SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

 

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		(I.R.S. Employer Identification Number)
of incorporation or organization)

 

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 May 1, 2005, the Registrant had outstanding 16,568,339 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)
		March 31,			December 31,
		2005			2004
Assets
Cash and due from banks		$	47,171		$	58,600
Interest bearing balances with banks		56			62
Cash and cash equivalents		47,227			58,662
Securities available for sale		479,290			452,942
Loans held for sale		11,930			16,597
Loans		1,590,038			1,509,076
Allowance for loan losses		15,414			15,495
Net loans		1,574,624			1,493,581
Premises and equipment, net		37,651			36,208
Goodwill, net		2,130			2,130
Core deposit intangible assets, net		622			711
Bank owned life insurance		20,889			20,670
Accrued interest and other assets		27,232			22,160
Total assets		$	2,201,595		$	2,103,661
Liabilities
Deposits:
Demand		$	243,760		$	250,328
Savings		791,671			763,637
Time		801,148			784,884
Total deposits		1,836,579			1,798,849
Securities sold under repurchase agreements		37,857			45,242
Other short-term borrowings		136,611			75,786
Junior subordinated debentures		31,625			31,625
Notes payable		2,700			2,700
Accrued interest and other liabilities		18,435			14,471
Total liabilities		2,063,807			1,968,673
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 16,568,339 in 2005 and 16,484,442 in 2004; outstanding 13,496,111 in 2005 and 13,412,214 in 2004		16,568			16,497
Additional paid-in capital		13,698			12,480
Retained earnings		160,595			156,025
Accumulated other comprehensive income (loss)		(2,735		)	324
Treasury stock, at cost, 3,072,228 shares in 2005 and 2004		(50,338		)	(50,338		)
Total stockholders’ equity		137,788			134,988
Total liabilities and stockholders’ equity		$	2,201,595		$	2,103,661

 

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
		March 31,
		2005			2004
Interest income
Loans, including fees		$	23,014		$	19,596
Loans held for sale		173			114
Securities:
Taxable		2,750			2,825
Tax-exempt		1,124			718
Federal funds sold		—			1
Total interest income		27,061			23,254
Interest expense
Savings deposits		2,279			1,314
Time deposits		5,690			4,011
Repurchase agreements		211			94
Other short-term borrowings		609			371
Junior subordinated debentures		617			617
Notes payable		23			5
Total interest expense		9,429			6,412
Net interest income		17,632			16,842
Provision for loan losses		(37		)	—
Net interest income after provision for loan losses		17,669			16,842
Noninterest income
Trust income		1,649			1,373
Service charges on deposits		1,800			1,708
Secondary mortgage fees		184			197
Gain on sale of loans		1,394			1,227
Securities gains (losses), net		(4		)	640
Bank owned life insurance		219			—
Other income		1,230			1,066
Total noninterest income		6,472			6,211
Noninterest expense
Salaries and employee benefits		9,120			8,426
Occupancy expense, net		611			946
Furniture and equipment expense		1,266			1,019
Amortization of core deposit intangible assets		89			89
Other expense		3,913			3,289
Total noninterest expense		14,999			13,769
Income before income taxes		9,142			9,284
Provision for income taxes		2,953			3,214
Net income		$	6,189		$	6,070
Share and per share information:
Ending number of shares		13,496,111			13,412,214
Average number of shares		13,452,126			13,400,083
Diluted average number of shares		13,594,802			13,540,116
Basic earnings per share		$	0.46		$	0.45
Diluted earnings per share		$	0.46		$	0.45
Dividends paid per share		$	0.12		$	0.10

 

See accompanying notes to consolidated financial statements.

 

4

 

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

Three Months Ended March 31, 2005 and 2004

(In thousands)

 

