-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MyYigjNS0amdYNXke594X+Tpee0pABR0Fzi8alugmFAWqsFpyREYzNjGAwFXT4Cy NaGWXdqJk6i3AhgxbF8T2w== 0000357173-98-000005.txt : 19980331 0000357173-98-000005.hdr.sgml : 19980331 ACCESSION NUMBER: 0000357173-98-000005 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980330 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: OLD SECOND BANCORP INC CENTRAL INDEX KEY: 0000357173 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 363143493 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-10537 FILM NUMBER: 98578868 BUSINESS ADDRESS: STREET 1: 37 S RIVER ST CITY: AURORA STATE: IL ZIP: 60507 BUSINESS PHONE: 7088920202 MAIL ADDRESS: STREET 1: 37 SOUTH RIVER STREET CITY: AURORA STATE: IL ZIP: 60507 10-K 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) X Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (No Fee Required) For the fiscal year ended December 31, 1997 or Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (No Fee Required) For the 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 of Incorporation) (I.R.S. Employer I.D. No.) 37 South River Street, Aurora, Illinois 60507 (Address of principal executive offices) (Zip Code) (630) 892-0202 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Yes 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 X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Yes X No State the aggregate market value of the voting stock held by non-affiliates of the Registrant. The aggregate market value shall be computed by reference to the price at which the stock was sold, or the average bid and asked prices of such stock, as of a specified date within 60 days prior to the date of filing: $189,049,780 as of March 12, 1998 Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date. 3,049,190 shares of No par value common stock at March 12, 1998. DOCUMENTS INCORPORATED BY REFERENCE Portions of the December 31, 1997 Annual Report to Stockholders and the Registrant's Proxy Statement dated February 11, 1998, have been incorporated by reference in Parts I, II and III of the Annual Report on Form 10-K, to the extent indicated herein. Index to Exhibits is in Part IV on pages 17 and 18. This Form 10-K consists of 61 pages. Page 1 FORM 10-K TABLE OF CONTENTS Part I Item 1. Business 3 Item 2. Properties 14 Item 3. Legal Proceedings 14 Item 4. Submission of Matters to a Vote of Security Holders 14 Part II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters 15 Item 6. Selected Financial Data 15 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 15 Item 7a. Quantitative and Qualitative Disclosures about Market Risk 15 Item 8. Financial Statements and Supplementary Data 15 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 15 Part III Item 10. Directors and Executive Officers of the Registrant 16 Item 11. Executive Compensation 16 Item 12. Security Ownership of Certain Beneficial Owners and Management 16 Item 13. Certain Relationships and Related Transactions 16 Part IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 17 Part I Item 1. Business OLD SECOND BANCORP, INC. Old Second Bancorp, Inc. ("Bancorp") was organized on September 8, 1981 by the directors of The Old Second National Bank of Aurora ("Old Second"). Bancorp was incorporated under the laws of the State of Delaware on September 18, 1981. Bancorp is a multi-bank holding company principally engaged in the business of attracting deposits and investing these funds, together with borrowings and other funds, to primarily originate commercial, real estate and consumer loans and purchase investment securities. At December 31, 1997, Bancorp had seven subsidiary banks, as follows: The Old Second National Bank of Aurora, The Old Second Community Bank of North Aurora, The Old Second Community Bank of Aurora, The Yorkville National Bank, Burlington Bank, Kane County Bank and Trust and Bank of Sugar Grove. In addition, Bancorp has a mortgage banking subsidiary principally engaged in the business of originating, purchasing, selling and servicing residential mortgage loans. The directors of Bancorp are the same as the directors of Old Second. The directors receive no fees for Bancorp meetings. Bancorp has no salaried employees. The officers of Bancorp are also officers of Old Second. Executive Officers of the Registrant Shown below are the names and ages of the executive officers of Bancorp with an indication of all positions and offices held with Bancorp: Old Second Bancorp, Name Age Inc. Offices (1) - ---------------- --- ------------------- James E. Benson 67 Chairman, Chief Executive Officer, and Director R. J. Carlson 62 President, Chief Operating Officer, Chief Financial Officer, Secretary and Director William B. Skoglund 47 Vice President, Assistant Secretary and Director George Starmann III 54 Vice President and Director (1) Offices with Bancorp have been held since the formation of Bancorp in 1981, with the following exceptions: James E. Benson was appointed Chairman in 1992. R. J. Carlson was promoted from Vice-President to President in 1992 and was elected to the Board of Directors in January of 1987. William B. Skoglund was appointed as an officer and elected as a director in March of 1992. George Starmann III was appointed as Vice-President in 1994 and elected as a director in March 1995. Officers are appointed annually by the Board of Directors.
Page 3 OLD SECOND BANCORP SUBSIDIARIES The Old Second National Bank of Aurora is located at 37 South River Street, Aurora, Illinois. Old Second is the successor to a bank that was founded in 1871, and is incorporated under the laws of the United States. Old Second offers complete banking and trust services for retail, commercial, industrial, and public entity customers in Aurora and the surrounding area. Services include loans to all customer segments, checking, savings and time deposits; lock box service and safe deposit boxes; trust and other fiduciary services to commercial customers and individuals and other customer services. Non-FDIC insured mutual funds, stocks, bonds, securities and annuities are provided by LPL Financial Services, Inc., a registered broker/dealer and member NASD, SIPC. Old Second has two offsite Automatic Teller Machines, and its customers can use certain other financial institutions' offsite teller machines to complete deposit, withdrawal, transfer, and other banking transactions. Old Second has full-service branches located at: 1991 West Wilson Street, Batavia; 4080 Fox Valley Center Drive, Aurora; 555 Redwood Drive, Aurora; 1200 Douglas Road, Oswego, which opened in April of 1997; 1100 South County Line Road, Maple Park, and 2S101 Harter Road, Kaneville, both of which were acquired in June of 1997. Old Second has trust offices at 37 South River Street in Aurora, 321 James Street in Geneva, and 122 North Main Street in Elburn. The Old Second Community Bank of North Aurora is located at 200 West John Street, North Aurora. The Old Second Community Bank of Aurora is located at 1350 North Farnsworth Avenue, Aurora. Yorkville National Bank is located at 102 East Van Emmon Street, Yorkville, with branches located at 408 East Countryside Parkway in Yorkville, 6800 West Route 64 in Plano and 323 East Norris Drive in Ottawa. Burlington Bank is located at 194 South Main Street in Burlington. Kane County Bank and Trust Company is located at 749 North Main Street in Elburn, with branches at 122 North Main Street in Elburn and 40W422 Route 64 in Wasco. Bank of Sugar Grove is located on Cross Street at Illinois Route 47, Sugar Grove. These Banks offer banking services for retail, commercial, industrial, and public entity customers in the Aurora, Batavia, Oswego, Maple Park, Kaneville, North Aurora, Yorkville, Plano, Ottawa, Burlington, Elburn, Wasco and Sugar Grove communities and surrounding areas. Services include loans to all customer segments, checking, savings and time deposits, and other customer services. With the exception of Yorkville's main banking facility, these Banks have onsite 24 hour Automatic Teller Machines, whereas Yorkville has one offsite Automated Teller Machine. Their customers can use certain other financial institutions' offsite teller machines to complete deposit, withdrawal, transfer, and other banking transactions as well. The banks are subject to vigorous competition from other banks and many savings and loan associations, as well as credit unions and other financial institutions in the area. Within the Aurora banking market, which is approximated by the southern two-thirds of Kane County and the northern one-third of Kendall County, there are in excess of 20 other banks. Within the Yorkville National Bank banking market, which includes portions of Kane and LaSalle and all of Kendall counties, there are approximately 10 other banks or banking facilities and several savings and loan associations. At December 31, 1997, Bancorp and its subsidiaries had 396 full-time and 125 part-time employess. The only industry segment in which Bancorp and its subsidiaries are engaged in is banking, and there are no foreign operations. Maple Park Mortgage ("Maple Park") operates from leased offices in St. Charles, Sycamore, Oswego and Bannockburn, Illinois. The main office is located at 1450 West Main Street in St. Charles. Since 1992, Maple Park has developed a wholesale (correspondent) division primarily engaged in soliciting mortgage loans in Iowa, Colorado, Wyoming and Illinois. The wholesale division emphasizes developing relationships with financial institutions. Maple Park currently holds contracts with over 300 banks and credit unions. Maple Park operates as a mortgage broker and servicer offering a wide range of products including conventional, fixed and adjustable-rate mortgages. The New Leaf division of Maple Park is located in St. Charles and specializes in assisting prospective and current homeowners who do not qualify in the traditional market to obtain mortgages. Maple Park currently has 57 full-time employess and 2 part-time employees. Maple Park faces vigorous competition in all phases of its retail and correspondent divisions. Maple Park believes that competition for its retail products is principally based on location, convenience, quality and price. Within its retail mortgage banking market, there are approximately six large companies offering mortgage banking products and services and a number of small or mid-sized brokerage operations. Maple Park believes that competition for its correspondent division is primarily based on convenience, quality and price. There are several large national companies competing in their correspondent markets. Page 4 ADDITIONAL STATISTICAL INFORMATION - OLD SECOND BANCORP, INC. CONSOLIDATED DAILY AVERAGE BALANCE SHEETS AND INTEREST RATES Years Ended December 31, 1997 1996 1995 ____________________________________________________________ Avg Income Yield Avg Income Yield Avg Income Yield Bal Expense Rate Bal Expense Rate Bal Expense Rate ____________________________________________________________ ASSETS Interest bearing deposits with banks 298 22 7.38% 301 22 7.31% 477 22 4.61% Federal funds sold 43,803 2,407 5.50% 41,377 2,227 5.38% 39,329 2,274 5.78% Investment securities: Taxable 204,352 13,025 6.37% 196,791 12,723 6.47% 195,798 12,537 6.40% Non taxable (1) 61,830 3,302 5.34% 68,276 3,755 5.50% 70,345 4,118 5.85% Loans held for sale and net loans (2) 515,016 46,422 9.01% 448,422 40,959 9.13% 427,744 39,288 9.18% ------- ------ ---- ------- ------ ---- ------- ------ ---- Total interest earning assets (1) 825,299 65,178 7.90% 755,167 59,686 7.90% 733,693 58,239 7.94% ======= ====== ==== ======= ====== ==== ======= ====== ==== Cash and due from banks 34,513 33,329 33,026 Bank premises and equipment, net 20,514 18,833 17,753 Other assets 21,034 19,267 23,453 ------ ------ ------ Total assets 901,360 826,596 807,925 ======= ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Interest bearing transaction deposits 111,170 2,194 1.97% 108,091 2,361 2.18% 102,168 2,399 2.35% Savings deposits 185,304 5,726 3.09% 179,103 5,374 3.00% 176,977 5,776 3.26% Time deposits 373,433 21,672 5.80% 339,529 19,512 5.75% 319,255 18,071 5.66% ------- ------ ----- ------- ------ ---- ------- ------ ---- Total deposits 669,907 29,592 4.42% 626,723 27,247 4.35% 598,400 26,246 4.39% Securities sold under agreements to repurchase 13,958 690 4.94% 3,632 181 4.98% 3,688 142 3.85% Notes payable 8,991 589 6.55% 2,377 221 9.30% 9,970 650 6.52% Other short-term borrowings 3,415 180 5.27% 2,724 138 5.07% 4,555 284 6.23% ----- --- ---- ----- --- ---- ----- --- ---- Total interest bearing liabilities 696,271 31,051 4.46% 635,456 27,787 4.37% 616,613 27,322 4.43% ======= ====== ==== ======= ====== ==== ======= ====== ==== Demand deposits 109,219 102,738 109,718 Other liabilities 9,014 6,951 8,582 ------- ------- ------- Total liabilities 814,504 745,145 734,913 Stockholders' equity 86,856 81,451 73,012 ------- ------- ------- Total liabilities and stockholders' equity 901,360 826,596 807,925 ======= ======= ======= Net interest spread (1) 3.44% 3.53% 3.51% ===== ===== ==== Net yield on interest earning assets (1) 4.14% 4.22% 4.21% ===== ===== =====
Page 5 (1) Interest income and yield on tax-exempt securities are not reflected in the tables on a tax-equivalent basis. Net yield on interest-earning assets is net interest income divided by total average interest-earning assets. (2) Principal balances on nonaccruing loans, if any, are included in net loans on the average balance sheet. There were no out-of-period adjustments or foreign activities for any reportable period. Fees included in the above interest income computations are as follows, in thousands: Years Ended December 31, 1997 $719 1996 $731 1995 $648 Changes in Interest Income and Expense The following table shows the dollar amount of changes in interest income and expense, by major categories of assets and liabilities, attributable to changes in volume or rate or both, for the periods indicated, in thousands of dollars: 1997 Compared to 1996 Increase (Decrease) Due To Interest income: Volume (1) Rate(1) Net ----------------------------------- Interest bearing deposits with banks $ 0 $ (0) $ (0) Investment securities: Taxable 482 (180) 302 Non taxable (344) (109) (453) Federal funds sold 133 47 180 Loans, net 5,972 (509) 5,463 ------- ------- ------- Net increase (decrease) $ 6,243 $ (751) $ 5,492 ------- ------- ------- Interest expense: Interest bearing deposits $ 61 $ (228) $ (167) Savings deposits 192 160 352 Time deposits 1,968 192 2,160 Securities sold under agreements to repurchase 510 (1) 509 Notes payable 411 (43) 368 Other 36 6 42 ------- ------ -------- Net increase $ 3,178 $ 86 $ 3,264 Increase (decrease) ------- ------ -------- in net interest margin $ 3,065 $ (837) $ 2,228 ------- ------ --------
Page 6 1996 Compared to 1995 Increase (Decrease) Due To Interest income: Volume (1) Rate(1) Net ------------------------------------- Interest bearing deposits with banks $ (13) $ 13 $ 0 Investment securities: Taxable 65 121 186 Non taxable (114) (249) (363) Federal funds sold 110 (157) (47) Loans, net 1,918 (247) 1,671 ------- ------- ------- Net increase (decrease) $ 1,966 $ (519) $ 1,447 ------- ------- ------- Interest expense: Interest bearing deposits $ 129 $ (167) $ (38) Savings deposits 64 (466) (402) Time deposits 1,165 276 1,441 Securities sold under agreements to repurchase (3) 42 39 Notes payable (591) 162 (429) Other (93) (53) (146) ------- ------- ------- Net increase (decrease) $ 671 $ (206) $ 465 ------- ------- ------- Increase (decrease) in net interest margin $ 1,295 $ (313) $ 982 ------- ------- ------- 1) The change in interest due to both rate and volume has been allocated to change due to volume and change due to rate in proportion to the the relationship of the absolute dollar amounts of the change in each.
