025			19,314			23,363
Noninterest expense
Salaries and employee benefits		8,602			8,896			25,313			26,100
Occupancy expense, net		974			853			2,812			2,518
Furniture and equipment expense		1,077			726			3,331			3,002
Amortization of core deposit intangible assets		88			88			266			266
Litigation settlement		—			—			1,750			—
Other expense		3,606			3,563			9,890			9,250
Total noninterest expense		14,347			14,126			43,362			41,136
Income before income taxes		9,384			8,833			26,751			25,702
Provision for income taxes		3,096			3,061			8,872			9,084
Net income		$	6,288		$	5,772		$	17,879		$	16,618
Per share information:
Ending number of shares		13,417,680			13,370,280			13,417,680			13,370,280
Average number of shares		13,417,680			13,382,592			13,410,340			14,340,176
Diluted average number of shares		13,555,748			13,515,602			13,541,069			14,466,236
Basic earnings per share		$	0.47		$	0.43		$	1.33		$	1.16
Diluted earnings per share		$	0.46		$	0.43		$	1.32		$	1.15
Dividends paid per share		$	0.12		$	0.10		$	0.34		$	0.30

 

See accompanying notes to unaudited consolidated financial statements.

 

4

 

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

Nine Months Ended September 30, 2004 and 2003

(In thousands)

 

		(Unaudited) 2004			(Unaudited) 2003
Cash flows from operating activities
Net income		$	17,879		$	16,618
Adjustments to reconcile net income to net cash provided (used) by operating activities:
Depreciation		2,248			2,077
Changes in mortgage servicing rights,net		(24		)	44
Provision for loan losses		—			2,546
Net change in mortgage loans held for sale		(3,707		)	25,005
Change in income taxes payable		(373		)	279
Change in accrued interest receivable and other assets		(22,312		)	263
Change in accrued interest payable and other liabilities		13,987			(1,334		)
Premium amortization and discount accretion on securities		2,669			3,407
Securities gains, net		(477		)	(135		)
Amortization of core deposit intangible assets		267			266
Tax benefit from stock options exercised		159			235
Net cash provided by operating activities		10,316			49,271
Cash flows from investing activities
Proceeds from sales and maturities of securities available for sale		115,088			196,510
Purchases of securities available for sale		(146,203		)	(176,292		)
Net change in loans		(134,937		)	(196,576		)
Sales of other real estate		663			131
Net purchases of premises and equipment		(2,860		)	(4,675		)
Net cash used by investing activities		(168,249		)	(180,902		)
Cash flows from financing activities
Net change in deposits		324,796			153,419
Net change in repurchase agreements		(11,782		)	(27,161		)
Net change in other borrowings		(104,777		)	(3,855		)
Proceeds from issuance of junior subordinated debentures		—			30,206
Proceeds from notes payable		2,200			—
Proceeds from exercise of stock options		289			615
Dividends paid		(4,290		)	(4,303		)
Purchase of treasury stock		—			(31,442		)
Net cash provided by financing activities		206,436			117,479
Net change in cash and cash equivalents		48,503			(14,152		)
Cash and cash equivalents at beginning of period		55,168			73,064
Cash and cash equivalents at end of period		$	103,671		$	58,912
Supplemental cash flow information
Income taxes paid		$	9,166		$	9,402
Interest paid		17,801			16,836

 

See accompanying notes to unaudited consolidated financial statements.

 

5

 

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

 

Note 1 – Summary of Significant Accounting Policies

 

The accounting policies followed in the preparation of interim consolidated financial statements are consistent with those used in the preparation of annual financial information. The interim consolidated 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 period presented.  Results for the periods ended September 30, 2004 are not necessarily indicative of the results that may be expected for the year ending December 31, 2004.  These interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes included in the Company’s 2003 Form 10-K.  Unless otherwise indicated, amounts in the tables contained in these Notes are in thousands.

 

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 consolidated financial statements and accompanying notes. These estimates, assumptions, and judgments are based on information available as of the date of the consolidated financial statements. Future changes in information may affect these estimates, assumptions, and judgments, which, in turn, may affect amounts, reported in the consolidated financial statements.

 

All significant accounting policies are presented in Note 1 to the consolidated financial statements for the year ended December 31, 2003. 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 consolidated financial statements and how those values are determined.