		(Unaudited)			(Unaudited)
		2005			2004
Cash flows from operating activities
Net income		$	6,189		$	6,070
Adjustments to reconcile net income to net cash provided (used) by operating activities:
Depreciation		818			741
Change in mortgage servicing rights		8			(8		)
Provision for loan losses		(37		)	—
Origination of loans held for sale		(85,731		)	(99,838		)
Proceeds from sale of loans held for sale		90,629			95,882
Gain on sale of loans held for sale		(755		)	(1,178		)
Change in current income taxes payable		2,704			7,745
Purchase of bank owned life insurance		—			(20,000		)
Change in accrued interest receivable and other assets		(5,457		)	5,565
Change in accrued interest payable and other liabilities		3,956			(5,845		)
Premium amortization and discount accretion on securities		1,046			827
Securities gains (losses), net		4			(640		)
Amortization of core deposit intangible assets		89			89
Tax benefit from stock options exercised		398			150
Net cash provided (used) by operating activities		13,861			(10,440		)
Cash flows from investing activities
Proceeds from maturity of securities available for sale		24,750			40,390
Purchases of securities available for sale		(57,229		)	(18,333		)
Net change in loans		(81,006		)	(71,930		)
Net purchases of premises and equipment		(2,261		)	(907		)
Net cash used by investing activities		(115,746		)	(50,780		)
Cash flows from financing activities
Net change in deposits		37,730			48,027
Net change in repurchase agreements		(7,385		)	(12,687		)
Net change in other borrowings		60,825			16,989
Proceeds from exercise of stock options		891			238
Dividends paid		(1,611		)	(1,339		)
Net cash provided by financing activities		90,450			51,228
Net change in cash and cash equivalents		(11,435		)	(9,992		)
Cash and cash equivalents at beginning of period		58,662			55,168
Cash and cash equivalents at end of period		$	47,227		$	45,176
Supplemental cash flow information
Income taxes paid		$	—		$	—
Interest paid		9,136			6,314

 

See accompanying notes to 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 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 period presented.  Results for the period ended March 31, 2005 are not necessarily indicative of the results that may be expected for the year ending December 31, 2005.  These interim financial statements should be read in conjunction with the audited financial statements and notes included in Old Second Bancorp, Inc.’s (the Company) 2004 Form 10-K.  Unless otherwise indicated, amounts in the tables contained in the notes are in thousands. Certain items in prior periods have been reclassified to conform to the current presentation.

 

The Company’s consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States and follow general practices within the banking industry. Application of these principles requires management to make estimates, assumptions, and judgments that affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions, and judgments are based on information available as of the date of the financial statements. Future changes in information may affect these estimates, assumptions, and judgments, which, in turn, may affect amounts reported in the financial statements.

 

All significant accounting policies are presented in Note A to the consolidated financial statements for the year ended December 31, 2004. These policies, along with the disclosures presented in the other financial statement notes and in this discussion, provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined.

 

On December 16, 2004, the Financial Accounting Standards Board (FASB) issued FASB Statement No. 123 (revised 2004), Share-Based Payment, which is a revision of FASB Statement No. 123, “Accounting for Stock- Based Compensation.”  Statement 123 (R) supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and amends FASB Statement No. 95, “Statement of Cash Flows.”  Generally, the approach in Statement 123 (R) is similar to the approach described in Statement 123.  However, Statement 123 (R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values.  Pro forma disclosure is no longer an alternative.  On April 14, 2005, the SEC announced it would provide for a phased-in implementation for the adoption of Statement 123 (R).  Based on this guidance the Company is now required to adopt Statement 123 (R) on January 1, 2006.

 

6

 

As permitted by Statement 123, the Company accounts for share-based payments to employees using APB No. Opinion 25’s intrinsic value method and, as such, generally recognizes no compensation cost for employee stock options.  Accordingly, the adoption of Statement 123 (R)’s fair value method will have a significant impact on results of operations, although it will have no impact on the overall financial position.  The impact of adoption of Statement 123 (R) cannot be predicted at this time because it will depend on levels of share-based payments granted in the future.  However, had the Company adopted Statement 123 (R) in prior periods, the impact of that standard would have approximated the impact of statement 123 as described in the disclosure of pro forma net income and earnings per share in Note A to the consolidated financial statements.

 

7

 

Note 2 – Securities

 

Securities available for sale are summarized as follows:

 

					Gross			Gross
		Amortized			Unrealized			Unrealized			Fair
		Cost			Gains			Losses			Value
March 31, 2005:
U.S. Treasuries		$	998		$	—		$	11		$	987
U.S. Government agencies		332,479			384			4,036			328,827
States and political subdivisions		143,090			1,168			2,047			142,211
Mortgage backed and equity securities		7,265			1			1			7,265
		$	483,832		$	1,553		$	6,095		$	479,290
December 31, 2004:
U.S. Treasuries		$	998		$	—		$	6		$	992
U.S. Government agencies		313,768			850			1,449			313,169
States and political subdivisions		130,448			1,845			703			131,590
Mortgage backed and equity securities		7,190			1			—			7,191
		$	452,404		$	2,696		$	2,158		$	452,942

