Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
OSBC > SEC Filings for OSBC > Form 10-Q on 14-Nov-2012All Recent SEC Filings

Show all filings for OLD SECOND BANCORP INC | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for OLD SECOND BANCORP INC


14-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Overview

The Company is a financial services company with its main headquarters located in Aurora, Illinois. The Company is the holding company of 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 September 30, 2012, as compared to December 31, 2011, and the results of operations for the three-month and nine-month periods ended September 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 $1.6 million prior to preferred stock dividends and accretion in the first nine months of 2012. This compared to a $7.5 million provision for loan losses and a net loss of $3.5 million prior to preferred stock dividends and accretion for the same period in 2011.

Results of Operations

The net income for the third quarter of 2012 was $120,000, or $0.08 loss per diluted share, as compared with a $1.4 million net loss, or $0.18 loss per diluted share, in the third quarter of 2011. The net loss for the first nine months of 2012 was $1.6 million or $0.37 loss per diluted share, as compared to $3.5 million in net loss, or $0.49 of loss per diluted share in the first nine months of 2011. The Company recorded a $6.3 million provision for loan losses in the first nine months of 2012, while the Company did not include any additional provision in the third quarter of 2012. Net loan charge-offs totaled $18.0 million in the first nine months of 2012, which included $29,000 of net charge-offs in the third quarter. The provision for loan losses in the first nine months of 2011 was $7.5 million, which included an addition of $3.0 million in the third quarter of 2011. Net loan charge-offs totaled $24.0 million in the first nine months of 2011, which included $9.2 million of net charge-offs in the third quarter of 2011. The net loss available to common stockholders was $1.1 million for the third quarter of 2012 and a loss of $5.3 million for the first nine months of 2012, as compared to net loss available to common shareholders of $2.6 million and $7.0 million, respectively, for the same periods in 2011.

Net Interest Income

Net interest and dividend income decreased $3.5 million, from $48.9 million in the first nine months of 2011, to $45.4 million in the first nine months of 2012. Average earning assets decreased $112.3 million, or 6.1%, to $1.73 billion from the first nine months of 2011 to the first nine months of 2012, as management continued to emphasize asset quality and funded new loan originations continued to be limited. The $281.5 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 nine months of 2012 to


Table of Contents

21.7% of total assets up from 15.8% at the end of 2011 and 9.7% at September 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 $110.6 million, or 7.0%, from the first nine months of 2011 to the first nine months of 2012. The net interest margin (tax-equivalent basis), expressed as a percentage of average earning assets, decreased slightly from 3.57% in the first nine months of 2011 to 3.52% in the first nine months of 2012. The average tax-equivalent yield on earning assets decreased from 4.70% in the first nine months of 2011 to 4.39%, or 31 basis points in the first nine months of 2012. The 2012 first nine months of 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 nine months of 2012 earning asset tax equivalent yield would have been 4.27% without this benefit whereas the first nine months of 2011 would have been 4.63%. During the same period, the cost of funds on interest bearing liabilities decreased from 1.39% to 1.09%, or 30 basis points, helping to offset the decrease in yield. The decrease in average earning assets and movement to lower yielding securities with reduction in higher yielding loan volumes in 2012 were the main causes of decreased interest income.

Net interest and dividend income decreased $1.3 million from $15.9 million in the third quarter of 2011 to $14.6 million in the third quarter of 2012. The decrease in average earning assets on a quarterly comparative basis was $48.7 million, or 2.8%, from September 30, 2011 to September 30, 2012 due in part to continued low demand from qualified borrowers as well as OREO migration activity in the quarter. Average interest bearing liabilities decreased $66.2 million, or 4.4%, during the same period. The net interest margin (tax-equivalent basis), expressed as a percentage of average earning assets, decreased from 3.63% in the third quarter of 2011 to 3.44% in the third quarter of 2012. The average tax-equivalent yield on earning assets decreased from 4.73% in the third quarter of 2011 to 4.24% in the third quarter of 2012, or 49 basis points. The 2012 third 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 third quarter 2012 earning asset tax equivalent yield would have been 4.10% without this benefit whereas the third quarter of 2011 would have been 4.65%. The cost of interest-bearing liabilities also decreased from 1.35% to 1.02%, or 33 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 nine-month periods ended September 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.


