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| OSBC > SEC Filings for OSBC > Form 10-Q on 14-Aug-2012 | All Recent SEC Filings |
14-Aug-2012
Quarterly Report
Overview
Old Second Bancorp, Inc. (the "Company") is a financial services company with its main headquarters located in Aurora, Illinois. The Company is the holding company of Old Second National Bank (the "Bank"), a national banking organization headquartered in Aurora, Illinois and provides commercial and retail banking services, as well as a full complement of trust and wealth management services. The Company has offices located in Cook, Kane, Kendall, DeKalb, DuPage, LaSalle and Will counties in Illinois. The following management's discussion and analysis is presented to provide information concerning our financial condition as of June 30, 2012, as compared to December 31, 2011, and the results of operations for the three-month and six-month periods ended June 30, 2012 and 2011. This discussion and analysis should be read in conjunction with our consolidated financial statements and the financial and statistical data appearing elsewhere in this report and our 2011 Form 10-K.
The ongoing weakness in the financial sector and economy, particularly as it relates to credit costs associated with real estate in the Company's market areas, continues to directly affect borrowers' ability to repay their loans. This has resulted in a continued elevated, but improving, level of nonperforming loans. Overall economic weakness is reflected in the Company's operating results, and management remains vigilant in analyzing the loan portfolio quality, making an appropriate loan loss provision and making decisions to charge-off loans. The Company recorded a $6.3 million provision for loan losses and a net loss of $1.7 million prior to preferred stock dividends and accretion in the first half of 2012. This compared to a $4.5 million provision for loan losses and a net loss of $2.1 million prior to preferred stock dividends and accretion for the same period in 2011.
Results of Operations
The net income for the second quarter of 2012 was $1.3 million, or $0.00 earnings per diluted share, as compared with $1.0 million in net income, or $0.01 loss per diluted share, in the second quarter of 2011. The net loss for the first half of 2012 was $1.7 million or $0.29 loss per diluted share, as compared to $2.1 million in net loss, or $0.31 of loss per diluted share in the first half of 2011. The Company recorded a $6.3 million provision for loan losses in the first half of 2012, which included an addition of $200,000 in the second quarter. Net loan charge-offs totaled $18.0 million in the first half of 2012, which included $7.5 million of net charge-offs in the second quarter. The provision for loan losses in the first half of 2011 was $4.5 million, which included an addition of $500,000 in the second quarter of 2011. Net loan charge-offs totaled $14.8 million in the first half of 2011, which included $7.6 million of net charge-offs in the second quarter of 2011. The net income available to common stockholders was $14,000 for the second quarter of 2012 and a loss of $4.2 million for the first half of 2012, as compared to net loss available to common shareholders of $162,000 and $4.4 million, respectively, for the same periods in 2011.
Net Interest Income
Net interest and dividend income decreased $2.2 million, from $33.0 million in the first half of 2011, to $30.8 million in the first half of 2012. Average earning assets decreased $144.8 million, or 7.7%, to $1.75 billion from the first half of 2011 to the first half of 2012, as management continued to emphasize asset quality and funded new loan originations continued to be limited. The $293.0 million decrease in year to date average loans and loans held-for-sale was primarily due to the ongoing lower funded demand from qualified borrowers in the Bank's market area, charge-off activity, and movement of loan assets to OREO as well as maturities and payments on performing loans. To utilize available liquid funds, management continued to increase securities available-for-sale in the first half of 2012 to 20.1% of total assets up from
15.8% at the end of 2011 and 7.3% at June 30, 2011. At the same time, management reduced deposits that had previously provided funding for those assets by emphasizing relationship banking rather than single service customers. As a result, average interest bearing liabilities decreased $133.3 million, or 8.2%, during the same period. The net interest margin (tax-equivalent basis), expressed as a percentage of average earning assets, increased from 3.54% in the first half of 2011 to 3.57% in the first half of 2012. The average tax-equivalent yield on earning assets decreased from 4.69% in the first half of 2011 to 4.46%, or 23 basis points, in the first half of 2012. The 2012 first half earning asset tax equivalent yield received benefit from collection of previously reversed or unrecognized interest on loans that returned to performing status during the period. The first half 2012 earning asset tax equivalent yield would have been 4.35% without this benefit. At the same time, however, the cost of funds on interest bearing liabilities decreased from 1.41% to 1.13%, or 28 basis points, helping to offset the decrease in yield. The decrease in average earning assets and movement to lower yielding securities in 2012 were the main causes of decreased interest income.