Page 7 Interest Rate Repricing Gaps The management of interest rate sensitivity is accomplished by monitoring the maturities and repricing opportunities of interest-earning assets and interest-bearing liabilities. Amounts are positioned into rate maturity periods based upon contractual or historical experience of frequency of repricing the respective assets and liabilities. The following table summarizes the interest rate repricing gaps for selected maturity periods as of December 31, 1997: OLD SECOND BANCORP, INC. (In thousands) Rate Maturity Period --------------------------------------------- 0-90 91-180 181-365 Over 1 Days Days Days Year Total --------------------------------------------- INTEREST-EARNING ASSETS: - ----------------------- Interest-earning deposits $ 350 $ 350 Federal funds sold 46,050 46,050 Investment securities 24,486 $ 7,186 $ 19,754 $213,041 264,467 Loans held for sale 26,927 26,927 Loans, net 188,968 27,780 47,176 270,708 534,632 -------- -------- -------- -------- ------- Total interest-earning assets $286,781 $ 34,966 $ 66,930 $483,749 $872,426 INTEREST-BEARING LIABILITIES: - ------------------ Money market, savings and NOW accounts $203,902 $100,755 $304,657 Time deposits 121,080 $ 61,938 $ 77,302 109,188 369,508 Other borrowed funds 53,477 1,629 50 55,156 -------- -------- -------- -------- -------- Total interest- bearing liabilities $378,459 $ 63,567 $ 77,352 $209,943 $729,321 Period gap $ (91,678) $(28,601) $(10,422) $273,806 $143,105 Cumulative gap $ (91,678) $(120,279) $(130,701) $143,105
Total interest-earning assets exceeded interest-bearing liabilities by $143,105,000 at December 31, 1997. This difference was funded through noninterest-bearing liabilities and stockholders' equity. The above table shows that total interest-bearing liabilities maturing or repricing within one year exceed interest-earning assets maturing or repricing by $130,701,000. Theoretically, in a period of rising interest rates, it is preferable to have a positive gap (interest-earning assets in excess of interest-bearing liabilities) because more interest-earning assets should mature or reprice within a given time period than interest-bearing liabilities to increase interest income in excess of the increase in interest expense. Conversely, theoretically, in a period of declining interest rates, it is preferable to be in a negative gap position (interest- bearing liabilities in excess of interest-earning assets) because more interest-bearing liabilities should mature or reprice to lower interest expense in excess of the decline in interest income. Because assets and liabilities do not reprice in exactly the same manner as interest levels change, the above table should not be viewed as a sole indicator of how the Bancorp will be affected by changes in interest rates. Page 8 INVESTMENT PORTFOLIO The required information for book value, market value and maturities of investment securities appears in Note D of the Annual Report to Stockholders and is incorporated by reference in this Annual Report on Form 10-K. Weighted Average Yield of Investment Securities The weighted average yield for each range of maturities of investment securities is shown below as of December 31, 1997: Maturing ---------------------------------------------- Within From 1 To From 5 To After 1 Year 5 Years 10 Years 10 Years ---------------------------------------------- U.S. Government and agency obligations 6.17% 6.31% 7.02% 6.48% States & political subdivisions 6.17 5.76 5.25 6.30 Collateralized mortgage obligations 5.44 6.21 Other 6.60
[FN] Note: Yields on tax-exempt obligations are not computed on a tax equivalent basis. LOAN PORTFOLIO Classification of Loans The following table shows the classification of loans in thousands of dollars, on the dates indicated: December 31, -------------------------------------------- 1997 1996 1995 1994 1993 -------------------------------------------- Commercial, financial, and agricultural $146,591 $143,961 $141,948 $146,890 $135,555 Real estate-construction 43,095 40,437 35,653 32,548 25,744 Real estate-mortgage 287,167 248,742 239,081 185,698 181,886 Installment 58,127 49,164 45,847 45,120 37,134 -------- -------- ------- ------- -------- Total $534,980 $482,304 $462,529 $410,256 $380,319 ======== ======== ======== ======== ========
The following table shows the percentage of total loans represented by each classification of loans on the dates indicated: December 31, ------------------------------------------- 1997 1996 1995 1994 1993 ------------------------------------------- Commercial, financial, and agricultural 27.4% 29.8% 30.7% 35.8% 35.6% Real estate-construction 8.1 8.4 7.7 7.9 6.8 Real estate-mortgage 53.6 51.6 51.7 45.3 47.8 Installment 10.9 10.2 9.9 11.0 9.8 ---- ---- ---- ---- ---- Total 100.0% 100.0% 100.0% 100.0% 100.0% ===== ===== ===== ===== =====
Page 9 LOAN PORTFOLIO (continued) Maturities of Loans and Sensitivity to Changes in Interest Rates The following table is a summary of maturities of loans by certain categories at December 31, 1997 in thousands of dollars: Due after Due in 1 1 year year or through Due after less 5 years 5 years Total -------------------------------------- Commercial, financial, and agricultural $71,959 $61,519 $13,113 $146,591 Real estate construction 35,043 8,052 0 43,095
Commercial, financial, and agricultural loans due after one year in the amount of $80,353,000 at December 31, 1997 have floating or adjustable interest rates. Such loans with fixed rates totaled $66,238,000. Real estate construction loans due after one year in the amount of $29,849,000 have floating or adjustable interest rates. Such loans with fixed rates totaled $13,246,000. Floating or adjustable interest rate loans are those on which the interest rate can be adjusted to changes in the prime rate or other rate changes. Fixed rate loans are those on which the interest rate cannot be changed for the term of the loan. Page 10 Risk Elements Nonaccrual, past due and restructured loans include, respectively, loans on which no interest is currently being accrued, accruing loans which are past due 90 days or more as to principal or interest payments, and loans neither in nonaccrual status nor 90 day delinquent status on which the terms of maturity or interest rate have been renegotiated to provide a reduction or deferral of interest or principal payments due to a deterioration in the financial position of the borrower. It is management's general policy to discontinue the accrual of interest on a loan when it is past due 90 days with regard to either interest or principal payments. At any given date, Bancorp's subsidiaries may have various loans outstanding, which are accruing interest, are not contractually past due more than 90 days, and are not renegotiated, but which, in management's opinion, may not be repaid according to original terms; these are shown below as "potential loan problems". Management periodically reviews these accounts which are currently in its portfolio and is of the opinion that, although some restructuring of loan terms may be required, no material loss of principal will occur. The following is a summary of loans described above at the dates indicated, in thousands of dollars: December 31, -------------------------------------- 1997 1996 1995 1994 1993 -------------------------------------- Nonaccrual, past due and restructured loans a) Nonaccrual $2,189 $3,505 $4,514 $2,344 $4,428 b) Past Due 1,011 622 245 555 603 c) Restructured 122 0 58 69 86 Potential Loan Problems(1) 6,911 7,334 5,198 4,389 2,188 (1)Loans in this category represent those which have been periodically delinquent as to the payment of principal and interest and are vulnerable to adverse economic conditions. The collateral position of Bancorp's subsidiaries on these loans mitigates the amount of loss exposure when viewed in their entirety. There were no foreign outstandings or loan concentrations at the dates indicated.
Following is information regarding interest income for the year ended December 31, 1997 for domestic loans which are on a nonaccrual basis or restructured as of December 31, 1997, in thousands of dollars: Gross interest income that would have been included in income for 1997 if the loans had been current in accordance with their original terms $273 Gross interest income included in income on these loans for 1997 $ 84 Page 11 SUMMARY OF LOAN LOSS EXPERIENCE Loan loss experience for the indicated periods in thousands of dollars is summarized as follows: Years Ended December 31, ------------------------------------------- 1997 1996 1995 1994 1993 ------------------------------------------- Average loans held for sale and loans net of unearned income $521,906 $454,708 $434,403 $389,769 $362,752 ======== ======== ======== ======== ======== Allowance for possible loan losses: Balance at beginning of period $ 6,968 $ 6,686 $ 6,370 $ 5,110 $ 5,230 Additions (deductions): Charge-offs: Commercial, financial and agricultural $ 1,285 $ 615 $ 3,299 $ 1,701 $ 1,577 Real estate-construction 81 0 0 0 0 Real estate-mortgage 67 117 134 130 438 Installment 209 169 185 108 210 ------- ------ ------- ------- ------- Total charge-offs 1,642 901 3,618 1,939 2,225 Recoveries: Commercial, financial and agricultural 176 362 431 783 342 Real estate-construction 0 0 0 0 0 Real estate-mortgage 105 0 11 425 170 Installment 60 73 93 209 74 ------ ----- ------ ------ ------- Total recoveries 341 435 535 1,417 586 ------ ----- ------ ------ ------- Net (charge-offs) (1,301) (466) (3,083) (522) (1,639) Provision charged to operating expense 1,256 748 3,399 1,782 1,519 ------ ----- ------ ----- ----- Balance at the end of period 6,923 6,968 6,686 6,370 5,110 ====== ===== ====== ===== =====
The amount of additions to the allowance for possible loan losses charged to operating expense for the periods indicated was based on a variety of factors, including actual charge-offs during the year, historical loss experience, industry guidelines and an evaluation of current and prospective economic conditions in the market area, and a review of the loans currently outstanding. Allowance for possible loan losses by category: Commercial, financial and agricultural $ 4,100 $ 4,100 $ 3,990 $ 3,730 $ 2,985 Real estate-construction 185 185 180 160 115 Real estate-mortgage 1,060 1,060 1,040 1,000 815 Installment 1,430 1,430 1,248 1,275 995 Unallocated 148 193 228 205 200 -------- ------- -------- -------- ------- Total $ 6,923 $ 6,968 $ 6,686 $ 6,370 $ 5,110 ======== ======== ======== ======== ======== Ratio of net (charge-offs) recoveries to average loans outstanding for the period (.25)% (.10)% (.71)% (.13)% (.45)% === === === === ===
Page 12 Maturities of Certificates of Deposit of $100,000 or more The following table sets forth the maturity of Time Deposits of $100,000 or more, in thousands of dollars, at the date indicated: December 31, 1997 ----------- Maturing within 3 months $ 26,878 After 3 but within 6 months 9,516 After 6 but within 12 months 15,532 After 12 months 18,531 ----------- Total $ 70,457 ===========
Return on Equity and Assets The following table presents certain ratios relating to equity and assets: Years Ended December 31, 1997 1996 1995 -------------------------------- Return on total average assets 1.06% 1.01% 1.08% Return on average stockholders' equity 11.04% 10.24% 11.99% Dividend payout ratio 28.34% 30.40% 24.39% Average equity to average assets ratio 9.64% 9.85% 9.04%
Page 13 Item 2. Properties Except for certain teller machine locations, Old Second Bancorp subsidiaries own 18 bank locations. Old Second National Bank leases space for the Trust office in Geneva and Yorkville National Bank leases space for a branch in the Super Wal-Mart in Plano. Maple Park Mortgage operates its retail division from leased offices in St. Charles, Sycamore, Oswego and Bannockburn. The administrative offices of Maple Park Mortgage are located in St. Charles. Old Second's main banking office located at 37 South River Street, Aurora, Illinois, has a total of approximately 82,000 square feet. The original five story, 30,000 square foot building was built in 1925, and a two story, 24,000 square foot addition was constructed in 1982. A 28,000 square foot building adjacent to the main bank is used for a ten lane drive-up bank facility and banking offices. Parking facilities are provided for approximately one hundred cars. Old Second leases to others about 13,700 square feet of building space and utilizes the remainder for its own operations. Item 3. Legal Proceedings In the normal course of business, Old Second Bancorp, Inc. and its subsidiaries are party to several legal proceedings, none of which are expected to have a materially adverse effect on its financial condition. Item 4. Submission of Matters to a Vote of Security Holders. No matters were submitted to a vote of stockholders during the fourth quarter of fiscal 1997. Page 14 Part II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters The Common Stock of Bancorp, has been traded in the over-the-counter market on the NASDAQ National Market System under the symbol OSBC since November 11, 1993. Prior to that date, there was no established public trading market for Bancorp's Common Stock. However, the stock was quoted on the over-the-counter market even though there was relatively little trading activity in the stock. Information regarding the number of stockholders and market price for Bancorp's Common Stock for 1997 and 1996 appears on page 52 of the Annual Report to Stockholders and is incorporated by reference in this Annual Report on Form 10-K. Information regarding dividends declared on the Common Stock of Bancorp is described in the Capital and Dividends' portion of Management's Discussion on page 32 of the Annual Report to Stockholders and is incorporated by reference in this Annual Report on Form 10-K. Information regarding dividend restrictions regarding Bancorp is described in Note P on page 46 of the Annual Report to Stockholders and is incorporated by reference in this Annual Report on Form 10-K. Item 6. Selected Financial Data "Selected Consolidated Financial Data" for the five years ended December 31, 1997 appears on page 32 of the Annual Report to Stockholders and is incorporated by reference in this Annual Report on Form 10-K. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations "Management's Discussion and Analysis of Financial Condition and Results of Operations" appears on pages 26 through 31 of the Annual Report to Stockholders and is incorporated by reference in this Annual Report on Form 10-K. Item 7a. Quantitative and Qualitative Disclosures about Market Risk Quantitative and Qualitative disclosures on market risk appears in the Management's Discussion and Analysis on page of 29 of the Annual Report to Shareholders and is incorporated by reference in this Annual Report on Form 10-K. Item 8. Financial Statements and Supplementary Data The Consolidated Financial Statements and Related Notes, and the report thereon of Ernst & Young LLP dated January 16, 1998, appear on pages 33 through 54 of the Annual Report to Stockholders and are incorporated by reference in this Annaul Report on Form 10-K. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. Page 15 Part III Item 10. Directors and Executive Officers of the Registrant The required information for directors of the Registrant is shown on pages 4 through 8, under "Election of Directors" in the Registrant's Proxy Statement and is incorporated by reference in this Annual Report on Form 10-K. The required information for executive officers of the Registrant is included in Part I of this Form 10-K. Item 11. Executive Compensation The required information for executive compensation of the Registrant is shown on pages 8 through 14 under "Executive Compensation" in the Registrant's Proxy Statement and is incorporated by reference in the Annual Report on Form 10-K. Item 12. Security Ownership of Certain Beneficial Owners and Management The required information for security ownership of certain beneficial owners and management of the registrant is shown on pages 3 and 4 under "Voting Securities and Principal Holders Thereof" in the Registrant's Proxy Statement and is incorporated by reference in this Annual Report on Form 10-K. Item 13. Certain Relationships and Related Transactions The required information for Certain Relationships and Related Transactions is shown on page 18 in the Registrant's Proxy Statement and is incorporated by reference in this Annual Report on Form 10-K. Page 16 Part IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. (a)(1) Financial Statements Reference -------------------- ------------- Form 10-K Incorporated by reference in Part Annual Report II, Item 8 of this report: (page) Consolidated Balance Sheets as of December 31, 1997 and 1996 33 Consolidated Statements of Income for the years ended December 31, 1997, 1996, and 1995 34 Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996, and 1995 35-36 Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 1997, 1996, and 1995 36 Notes to Consolidated Financial Statements 37-51 Report of Independent Accountants 52 (2) Financial Statement Schedules ----------------------------- No schedules are included as they are not required. (3) Exhibits -------- The Registrant hereby incorporates by reference its By-Laws as filed as exhibits to its Registration Statement on Form S-14 (File No.2-75588) which was filed with the Securities and Exchange Commission on January 22, 1982. Page 17 (a)(3) Exhibits (Continued) Reference ------------ Form 10-K Annual Report (page) 13.1 Old Second Bancorp, Inc. - 1997 Annual Report to Stockholders is furnished for the information of the Commission and iS not deemed to be "filed as a part of this 10-K," except for portions incorporated herein. 