Table of Contents

                         ANALYSIS OF AVERAGE BALANCES,

                       TAX EQUIVALENT INTEREST AND RATES

                  Three Months ended September, 2012 and 2011

                   (Dollar amounts in thousands - unaudited)



                                            2012                                        2011
                             Average                                    Average
                             Balance        Interest       Rate         Balance        Interest       Rate
Assets
Interest bearing
deposits                    $    46,138      $     29        0.25 %    $    91,178      $     58        0.25 %
Securities:
Taxable                         404,855         1,868        1.85          144,581           928        2.57
Non-taxable (tax
equivalent)                       9,518           151        6.35           12,172           176        5.78
Total securities                414,373         2,019        1.95          156,753         1,104        2.82
Dividends from FRB and
FHLB stock                       11,984            77        2.57           14,050            73        2.08
Loans and loans
held-for-sale 1               1,230,180        16,279        5.18        1,489,366        19,899        5.23
Total interest earning
assets                        1,702,675        18,404        4.24        1,751,347        21,134        4.73
Cash and due from
banks                            31,850             -           -           32,264             -           -
Allowance for loan
losses                          (40,823 )           -           -          (65,660 )           -           -
Other noninterest
bearing assets                  228,859             -           -          241,963             -           -
Total assets                $ 1,922,561                                $ 1,959,914

Liabilities and
Stockholders' Equity
NOW accounts                $   270,908      $     65        0.10 %    $   259,505      $     95        0.15 %
Money market accounts           321,762           137        0.17          285,712           164        0.23
Savings accounts                213,927            51        0.09          193,267            68        0.14
Time deposits                   526,314         1,973        1.49          663,613         3,436        2.05
Interest bearing
deposits                      1,332,911         2,226        0.66        1,402,097         3,763        1.06
Securities sold under
repurchase agreements             7,164             1        0.06            1,930             -           -
Other short-term
borrowings                          652             -           -            2,865             -           -
Junior subordinated
debentures                       58,378         1,243        8.52           58,378         1,155        7.91
Subordinated debt                45,000           223        1.94           45,000           201        1.75
Notes payable and
other borrowings                    500             5        3.91              500             4        3.13
Total interest bearing
liabilities                   1,444,605         3,698        1.02        1,510,770         5,123        1.35
Noninterest bearing
deposits                        380,226             -           -          344,757             -           -
Other liabilities                28,130             -           -           23,738             -           -
Stockholders' equity             69,600             -           -           80,649             -           -
Total liabilities and
stockholders' equity        $ 1,922,561                                $ 1,959,914
Net interest income
(tax equivalent)                             $ 14,706                                   $ 16,011
Net interest income
(tax equivalent)
to total earning
assets                                                       3.44 %                                     3.63 %
Interest bearing
liabilities to earning
assets                            84.84 %                                    86.26 %

1 Interest income from loans is shown on a tax equivalent basis as discussed below and includes fees of $498,000 and $448,000 for the third quarter of 2012 and 2011, respectively. Nonaccrual loans are included in the above stated average balances.


Table of Contents

                         ANALYSIS OF AVERAGE BALANCES,

                       TAX EQUIVALENT INTEREST AND RATES

                   Nine Months ended September, 2012 and 2011

                   (Dollar amounts in thousands - unaudited)



                                            2012                                        2011
                             Average                                    Average
                             Balance        Interest       Rate         Balance        Interest       Rate
Assets
Interest bearing
deposits                    $    48,871      $     89        0.24 %    $   105,618      $    197        0.25 %
Federal funds sold                    -             -           -              713             1        0.18
Securities:
Taxable                         365,549         5,222        1.90          134,596         2,691        2.67
Non-taxable (tax
equivalent)                      10,417           467        5.98           13,364           590        5.89
Total securities                375,966         5,689        2.02          147,960         3,281        2.96
Dividends from FRB and
FHLB stock                       12,562           228        2.42           13,934           216        2.07
Loans and loans
held-for-sale 1               1,293,533        51,741        5.26        1,575,039        62,024        5.19
Total interest earning
assets                        1,730,932        57,747        4.39        1,843,264        65,719        4.70
Cash and due from
banks                            27,528             -           -           34,023             -           -
Allowance for loan
losses                          (46,824 )           -           -          (73,201 )           -           -
Other non-interest
bearing assets                  236,281             -           -          238,975             -           -
Total assets                $ 1,947,917                                $ 2,043,061