Net interest income decreased $784,000 from $16.5 million in the second quarter of 2011 to $15.7 million in the second quarter of 2012. The decrease in average earning assets on a quarterly comparative basis was $114.5 million, or 6.2%, from June 30, 2011 to June 30, 2012 due in part to continued low demand from qualified borrowers as well as charge-off and OREO activity in the quarter. Average interest bearing liabilities decreased $98.4 million, or 6.2%, during the same period. The net interest margin (tax-equivalent basis), expressed as a percentage of average earning assets, increased from 3.59% in the second quarter of 2011 to 3.65% in the second quarter of 2012. The average tax-equivalent yield on earning assets decreased from 4.72% in the second quarter of 2011 to 4.52% in the second quarter of 2012, or 20 basis points. The 2012 second quarter earning asset tax equivalent yield received benefit from collection of previously reversed or unrecognized interest on loans that returned to performing status during the period. The second quarter 2012 earning asset tax equivalent yield would have been 4.32% without this benefit. The cost of interest-bearing liabilities also decreased from 1.39% to 1.09%, or 20 basis points, in the same period. Consistent with the year to date margin trend, the decreased overall average earning assets and the movement to lower yielding securities combined with the repricing of interest bearing assets and liabilities in a lower interest rate environment decreased interest income to a greater degree than it decreased interest expense.
Management, in order to evaluate and measure performance, uses certain non-GAAP performance measures and ratios. This includes tax-equivalent net interest income (including its individual components) and net interest margin (including its individual components) to total average interest-earning assets. 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 tables and notes below for supplemental data and the corresponding reconciliations to GAAP financial measures for the three and six-month periods ended June 30, 2012 and 2011.
The following tables set forth certain information relating to the Company's average consolidated balance sheets and reflect the yield on average earning assets and cost of average liabilities for the periods indicated. Dividing the related interest by the average balance of assets or liabilities derives rates. Average balances are derived from daily balances. For purposes of discussion, net interest income and net interest income to total earning assets on the following tables have been adjusted to a non-GAAP tax equivalent ("TE") basis using a marginal rate of 35% to more appropriately compare returns on tax-exempt loans and securities to other earning assets.
ANALYSIS OF AVERAGE BALANCES,
TAX EQUIVALENT INTEREST AND RATES
Three Months ended June 30, 2012 and 2011
(Dollar amounts in thousands - unaudited)
2012 2011
Average Average
Balance Interest Rate Balance Interest Rate
Assets
Interest bearing deposits $ 56,486 $ 35 0.25% $ 112,817 $ 69 0.24%
Federal funds sold - - - 689 1 0.57
Securities:
Taxable 364,475 1,856 2.04 130,853 885 2.71
Non-taxable (tax equivalent) 11,165 157 5.62 12,974 195 6.01
Total securities 375,640 2,013 2.14 143,827 1,080 3.00
Dividends from FRB and FHLB
stock 12,382 77 2.49 14,050 74 2.11
Loans and loans held-for-sale
1 1,293,446 17,688 5.41 1,581,059 20,845 5.22
Total interest earning assets 1,737,954 19,813 4.52 1,852,442 22,069 4.72
Cash and due from banks 34,279 - - 34,953 - -
Allowance for loan losses (48,353) - - (75,276) - -
Other non-interest bearing
assets 240,075 - - 236,660 - -
Total assets $ 1,963,955 $ 2,048,779
Liabilities and Stockholders'
Equity
NOW accounts $ 279,205 $ 67 0.10% $ 263,919 $ 113 0.17%
Money market accounts 310,497 135 0.17 298,090 187 0.25
Savings accounts 214,873 52 0.10 195,547 72 0.15
Time deposits 576,099 2,342 1.64 724,453 3,791 2.10
Interest bearing deposits 1,380,674 2,596 0.76 1,482,009 4,163 1.13
Securities sold under
repurchase agreements 4,636 1 0.09 2,046 - -
Other short-term borrowings 3,132 1 0.13 2,802 - -
Junior subordinated
debentures 58,378 1,220 8.36 58,378 1,133 7.76
Subordinated debt 45,000 224 1.97 45,000 206 1.81
Notes payable and other
borrowings 500 4 3.16 500 4 3.16
Total interest bearing
liabilities 1,492,320 4,046 1.09 1,590,735 5,506 1.39
Non-interest bearing deposits 373,869 - - 357,082 - -
Other liabilities 26,774 - - 21,708 - -
Stockholders' equity 70,992 - - 79,254 - -
Total liabilities and
stockholders' equity $ 1,963,955 $ 2,048,779
Net interest income (tax
equivalent) $ 15,767 $ 16,563
Net interest income (tax
equivalent) to total earning
assets 3.65% 3.59%
Interest bearing liabilities
to earning assets 85.87% 85.87%
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1. Interest income from loans is shown on a tax equivalent basis as discussed below and includes fees of $519,000 and $705,000 for the second quarter of 2012 and 2011, respectively. Nonaccrual loans are included in the above stated average balances.