22-57 22.1 Subsidiaries of the Registrant 58 23.1 Consent of Independent Accountant 59 25.1 Audit Opinion of Independent Accountant 60 27.1 Financial Data Schedule 61 Other exhibits are omitted because of the absence of conditions under which they are required. (b) Reports on Form 8-K: There were no Form 8-K reports filed during the fourth quarter of 1997. Page 18 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. OLD SECOND BANCORP, INC. (Registrant) Date -------------------- By /s/ James E. Benson James E. Benson- Chairman, Chief Executive Officer, and Director Date -------------------- By /s/ Ronald J. Carlson Ronald J. Carlson - President, Chief Financial Officer, Secretary and Director Page 19 SIGNATURES, Continued Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities on the dates indicated. Date SIGNATURE AND TITLE ---- ------------------- /s/ Walter Alexander ---------- --------------------------- Walter Alexander - Director /s/ James E. Benson ---------- --------------------------- James E. Benson - Chairman Chief Executive Officer, and Director /s/ Ronald J. Carlson ---------- --------------------------- Ronald J. Carlson-President, Chief Financial Officer, Secretary and Director ---------- --------------------------- Marvin Fagel - Director ---------- --------------------------- Joanne Hansen - Director /s/ Kenneth F. Lindgren ---------- ----------------------------- Kenneth F. Lindgren - Director ---------- ----------------------------- Jesse Maberry - Director ---------- ----------------------------- Gary McCarter - Director Page 20 SIGNATURES, continued Date SIGNATURE AND TITLE ---------- ------------------------ D. Chet McKee - Director /s/ William J. Meyer ----------- --------------------------- William J. Meyer - Director ---------- --------------------------- Larry A. Schuster - Director /s/ Willaim B. Skoglund ---------- --------------------------- William B. Skoglund - Vice President, Assistant Secretary, and Director /s/ George Starmann III ---------- -------------------------- George Starmann III Vice President and Director Page 21 EX-13 2 ANNUAL REPORT TO SECURITY HOLDERS Old Second Bancorp, Inc. 1997 Annual Report INDEX - ----- Financial Highlights 1 Letter to Stockholders 2, 3 Management's Discussion 4-8 Selected Consolidated Financial Data 9 Consolidated Balance Sheets 10 Consolidated Statements of Income 11 Consolidated Statements of Cash Flows 12 Consolidated Statements of Changes in Stockholders' Equity 13 Notes to Consolidated Financial Statements 13-25 Report of Independent Accountants 26 Corporate Information 27 Board of Directors 28, 29 Consolidating and Consolidated Balance Sheet 30, 31 Service Area Map and Locations 32, 33 Page 22 FINANCIAL HIGHLIGHTS In thousands, except per share data - for the years ended December 31, 1997 1996 --------- --------- Total Interest Income $ 65,178 $ 59,686 Net Interest Income After Provision for Possible Loan Losses 32,871 31,151 Net Income 9,594 8,337 Per Share: Net Income - Basic 3.15 2.73 Net Income - Diluted 3.14 2.73 Cash Dividends Declared .89 .83 At December 31 Assets 948,371 889,844 Loans, Net 527,709 474,946 Deposits 788,929 789,969 Stockholders' Equity Before Net Unrealized Gain on Investments 90,768 83,896 Per Share 29.77 27.51 Total Stockholders' Equity 92,121 84,200 Per Share 30.21 27.61 Note: The Financial Highlights for 1996 have been restated to reflect the acquisition of Maple Park Bancshares, Inc., which was accounted for as a pooling-of-interests. Per share numbers and amounts give retroactive effect to a five-for-four stock split in 1996.
Page 23 LETTER TO STOCKHOLDERS To our Stockholders: Old Second Bancorp, through the lead bank Old Second National, completed a very successful 126th year of business in 1997. This year, we very carefully planned for growth and expansion of services as well as completion of acquisitions and facilities. Much time and energy was put into our development plans which will ultimately enhance shareholder value. Once again, most of our banks and branches met or exceeded their goals. We set new records for total assets, loans, income, dividends declared, and book value per share. Highlights are listed below, but detailed financial information is set forth in the reports that follow (all financial information has been restated to include Maple Park Bancshares, Inc.): Net income after taxes was $9,594,000, up 15.1%. Total assets at year end were $948,371,000, compared to $889,844,000 for the prior year. Stockholders' equity grew to $92,121,000. Cash dividends declared were $.89 per share, a 7.2% increase over the prior year. Return on equity was 11.04%. Return on assets was 1.06%. Basic earnings per share increased to $3.15 from $2.73 in 1996. Old Second Bancorp's stock price has increased dramatically over the past twelve months. Trades at the end of December 1996 were running in the $40.00-$41.00 per share range, while trades at the end of 1997, as reported by NASDAQ, were in the $60.00 per share range. Our Trust Department has had another exceptional year. Assets under management exceed $550,000,000. Trust fees for 1997 were at an all time high of $3,917,000. We look for continued growth in this area, and will consider establishing additional locations in the western suburbs to expand the three present locations of Aurora, Geneva and Elburn. 1997 was the first full year of operation for the Yorkville National Bank's Ottawa Branch. This branch was acquired in December of 1996. We are quite pleased with the growth and profitability of this branch. We think this is a good market for our company. In order to sustain and increase this growth we must provide additional space; so plans are now underway for a new building at the current location in Ottawa. Our new full service branch of Old Second National Bank in Oswego opened in April of 1997. We are pleased with this new location and expect good growth and profitability as this area continues to have remarkable growth. The acquisition of Maple Park Bancshares was completed in May of 1997. This purchase included First State Bank of Maple Park which owned Maple Park Mortgage Company. The two bank locations of this acquisition, Maple Park and Kaneville, have been established as branches of The Old Second National Bank. The building that had been built in Elburn by Maple Park, but not occupied, has been transferred to our Kane County Bank and Trust Company, which moved into it during October of 1997. This will provide them with a much needed modern facility for better service to their existing customers as well as for the expected growth of this area. Maple Park Mortgage Company has been set up as a separate wholly-owned subsidiary of Old Second Bancorp, Inc. This company operates out of offices in St. Charles, Bannockburn, Oswego and Sycamore, with many representatives throughout the western suburban area. We expect this operation to generate substantial fee income. The year of 1997 was no exception to expansion of electronic banking. In addition to our debit cards and corporate cash management services, we are now offering personal computer home banking (O2 PC Bank). Additional technology-driven services are currently being looked at so we remain competitive. Customers today expect a choice of how banking services are provided including ATM's, PC banking, telephone, mail, supermarkets and traditional banking facilities. We expect to provide these delivery opportunities as an access to our services as efficiently and as cost effective as possible. Page 24 Our goals for 1998 and into the next Millennium are to: 1. Preserve, strengthen and enhance our existing customer base and to increase market share in the Fox Valley and western suburbs that we serve. 2. To provide timely, personalized service and state of the art delivery systems. 3. Invest capital into businesses that will produce value for our stockholders. These goals must be met without jeopardizing the strength and stability of our strong capital position. Management of Old Second Bancorp, Inc. looks forward to the challenges of 1998 and beyond. We believe that 1998 will be an exciting and rewarding year. We feel that with our 18 banking locations, three Trust offices and four mortgage locations, we are well positioned to capitalize on the growth taking place in our market area. We again remind ourselves that the key to our success stems directly from our fine staff of employees throughout our organization. I would again like to further thank our directors for their guidance and support, our stockholders for their confidence and our loyal customers for entrusting their business with Old Second Bancorp, Inc. Sincerely, /s/ James Benson James Benson Chairman and CEO Page 25 MANAGEMENT'S DISCUSSION MANAGEMENTS DISCUSSION AND ANALYSIS Financial Condition and Results of Operations The consolidated financial statements include the accounts of Old Second Bancorp, Inc.(the Corporation) and its subsidiaries, all of which are wholly owned. On May 13, 1997, the Corporation issued 111,706 shares of common stock to acquire 100% of the outstanding common stock of Maple Park Bancshares, Inc. (Maple Park) which included First State Bank of Maple Park (First State Bank) and Maple Park Mortgage Company (Maple Park Mortgage). The two bank facilities of First State Bank, located in Maple Park and Kaneville, became branches of The Old Second National Bank (Old Second). Maple Park Mortgage has offices in Bannockburn, St. Charles, Sycamore and Oswego. The acquisition was accounted for as a pooling-of-interests; accordingly, all financial information for prior periods has been restated to include the accounts and results of operations of Maple Park. Maple Park had total assets of $59,266,000 at May 13, 1997. During 1997, the Corporation also added new bank branches in Oswego and Elburn. With the acquisition of Maple Park and the additions of Oswego and Elburn, the Corporation increased the total number of locations to eighteen full-service bank facilities, three trust locations and four mortgage banking offices. The Corporation continues to improve and develop operations designed to bring state-of-the-art products and services to customers. During 1997, we introduced "O2 PC Bank" which allows customers to access their banking through a personal computer from their home or office. "O2 PC Bank" also allows customers to pay all of their bills electronically in the United States. We also updated our Infoline telephone banking system to include features such as transferring money between accounts, receiving a fax statement on checking or savings accounts, issuing a stop payment on a check and accessing information on certificates of deposits. The addition of Maple Park Mortgage expands the wide selection of home, adjustable rate, fixed rate and conventional mortgages available to customers. The New Leaf division of Maple Park Mortgage is located in St. Charles and specializes in assisting prospective and current homeowners who do not qualify in the traditional market to obtain mortgages. Loan originators are available at all 18 Old Second banking locations in addition to four Maple Park Mortgage offices for added customer convenience. Our efforts to meet the needs of our growing markets through new locations, products and services helped us reach many financial goals during 1997. At December 31, 1997, total assets of $948,371,000 were $58,527,000 (6.6%) higher than year-end 1996. Gross loans of $534,980,000 were up $52,676,000 (10.9%) and deposits of $788,929,000 decreased by $1,040,000. Throughout 1997, the Fox Valley area continued to grow due to strong housing and business development resulting in increased demand for real estate loan products, both commercial and residential. Construction and real estate mortgage loans represented $330,262,000 of gross loans at year-end 1997, an increase of $41,083,000 (14.2%) from year-end 1996. Mortgage loans held for sale increased to $26,927,000 at year-end 1997 from $6,137,000 the prior year-end. Deposits were down slightly from year-end 1996 due primarily to anticipated decreases at the Ottawa and Maple Park locations which declined $17,403,000. On a consolidated basis, demand and savings deposits were down $3,572,000 (3.0%) and $615,000 (0.2%), respectively, from year-end 1996. Time deposits have grown $3,147,000 (0.9%) since December 31, 1996. The Corporation also took advantage of additional funding sources including securities sold under agreements to repurchase and a note payable. Securities sold under agreements to repurchase increased to $22,926,000 from $1,838,000 in 1996. Additionally, a note payable of $24,133,000 at year-end 1997 relates to a line of credit used by Maple Park Mortgage to fund residential mortgages held for sale. Net income for 1997 of $9,594,000 was up $1,257,000 (15.1%) from 1996, following a decrease of $419,000 (4.8%) in 1996 over 1995. Net interest income for 1997 of $34,127,000 was up $2,228,000 from 1996 following an increase of $982,000 in 1996 over 1995. Increases in both years were primarily due to volume. Management's quarterly review of the adequacy of the allowance for possible loan losses and the amount of the provision for possible loan losses is based on various factors, such as the nature and volume of the loan portfolio, historical loss experience and changes in economic conditions. The provision for possible loan losses for 1997 totaled $1,256,000 compared to $748,000 in 1996 and $3,399,000 in 1995. As anticipated during negotiations with Maple Park, Management conformed Maple Park's methodology for recording the allowance for possible Page 26 MANAGEMENTS DISCUSSION AND ANALYSIS- (continued) loan losses to Old Second's and an additional provision in 1997 was required. The provision for possible loan losses in 1996 and 1995 included $35,000 and $3,096,000 respectively for Maple Park. The subsidiaries realized net loan charge-offs of $1,301,000, $466,000, and $3,083,000 in 1997, 1996 and 1995, respectively, which includes net charge-offs of $269,000, $480,000, and $2,703,000 for Maple Park prior to acquisition. Total other income for 1997 of $13,959,000 was substantially the same as 1996 which was $4,274,000 lower than 1995. Increases in trust fees and service charges on deposit accounts in 1997 were offset by lower mortgage servicing income. Trust fees of $3,917,000 in 1997 were at record high levels increasing $207,000 (5.6%) from 1996; the fees in 1996 were $660,000 (21.6%) higher than 1995. Service charges on deposit accounts of $3,134,000 were up from $2,907,000 in 1996; 1996 levels increased $298,000 from 1995. The fluctuations in secondary mortgage fees and gains on sales of loans correspond to the changing demands of customers as they took advantage of refinancing during periods of declining interest rates. Total other expenses for 1997 of $33,218,000 were up $77,000 from 1996 following a decrease of $476,000 in 1996 over 1995. The productivity ratio, defined as net interest income plus non-interest income divided by non-interest expenses, measures the effectiveness of the Corporation to generate interest and non-interest income, while controlling costs necessary to deliver quality products and service to customers. The productivity ratio was 145% in 1997, 138% for 1996 and 146% in 1995. Salaries and employees benefits of $17,953,000 in 1997 were up slightly (2.6%) from 1996 which was substantially the same as 1995. The rate of increase in 1997 and 1996 was slowed due partially to the implementation of the cost- effective health care program in 1996 which resulted in increased employee usage of health maintenance organizations. Net occupancy for 1997 was $2,162,000, a decrease of $54,000 from 1996 which was $222,000 higher than 1995. The 1997 expense included costs associated with establishing the Oswego branch. The increase in 1996 included costs associated with the Wal-Mart branch as well as higher maintenance and utilities costs for our expanded network of offices. Furniture and equipment costs were $3,275,000 for 1997 compared to $3,299,000 in 1996 and $2,706,000 in 1995. The increase in expenses since 1995 reflect technology-related decisions of Management which included costs to expand our electronic banking capabilities with home banking and an income tax payment system for customers. 