 

Note 3 – Loans

 

Major classifications of loans were as follows:

 

		March 31,			December 31,
		2005			2004
Commercial and industrial		$	178,100		$	171,058
Real estate - commercial		548,297			514,782
Real estate - construction		295,828			269,537
Real estate - residential		526,142			514,020
Installment		44,184			42,155
		1,592,551			1,511,552
Unearned origination fees		(2,513		)	(2,476		)
		$	1,590,038		$	1,509,076

 

Note 4 – Allowance for Loan Losses

 

Changes in the allowance for loan losses as of March 31, are summarized as follows:

 

		2005			2004
Balance, January 1		$	15,495		$	18,301
Provision for loan losses		(37		)	—
Loans charged-off		(353		)	(75		)
Recoveries		309			85
Balance, end of period		$	15,414		$	18,311

 

8

 

Note 5 – Deposits

 

Major classifications of deposits were as follows:

 

		March 31,			December 31,
		2005			2004
Noninterest bearing		$	243,760		$	250,328
Savings		128,276			123,981
NOW accounts		232,344			234,757
Money market accounts		431,051			404,899
Certificates of deposit of less than $100,000		523,341			510,231
Certificates of deposit of $100,000 or more		277,807			274,653
		$	1,836,579		$	1,798,849

 

Note 6 – Borrowings

 

The following table is a summary of borrowings as of March 31, 2005 and December 31, 2004:

 

		2005			2004
Securities sold under agreement to repurchase		$	37,857		$	45,242
Federal funds purchased		136,000			49,000
FHLB advances		—			25,000
Treasury tax and loans		847			1,969
Junior subordinated debentures		31,625			31,625
Note payable and other		2,464			2,517
		$	208,793		$	155,353

 

The Company enters into sales of securities under agreements to repurchase (repurchase agreements).  These repurchase agreements are treated as financings.  The dollar amounts of securities underlying the agreements remain in the asset accounts.  Securities sold under agreements to repurchase consisted of U.S. government agencies at March 31, 2005 and December 31, 2004, and are held in third party pledge accounts.

 

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 were collateralized by FHLB stock of $1.1 million at December 31, 2004.  The maturity date of the outstanding FHLB advances was March 1, 2005, and they were repaid on that date.

 

At March 31, 2005 and December 31, 2004, respectively, the period to date average balance of short-term borrowings totaled $124.9 million at a weighted average rate of 2.7% and $123.7 million at a weighted average rate of 1.4%.   The increase in short-term borrowings was primarily the result of asset growth during 2005 that exceeded deposit growth. During 2005, loans and securities grew $107.4 million while deposits grew $37.7 million.

 

9

 

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.  Securities with a face value greater than or equal to the amount borrowed are pledged as a condition of borrowing TT&L deposits. As of March 31, 2005 and December 31, 2004, the TT&L deposits were $847,000 and $2.0 million, respectively.

 

The Company had a $20 million line of credit available with Marshall & Ilsley under which there was a $2.7 million outstanding balance as of December 31, 2004 and March 31, 2005.  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, including funding loans held for sale at the Old Second Mortgage Company subsidiary.

 

Note 7– Junior Subordinated Debentures

 

The Company completed the sale of $27.5 million of cumulative trust preferred securities by its unconsolidated subsidiary, Old Second Capital Trust I in June 2003.  An additional $4.1 million of cumulative trust preferred securities was sold in the first week of July 2003.  The costs associated with the tender offer of the cumulative trust preferred securities are being amortized over 30 years.  Cash distributions on the securities 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”) authorizes the issuance of up to 1,333,000 shares of the Company’s common stock, including the granting of qualified stock options (“Incentive Stock Options”), nonqualified stock options, restricted stock and stock appreciation rights. Stock based awards may be granted to selected directors and officers or employees at the discretion of the board of directors. The Incentive Plan requires the exercise price of any incentive stock option issued to an employee to be at least equal to the fair market value of Company common stock on the date the option is granted. All stock options are granted for a maximum term of ten years, with vesting occurring over the first three years.

 

Nonqualified stock options may be granted to directors. These and other awards under the Incentive Plan may be granted subject to a vesting requirement and would become fully vested upon a merger or change in control of the Company. Since December 31, 1998, there have been no nonqualified stock options, stock appreciation rights, or restricted stock issued under the Incentive Plan.