Liabilities and
Stockholders' Equity
NOW accounts                $   275,712      $    204        0.10 %    $   265,126      $    347        0.17 %
Money market accounts           311,046           438        0.19          297,603           670        0.30
Savings accounts                211,331           165        0.10          191,256           258        0.18
Time deposits                   565,183         6,920        1.64          724,219        11,220        2.07
Interest bearing
deposits                      1,363,272         7,727        0.76        1,478,204        12,495        1.13
Securities sold under
repurchase agreements             4,502             2        0.06            1,911             -           -
Other short-term
borrowings                        4,635             4        0.11            2,900             -           -
Junior subordinated
debentures                       58,378         3,660        8.36           58,378         3,401        7.77
Subordinated debt                45,000           684        2.00           45,000           610        1.79
Notes payable and
other borrowings                    500            13        3.42              500            12        3.16
Total interest bearing
liabilities                   1,476,287        12,090        1.09        1,586,893        16,518        1.39
Non-interest bearing
deposits                        373,975             -           -          354,038             -           -
Other liabilities                25,629             -           -           21,651             -           -
Stockholders' equity             72,026             -           -           80,479             -           -
Total liabilities and
stockholders' equity        $ 1,947,917                                $ 2,043,061
Net interest income
(tax equivalent)                             $ 45,657                                   $ 49,201
Net interest income
(tax equivalent)
to total earning
assets                                                       3.52 %                                     3.57 %
Interest bearing
liabilities to earning
assets                            85.29 %                                    86.09 %

1 Interest income from loans is shown on a tax equivalent basis as discussed below and includes fees of $1.4 million and $1.7 million for the first nine months of 2012 and 2011, respectively. Nonaccrual loans are included in the above stated average balances.


Table of Contents

As indicated previously, net interest income and net interest income to earning assets have been adjusted to a non-GAAP 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                            Nine Months Ended
                                                        September 30,                                 September 30,
                                                 2012                   2011                   2012                   2011

Interest income (GAAP)                     $           18,333     $           21,045     $           57,519     $           65,451
Taxable equivalent adjustment - loans                      18                     27                     64                     61
Taxable equivalent adjustment -
securities                                                 53                     62                    164                    207
Interest income (TE)                                   18,404                 21,134                 57,747                 65,719
Less: interest expense (GAAP)                           3,698                  5,123                 12,090                 16,518
Net interest income (TE)                   $           14,706     $           16,011     $           45,657     $           49,201
Net interest and income (GAAP)             $           14,635     $           15,922     $           45,429     $           48,933
Average interest earning assets            $        1,702,675     $        1,751,347     $        1,730,932     $        1,843,264
Net interest income to total interest
earning assets                                          3.42%                  3.61%                  3.51%                  3.54%
Net interest income to total interest
earning assets (TE)                                     3.44%                  3.63%                  3.52%                  3.56%

Provision for Loan Losses

In the first nine months of 2012, the Company recorded a $6.3 million provision for loan losses, which did not include any provision in the third quarter. In the first nine months of 2011, the provision for loan losses was $7.5 million, which included $3.0 million in the third quarter. Provisions for loan losses are made to provide for probable and estimable losses inherent in the loan portfolio. Nonperforming loans decreased to $105.8 million at September 30, 2012 from $138.9 million at December 31, 2011, and $139.3 million at September 30, 2011. Charge-offs, net of recoveries, totaled $18.0 million and $24.0 million in the first nine months of 2012 and 2011, respectively. Net charge-offs totaled $29,000 in the third quarter of 2012 and $9.2 million in the third 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 September 30, 2012 are included in the following tables.