1997 and 1996 also include costs related to establishing new locations. The premium for FDIC insurance is established by the federal regulatory agency and was substantially reduced in 1995. The current premium structure allows for varying rates based upon capitalization levels and soundness criteria. Prior to acquisition, Maple Park was not assessed premium rates at the lowest possible level. As of December 31, 1997, the strength of the subsidiaries' financial condition will result in premium rates assessed at the lowest possible level. The expense for FDIC insurance was $179,000 in 1997, $151,000 in 1996 and $802,000 in 1995. Marketing costs for 1997 were $1,126,000 compared to $1,119,000 in 1996 and $964,000 in 1995. Marketing expenses were higher in 1997 than 1996 because of higher discretionary marketing expenses. Stationery and supplies costs declined the past two years: total expenses were $941,000 in 1997, down $81,000 from 1996, which was $214,000 lower than 1995. The Corporation has successfully controlled costs in other expenses - other. These expenses were $6,454,000 in 1997, $79,000 higher than 1996 which was $885,000 lower than the 1995 total. Income tax expense resulted in effective tax rates for 1997, 1996 and 1995 of 29.5%, 30.3% and 27.8%, respectively. The increase in the effective tax rate in 1996 was mainly attributable to a decrease in interest exempt from federal income taxes. Generally, tax-exempt securities yield lower rates due to the tax benefit factor. In making investment decisions, Management analyzes the tax-exempt yield adjusted for the tax benefit on tax-exempt securities in comparison to the yield available on taxable investments. Selection of specific investments is intended to maximize net income after taxes while considering the level of risk. In 1997, the Corporation adopted Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share", which prescribes the computation, presentation and disclosure requirements for earnings per share. The effect of adopting SFAS No. 128 was not material. Page 27 MANAGEMENTS DISCUSSION AND ANALYSIS - (continued) In June 1997, the Financial Accounting Standards Board issued SFAS No. 130, "Reporting Comprehensive Income". SFAS No. 130 establishes new rules for the reporting and display of comprehensive income and its components; however, adoption in 1998 will have no impact on the Corporation's net income or stockholders' equity. SFAS No. 130 requires unrealized gains or losses on the Corporation's available-for-sale securities, which currently are reported in stockholders' equity, to be included in other comprehensive income and the disclosure of total comprehensive income. The adoption of SFAS No. 130 will not be material to the Corporation. In June 1997, the Financial Accounting Standards Board issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" which addresses the reporting of financial information from operating segments in annual and interim financial statements. The Corporation will apply SFAS No. 131 to financial statements presented after December 31, 1997 and, based on current circumstances, believes the effect of adoption will not be material. Liquidity Liquidity is generally defined as the ability to meet cash flow requirements. For a bank, meeting cash flow requirements means having funds available to satisfy customer needs as well as having funds available to meet depositor withdrawal requests. For the parent company, liquidity means having funds available to pay cash dividends and operating expenses. Liquid assets consist primarily of non-interest bearing and interest bearing deposits, overnight federal funds sold and unpledged investment securities. The Consolidated Statement of Cash Flows included with the financial statements herein sets forth the cash flows from operating, investing and financing activities for the various time periods. For the year ended December 31, 1997, cash provided by operating activities resulted in cash outflows of $3,765,000; while for years ended December 31, 1996 and 1995, there were cash inflows of $32,192,000, and $778,000, respectively. Generally, cash inflows and outflows from operating activities result primarily from interest received in excess of the sum of interest paid and amounts paid to suppliers and employees plus the change in cash flows for mortgage loans originated, purchased and sold. The primary components of cash flows used in investing activities are funding and repayment of customer loans and purchases, sales and maturities of investment securities. During 1997, the excess cash inflows from financing activities (discussed in the following paragraph) have been used to meet increased loan demand. The net cash outflows from investing activities were $34,440,000, $74,225,000 and $38,805,000 for 1997, 1996, and 1995, respectively. Cash flows provided by financing activities are primarily attributable to fluctuations in deposit levels, other short-term borrowings, notes payable and the payment of dividends to stockholders. During 1997, cash inflows of $44,223,000 from financing activities resulted primarily from increases in short-term borrowings and notes payable. Cash inflows from financing activities, primarily the result of increases in deposits, were $36,119,000 and $41,850,000 in 1996 and 1995, respectively. As Management attempts to efficiently use funds available for investing activities while maintaining adequate liquidity, cash and cash equivalents increased from $81,007,000 at year-end 1996 to $87,025,000 at year-end 1997. The net cash flows in 1996 resulted in a decline of $5,914,000 in cash and cash equivalents from year-end 1995. The Corporation has several additional sources of liquidity including the unpledged portion of available-for-sale investment securities which at 19.0% of total assets represents a significant source of liquidity. Other sources include maturing loans and, to a lesser degree, the ability to borrow funds from correspondent banks and obtain funds in the federal funds and repurchase agreement markets. The cash requirements of the parent company have been met by dividends from its subsidiaries, which are the primary source of funds for dividends paid by the Corporation to stockholders. Dividend payments from the subsidiaries to the parent company are subject to limitations under certain banking regulations. However, certain amounts of retained earnings of the subsidiaries are free of such limitations. Management believes that the cash needs of the parent company can be met by dividend payments from the subsidiaries since a sufficient amount of subsidiaries' retained earnings is free of regulatory restrictions (See Note P - Dividend Limitation). Management feels that adequate liquidity has been maintained to meet cash flow requirements and is not aware of any known trends, events or uncertainties that will have, or that are reasonably likely to have, a material effect on the Corporation's or any subsidiaries' liquidity, capital resources or operations. Page 28 Interest Rate Risk The management of interest rate sensitivity is accomplished by monitoring the maturities and repricing opportunities of interest-earning assets and interest-bearing liabilities. Amounts are positioned into rate maturity periods based upon contractual or historical experience or frequency of repricing the respective assets and liabilities. Theoretically, in a MANAGEMENTS DISCUSSION AND ANALYSIS- (continued) period of rising interest rates it is preferable to have what is commonly known as a positive gap (interest-earning assets in excess of interest- bearing liabilities) because more interest-earning assets should mature or reprice within a given time period than interest-bearing liabilities to increase interest income in excess of the increase in interest expense. Conversely, in a period of declining interest rates it is preferable to be in a negative gap position (interest-bearing liabilities in excess of interest- earning assets) because more interest-bearing liabilities should mature or reprice resulting in lower interest expense in excess of the decline in interest income. Because assets and liabilities do not reprice in exactly the same manner as interest levels change, the theory noted herein should not be used as the sole indicator of how the Corporation would be affected by changes in interest rates. The Corporation has set specific guidelines to manage its cumulative gap position. If necessary, Management can shorten loan maturities, price loans with variable rates, purchase investment securities with short maturities or attract longer term certificates of deposits to manage the gap position of the Corporation. The effect on earnings and capital position would be considered when making decisions to manage the gap position. Many organizations use financial derivative products to provide greater flexibility in managing interest rate risk. Derivative financial instruments derive their value from the performance of assets, interest or currency exchange rates, or indexes. Derivative products include a wide assortment of financial contracts including structured notes, swaps, futures, options, forwards and various combinations thereof. These products vary greatly with respect to complexity and risk. The Corporation has invested in several types of structured notes that are classified as derivatives. All structured notes held by the Corporation are debt securities issued by U.S. government agencies. Although classified as available-for-sale, the Corporation has the ability to hold these investment securities to maturity and intends to do so; therefore, any unrealized gains or losses resulting from price fluctuations are considered temporary and are not expected to be realized by the Corporation. At December 31, 1997, the Corporation held structured notes of approximately $19,923,00 all of which mature in one to five years. The following table provides information as of December 31, 1997 about the Corporation's financial instruments that are sensitive to changes in interest rates. Except for the effects of prepayments on mortgage related assets, the table presents principle cash flows and related weighted average interest rates by the earlier of term to repricing or contractual term to maturity. Principal payments on loans are included according to scheduled payments and maturity dates. The Corporation assumes that a portion of savings deposits are core deposits which are expected to roll off in over two years. Page 29 MANAGEMENTS DISCUSSION AND ANAYLSIS - (continued) MANAGEMENT'S DISCUSSION MATURITY OR REPRICING ------------------------------------------------------ Within 3 Months 6 Months One Year Over 3 to 6 to One to Two Two Months Months Year Years Years Total ------------------------------------------------------ Interest earning financial assets: Interest bearing deposits with banks 350 350 Weighted average interest rate 5.00% 5.00% Federal funds sol 46,050 46,050 Weighted average interest rate 5.35% 5.35% Investment securities 24,486 7,186 19,754 42,916 170,125 264,467 Weighted average interest ra 5.53% 7.38% 6.13% 6.25% 6.25% 6.20% Loans held for sale 26,927 26,927 Weighted average interest rate 7.50% 7.50% Commercial loans Fixed rate 19,154 9,169 12,699 12,297 22,958 76,277 Weighted average interest rate 8.86% 8.80% 8.82% 8.89% 8.86% 8.85% Variable rate 102,891 354 960 1,939 1,898 108,042 Weighted average interest rate 9.33% 10.27% 9.52% 9.51% 9.42% 9.34% Real estate loans Fixed rate 11,726 9,558 15,182 30,299 76,013 142,778 Weighted average interest rate 9.09% 8.84% 8.57% 8.79% 8.82% 8.80% Variable rate 23,093 1,999 6,332 8,303 66,061 105,788 Weighted average interest rate 8.98% 8.42% 8.13% 8.02% 8.08% 8.28% Installment loans Fixed rate 7,181 6,700 11,937 20,637 28,316 74,771 Weighted average interest rate 9.02% 9.08% 9.05% 8.54% 8.58% 8.73% Variable rate 1,180 1,180 Weighted average interest rate 9.46% 9.46% Other loans Fixed rate 3,418 66 1636 297 5417 Weighted average interest rate 8.90% 7.50% 8.10% 7.23% 7.50% Variable rate 20,325 20,325 Weighted average interest rate 9.65% 9.65% Interest bearing financial liabilities: Savings deposits 203,902 100,755 304,657 Weighted average interest rate 2.97% 2.80% 2.91% Certificates of deposits 121,080 61,938 77,302 49,499 59,689 369,508 Weighted average interest rate 5.76% 5.69% 5.68% 5.69% 5.44% 5.67% Securities sold under agreements to repurchase and short-term borrowings 29,344 1,629 50 31,023 Weighted average interest rate 4.63% 5.34% 5.56% 4.67% Notes payable 24,133 24,133 Weighted average interest rate 6.50% 6.50% Period gap (91,678) (28,601) (10,422) 68,528 205,224 143,051 Cumulative gap (91,678) (120,279) (130,701) (62,173) 143,051
Page 30 MANAGEMENTS DISCUSSION AND ANALYSIS- (continued) Capital and Dividends Total stockholders' equity of $92,121,000 at year-end 1997 increased $7,921,000 from 1996 due to higher retained earnings and an increase in the net unrealized gain on investments offset by dividends declared to stockholders.Available-for-sale investment securities are reported at market value on the Balance Sheet with the net unrealized gain (loss) on investments reported as a separate component of stockholders' equity. Since the Corporation generally holds investment securities until maturity, the net unrealized gain (loss) resulting from market fluctuations is considered temporary and is not expected to be realized. Stockholders' equity before net unrealized gain on investments at December 31, 1997 is 9.6% of total assets, up from 9.4% in 1996. The equity to asset ratio including the effect of the net unrealized gain on investments is 9.7% at December 31, 1997 compared to 9.5% at year-end 1996. The equity to asset ratios (leverage ratios) continue to be maintained at adequate levels. The Federal Reserve Board has established risk-based capital guidelines which include minimum capital requirements (see Note Q-Regulatory Matters). At December 31, 1997, the minimum total and Tier 1 risk-based capital ratios were 8.00% and 4.00%, respectively. As of December 31, 1997, the Corporation's total and Tier 1 risk-based capital ratios were 14.8% and 13.7%, respectively. Total and Tier 1 risk-based capital ratios were 15.0% and 13.8%, respectively, at December 31, 1996. During 1997, dividends declared were $.19 per share during the first quarter, $.20 per share during second, third and fourth quarters with a year-end extra dividend of $.10 for a total of $.89. During 1996, the Corporation declared total dividends of $.83 per share. Impact of Year 2000 The Corporation is currently in the process of addressing a potential problem that faces all users of automated systems including information systems. Many computer systems process transactions based on two digits representing the year of transaction, rather than a full four digits. These computer systems may not operate properly when the last two digits become "00", as will occur on January 1, 2000. The problem could effect a wide variety of automated information systems, such as mainframe applications, personal computers, communications systems, environmental systems and other information systems. The Corporation has identified areas of operations critical for the delivery of its products and services. The majority of the programs/applications used in the Corporation's operations are purchased from outside vendors. The vendors providing the software are responsible for maintenance of the systems and modifications to enable uninterrupted usage after December 31, 1999. The Corporation's plan includes identification of the problems by performing an inventory of all software applications, obtaining certification of compliance from third parties and testing all of the impacted applications (both internally developed and third-party provided). The Corporation's goal is to have the plan complete and to be fully compliant by December 31, 1998. The vendor of the Corporation's core operating system has already provided certification of compliance with the year 2000 issue. Testing of the system will occur during 1998. Contingency plans, if any are needed, will be developed during 1998 to address potential problems that are identified. The Corporation's plan also includes reviewing any potential risks associated with the loan and investment portfolios due to the year 2000 issue. Based on currently available information, Management does not anticipate that the cost to address year 2000 issues will have a materially adverse impact on the Corporation's financial condition or results of operations. Effects of Inflation The financial statements presented herein are prepared using historical dollars except for investment securities which are presented at market value. Inflation affects the operating results in the cost of operating expenses and the pricing of services. Management closely monitors expenses and the pricing of services so as to control expenses and adjust service fees in view of inflationary increases. Changes in inflation rates also affect the rates earned on assets and the rates paid on liabilities. The asset/liability management program will generally compensate for these effects over a given time period. Page 31 SELECTED CONSOLIDATED FINANCIAL DATA (in thousands except share and per share data) Old Second Bancorp, Inc. and Subsidiaries 1997 1996 1995 1994 1993 ------- -------- ------ ------ ------ BALANCE SHEET ITEMS AT YEAR-END Total Assets $948,371 $889,844 $847,165 $786,502 $730,528 Net Loans 527,709 474,946 455,341 403,281 374,413 Total Deposits 788,929 789,969 737,991 696,903 643,853 Notes Payable 24,133 1,017 11,407 5,230 4,108 Stockholders' Equity Before Net Unrealized Gain (Loss) on Investments 90,768 83,896 78,096 71,489 Total Stockholders' Equity 92,121 84,200 79,615 65,679 67,285 RESULTS OF OPERATIONS Net Interest Income $ 34,127 $ 31,899 $ 30,917 $ 29,829 $ 28,277 Provision for Possible Loan Losses 1,256 748 3,399 1,782 1,519 Net Income 9,594 8,337 8,756 6,445 8,947 PER SHARE DATA Net Income - Basic $ 3.15 $ 2.73 $ 2.87 $ 2.11 $ 2.93 Net Income - Diluted 3.14 2.73 2.87 2.11 2.93 Dividends Declared .89 .83 .70 .63 .57 Stockholders' Equity Before Net Unrealized Gain (Loss) on Investments 29.77 27.51 25.61 23.44 Total Stockholders' Equity 30.21 27.61 26.11 21.54 22.06 WEIGHTED AVERAGE SHARES OUTSTANDING 3,049,190 3,049,292 3,049,412 3,049,412 3,049,412 SHARES OUTSTANDING AT YEAR-END 3,049,190 3,049,190 3,049,412 3,049,412 3,049,412 Note: The Selected Consolidated Financial Data for prior years has been restated to reflect the acquisition of Maple Park Bancshares, Inc., which was accounted for as a pooling-of-interests. Per share numbers and amounts give retroactive effect to a five-for-four stock split in 1996.