 

6

 

Note 2 – Securities

 

Securities available for sale are summarized as follows:

 

 

		Amortized Cost					Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
September 30, 2004:
U.S. Treasuries		$			998		$	—			$	1			$			997
U.S. Government agencies		318,295					1,569				626				319,238
States and political subdivisions		108,660					2,089				315				110,434
CMOs and asset backed securities		189					3				—				192
Other securities		6,824					—				—				6,824
		$		434,966			$	3,661			$	942			$		437,685
December 31, 2003:
U.S. Treasuries		$		2,004			$	7			$		—		$		2,011
U.S. Government agencies		317,353					3,726				540				320,539
States and political subdivisions		80,559					2,133				396				82,296
CMOs and asset backed securities		1,479					62				—				1,541
Other securities		4,648					—				—				4,648
		$	406,043				$		5,928		$		936		$	411,035

 

Note 3 – Loans

 

Major classifications of loans were as follows:

 

		September 30, 2004			December 31, 2003
Commercial and industrial		$	174,613		$	192,444
Real estate - commercial		461,621			459,014
Real estate - construction		281,242			218,519
Real estate - residential		496,531			408,789
Installment		43,045			44,449
		1,457,052			1,323,215
Unearned origination fees		(2,708		)	(3,677		)
		$	1,454,344		$	1,319,538

 

7

 

Note 4 – Allowance for Loan Losses

 

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

 

		2004			2003
Balance, January 1		$	18,301		$	15,769
Provision for loan losses		—			2,546
Loans charged-off		(437		)	(1,168		)
Recoveries		306			460
Balance, end of period		$	18,170		$	17,607

 

Note 5 – Deposits

 

Major classifications of deposits were as follows:

 

		September 30, 2004				December 31, 2003
Noninterest bearing		$		242,578		$	214,439
Savings		118,701				116,565
NOW accounts		299,457				234,184
Money market accounts		429,333				387,089
Certificates of deposit of less than $100,000		500,461				390,353
Certificates of deposit of $100,000 or more		258,900				182,004
		$	1,849,430			$		1,524,634

 

Note 6 – Borrowings

 

The Company had a $30.0 million line of credit available with Marshall & Ilsley under which there was an outstanding balance of $2.7 million as of September 30, 2004.  At December 31, 2003 the Company had a $20.0 million line of credit available with Marshall & Ilsley under which there was an outstanding balance of $500,000.  A revolving business note dated April 30, 2004 secures the line of credit and is guaranteed by the Company.   The note provides that any outstanding principal will bear interest, at the Company’s option; at the rate of either 1% over the previous month average Federal Reserve targeted rate (federal funds rate) or 0.90% over the adjusted interbank rate, with a minimum interest rate of 2.20%.  This borrowing is for general corporate purposes.

 

The Company enters into sales of securities under agreements to repurchase (repurchase agreements).  Repurchase agreements may be of varying maturities but are generally under one year.  Underlying securities remain in the Company’s portfolio during the term of the repurchase agreement and are treated as collateral pledged to the customer.  Repurchase agreements generally consisted of U.S. government agencies at September 30, 2004 and December 31, 2003.

 

8

 

The Company borrowings at the FHLB are limited to the lesser of 35% of total assets or 60% of the book value of certain mortgage loans. In addition, these notes are collateralized by FHLB stock of $5.8 million at September 30, 2004 and $3.7 million at December 31, 2003.

 

The Company is a Treasury Tax & Loan (TT&L) depository for the Federal Reserve Bank (FRB), and as such, it accepts TT&L deposits. The Company is allowed to hold these deposits for the FRB until they are called. The interest rate is the federal funds rate less 25 basis points. U.S. Treasury securities with a face value greater than or equal to the amount borrowed are pledged as a condition of holding TT&L deposits. As of September 30, 2004 and December 31, 2003, the TT&L deposits were $1.7 million and $3.1 million, respectively.

 

At September 30, 2004 and December 31, 2003, total short-term borrowings totaled $40.0 million at a weighted average rate of 1.25% and $154.4 million at a weighted average rate of 1.24%, respectively.   The decrease in short-term borrowings was primarily the result of deposit growth during 2004 that exceeded asset growth. During the nine months ended September 30, 2004, loans and securities grew $165.2 million while deposits grew $324.8 million.