ANALYSIS OF AVERAGE BALANCES,
TAX EQUIVALENT INTEREST AND RATES
Six Months ended June 30, 2012 and 2011
(Dollar amounts in thousands - unaudited)
2012 2011
Average Average
Balance Interest Rate Balance Interest Rate
Assets
Interest bearing deposits $ 50,252 $ 60 0.24% $ 112,958 $ 139 0.24%
Federal funds sold - - - 1,075 1 0.19
Securities:
Taxable 345,681 3,354 1.94 129,521 1,763 2.72
Non-taxable (tax equivalent) 10,872 316 5.81 13,970 414 5.93
Total securities 356,553 3,670 2.06 143,491 2,177 3.03
Dividends from FRB and FHLB
stock 12,854 151 2.35 13,875 143 2.06
Loans and loans held-for-sale
1 1,325,558 35,462 5.29 1,618,586 42,125 5.18
Total interest earning assets 1,745,217 39,343 4.46 1,889,985 44,585 4.69
Cash and due from banks 25,344 - - 34,917 - -
Allowance for loan losses (49,857) - - (77,034) - -
Other non-interest bearing
assets 240,031 - - 237,456 - -
Total assets $ 1,960,735 $ 2,085,324
Liabilities and Stockholders'
Equity
NOW accounts $ 278,141 $ 139 0.10% $ 267,983 $ 252 0.19%
Money market accounts 305,629 301 0.20 303,647 506 0.34
Savings accounts 210,019 114 0.11 190,234 190 0.20
Time deposits 584,830 4,947 1.70 755,025 7,784 2.08
Interest bearing deposits 1,378,619 5,501 0.80 1,516,889 8,732 1.16
Securities sold under
repurchase agreements 3,156 1 0.06 1,901 - -
Other short-term borrowings 6,648 4 0.12 2,918 - -
Junior subordinated
debentures 58,378 2,417 8.28 58,378 2,246 7.69
Subordinated debt 45,000 461 2.03 45,000 409 1.81
Notes payable and other
borrowings 500 8 3.16 500 8 3.18
Total interest bearing
liabilities 1,492,301 8,392 1.13 1,625,586 11,395 1.41
Non-interest bearing deposits 370,815 - - 358,755 - -
Other liabilities 24,367 - - 20,590 - -
Stockholders' equity 73,252 - - 80,393 - -
Total liabilities and
stockholders' equity $ 1,960,735 $ 2,085,324
Net interest income (tax
equivalent) $ 30,951 $ 33,190
Net interest income (tax
equivalent) to total earning
assets 3.57% 3.54%
Interest bearing liabilities
to earning assets 85.51% 86.01%
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1. Interest income from loans is shown on a tax equivalent basis as discussed below and includes fees of $936,000 and $1.2 million for the first six months of 2012 and 2011, respectively. Nonaccrual loans are included in the above stated average balances.
As indicated previously, net interest income and net interest income to earning assets have been adjusted to a non-GAAP tax equivalent ("TE") basis using a marginal rate of 35% to more appropriately compare returns on tax-exempt loans and securities to other earning assets. The table below provides a reconciliation of each non-GAAP TE measure to the GAAP equivalent for the periods indicated:
Effect of Tax Equivalent Adjustment Effect of Tax Equivalent Adjustment
Three Months Ended Six Months Ended
June 30, June 30,
2012 2011 2012 2011
Interest income (GAAP) $ 19,736 $ 21,980 $ 39,186 $ 44,406
Taxable equivalent adjustment -
loans 22 21 46 34
Taxable equivalent adjustment -
securities 55 68 111 145
Interest income (TE) 19,813 22,069 39,343 44,585
Less: interest expense (GAAP) 4,046 5,506 8,392 11,395
Net interest income (TE) $ 15,767 $ 16,563 $ 30,951 $ 33,190
Net interest and income (GAAP) $ 15,690 $ 16,474 $ 30,794 $ 33,011
Average interest earning assets $ 1,737,954 $ 1,852,442 $ 1,745,217 $ 1,889,985
Net interest income to total
interest earning assets 3.63% 3.57% 3.55% 3.52%
Net interest income to total
interest earning assets (TE) 3.65% 3.59% 3.57% 3.54%
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Provision for Loan Losses
In the first half of 2012, the Company recorded a $6.3 million provision for loan losses, which included an addition of $200,000 in the second quarter. In the first half of 2011, the provision for loan losses was $4.5 million, which included an addition of $500,000 in the second quarter. Provisions for loan losses are made to provide for probable and estimable losses inherent in the loan portfolio. Nonperforming loans decreased to $112.6 million at June 30, 2012 from $138.9 million at December 31, 2011, and $179.4 million at June 30, 2011. Charge-offs, net of recoveries, totaled $18.0 million and $14.8 million in the first six months of 2012 and 2011, respectively. Net charge-offs totaled $7.5 million in the second quarter of 2012 and $7.6 million in the second quarter of 2011. The distribution of the Company's gross charge-off activity for the periods indicated is detailed in the first table below and the distribution of the Company's remaining nonperforming loans and related specific allocations at June 30, 2012 are included in the following table:
Loan Charge-offs, Gross Three Months Ended Six Months Ended
(in thousands) June 30, June 30,
2012 2011 2012 2011
Real estate-construction
Homebuilder $ 287 $ 1,149 $ 1,094 $ 1,654
Land - 1,583 20 3,014
Commercial speculative 1,515 488 1,965 488
All other 138 9 263 43
Total real estate-construction 1,940 3,229 3,342 5,199
Real estate-residential
Investor 1,911 960 3,091 1,086
Owner occupied 450 1,198 1,218 2,054
Revolving and junior liens 534 62 877 244
Total real estate-residential 2,895 2,220 5,186 3,384
Real estate-commercial, nonfarm
Owner general purpose 318 577 1,192 3,236
Owner special purpose 97 311 2,474 1,632
Non-owner general purpose 3,373 2,760 4,503 2,943
Non-owner special purpose 124 101 124 862
Retail properties 147 1,634 4,046 2,404
Total real estate-commercial, nonfarm 4,059 5,383 12,339 11,077
Real estate-commercial, farm - - - -
Commercial 98 10 108 155
Other 138 150 277 264
$ 9,130 $ 10,992 $ 21,252 $ 20,079
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The distribution of the Company's nonperforming loans as of June 30, 2012, is included in the chart below (in thousands):
Nonperforming loans
as of June 30, 2012
90 Days or
More Past Restructured Total Non % Non
Nonaccrual Due Loans performing Performing Specific
Total 1 (Accruing) (Accruing) Loans Loans Allocation
Real estate-construction $ 17,530 $ - $ 2,683 $ 20,213 18.0% $ 1,233
Real estate-residential:
Investor 13,631 - - 13,631 12.1% 940
Owner occupied 9,532 - 5,571 15,103 13.4% 508
Revolving and junior liens 3,077 - 61 3,138 2.8% 720
Real estate-commercial, nonfarm 53,369 - 3,754 57,123 50.7% 2,595
Real estate-commercial, farm 2,278 - - 2,278 2.0% 112
Commercial 1,091 - - 1,091 1.0% 239
$ 100,508 $ - $ 12,069 $ 112,577 100.0% $ 6,347
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1 Nonaccrual loans included a total of $11.3 million in restructured loans.
Component balances are $1.8 million in
real estate construction, $5.4 million in real estate-commercial nonfarm, $1.1
million is in real estate - residential
investor, $3.0 million is in real estate - owner occupied and $17,000 in
Commercial.
Classified loans (reflecting a management decision to change to a definition of classified as substandard and TDR accruing to more closely reflect our regulator's definition) have decreased $150.4 million or 49.2% from a year ago and $82.7 million or 34.7% from December 31, 2011. Classified loans are summarized in the table below (in thousands):
Classified Loans
6/30/2012 12/31/2011 6/30/2011
Commercial $ 1,409 $ 2,380 $ 11,676
Real estate - commercial 87,413 134,015 170,452
Real estate - construction 25,180 40,476 60,172
Real estate - residential 41,430 61,234 63,480
Consumer 7 13 20
$ 155,439 $ 238,118 $ 305,800
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Commercial Real Estate
Commercial Real Estate Nonfarm ("CRE") remained the largest component of nonperforming loans at $57.1 million, or 50.7% of total nonperforming loans. The dollar volume of nonperforming CRE loans is down from $64.0 million at December 31, 2011 and $82.7 million at June 30, 2011. These decreases resulted from loans moving to OREO during these periods, loans paying off and loans upgraded as a result of improved performance. The class components of the CRE segment at June 30, 2012, were as follows (dollars in thousands):
Real Estate - Commercial Nonfarm
90 Days or
More Past Restructured Total Non % Non
Nonaccrual Due Loans performing performing Specific
Total (Accruing) (Accruing) Loans CRE Loans Allocation
Owner occupied general
purpose $ 6,091 $ - $ - $ 6,091 10.7% $ 346
Owner occupied special
purpose 12,234 - - 12,234 21.4% 411
Non-owner occupied general
purpose 21,765 - 3,754 25,519 44.7% 519
Non-owner occupied special
purpose 497 - - 497 0.9% -
Retail properties 12,782 - - 12,782 22.3% 1,319
$ 53,369 $ - $ 3,754 $ 57,123 100.0% $ 2,595
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Portfolio loans secured by retail property, primarily retail strip malls, continue to experience the most financial stress as vacancies and lower rents to secure tenants hampered successful retail mall performance. This class accounted for 9.0% of all CRE loans and 22.3% of all nonperforming CRE loans at . . .
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