Page 32 CONSOLIDATED BALANCE SHEETS (in thousands except share data) Old Second Bancorp, Inc. and subsidiaries December 31, 1997 1996 ------- -------- ASSETS Cash and Due From Banks $ 40,625 $ 40,132 Interest Bearing Deposits with Banks 350 200 Federal Funds Sold 46,050 40,675 --------- -------- Total Cash and Cash Equivalents 87,025 81,007 Available-for-Sale Investment Securities 264,467 287,064 Loans Held for Sale 26,927 6,137 Loans 534,980 482,304 Less: Allowance for Possible Loan Losses 6,923 6,968 Unearned Income 348 390 ---------- --------- Loans, Net 527,709 474,946 Premises and Equipment, Net 20,805 19,410 Other Assets 21,438 21,280 ------- ------- TOTAL ASSETS $948,371 $889,844 ======= ======= LIABILITIES Deposits Demand $114,764 $118,336 Savings 304,657 305,272 Time 369,508 366,361 ---------- --------- Total Deposits 788,929 789,969 Securities Sold Under Agreements to Repurchase 22,926 1,838 Other Short-term Borrowings 8,097 4,401 Notes Payable 24,133 1,017 Other Liabilities 12,165 8,419 ------- ------- TOTAL LIABILITIES 856,250 805,644 STOCKHOLDERS' EQUITY Preferred Stock, no par value: 300,000 shares authorized, none issued Common Stock, no par value: shares authorized: 6,000,000 issued and outstanding: 3,049,190 15,844 15,844 Retained Earnings 74,924 68,052 --------- ---------- Stockholders' Equity Before Net Unrealized Gain on Investments 90,768 83,896 Net Unrealized Gain on Investments 1,353 304 ------ ------ TOTAL STOCKHOLDERS' EQUITY 92,121 84,200 ------ ------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $948,371 $889,844 ======= =======
See accompanying notes. Page 33 CONSOLIDATED STATEMENTS OF INCOME (in thousands except share and per share data) Old Second Bancorp, Inc. and Subsidiaries for the years ended December 31, 1997 1996 1995 INTEREST INCOME -------- ------- ------- Loans $46,422 $40,959 $39,288 Investment Securities: Taxable 13,025 12,723 12,537 Exempt from Federal Income Taxes 3,302 3,755 4,118 Federal Funds Sold 2,407 2,227 2,274 Interest Bearing Deposits with Banks 22 22 22 ------ ------ ------ Total Interest Income 65,178 59,686 58,239 ------ ------ ------ INTEREST EXPENSE Savings Deposits 7,920 7,735 8,175 Time Deposits 21,672 19,512 18,071 Other Borrowings 1,459 540 1,076 ------ ------ ------ Total Interest Expense 31,051 27,787 27,322 ------ ------ ------ Net Interest Income 34,127 31,899 30,917 PROVISION FOR POSSIBLE LOAN LOSSES 1,256 748 3,399 ------ ------ ------ Net Interest Income After Provision for Possible Loan Losses 32,871 31,151 27,518 ------ ------ ------ OTHER INCOME Trust Fees 3,917 3,710 3,050 Service Charges on Deposit Accounts 3,134 2,907 2,609 Secondary Mortgage Fees 926 915 2,012 Mortgage Servicing Income 484 1,161 1,580 Gain on Sale of Loans 4,035 3,609 3,262 Gain on Sale of Mortgage Servicing Rights 3,700 Other 1,463 1,658 2,021 ------ ------ ------ Total Other Income 13,959 13,960 18,234 ------ ------ ------ OTHER EXPENSES Salaries and Employee Benefits 17,953 17,493 17,420 Net Occupancy of Premises 2,162 2,216 1,994 Furniture and Equipment 3,275 3,299 2,706 FDIC Insurance 179 151 802 Marketing 1,126 1,119 964 Stationery and Supplies 941 1,022 1,236 Amortization of Intangibles 1,128 1,466 1,235 Other 6,454 6,375 7,260 ------ ------ ------ Total Other Expenses 33,218 33,141 33,617 ------ ------ ------ INCOME BEFORE INCOME TAXES 13,612 11,970 12,135 INCOME TAX EXPENSE 4,018 3,633 3,379 ------ ------ ------ NET INCOME $ 9,594 $ 8,337 $ 8,756 ===== ===== ====== NET INCOME PER SHARE - BASIC $ 3.15 $ 2.73 $ 2.87 NET INCOME PER SHARE - DILUTED 3.14 2.73 2.87 WEIGHTED AVERAGE SHARES OUTSTANDING 3,049,190 3,049,292 3,049,412 See accompanying notes.
Page 34 CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) Old Second Bancorp, Inc. and Subsidiaries for the years ended December 31, CASH FLOWS FROM 1997 1996 1995 OPERATING ACTIVITIES: ------- -------- -------- Interest Received $64,620 $60,106 $57,963 Interest Paid (31,194) (27,548) (26,300) Paid to Suppliers and Employees (26,665) (26,654) (30,302) Trust Fees Received 3,917 3,710 3,050 Income Taxes Paid (3,695) (4,176) (3,105) Service Charges Received on Deposit Accounts 3,134 2,907 2,609 Mortgage Loan Originations and Purchases (279,450) (346,212) (374,686) Mortgage Loans Sold to Secondary Market 262,695 366,325 365,936 Other Income Received 2,873 3,734 5,613 ------- ------- ------- Net Cash Provided By Operating Activities (3,765) 32,192 778 ------- ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Net Increase in Loans (54,019) (42,994) (43,447) Purchases of Available- for-Sale Securities (57,078) (90,193) (54,977) Proceeds from Sales and Maturities of Available- for-Sale Securities 80,809 64,972 57,399 Net Cash and Cash Equivalents Disbursed For Acquisitions (3,505) Net Proceeds on Sales (Purchases) of Mortgage Servicing Rights (530) (706) 4,164 Capital Expenditures (3,271) (1,967) (2,595) Other, Net (351) 168 651 ------- ------- ------- Net Cash Used In Investing Activities (34,440) (74,225) (38,805) ------- ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Net Increase (Decrease) in Deposits (1,040) 51,978 41,088 Net Increase (Decrease) in Other Short-term Borrowings 24,784 (2,900) 7,347 Net Proceeds (Payments) of Notes Payable 23,116 (10,390) (1,608) Dividends Paid (2,689) (2,478) (1,970) Other, Net 52 (91) (3,007) ------ ------- ------ Net Cash Provided By Financing Activities 44,223 36,119 41,850 ------- ------- ------- Net Increase (Decrease) in Cash and Cash Equivalents 6,018 (5,914) 3,823 Cash and Cash Equivalents at Beginning of Year 81,007 86,921 83,098 ------- ------- ------- Cash and Cash Equivalents at End of Year $87,025 $81,007 $86,921 ====== ====== ======
Page 35 RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES: Net Income $ 9,594 $ 8,337 $ 8,756 Adjustments to Reconcile Net Income to Net Cash Provided By Operating Activities: Depreciation 1,876 1,711 1,958 Provision for Possible Loan Losses 1,256 748 3,399 Increase (Decrease) in Current Taxes Payable 606 (177) 306 Deferred Taxes, Net (282) (365) (284) Net (Increase) Decrease in Mortgages Held for Sale (20,790) 16,504 (12,012) (Increase) Decrease in Interest Receivable (1,145) 168 (384) Increase (Decrease) in Interest Payable (143) 237 747 Premium Amortization/ Discount Accretion on Investments, Net 587 252 577 Amortization of Intangible Assets 1,128 1,466 1,235 Increase (Decrease) in Accrued Expenses 3,476 (187) 1,472 (Increase) Decrease in Prepaid Expenses 73 3,498 (1,374) Gain on Sale of Mortgage Servicing Rights (3,700) Securities Gains (1) (45) Other 127 -------- ------- -------- Total Adjustments (13,359) 23,855 (7,978) -------- ------- ------- Net Cash Provided By Operating Activities $ (3,765) $ 32,192 $ 778 ======= ======= =======
See accompanying notes. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY (in thousands except per share data) Old Second Bancorp, Inc. and Subsidiaries Net Unrealized Common Retained Gain (Loss) on Stock Earnings Investments Total ---------- -------- --------------- -------- Balance at January 1, 1995 $15,844 $55,645 (5,810) $65,679 Net Income for 1995 8,756 8,756 Dividends Declared ($.70 per share) (2,149) (2,149) Change in Net Unrealized Gain (Loss) for 1995 7,329 7,329 ------- ------ ------ ------- Balance at December 31, 1995 15,844 62,252 1,519 79,615 Net Income for 1996 8,337 8,337 Dividends Declared ($.83 per share (2,537) (2,537) Change in Net Unrealized Gain (Loss) for 1996 (1,215) (1,215) ------- ------ ------ ------- Balance at December 31, 1996 15,844 68,052 304 84,200 Net Income for 1997 9,594 9,594 Dividends Declared ($.89 per share) (2,722) (2,722) Change in Net Unrealized Gain (Loss) for 1997 1,049 1,049 ------- ------- ------- ------- Balance at December 31, 1997 $15,844 $74,924 $ 1,353 $92,121 ====== ======= ====== =======
See accompanying notes. Page 36 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Old Second Bancorp, Inc. and Subsidiaries NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accounting and reporting policies of Old Second Bancorp, Inc. (the Corporation) and its subsidiaries conform to generally accepted accounting principles and to general practice within the banking industry. Certain 1996 and 1995 amounts have been reclassified to conform to the 1997 presentation. The following is a description of the more significant of these policies: Consolidation The consolidated financial statements include the accounts of Old Second Bancorp, Inc. and its wholly-owned subsidiaries: The Old Second National Bank of Aurora, The Old Second Community Bank of North Aurora, The Old Second Community Bank of Aurora, Yorkville National Bank, Burlington Bank, Kane County Bank and Trust, Bank of Sugar Grove, Maple Park Mortgage Company and Maple Park Bancshares, Inc. All significant intercompany balances and transactions have been eliminated in consolidation. The Corporation is a multi-bank holding company, principally engaged in the business of attracting deposits and investing these funds, together with borrowings and other funds, to primarily originate commercial, real estate and consumer loans, and purchase investment securities. In addition to the bank subsidiaries, the Corporation has a mortgage banking subsidiary principally engaged in the business of originating, purchasing, selling and servicing residential mortgage loans. The Corporation conducts its activities from a network of offices in Kane, Kendall, DeKalb, DuPage, Lake and LaSalle counties. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires Management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates. Page 37 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Cash Equivalents For purposes of reporting cash flows, cash and cash equivalents include cash on hand, cash due from banks and federal funds sold. Generally, federal funds are purchased and sold for one-day periods. Investment Securities The Corporation and its subsidiaries generally purchase securities for investing purposes. Investment securities are classified in three categories and accounted for as follows: (1) held-to-maturity - reported at amortized cost; (2) trading securities - reported at fair value with unrealized gains and losses included in current earnings; and (3) available-for-sale securities - reported at fair value with unrealized gains and losses excluded from current earnings and reported as a separate component of stockholders' equity. Realized gains and losses on the sale of investment securities are recognized at the time of the transaction and are determined by the specific identification method. Loans Held For Sale The Corporation's mortgage subsidiary originates residential real estate mortgage loans which are to be sold in the secondary market, including loans secured under programs with the Federal Home Loan Mortgage Corporation ("FHLMC"), and the Federal National Mortgage Association ("FNMA"). Mortgage loans held for sale may be hedged with forward sales commitments in order to minimize interest rate market exposure by contracting for the sale of loans in the future at specific prices. Gains and losses from hedging transactions on residential real estate mortgage loans held for sale are included in the cost of the loans in determining the gain or loss when the loans are sold. Residential real estate mortgage loans held for sale are carried at the lower of aggregate cost or fair value. Loans Interest on installment loans made on a discounted basis is generally recognized as income using the interest method. Interest on all other loans is recorded as earned. It is Management's policy to discontinue the accrual of interest income on any loan when there is reasonable doubt as to the timely collectibility of interest or principal. Allowance for Possible Loan Losses The allowance for possible loan losses is increased by provisions charged to operating expense and decreased by charge-offs, net of recoveries, and is available for losses incurred on loans. The provision for possible loan losses is computed based on Management's judgment as to the adequacy of the allowance for possible loan losses after considering such factors as the volume and character of the portfolio, general economic conditions and past loan loss experience. A loan is considered impaired when the carrying amount of the loan exceeds the present value of the future cash flows, discounted at the loan's original effective rate. However, as a practical expedient, Management measures impairment based on the fair value of the underlying collateral. Premises and Equipment Premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is computed over estimated useful lives of ten to forty years for premises and five to ten years for furniture and equipment principally by the use of accelerated depreciation methods. Expenditures for maintenance and repair are expensed as incurred and expenditures for major renovations are capitalized. The cost of property retired or otherwise disposed of is applied against the related accumulated depreciation to the extent thereof, and any gain or loss on disposition is recognized at the time of disposal. Real Estate Owned Real estate owned is initially recorded at the lower of net book value or fair value, less estimated costs to sell. The excess of net book value over fair value at the foreclosure date is charged to the allowance for possible loan losses. Subsequent to foreclosure, any gain or loss on disposition is recognized at the time of disposal. Trust Department Revenue Trust department income is recorded principally on a cash basis, which does not result in a material difference from the accrual basis. Page 38 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Retirement Plan Costs The Corporation uses the "projected unit credit" actuarial method for financial reporting purposes and the entry age cost method for the funding of the qualified plan. Long-Term Incentive Plan The Corporation accounts for its Long-Term