 

10

 

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

 

		Quarter- ended
		March 31,						March 31,
		2005						2004
				Weighted						Weighted
				Average						Average
				Exercise						Exercise
		Shares		Price				Shares		Price
Beginning outstanding		656,933		$	19.254			570,266		$	15.191
Granted		—		—				—		—
Exercised		(71,764	)	12.542				(24,134	)	9.647
Expired		—		—				—		—
Ending outstanding		585,169		$	20.077			546,132		$	15.435
Weighted average fair value of options granted during the period				$		—				$		—

 

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 2005.

 

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.

 

		March 31,
		2005			2004
Net income as reported		$	6,189		$	6,070
Pro forma net income		6,056			5,975
Basic earnings per share as reported		0.46			0.45
Pro forma basic earnings per share		0.45			0.45
Diluted earnings per share as reported		0.46			0.45
Pro forma diluted earnings per share		0.45			0.44

 

11

 

Note 9 – Earnings Per Share

 

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

 

		Three Months Ended
		March 31,
		2005		2004
Basic earnings per share:
Weighted-average common shares outstanding		13,452,126		13,400,083
Net income available to common stockholders		$6,189		$6,070
Basic earnings per share		$0.46		$0.45
Diluted earnings per share:
Weighted-average common shares outstanding		13,452,126		13,400,083
Dilutive effect of stock options		142,676		140,033
Diluted average common shares outstanding		13,594,802		13,540,116
Net income available to common stockholders		$6,189		$6,070
Diluted earnings per share		$0.46		$0.45
Number of antidilutive options excluded from the diluted earnings per share calculation		137,000

 

Note 10 – Comprehensive Income

 

Comprehensive income is included below:

 

		Three Months Ended
		March 31,
		2005			2004
Change in net holding gains on available for sale securities arising during the period		$	(5,081	)	$	2,212
Related tax expense		2,022			(880		)
Net unrealized gains / (losses)		(3,059		)	1,332
Less: Reclassification adjustment for the net gains (losses) realized during the period
Realized gains		—			640
Realized losses		(4		)	—
Net realized gains (losses)		(4		)	640
Income tax (benefit) expense on net realized gains		(2		)	255
Net realized gains (losses) after tax		(2		)	385
Total other comprehensive income (loss)		$	(3,057	)	$	947

 

12

 

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.

 

		Three Months Ended
		March 31,
		Pension Benefits						Other Benefits
		2005			2004			2005			2004
Service cost		$	425,619		$	354,863		$	18,697		$	19,111
Interest cost		232,771			217,690			22,889			22,414
Expected return on plan assets		(217,481		)	(190,509		)	—			—
Amortization of transition obligation / (asset)		—			—			—			—
Amortization of prior service cost		(936		)	1,360			4,254			4,254
Recognized net actuarial (gain) / loss		71,223			55,725			15,270			19,038
Net periodic benefit cost		$	511,196		$	439,129		$	61,110		$	64,817

 

		2005		2004
Key assumptions:
Discount rate		5.50	%	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 $400,000 and $419,000 in the first quarters of 2005 and 2004, respectively.

 

13

 

Item 2.   Managements’ Discussion and Analysis of Financial Condition and Results for Operations

 

Overview

 

Old Second Bancorp, Inc. (the Company) is a financial services company with its main headquarters located in Aurora, Illinois.  The Company has offices located in Kane, Kendall, DeKalb, DuPage, LaSalle, and Will counties in Illinois.  The Company provides financial services through its three subsidiary banks at its twenty-seven banking locations.  Old Second Mortgage, which also conducts business as “Maple Park 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.

 

Results of Operations

 

Net income for the first quarter of 2005 was $6.19 million, or $ 0.46 diluted earnings per share, compared with $6.07 million, or $0.45 diluted earnings per share in the first quarter of 2004.  Continued loan growth and an increase in noninterest income contributed to the increase in earnings for the quarter.  The return on equity decreased from 20.22% in the first three months of 2004, to 18.20% for the same period of 2005.

 

Net Interest Income

 

The increase in net income for the three-month period was primarily the result of an increase in net interest income.  Net interest income was $17.6 million and $16.8 million during the three months ended March 31, 2005 and 2004, respectively, an increase of 4.69%.

 

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 table below for supplemental data and the corresponding reconciliation to GAAP financial measures for the three months ended March 31, 2005 and 2004.

 

14

 

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.