 

Note 7–Junior Subordinated Debentures

 

During June 2003, the Company completed its tender offer for shares of its common stock, in which 723,053 shares were repurchased at $42.50 per share.  The total cash payment required to complete the tender offer was approximately $31.6 million, which was funded by the sale of trust preferred debentures.  The Company completed the sale of $27.5 million of cumulative trust preferred debentures by its subsidiary, Old Second Capital Trust I in June 2003.  An additional $4.1 million of cumulative trust preferred debentures was sold in the first week of July 2003.  The costs associated with the tender offer of the cumulative trust preferred debentures are being amortized over 30 years using the straight-line method.  Cash distributions on the debentures are payable quarterly at an annual rate of 7.80% and are included in interest expense in the consolidated financial statements.

 

Note 8– Long-Term Incentive Plan

 

The Long-Term Incentive Plan (the “Incentive Plan”) currently authorizes the issuance of up to 1,332,000 shares of the Company’s common stock, including the granting of qualified 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 during the first three years.

 

Nonqualified stock options may be granted to directors based on a formula. These options, along with 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.

 

9

 

A summary of activity in the Incentive Plan and options outstanding is included below:

 

		Nine Months Ended September 30, 2004					Year Ended December 31, 2003
		Shares		Weighted Average Exercise Price			Shares		Weighted Average Exercise Price
Beginning outstanding		570,267		$	15.191		528,801		$	12.401
Granted		—		—			110,000		25.075
Exercised		(43,667	)	9.653			(68,534	)	9.532
Expired		—		—			—		—
Ending outstanding		526,600		$	15.650		570,267		$	15.191
At period-end:
Options exercisable		309,941					353,596
Range of exercise price				$5.85 - $25.08					$5.85 - $25.08
Weighted average contractual life in years		7.0					7.5
Weighted average fair value of options granted during the year				$	—				$	7.98

 

The Company accounts for stock options in accordance with APB No. 25, as allowed under SFAS No. 123.  No expense for stock options is recorded, as the grant price equals the market price of the stock at grant date.  There were no stock options granted in 2004.

 

The following pro forma information presents net income and earnings per share had the fair value method of SFAS No. 123 been used to measure compensation cost for stock option plans.

 

		Three Months Ended September 30,						Nine Months Ended September 30,
		2004			2003			2004			2003
Net income as reported		$	6,288		$	5,772		$	17,879		$	16,618
Pro forma net income		6,187			5,704			17,576			16,414
Basic earnings per share as reported		0.47			0.43			1.33			1.16
Pro forma basic earnings per share		0.46			0.43			1.31			1.14
Diluted earnings per share as reported		0.46			0.43			1.32			1.15
Pro forma diluted earnings per share		0.46			0.42			1.30			1.13

 

The pro forma effects were computed using option-pricing models with the following assumptions

 

Risk free interest rate		4.00	%	-	4.45	%
Expected option life, in years		10
Expected stock price volatility		24.3	%	-	26.7	%
Dividend yield		2.00	%

 

10

 

Note 9 – Earnings Per Share

 

Earnings per share is included below (share data not in thousands):

 

		Three Months Ended September 30,						Nine Months Ended September 30,
		2004			2003			2004			2003
Basic earnings per share:
Weighted-average common shares outstanding		13,417,680			13,382,592			13,410,340			14,340,176
Net income		$	6,288		$	5,772		$	17,879		$	16,618
Basic earnings per share		$	0.47		$	0.43		$	1.33		$	1.16
Diluted earnings per share:
Weighted-average common shares outstanding		13,417,680			13,382,592			13,410,340			14,340,176
Dilutive effect of stock options		138,068			133,010			130,729			126,060
Diluted average common shares outstanding		13,555,748			13,515,602			13,541,069			14,466,236
Net income		$	6,288		$	5,772		$	17,879		$	16,618
Diluted earnings per share		$	0.46		$	0.43		$	1.32		$	1.15

 

Note 10 – Comprehensive Income

 

Comprehensive income is included below:

 

		Three Months Ended September 30,						Nine Months Ended September 30,
		2004			2003			2004			2003
Change in net holding gains on available for sale securities arising during the period		$	3,699		$	(2,104	)	$	(2,273	)	$	(1,969	)
Related tax expense		(1,472		)	837			905			783
Net unrealized gains / (losses)		2,227			(1,267		)	(1,368		)	(1,186		)
Less: Reclassification adjustment for the net gains realized during the period
Realized net gains (losses)		88			96			477			135
Related tax expense		(31		)	(34		)	(167		)	(47		)
Net realized gains		57			62			310			88
Total other comprehensive income		$	2,284		$	(1,205	)	$	(1,058	)	$	(1,098	)

 

11

 

Note 11 – 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.