Incentive Plan in accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees". Under APB Opinion No. 25, as the exercise price of the Corporation's employees' stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. The amount of compensation expense which would have been recorded by the Corporation had it followed the provisions of SFAS No. 123, "Accounting for Stock-Based Compensation", would not have a material effect on net income per share. Income Taxes The Corporation provides for deferred tax assets and liabilities which represent differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Deferred taxes arise because certain transactions affect the determination of taxable income for tax return purposes. Current tax expense is provided based upon the actual tax liability incurred for tax return purposes. Per Share Amounts Net income per share amounts are based upon the weighted average number of shares of Common Stock outstanding during each reported period. Prior year amounts have been restated to reflect the acquisition of Bank of Sugar Grove in 1995, a five-for-four stock split in 1996, and the acquisition of Maple Park in 1997. In 1997, the Financial Accounting Standards Board issued Statement No. 128, "Earnings per Share". Statement 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. All earnings per share amounts for all periods have been presented, and where appropriate, restated to conform to the Statement 128 requirements. Excess Purchase Price Over Fair Value Of Net Assets Acquired The excess purchase price paid over the fair value of net assets acquired is included in other assets and is amortized into other expenses on a straight-line basis over fifteen years. This amount is periodically assessed to determine if impairment exists. Financial Servicing Assets During 1997, the Corporation adopted the requirements of SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," for various transfers of receivables and other financial assets that occurred during the year. Adoption did not have a material effect on the Corporation's financial position or results of operations. NOTE B - ACQUISITION On May 13, 1997 the Corporation issued 111,706 shares of common stock to acquire 100% of the outstanding common stock of Maple Park Bancshares, Inc. (Maple Park). The acquisition of Maple Park was accounted for as a pooling-of-interests; accordingly, all financial information for prior periods has been restated to include the accounts and results of operations of Maple Park. Operating results for the Corporation and Maple Park prior to combination were as follows (in thousands): For the Period Ended For the Period Ended May 12, 1997 December 31, 1996 -------------------------- -------------------------- Old Second Old Second Bancorp, Maple Bancorp, Maple Inc. Park Combined Inc. Park Combined ---------- ---- --------- --------- ----- -------- Net Interest Income $10,910 $636 $11,546 $29,919 $1,980 $31,899 Net Income (Loss) 3,968 (142) 3,826 $9,632 (1,295) $8,337
Page 39 NOTE B - ACQUISITION (continued) On December 27, 1996, the Yorkville National Bank, a wholly owned subsidiary of the Corporation, purchased deposits of $28,489,000 from First of America - - Ottawa branch (Ottawa) for a premium of $3,505,000. The acquisition included the purchase of certain loans and bank premises of Ottawa. The premium on deposits will be amortized on a straight-line basis over a 10 year period. NOTE C - CASH AND DUE FROM BANKS The subsidiaries maintain compensating cash balances under informal arrangements with their respective correspondents for services received. In addition, The Old Second National Bank of Aurora (Old Second) and Yorkville National Bank (Yorkville) are required to maintain certain average reserve balances with the Federal Reserve Bank. During 1997, average reserve balances with the Federal Reserve Bank were $7,853,000 and $982,000 for Old Second and Yorkville, respectively. NOTE D - INVESTMENT SECURITIES The amortized cost and estimated market values of investment securities at December 31, 1997 are as follows: Gross Gross Amortized Unrealized Unrealized Market Cost Gains Losses Value ------------------------------------------- U.S. Treasury $ 15,747 $ 64 $ 5 $ 15,806 U.S. Government Agencies 144,031 1,031 751 144,311 State & Political Subdivisions 75,398 1,870 68 77,200 Mortgage-Backed Obligations 25,336 120 49 25,407 Other 1,743 1,743 ------- ------ ------- ------- $262,255 $3,085 $ 873 $264,467 ======= ====== ====== =======
The amortized cost and estimated market values of investment securities at December 31, 1996 are as follows: Gross Gross Amortized Unrealized Unrealized Market Cost Gains Losses Value ------------------------------------------ U.S. Treasury $ 21,014 $ 77 $ 42 $ 21,049 U.S. Government Agencies 146,871 634 1,228 146,277 State & Political Subdivisions 83,062 1,436 280 84,218 Mortgage-Backed Obligations 33,752 98 206 33,644 Other 1,876 1,876 ------- ----- ------ -------- $286,575 $2,245 $1,756 $287,064 ======= ===== ====== =======
Page 40 The contractual maturities of investment securities at amortized cost and estimated market value at December 31, 1997 are as follows: Within One to Five to Over One Year Five Years Ten Years Ten Years Total -------------------------------------------------- AMORTIZED COST U.S. Treasury $ 8,451 $ 7,296 $ 15,747 U.S. Government Agencies 25,771 102,230 $11,730 $ 4,300 144,031 State & Political Subdivisions 10,608 29,111 24,892 10,787 75,398 Other 2 1,741 1,743 ------ ------ ------ ------ ------ $44,830 $138,639 $36,622 $16,828 ====== ======= ====== ====== Mortgage-Backed Obligations 25,336 ------ $262,255 ====== MARKET VALUE U.S. Treasury $ 8,465 $ 7,341 $ 15,806 U.S. Government Agencies 25,644 102,665 $11,685 $ 4,317 144,311 State & Political Subdivisions 10,687 29,777 25,611 11,125 77,200 Other 2 1,741 1,743 ------ ------- ------ ------ ------ $44,796 $139,785 $37,296 $17,183 ====== ======= ====== ====== Mortgage-Backed Obligations 25,407 ------- $264,467 =======
At December 31, 1997 and 1996, securities with an approximate aggregate amortized cost of $82,237,000 and $55,284,000, respectively, were pledged as collateral for public and trust deposits and for other purposes as required or permitted by law. NOTE E - LOANS The composition of loans outstanding by lending classifications is as follows: December 31, 1997 1996 ------- -------- Commercial, Financial and Agricultural $146,591 $143,961 Real Estate - Construction 43,095 40,437 Real Estate - Mortgage 287,167 248,742 Installment 58,127 49,164 ------- ------- $534,980 $482,304 ======= =======
In the normal course of business, the subsidiary banks extend credit to executive officers and directors, associates of such persons and entities in which these persons have significant interests. The following is an analysis of these loans which aggregated at least $60,000 per related party: for the years ended December 31, 1997 1996 ------ ------- Balance, Beginning of Year $16,125 $13,670 New Loans 49,868 23,497 Repayments (49,430) (22,328) Other Changes 780 1,286 ------- ------- Balance, End of Year $17,343 $16,125 ======= =======
The subsidiary banks make commercial, agricultural, real estate and consumer loans to customers in their market area. There are no significant concentrations of loans where customers' ability to honor loan terms are dependent upon a single economic sector. Page 41 NOTE F - ALLOWANCE FOR POSSIBLE LOAN LOSSES A summary of the activity in the allowance is as follows: for the years ended December 31, 1997 1996 1995 -------- -------- -------- Balance, Beginning of Year $6,968 $6,686 $6,370 Recoveries 341 435 535 Provisions for Possible Loan Losses 1,256 748 3,399 Charge-offs (1,642) (901) (3,618) ----- ----- ----- Balance, End of Year $6,923 $6,968 $6,686
NOTE G - PREMISES AND EQUIPMENT The cost, accumulated depreciation and amortization, and net book value of premises and furniture and equipment are summarized below: December 31, 1997 ------------------------------------------- Accumulated Net Depreciation & Book Cost Amortization Value ------------------------------------------ Land $ 4,568 $ 4,568 Buildings and Improvements 21,210 $ 8,548 12,662 Furniture and Equipment 13,941 10,366 3,575 ------ ------ ------ $39,719 $18,914 $20,805 ====== ====== ======
NOTE G - PREMISES AND EQUIPMENT (continued) The cost, accumulated depreciation and amortization, and net book value of premises and furniture and equipment are summarized below: December 31, 1996 ---------------------------------------- Accumulated Net Depreciation & Book Cost Amortization Value --------------------------------------- Land $ 4,146 $ 4,146 Buildings and Improvements 19,571 $ 7,891 11,680 Furniture and Equipment 12,761 9,177 3,584 ------ ------ ------ $36,478 $17,068 $19,410 ====== ====== ======
NOTE H - MORTGAGE SERVICING RIGHTS The changes in the Corporation's servicing assets are as follows. for the years ended December 31, 1997 1996 -------- -------- Balance, Beginning of Year $2,403 $2,120 Additions 530 706 Less: Amortization (390) (423) ------ ------ Balance, End of Year $2,543 $2,403 ====== ======
For purposes of measuring impairment, the Corporation stratifies the pools of assets underlying the servicing assets by loan type and interest rate. A valuation allowance is recorded where the fair value is below the carrying amount of specific stratifications, even though the overall fair value of the servicing assets exceeds amortized cost. Page 42 The changes in the Corporation's valuation allowance for serving assets are as follows: for the years ended December 31, 1997 1996 1995 ------- ------- ------- Balance, Beginning of Year $252 $171 Provisions of Impairment 81 $171 Less: Recoveries ---- ---- ---- Balance, End of Year $252 $252 $171 ==== ==== ====
NOTE I - TIME DEPOSITS OF $100,000 OR MORE Time Deposits of $100,000 or more were $70,457,000 and $77,748,000 at December 31, 1997 and 1996, respectively. NOTE J - NOTES PAYABLE $24,133,000 was outstanding at December 31, 1997 for a line of credit extended to Maple Park Mortgage for the funding of loans held for sale. There is $30,000,000 available through this line of credit which is due on July 1, 1998. Interest payments are due on a monthly basis at a rate of 1% over the previous month average Federal Funds rate. The note is unsecured and repayment is guaranteed by Old Second Bancorp, Inc. At December 31, 1996, Maple Park had notes payable at $1,017,000 which required semi-annual payments of principal and interest at the prime rate. These notes were fully paid in 1997. NOTE K - INCOME TAXES A summary of the provision for income taxes is as follows: for the years ended December 31, 1997 1996 1995 -------- -------- --------- Currently Payable, Principally Federal $4,300 $3,998 $3,663 Deferred (282) (365) (284) ------ ------ ------ $4,018 $3,633 $3,379 ====== ====== =====
Page 43 NOTE K - INCOME TAXES (continued) Temporary differences between the tax bases of assets and liabilities and their financial reporting amounts give rise to deferred tax assets and liabilities. The Corporation has the following temporary differences with their approximate tax effects resulting in a net deferred tax asset: December 31, 1997 December 31, 1996 ------------------- -------------------- Temporary Tax Temporary Tax Difference Effect Difference Effect ---------- ------ ---------- ------ Loan Loss Allowance $ 6,426 $ 2,185 $ 6,251 $ 2,125 Pension 649 221 624 212 Other Assets 2,186 743 2,448 833 ------- ------- ------- ------- Total Deferred Assets 9,261 3,149 9,323 3,170 Accumulated Depreciation (2,602) (884) (2,566) (873) Accretion on Investment Securities (933) (317) (1,651) (561) Other Liabilities (1,135) (386) (1,342) (456) ------- ------ -------- ------- Total Deferred Liabilities (4,670) (1,587) (5,559) (1,890) ------- ------ ------- ------- Net Deferred Tax Asset 4,591 1,562 3,764 1,280 Tax Effect of Net Unrealized Gain on Investments (2,212) (859) (489) (190) ------- ------- ------ ------- Net Deferred Tax Asset with Tax Effect of Net Unrealized Gain on Investments $ 2,379 $ 703 $ 3,275 $ 1,090 ====== ===== ======= =======
The principal items affecting the deferred income tax component of the provision for income taxes are as follows: for the years ended December 31, 1997 1996 1995 -------- -------- -------- Loan Loss Provision $(60) $(263) $(402) Accelerated Depreciation 11 (6) 58 Pension Expense (9) (35) (44) Accretion of Premiums and Discounts on Investment Securities (244) (69) 244 Other, Net 20 8 (140) ---- ---- ---- $(282) $(365) $(284) ===== ==== ====
A reconciliation of the expected provision for income taxes at the statutory Federal income tax rate of 34% and the actual tax provision is as follows: for the years ended December 31, 1997 1996 1995 ------- ----- ------ Amount % Amount % Amount % -------- ---- ------- ---- ------- ---- Expected Total Tax Provision At Statutory Rate $ 4,628 34.0% $4,070 34.0% $ 4,126 34.0% Decrease Resulting From Tax Exempt Income (1,104) (8.1) (1,226) (10.2) (1,387) (11.4) Increase Resulting From Goodwill Amortization 150 1.1 215 1.8 175 1.4 State Taxes 183 1.3 376 3.1 294 2.4 Other, Net 161 1.2 198 1.6 171 1.4 ------ ---- ------ ---- ------ --- $ 4,018 29.5 $ 3,633 30.3% $ 3,379 27.8% ====== ==== ====== ==== ====== ====