 

ANALYSIS OF AVERAGE BALANCES,

TAX EQUIVALENT INTEREST AND RATES

For periods ended March 31, 2005 and 2004

 

		2005								2004
		Average								Average
		Balance			Interest			Rate		Balance			Interest			Rate
Assets
Interest bearing deposits		$	890		$	—		0.14	%	$	112		$	—		1.21	%
Federal funds sold		—			—			0.00		528			1			0.86
Securities:
Taxable		329,272			2,750			3.39		328,810			2,825			3.46
Non-taxable (tax equivalent)		129,053			1,729			5.43		80,959			1,159			5.76
Total securities		458,325			4,479			3.96		409,769			3,984			3.91
Loans and loans held for sale		1,560,042			23,234			6.04		1,368,188			19,710			5.79
Total interest earning assets		2,019,257			27,713			5.57		1,778,597			23,695			5.36
Cash and due from banks		54,077			—			—		47,916			—			—
Allowance for loan losses		(15,471		)	—			—		(18,445		)	—			—
Other noninterest-bearing assets		84,591			—			—		52,425			—			—
Total assets		$	2,142,454							$	1,860,493
Liabilities and stockholder’s equity
Interest bearing transaction accounts		$	662,322		2,167			1.33		$	616,320		1,241			0.81
Savings accounts		124,718			112			0.36		119,782			73			0.25
Time deposits		799,521			5,690			2.89		598,632			4,011			2.69
Interest bearing deposits		1,586,561			7,969			2.04		1,334,734			5,325			1.60
Repurchase agreements		39,639			211			2.16		40,763			94			0.93
Federal funds purchased and other borrowed funds		85,250			609			2.90		113,629			371			1.31
Trust preferred debentures		31,625			617			7.91		30,223			617			8.21
Notes payable		2,700			23			3.45		981			5			2.22
Total interest bearing liabilities		1,745,775			9,429			2.19		1,520,330			6,412			1.70
Noninterest bearing deposits		244,364			—			—		208,808			—			—
Accrued interest and other liabilities		14,417			—			—		10,632			—			—
Stockholders’ equity		137,898			—			—		120,723			—			—
Total liabilities and stockholder’s equity		$	2,142,454							$	1,860,493
Net interest income (tax equivalent)					$	18,284							$	17,283
Net interest income (tax equivalent) to total earning assets								3.67	%							3.91	%
Interest bearing liabilities to earning assets		86.46		%						85.48		%

 

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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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
		March 31,
		2005			2004
(A) Interest income (GAAP)		$	27,061		$	23,254
Taxable-equivalent adjustment - Loans		47			54
Taxable-equivalent adjustment - Investments		605			387
Interest income - FTE		$	27,713		$	23,695
(B) Interest expense (GAAP)		9,429			6,412
Net interest income - FTE		$	18,284		$	17,283
(C) Net interest income - (GAAP) (A minus B)		$	17,632		$	16,842
Net interest margin (GAAP)		3.54		%	3.81		%
Net interest margin - FTE		3.67		%	3.91		%

 

Provision for Loan Losses

 

The Company recorded a negative provision for loan losses of $37,000 in the first quarter of 2005.  The Company did not make a provision for loan losses during the first nine months of 2004, and recorded a negative provision of $2.9 million in the fourth quarter of 2004. The determination by management to reduce the allowance for loan losses was based on a comprehensive analysis that considers a number of factors, including the quality of the loan portfolio and favorable loan loss experience. Provisions for loan losses are made to provide for probable and estimable losses inherent in the loan portfolio.  The provision reflects 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.  Net charge-offs in the first quarter of 2005 were $44,000 compared with net recoveries of $10,000 in the first quarter of 2004.  Total loan charge-offs were $353,000 during the first three months of 2005, compared with $75,000 during the first three months of 2004, while recoveries for the same periods were $309,000 and $85,000, respectively.

 

The allowance for loan losses represents management’s estimate of probable credit losses inherent in the loan portfolio. Determining the amount of the allowance for loan losses requires significant judgment and the use of estimates related to the amount and timing of expected future cash flows on impaired loans, estimated losses on pools of homogeneous loans based on historical loss experience, and consideration of current economic trends and conditions, all of which may be susceptible to significant change. The loan portfolio also represents the largest asset type on the consolidated statement of condition.

 

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 0.97% as of March 31, 2005, compared to 1.03% as of December 31, 2004 and 1.32% as of March 31, 2004.  In

 

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