 

		Nine Months Ended September 30,
		Pension Benefits						Other Benefits
		2004			2003			2004			2003
Service cost		$	354,864		$	272,417		$	19,792		$	15,849
Interest cost		217,690			184,212			24,553			20,795
Expected return on plan assets		(190,509		)	(166,820		)	—			—
Amortization of transition obligation / (asset)		—			(21,489		)	—			—
Amortization of prior service cost		1,360			1,360			4,253			4,253
Recognized net actuarial (gain) / loss		55,724			26,480			14,254			7,552
Net periodic benefit cost		$	439,129		$	296,160		$	62,852		$	48,449

 

		2004		2003
Key assumptions:
Discount rate		5.80	%	5.80	%
Long-term rate of return on assets		7.50	%	7.50	%
Salary increases		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 $1,174,000 and $1,203,000 for the nine-months ended September 30, 2004 and 2003, respectively.

 

12

 

Item 2.   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.  The Company has offices located in Kane, Kendall, DeKalb, DuPage and LaSalle counties in Illinois.  The Company provides financial services through its three subsidiary banks at its twenty-four banking locations.  Old Second Mortgage provides mortgage-banking services at its four offices.  Old Second Financial, Inc. provides insurance products.  The Old Second National Bank of Aurora, the Company’s lead subsidiary bank, also engages in trust operations.

 

Critical Accounting Policies

 

Certain of the Company’s accounting policies are important to the portrayal of the Company’s financial condition, since they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. Estimates associated with these policies are susceptible to material changes as a result of changes in facts and circumstances.  Some of the facts and circumstances that could affect these judgments include changes in interest rates, in the performance of the economy or in the financial condition of borrowers.  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 Company’s critical accounting policies are discussed in detail in the Annual Report for the year ended December 31, 2003 (incorporated by reference as part of the Company’s 10-K filing) in Note 1 of the Notes to the Consolidated Financial Statements.

 

Results of Operations

 

The Company earned $1.32 diluted earnings per share in the first nine months of 2004, a 14.78% increase over the $1.15 earned in the first nine months of 2003.  Net income was $17.9 million in the first nine months of 2004 compared with $16.6 million in the first nine months of 2003.  This was a 7.59% increase in earnings.  The Company earned $.46 diluted earnings per share in the third quarter of 2004, a 6.98% increase over the $.43 in the third quarter of 2003.  Net income was $6.3 million in the third quarter of 2004, compared with $5.8 million in the third quarter of 2003.  Year to date earnings were impacted in the second quarter 2004 by a $1.17 million reserve, net of tax, for the settlement of a damage award.

 

Return on equity increased to 19.29% in the first nine months of 2004, from 17.27% for the same period of 2003.  Return on equity decreased to 19.69% in the third quarter of 2004, from 20.67% for the same period of 2003.  The repurchase of common stock pursuant to a tender offer in June 2003, funded through the issuance of trust preferred securities, enhanced the return on equity for 2003.  Earnings for the first nine months of 2004 were enhanced by strong asset growth, the gain on sale of securities, the reduction of the loan loss provision and a decrease in the tax provision.

 

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Net Interest Income

 

Net-interest income increased from $46.0 million in the first nine months of 2003 to $50.8 million in the first nine months of 2004, a 10.38% increase. The increase was primarily the result of an increase in interest income on loans of $7.4 million, offset by the increase in interest expense related to the interest paid on the trust preferred debentures of $1.3 million.

 

Net interest income is the largest component of net income.  Net interest income is the difference between interest income, principally from loans and securities available for sale, and interest expense, principally on customer deposits and borrowings.  Changes in the net interest income are the result of changes in volume, net interest spread, and net interest margin.  Volume refers to the average dollar levels of interest-earning assets and interest-bearing liabilities.  Net interest spread refers to the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities.  Net interest margin refers to net interest income divided by average interest-earning assets and is influenced by the level and relative mix of interest-earning assets and interest-bearing liabilities.