Page 44 NOTE L - RETIREMENT PLANS The Corporation has a non-contributory defined benefit retirement plan covering substantially all of its banking subsidiaries' full-time and regular part-time employees. Generally, benefits are based on years of service and compensation, as defined. The following table sets forth the plan's funded status and amounts recognized in the Corporation's Consolidated Balance Sheets: Actuarial present value December 31, of benefit obligations: 1997 1996 1995 ------- -------- ------- Vested benefit obligations $5,391 $4,644 $4,638 Nonvested benefit obligations 343 300 261 ----- ----- ----- Accumulated benefit obligation 5,734 4,944 4,899 Excess of projected benefit obligation over accumulated benefit obligation 1,646 1,362 1,286 ----- ----- ----- Projected benefit obligation 7,380 6,306 6,185 Plan assets at fair value, primarily listed common stocks, corporate, and U.S. Government and Agency bonds 7,648 6,770 6,349 ----- ----- ----- Plan assets in excess of projected benefit obligation 268 464 164 Unrecognized net (gain) or loss (635) (471) 187 Prior service cost not yet recognized in net periodic pension cost 30 (71) (135) Unrecognized net asset at January 1, 1987, being amortized over 17 years (515) (602) (688) ----- ----- ----- Unfunded pension cost included in other liabilities $ (852) $ (680) $ (472) ===== ===== ===== Net pension cost includes for the years ended December 31, the following components: 1997 1996 1995 -------- ------- ------- Service cost $ 417 $ 388 $ 280 Interest cost 457 416 392 Actual return on plan assets (1,077) (848) (931) Net amortization and deferral 480 251 361 ----- ----- ----- Net periodic pension cost $ 277 $ 207 $ 102 ===== ===== =====
Certain employees participating in the defined benefit plan are also covered by an unfunded supplemental retirement plan. The purpose of this plan is to extend full retirement benefits to individuals without regard to statutory limitations for qualified funded plans. The following table sets forth the status of this supplemental plan: for the years ended December 31, 1997 1996 ------- ------ Accumulated benefit obligation $286 $429 Projected benefit obligation for service rendered to date 373 429 Accrued pension liability 170 134 Net periodic pension expense 52 57
The weighted-average discount rate used in determining the actuarial present value of the projected benefit obligations was 6.75% at December 31, 1997, 7.00 % at December 31, 1996 and 6.75% at December 31, 1995. The expected long-term rate of return on assets was 8.00% for each of the three years. The assumed rate of increase in future compensation levels was 4.50% for each of the three years. The subsidiaries of the Corporation have contributory and non-contributory Profit Sharing Plans covering substantially all of their respective full-time and regular part-time employees. The amounts expensed with respect to these Profit Sharing Plans were $644,000 in 1997, $644,000 in 1996, and $649,000 in 1995. Page 45 NOTE M - EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share (share and per share data not in thousands): 1997 1996 1995 ------ ------ ------ Numerator for basic and diluted earnings per share - net income $9,594 $8,337 $8,756 ====== ====== ====== Denominator for basic earnings per share -weighted average shares outstanding 3,049,190 3,049,292 3,049,412 Effect of dilutive securities - employee stock options 4,944 1,121 -------- --------- --------- Denominator for diluted earnings per share - adjusted weighted average shares outstanding 3,051,134 3,050,413 3,049,412 ========= ========= ========= Earnings per share - basic $3.15 $2.73 $2.87 Earnings per share - diluted 3.14 2.73 2.87
NOTE N - LONG TERM INCENTIVE PLAN The Corporation has a Long-Term Incentive Plan under which stock options and stock appreciation rights may be granted to employees at the discretion of the Board of Directors. During 1997, 14,050 options which expire in 2007 were granted at an exercise price of $60.50. During 1996, 10,100 options were granted at an exercise price of $40.875 per share. These options expire in 2006. During 1995, 8,875 options expiring in 2005 were granted at an exercise price of $31.20 per share, and 8,875 options were granted at an exercise price of $36.80 per share. Of these options, 250 expired in 1996 and the remaining options expire in 2005. The exercise price of these options was equal to the market price of the underlying stock on the grant date. At December 31, 1997, 15,033 of the options were exercisable. No stock appreciation rights have been granted to date. NOTE O - COMMITMENTS AND CONTINGENCIES In the normal course of business, there are outstanding commitments and contingent liabilities which are not reflected in the financial statements. Commitments and contingent liabilities include financial instruments which involve, to varying degrees, elements of credit, interest rate and liquidity risk. In the opinion of Management, these do not represent unusual risks for the Corporation's subsidiaries and Management does not anticipate any significant losses as a result of these transactions. The Corporation uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. Standby letters of credit outstanding at December 31, 1997, are approximately $11,336,000. Firm commitments by the Corporation's subsidiaries to fund loans in the future are approximately $187,972,000 as of December 31, 1997. There are various other outstanding commitments and contingent liabilities arising in the normal course of business. Disposition of these, in the opinion of Management, will not have a material effect upon financial position. NOTE P - DIVIDEND LIMITATION Under certain banking regulations, regulatory approval is required before dividends declared by the Corporation's subsidiary Banks can exceed defined limits. At December 31, 1997, $17,645,000 of retained earnings of subsidiary Banks are free of such regulatory limitations. There are no such restrictions regarding the Corporation. As a practical matter, dividend payments are restricted to lesser amounts as a result of the maintenance of prudent capital levels. NOTE Q - REGULATORY MATTERS The subsidiaries of the Corporation are subject to various regulatory capital requirements administered by the regulatory banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Corporation's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the subsidiaries of the Corporation must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The subsidiaries' capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Page 46 NOTE Q - REGULATORY MATTERS (continued) Quantitative measures established by regulation to ensure capital adequacy require the Corporation's subsidiaries to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital to risk- weighted assets, and of Tier 1 capital to average assets (as defined in the regulations). Risk-weighted assets are determined by weighing assets and off-balance sheet exposures according to their designated relative credit risks. Tier 1 capital includes certain classes of preferred stock and equity capital, net of certain adjustments for intangible assets and investments in non-consolidated subsidiaries. Total capital consists of Tier 1 capital plus subordinated debt, some types of preferred stock and an adjustment for allowance for possible loan losses. Management believes, as of December 31, 1997, the Corporation's subsidiaries meet all capital adequacy requirements to which they are subject. The total and Tier 1 capital amounts and ratios on a consolidated basis and for Old Second, a significant subsidiary of the Corporation, are set forth in the table below. Included are the minimum ratios as defined by regulatory agencies to maintain minimum Capital Adequacy and to be Well Capitalized Under Prompt Corrective Action Provisions and the actual amounts on a consolidated basis and for Old Second that satisfy such minimums. To Be Well Capitalized Under For Capital Prompt Corrective Actual Adequacy Purposes: Action Provisions: ----------------- ------------------ ----------------- Amount Ratio Amount Ratio Amount Ratio -------- ------- ---------- ------ ------- ------ CONSOLIDATED: As of December 31, 1997 Total Capital to Risk Weighted Assets $90,378 14.8% $48,877 8.0% $61,096 10.0% Tier 1 Capital to Risk Weighted Assets 83,454 13.7 24,438 4.0 36,658 6.0 Tier 1 Capital to Average Assets 83,454 8.8 37,878 4.0 47,347 5.0 As of December 31, 1996 Total Capital to Risk Weighted Assets 83,502 15.0 44,453 8.0 55,566 10.0 Tier 1 Capital to Risk Weighted Assets 76,563 13.8 22,227 4.0 33,340 6.0 Tier 1 Capital to Average Assets 76,563 9.3 32,835 4.0 41,044 5.0 OLD SECOND: As of December 31, 1997 Total Capital to Risk Weighted Assets 50,202 13.7 29,271 8.0 36,589 10.0 Tier 1 Capital to Risk Weighted Assets 46,520 12.7 14,636 4.0 21,953 6.0 Tier 1 Capital to Average Assets 46,520 8.7 21,461 4.0 26,826 5.0 As of December 31, 1996 Total Capital to Risk Weighted Assets 45,057 15.1 23,941 8.0 29,927 10.0 Tier 1 Capital to Risk Weighted Assets 41,669 13.9 11,971 4.0 17,956 6.0 Tier 1 Capital to Average Assets 41,669 9.7 17,162 4.0 21,452 5.0
NOTE R - FAIR VALUE OF FINANCIAL INSTRUMENTS Statements of Financial Accounting Standard Number 107, "Disclosure About Fair Value Of Financial Instruments" requires that the Corporation disclose estimates, methods, and assumptions used in determination of the fair values of the Corporation's financial instruments, as set forth below. Cash and Cash Equivalents, Securities Sold Under Agreement to Repurchase and Other Short-Term Borrowings. For these short-term instruments, the carrying amount is a reasonable estimate of fair value. Investment securities For investment securities, fair values are based on quoted market prices or dealer quotes. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities. Page 47 NOTE R - FAIR VALUE OF FINANCIAL INSTRUMENTS (continued) Loans Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type, such as commercial, commercial real estate, residential mortgage, credit card, and other consumer. Each loan category is further segmented into fixed and adjustable rate interest terms. Cash flows are discounted using current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. Deposit Liabilities The fair value of demand deposits, savings accounts, and certain money market deposits is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated by discounting future cash flows at rates currently offered for deposits of similar remaining maturities. Notes Payable Rates currently available to the Corporation for debt with similar terms and remaining maturities are used to estimate fair value of existing debt. Commitments to Extend Credit and Standby Letters of Credit The fair value of commitments is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties at the reporting date. The carrying amount and estimated fair value of the Corporation's financial instruments are as follows: December 31, 1997 December 31, 1996 ----------------------- --------------------- Carrying Fair Carrying Fair Amount Value Amount Value Financial Assets: ---------- ---------- --------- ------- Cash and Cash Equivalents $ 87,025 $ 87,025 $ 81,007 $ 81,007 Available-for-Sale Securities 264,467 264,467 287,064 287,064 Loans Held for Sale 26,927 26,927 6,137 6,137 Loans, Net 527,709 533,103 474,946 481,185 -------- -------- -------- -------- Total Financial Assets $906,128 $911,522 $849,154 $855,393 Financial Liabilities: Deposits $788,929 $798,152 $789,969 $788,243 Securities Sold Under Agreements to Repurchase 22,926 22,926 1,838 1,838 Other Short-Term Borrowings 8,097 8,097 4,401 4,401 Note Payable 24,133 24,133 1,017 1,017 -------- -------- -------- -------- Total Financial Liabilities $844,085 $853,308 $797,225 $795,499 ======== ======== ======== ======== Unrecognized Financial Instruments: Commitments to Extend Credit $ 18 $ 322 Standby Letters of Credit (113) (76) -------- ------- Total Unrecognized Financial Instruments $ (95) $ 246 ======= =======
Page 48 NOTE S - SUMMARY OF QUARTERLY FINANCIAL INFORMATION (UNAUDITED) The following unaudited quarterly financial information, in the opinion of Management, fairly presents the results of operations for such periods. 1997 Quarter 1996 Quarter ----------------------------- -------------------------------- 4th 3rd 2nd 1st 4th 3rd 2nd 1st ------- ------ ------ ------ ------- ------ ------ ------ Interest Income $17,333 $16,764 $15,598 $15,483 $15,242 $15,055 $14,573 $14,816 Interest Expense 8,285 8,174 7,394 7,198 7,144 6,996 6,671 6,976 Net Interest Income 9,048 8,590 8,204 8,285 8,098 8,059 7,902 7,840 Provision for Possible Loan Losses 355 356 350 195 204 265 140 139 Income Before Income Taxes 4,417 3,604 2,320 3,271 2,369 3,083 3,036 3,482 Net Income 3,325 2,500 1,495 2,274 1,811 2,088 2,065 2,373 Net Income Per Share - Basic 1.09 .82 .49 .75 .59 .68 .68 .78 Net Income Per Share - Diluted 1.08 .82 .49 .75 .59 .68 .68 .78
NOTE T - CONDENSED FINANCIAL INFORMATION OF THE CORPORATION ONLY Following is condensed financial information of the Corporation only, for the respective dates and time periods shown: Condensed Balance Sheets December 31, 1997 1996 ASSETS Cash on Deposit with Bank Subsidiaries $ 1,198 $ 2,078 Investment In Wholly-Owned Subsidiaries 89,799 80,342 Available-for-Sale Securities 2,087 2,787 Other Assets 116 78 ------ ------ TOTAL ASSETS $93,200 $85,285 ====== ====== LIABILITIES AND STOCKHOLDERS' EQUITY Other Liabilities $ 1,079 $ 1,085 Stockholders' Equity 92,121 84,200 ------ ------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 93,200 $85,285 ====== ======
Page 49 NOTE T - CONDENSED FINANCIAL INFORMATION OF THE CORPORATION ONLY-(continued) Condensed Statements of Income for the years ended December 31, 1997 1996 1995 INCOME -------- -------- -------- Dividend Income from Subsidiaries $ 3,915 $ 4,015 $ 3,730 Interest Income 161 122 40 ------ ----- ----- TOTAL INCOME 4,076 4,137 3,770 EXPENSES Other Expenses 952 903 898 ----- ----- ----- TOTAL EXPENSES 952 903 898 Income Before Income Taxes and Equity In Undistributed Net Income of Subsidiaries 3,124 3,234 2,872 Income Tax Benefit (192) (83) (201) ----- ----- ---- Income Before Equity In Undistributed Net Income of Subsidiaries 3,316 3,317 3,073 Equity In Undistributed Net Income of Subsidiaries 6,278 5,020 5,683 ------ ------ ------ NET INCOME $ 9,594 $ 8,337 $ 8,756 ====== ===== =====