Table of Contents

Loan Charge-offs, Gross                   Three Months Ended       Nine Months Ended
(in thousands)                              September 30,            September 30,
                                           2012        2011        2012        2011
Real estate-construction
Homebuilder                              $      44    $  1,391    $  1,138    $  3,045
Land                                             -          75          20       3,089
Commercial speculative                         816         449       2,781         937
All other                                       49         114         312         157
Total real estate-construction                 909       2,029       4,251       7,228
Real estate-residential
Investor                                       250       1,662       3,341       2,748
Owner occupied                                 446       1,684       1,664       3,738
Revolving and junior liens                     534         536       1,411         780
Total real estate-residential                1,230       3,882       6,416       7,266
Real estate-commercial, nonfarm
Owner general purpose                            7         188       1,199       3,424
Owner special purpose                           90         658       2,564       2,290
Non-owner general purpose                      121       1,843       4,624       4,786
Non-owner special purpose                        -         809         124       1,671
Retail properties                              137       1,177       4,183       3,581
Total real estate-commercial, nonfarm          355       4,675      12,694      15,752
Real estate-commercial, farm                     -           -           -           -
Commercial                                       2         143         110         298
Other                                          186         169         463         433
                                         $   2,682    $ 10,898    $ 23,934    $ 30,977

The distribution of the Company's nonperforming loans as of September 30, 2012, is included in the chart below (in thousands):

Nonperforming loans

as of September 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       $    13,662    $        47    $      2,326    $   16,035        15.2%    $     1,408
Real
estate-residential:
Investor                       12,838            169               -        13,007        12.3%            875
Owner occupied                  9,368            100           5,408        14,876        14.1%            811
Revolving and junior
liens                           3,245              -              61         3,306         3.1%            864
Real
estate-commercial,
nonfarm                        50,662          1,256           3,724        55,642        52.6%          2,996
Real
estate-commercial,
farm                            1,790              -               -         1,790         1.7%            117
Commercial                      1,157              -               -         1,157         1.0%            514
                          $    92,722    $     1,572    $     11,519    $  105,813       100.0%    $     7,585

1 Nonaccrual loans included a total of $11.3 million in restructured loans. Component balances are $1.7 million in real estate construction, $5.6 million in real estate-commercial nonfarm, $1.3 million is in real estate - residential investor, $2.7 million is in real estate - owner occupied and $17,000 in Commercial.

Classified loans (under a definition closely reflecting our regulator's definition - substandard loans and TDR accruing) have decreased $122.2 million or 46.8% from a year ago and $99.3 million or 41.7% from December 31, 2011. Classified loans are summarized in the table below:


Table of Contents

                                       Classified Loans
                             9/30/2012    12/31/2011    9/30/2011
Commercial                    $   1,748    $    2,380    $   8,762
Real estate - commercial         75,510       134,015      145,904
Real estate - construction       22,387        40,476       47,089
Real estate - residential        39,143        61,234       59,235
Consumer                              5            13           15
                              $ 138,793    $  238,118    $ 261,005

Commercial Real Estate

Commercial Real Estate Nonfarm ("CRE") remained the largest component of nonperforming loans at $55.6 million, or 52.6% of total nonperforming loans. The dollar volume of nonperforming CRE loans is down from $64.0 million at December 31, 2011 and $65.7 million at September 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 September 30, 2012, were as follows (dollars in thousands):

                                         90 Days or
                                         More Past      Restructured     Total Non       % Non
                          Nonaccrual        Due            Loans         performing    performing     Specific
CRE                         Total        (Accruing)      (Accruing)        Loans       CRE Loans     Allocation
Owner occupied general
purpose                   $     5,901    $         -    $           -    $     5,901        10.6%    $       337
Owner occupied special
purpose                        12,889              -                -         12,889        23.2%            896
Non-owner occupied
general purpose                19,664          1,256            3,724         24,644        44.3%            350
Non-owner occupied
special purpose                   487              -                -            487         0.9%              -
Retail properties              11,721              -                -         11,721        21.0%          1,413
                          $    50,662    $     1,256    $       3,724    $    55,642       100.0%    $     2,996

. . .

  Add OSBC to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for OSBC - All Recent SEC Filings
Sign Up for a Free Trial to the NEW EDGAR Online Pro
Detailed SEC, Financial, Ownership and Offering Data on over 12,000 U.S. Public Companies.
Actionable and easy-to-use with searching, alerting, downloading and more.
Request a Trial      Sign Up Now


Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.