 

Management, in order to evaluate and measure performance, uses certain non-GAAP performance measures and ratios. These include taxable-equivalent net interest income (including its individual components) and net interest margin (including its individual components). Management believes that these measures and ratios provide users of the financial information with a more accurate view of the performance of the interest-earning assets and interest-bearing liabilities and of the Company’s operating efficiency for comparison purposes. Other financial holding companies may define or calculate these measures and ratios differently. See the following two tables for supplemental data and the corresponding reconciliation to GAAP financial measures for the three and nine months ended September 30, 2004 and 2003.

 

Yields on certain asset categories and the net interest margin of the Company and its banking subsidiaries are reviewed on a fully taxable-equivalent basis (“FTE”). In this non-GAAP presentation, net interest income is adjusted to reflect tax-exempt interest income on an equivalent before-tax basis. This measure ensures comparability of net interest income arising from both taxable and tax-exempt sources.

 

		Three Months Ended September 30,						Nine Months Ended September 30,
		2004			2003			2004			2003
(A) Interest income (GAAP)		$	24,554		$	22,194		$	71,410		$	65,127
Taxable-equivalent adjustment - Loans		51			48			157			144
Taxable-equivalent adjustment - Investments		443			325			1,241			971
Interest income - FTE		25,048			22,567			72,807			66,242
(B) Interest expense (GAAP)		7,499			6,432			20,611			19,106
Net interest income - FTE		$	17,549		$	16,135		$	52,196		$	47,136
(C) Net interest income - (GAAP) (A minus B)		$	17,055		$	15,762		$	50,799		$	46,021
Net interest margin (GAAP)		3.61		%	3.76		%	3.71		%	3.87		%
Net interest margin - FTE		3.72		%	3.84		%	3.81		%	3.97		%

 

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The following table sets forth certain information relating to the Company’s average consolidated balance sheets and reflects the yield on average earning assets and cost of average liabilities for the periods indicated. The rates are determined by dividing the related interest by the average balance of assets or liabilities. Average balances are derived from daily balances.

 

TAX EQUIVALENT INTEREST AND RATES

For the nine-month periods ended September 30, 2004 and 2003

 

		2004										2003
		Average Balance				Interest				Rate		Average Balance				Interest				Rate
Assets
Interest bearing deposits		$	389			$	3			1.07	%	$		711		$	1			0.19	%
Federal funds sold		4,623				49				1.41		10,890				90				1.10
Securities:
Taxable		317,497				7,970				3.35		310,347				8,066				3.47
Non-taxable (tax equivalent)		92,445				3,545				5.11		62,668				2,773				5.92
Total securities		409,942				11,515				3.75		373,015				10,839				3.89
Loans and loans held for sale		1,414,401				61,240				5.78		1,204,461				55,312				6.14
Total interest earning assets		1,829,355				72,807				5.32		1,589,077				66,242				5.57
Cash and due from banks		51,583				—				—		45,300				—				—
Allowance for loan losses		(18,326			)	—				—		(16,696			)	—				—
Other noninterest-bearing assets		68,258				—				—		52,672				—				—
Total assets		$	1,930,870									$	1,670,353
Liabilities and stockholders’ equity
Interest bearing transaction accounts		$		628,426		4,165				0.89		594,580				4,460				1.00
Savings accounts		122,405				224				0.24		115,873				355				0.41
Time deposits		666,175				13,170				2.64		530,080				12,885				3.25
Interest bearing deposits		1,417,006				17,559				1.66		1,240,533				17,700				1.91
Repurchase agreements		36,179				275				1.02		49,572				417				1.12
Federal funds purchased and other borrowed funds		88,688				885				1.33		33,852				361				1.43
Trust preferred debentures		30,235				1,869				8.26		10,257				617				8.04
Notes payable		1,281				23				2.35		674				11				2.18
Total interest bearing liabilities		1,573,389				20,611				1.75		1,334,888				19,106				1.91
Noninterest bearing deposits		221,388				—				—		194,511				—				—
Accrued interest and other liabilities		12,255				—				—		12,302				—				—
Stockholders’ equity		123,838				—				—		128,652				—				—
Total liabilities and stockholders’ equity		$		1,930,870								$	1,670,353
Net interest income (tax equivalent)						$		52,196								$		47,136
Net interest income (tax equivalent) to total earning assets										3.81	%									3.97	%
Interest bearing liabilities to earnings assets		86.01			%							84.00			%

 

Notes:  Nonaccrual loans are included in the above stated average balances.

Tax equivalent basis is calculated using a marginal tax rate of 35%.

 

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