Page 50 NOTE T - CONDENSED FINANCIAL INFORMATION OF THE CORPORATION ONLY (continued) Condensed Statements of Cash Flows for the years ended December 31, 1997 1996 1995 CASH FLOWS FROM OPERATING ACTIVITIES: ------- ------- ------- Dividends Received From Subsidiaries $3,915 $4,015 $3,730 Interest Received 187 130 7 Income Tax Payments Received From Subsidiaries 4,286 4,445 3,373 Income Taxes Paid (4,198) (4,430) (3,352) Paid to Suppliers (507) (257) (407) ----- ----- ----- Net Cash Provided By Operating Activities 3,683 3,903 3,351 ------ ------ ------ CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of Available- for-Sale Securities (500) (2,029) (1,669) Proceeds from Sales and Maturities of Available-for-Sale Securities 1,200 1,050 Investment in Subsidiary (2,574) Other, Net 36 (24) ------ ------ ------ Net Cash Used In Investing Activities (1,874) (943) (1,693) ------ ------ ------ CASH FLOWS FROM FINANCING ACTIVITIES: Dividends Paid (2,689) (2,478) (1,970) ------ ------ ------ Net Cash Used In Financing Activities (2,689) (2,478) (1,970) ------ ------ ----- Net Increase (Decrease) in Cash and Cash Equivalents (880) 482 (312) Cash and Cash Equivalents at Beginning of Year 2,078 1,596 1,908 ------ ------ ----- Cash and Cash Equivalents at End of Year $1,198 $2,078 $1,596 ====== ===== ====== RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES: Net Income $9,594 $8,337 $8,756 Adjustments to Reconcile Net Income To Net Cash Provided by Operating Activities: Equity In Undistributed Net Income of Subsidiaries (6,278) (5,020) (5,683) Goodwill Amortization 441 633 516 Decrease in Taxes Payable (69) (68) (180) (Increase) Decrease in Interest Receivable 16 (11) (33) Other, Net (21) 32 (25) ----- ----- ----- Total Adjustments (5,911) (4,434) (5,405) ------ ------ ----- Net Cash Provided By Operating Activities $3,683 $3,903 $3,351 ===== ===== ======
Page 51 REPORT OF INDEPENDENT ACCOUNTANTS ERNST & YOUNG LLP Report of Independent Accountants Stockholders and Board of Directors Old Second Bancorp, Inc. We have audited the accompanying consolidated balance sheets of Old Second Bancorp, Inc. and Subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of income, changes in stockholders' equity, and cash flows for the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Comapany's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the finanial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statements presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Old Second Bancorp, Inc. and Subsidiaries as of December 31, 1997, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP January 16, 1998 10K REPORT Copies of the Corporation's 1997 10K report filed with the Securities and Exchange Commission will be mailed to stockholders upon written request to: Ronald J. Carlson, President, Chief Financial Officer and Secretary, Old Second Bancorp, Inc., 37 South River Street, Aurora, Illinois 60506-4172. There were 1,315 holders of record of the Corporation's Common Stock at year- end 1997. MARKET PRICE OF COMMON STOCK The Corporation's Common Stock has been traded in the over-the-counter market on the NASDAQ National Market System under the symbol OSBC since November 11, 1993. The following table sets forth the range of bid and ask prices during each quarter for 1997 and 1996 as quoted by BLOOMBERG FINANCIAL MARKETS. This information represents quotations and does not necessarily reflect actual transactions. Bid Ask --------------------- ---------------------- 1997 High Low High Low - ------- -------- ------- -------- -------- First Quarter $47.50 $40.75 $49.00 $41.50 Second Quarter 47.50 46.75 48.75 48.00 Third Quarter 50.50 46.75 52.75 48.50 Fourth Quarter 63.00 50.50 66.50 52.75 Bid Ask 1996 High Low High Low -------- ------- ------- -------- First Quarter $38.00 $36.00 $39.00 $36.50 Second Quarter 39.25 36.75 39.75 38.00 Third Quarter 39.25 38.50 39.50 39.00 Fourth Quarter 40.50 39.25 41.50 39.75
The range of high and low closing sales prices of the Corporation's Common Stock as quoted on the NASDAQ National Market System from January 1, 1997 through December 31, 1997 was $63.00 and $41.25, respectively. Page 52 BOARD OF DIRECTORS Old Second Bancorp, Inc. and Subsidiaries Walter Alexander President, Alexander Lumber Company (lumber and building material sales) James E. Benson Chairman and Chief Executive Officer, Old Second Bancorp, Inc. Ronald J. Carlson President, Chief Operating Officer, Chief Financial Officer, and Secretary, Old Second Bancorp, Inc. and Vice President/CFO, The Old Second National Bank of Aurora Marvin Fagel President, Aurora Packing Company and Chairman of the Board and CEO, New City Packing Company (a meat packing company) Joanne Hansen President, Furnas Foundation, Inc. Kenneth Lindgren President, Daco Incorporated (contract manufacturer of machined components) Jesse Maberry Treasurer, Aurora Bearing Company (manufacturer of rod end and spherical bearings) Gary McCarter Vice President, Farmers Group, Inc. (insurance) D. Chet McKee President, Copley Memorial Hospital William J. Meyer President, William F. Meyer Company (plumbing fixtures and supplies) Larry A. Schuster Chairman, Westside Mechanical, Inc. (mechanical contractor) William B. Skoglund Vice President and Assistant Secretary, Old Second Bancorp, Inc., and President and Chief Executive Officer, The Old Second National Bank of Aurora George Starmann III Vice President, Old Second Bancorp, Inc. and Executive Vice President and Senior Trust Officer, The Old Second National Bank of Aurora Page 53 Directors Emeriti John C. Dunham Retired Chairman of the Board, Aurora Equipment Company Vernon H. Haase Retired Chairman, Henry Pratt Company Urban Hipp Retired, Barber-Greene Company Dorothy E. McEnroe Realtor, ReMax of Aurora M.J. O'Brien Retired Vice President and Secretary, Old Second Bancorp, Inc., and Retired Senior Vice President and Cashier, The Old Second National Bank of Aurora Daniel J. Ruddy President, Construction Advisory Services, Inc. Ralph N. Schleifer President, Fox Valley Dry Wall, Inc. Edward Schmitt President, Schmitt McDonalds Townsend L. Way, Jr. Retired President, Richards - Wilcox Mfg. Co. Richard Westphal Farmer Directors Emeriti John C. Dunham Vernon H. Haase Urban Hipp Dorothy F. McEnroe M. J. O'Brien Daniel J. Ruddy Ralph N. Schleifer Edward Schmitt Townsend L. Way, Jr. Richard Westphal Page 54 CONSOLIDATING AND CONSOLIDATED BALANCE SHEET (in thousands) Old Second Bancorp, Inc. and Subsidiaries at December 31, 1997 THE OLD THE Old SECOND THE OLD SECOND COMMUNITY SECOND NATIONAL BANK OF COMMUNITY YORKVILLE BANK OF NORTH BANK OF NATIONAL BURLINGTON AURORA AURORA AURORA BANK BANK ASSETS Cash and Due From Banks $ 24,492 $ 1,659 $ 4,183 $ 4,683 $ 728 Interest Bearing Deposits with Banks 350 Federal Funds Sold 31,390 2,475 2,375 3,800 1,625 --------- --------- -------- -------- -------- Total Cash and Cash Equivalents 56,232 4,134 6,558 8,483 2,353 Investment Securities 137,069 27,235 16,851 43,316 8,518 Loans Held for Sale Loans 324,196 22,968 20,123 84,583 23,509 Less: Allowance for Possible Loan Losses 3,681 373 316 1,055 345 Less: Unearned Income 342 -------- --------- --------- -------- -------- Loans, Net 320,173 22,595 19,807 83,528 23,164 Bank Premises and Equipment, Net 12,502 1,454 593 1,382 444 Other Assets 4,916 886 642 5,428 439 Investment in Subsidiaries ------- ------ ------ ------- ------ TOTAL ASSETS $530,892 $56,304 $44,451 $142,137 $34,918 ======== ======= ====== ======= ====== LIABILITIES Deposits Demand $ 74,484 $ 7,048 $ 6,774 $ 13,548 $ 2,404 Savings 159,596 23,250 16,836 46,913 13,429 Time 220,997 19,200 14,999 65,027 15,080 -------- -------- -------- ------- ------- Total Deposits 455,077 49,498 38,609 125,488 30,913 Sec. Sold Under Agreements to Repurchase 17,379 2,308 3,239 Other Short-Term Borrowings 6,434 1,000 182 Notes Payable Other Liabilities 4,780 320 223 1,247 246 ----- ------ ------ ------ ----- TOTAL LIABILITIES 483,670 52,126 39,832 130,156 31,159 STOCKHOLDERS' EQUITY Common Stock 3,275 250 480 525 250 Additional Capital 4,125 1,598 1,420 2,025 1,250 Retained Earnings 39,120 2,252 2,608 9,197 2,198 Net Unrealized Gain on Investments 702 78 111 234 61 ------ ------ ------- ------- ------ TOTAL STOCKHOLDERS' EQUITY 47,222 4,178 4,619 11,981 3,759 ------- ------ ------ ------- ------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $530,892 $56,304 $44,451 $142,137 $34,918 ======== ======= ======= ======= =======
Page 55 KANE COUNTY BANK OF MAPLE PARK BANK AND SUGAR MAPLE PARK BANCSHARES, TRUST GROVE MORTGAGE INC. ASSETS Cash and Due From Banks $ 3,701 $ 1,664 $ 3,351 $ 306 Interest Bearing Deposits with Banks Federal Funds Sold 5,275 -------- ------- ------- ------- Total Cash and Cash Equivalents 8,976 1,664 351 306 Investment Securities 17,074 12,317 Loans Held for Sale 26,541 Loans 35,451 24,150 Less: Allowance for Possible Loan Losses 705 448 Less: Unearned Income 6 ------- ------- Loans, Net 34,740 23,702 Bank Premises and Equipment, Net 2,736 1,162 337 Other Assets 1,269 996 3,107 Investment in Subsidiaries 2,167 ------- ------- ------- ----- TOTAL ASSETS $ 64,795 $ 39,841 $ 30,336 $ 2,473 ======= ======= ======= ======= LIABILITIES Deposits Demand $ 8,132 $ 4,328 Savings 30,456 13,967 Time 18,426 15,779 --------- -------- Total Deposits 57,014 34,074 Sec. Sold Under Agreements to Repurchase Other Short-Term Borrowings 481 890 Notes Payable $ 24,133 Other Liabilities 550 461 3,842 $ 52 ------- ------- ------- ------- TOTAL LIABILITIES 58,045 35,425 27,975 52 STOCKHOLDERS' EQUITY Common Stock 1,000 260 10 466 Additional Capital 2,500 2,300 1,752 Retained Earnings 3,159 1,789 2,351 203 Net Unrealized Gain on Investments 91 67 ------- ------- ------- ------ TOTAL STOCKHOLDERS' EQUITY 6,750 4,416 2,361 2,421 ------ ------ ------ ------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 64,795 $ 39,841 $ 30,336 $ 2,473 ======= ======= ======= ======
Page 56 OLD OLD SECOND SECOND BANCORP, BANCORP, CONSOLIDATING INC. INC. ADJUSTMENTS CONSOLIDATED ASSETS Cash and Due From Banks $ 1,198 $ (2,340) $ 40,625 Interest Bearing Deposits with Banks 350 Federal Funds Sold (890) 46,050 -------- -------- -------- Total Cash and Cash Equivalents 1,198 (3,230) 87,025 Investment Securities 2,087 264,467 Loans Held for Sale 386 26,927 Loans 534,980 Less: Allowance for Possible Loan Losses 6,923 Less: Unearned Income 348 -------- Loans, Net 527,709 Bank Premises and Equipment, Net 195 20,805 Other Assets 116 3,639 21,438 Investment in Subsidiar 89,799 (91,966) ------- ------- -------- TOTAL ASSETS $ 93,200 $ (90,976) $ 948,371 ======== ========= ======== LIABILITIES Deposits Demand $(1,954) $114,764 Savings 210 304,657 Time 369,508 --------- -------- Total Deposits (1,744) 788,929 Sec. Sold Under Agreements to Repurchase 22,926 Other Short-Term Borrowings (890) 8,097 Notes Payable 24,133 Other Liabilities $ 1,079 (635) 12,165 --------- ------- ------- TOTAL LIABILITIES 1,079 (3,269) 856,250 STOCKHOLDERS' EQUITY Common Stock 15,844 (6,516) 15,844 Additional Capital (16,970) Retained Earnings 74,924 (62,877) 74,924 Net Unrealized Gain on Investments 1,353 (1,344) 1,353 -------- --------- -------- TOTAL STOCKHOLDERS' EQUITY 92,121 (87,707) 92,121 ------- ------- ------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $93,200 $(90,976) $948,371 ======= ======== ========
Page 57 EX-21 3 SUBSIDIARIES OF THE REGISTRANT Exhibit 21.1 SUBSIDIARIES OF THE REGISTRANT The subsidiaries of the registrant are as follows: Incorporated Percentage of Voting Name Under Laws of Securities Owned ---- ------------- -------------------- The Old Second National Bank of Aurora The United States 100% The Old Second Community Bank of North Aurora State of Illinois 100% The Old Second Community Bank of Aurora State of Illinois 100% Yorkville National Bank The United States 100% Burlington Bank State of Illinois 100% Kane County Bank and Trust Company State of Illinois 100% Bank of Sugar Grove State of Illinois 100% Maple Park Bancshares, Inc. State of Illinois 100% Maple Park Mortgage State of Illinois 100% Page 58
EX-23 4 CONSENT OF INDEPENDENT ACCOUNTANT Exhibit 23.1 CONSENT OF INDEPENDENT AUDITOR We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 33-87722) pertaining to the Old Second Bancorp, Inc. Long-Term Incentive Plan of our report dated January 16, 1998, with respect to the consolidated financial statements of Old Second Bancorp, Inc. included in the Annual Report (Form 10-K) for the year ended December 31, 1997. We also consent to the incorporation by reference in the Registration Statement (Form S-3 No. 333-31049) pertaining to the registration of shares of Old Second Bancorp, Inc. common stock received in the Maple Park Bancshares, Inc. merger of our report dated January 16, 1998, with respect to the consolidated financial statements of Old Second Bancorp, Inc. included in the Annual Report (Form 10-K) for the year ended December 31, 1997. /s/ Ernst & Young LLP Chicago, Illinois March 27, 1998 Page 59 EX-25 5 AUDIT OPINION OF INDEPENDENT ACCOUNTANT Exhibit 25.1 Report of Independent Accountants The Stockholders and Board of Directors Old Second Bancorp Inc. We have audited the accompanying consolidated balance sheets of Old Second Bancorp, Inc. and Subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of income, changes in stockholders' equity, and cash flows for the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standard require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all materail respects, the consolidated financial position of Old Second Bancorp, Inc. and Subsidiaries as of December 31, 1997, and the consolidated results of operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP January 16, 1998 Page 60 EX-27 6 FINANCIAL DATA SCHEDULE
9 1,000 YEAR DEC-31-1997 DEC-31-1997 40625 350 46050 0 264467 0 0 527709 6923 948371 788929 55156 12165 0 15844 0 0 76277 948371 46422 16327 2429 65178 29595 31051 34127 1256 0 33218 13612 9594 0 0 9594 3.15 3.14 4.14 2189 1011 0 6911 6968 1642 341 6923 6923 0 0
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