Exhibit 99.1
Old Second Bancorp, Inc. | For Immediate Release |
(Nasdaq: OSBC) | October 20, 2006 |
Contact: | J. Douglas Cheatham |
| Chief Financial Officer |
| (630) 906-5484 |
Old Second Bancorp, Inc. Announces Third Quarter Earnings
AURORA, Illinois — Old Second Bancorp, Inc. (Nasdaq: OSBC) today announced third quarter earnings of $0.37 per diluted share, on earnings of $4.9 million. Diluted earnings per share were down from the third quarter of 2005, in which the Company earned $0.52 per diluted share on earnings of $7.2 million. Earnings for the first nine months of 2006 were $1.28 per diluted share, on $17.4 million in net income, compared with $1.46 per diluted share in the same period of 2005, on earnings of $19.9 million. The Company is in the process of distributing the assets of its defined benefit pension plan after terminating the plan in December of 2005. A loss on settlement of the benefit obligations relating to the termination of $1,001,000 was recorded in the third quarter of 2006. The loss related to the termination of the defined benefit pension plan was $1,358,000 for the first nine months of 2006. The liabilities are expected to exceed assets at the time of final distribution of all benefits by approximately $250,000. A contribution of the remaining shortfall amount is required to be made before the defined benefit plan is liquidated, which is anticipated to be in the fourth quarter of 2006. Generally, for the year to date period, balance sheet growth and an increase in noninterest income were offset by a lower net interest margin, a higher provision for loan losses, a decline in mortgage banking activity, and increased facility and related costs associated with branch expansion into new markets.
Net interest income declined in the first nine months of 2006, from $55.0 million in 2005 to $53.5 million in 2006. Third quarter net interest income declined from $18.8 million in 2005, to $17.3 million in 2006. For both the quarter and year to date periods, the growth in earning assets was offset by a lower net interest margin. Average earning assets grew $128.0 million or 6.14% from the first nine months of 2005 to the first nine months of 2006. In the same period, however, the net interest margin declined from 3.66% in 2005 to 3.37% in 2006.
On a year to date comparative basis, the average tax-equivalent yield on earning assets increased from 5.73% in 2005 to 6.49% in 2006, which was a 76 basis point increase. During the same nine-month period, however, the cost of funds increased from 2.40% to 3.55%, or 115 basis points. Changes in funding composition had a significant affect on increasing interest costs and lowering the net interest margin. The average balances of lower cost sources of funds such as interest-bearing transaction accounts and savings accounts declined $26.1 million, or 3.2% from the first nine months of 2005 to the first nine months of 2006. Noninterest-bearing deposits increased by a nominal amount while the aggregate categories of higher-cost sources of funds such as time deposits, repurchase agreements and short-term borrowing increased $170.4 million, or 17.7%.
The Company recorded a provision for loan losses of $400,000 in the third quarter of 2006, versus $450,000 in the third quarter of 2005. In the first nine months of 2006, the Company provided $1,244,000 compared with $813,000 in the first nine months of 2005, an increase of $431,000. Loan portfolio quality remained strong through the third quarter of 2006, and the amount of charge-offs continued at the Company’s low level. Management performed quantitative and
qualitative analysis of the allowance for loan losses and determined that the amount reported as of September 30, 2006, was appropriate. Despite the general decline in nonperforming assets in 2006, management increased the allowance for loan losses in 2006 to address concerns associated with the commercial real estate market and the large concentration held by the Company. The ratio of the allowance for loan losses to nonperforming loans was 363% as of September 30, 2006, compared with 324% as of September 30, 2005. Nonperforming loans were $4.5 million as of September 30, 2006, and $4.9 million as of September 30, 2005. Net charge-offs were $149,000 in the third quarter of 2006 and $136,000 in the third quarter of 2005. On a year to date basis, net charge-offs were $229,000 in the first nine months of 2006 and $469,000 in the first nine months of 2005.
Noninterest income was $6.9 million during the third quarter of 2006 and $7.4 million during the third quarter of 2005, a decrease of $500,000, or 6.8%. This decrease was primarily due to a reduction in mortgage banking income, including gains on sales of mortgage loans, secondary market fees, and servicing income, which declined $698,000, or 37.1%, from the third quarter of 2005 to the third quarter of 2006. For the year to date, mortgage-banking income was down $1,614,000, or 30.1%, from the first nine months of 2005 to the first nine months of 2006. Higher borrowing costs associated with an increased interest rate environment resulted in a decline in mortgage loan demand and related mortgage banking income. Other income decreased $146,000, or 9.7%, from the third quarter of 2005, to $1.4 million in the third quarter of 2006. Other income increased $80,000, or 2.0%, from the first nine months of 2005 to $4.2 million for the first nine months of 2006.
Trust income was up $127,000, or 8.0%, from the third quarter of 2005 to the third quarter of 2006, to $1.7 million. Trust income was $5.5 million in the first nine months of 2006, an increase of $636,000, or 13.1%, from the first nine months of 2005. Increases in trust income for both the quarter and the year to date period were primarily associated with estate fees. There were no security sales in the third quarter of 2006 or 2005, while securities gains totaled $418,000 in the first nine months of 2006, compared with a $5,000 loss in the first nine months of 2005. Bank owned life insurance (“BOLI”) income increased from $218,000 to $483,000 in the third quarter, and from $652,000 to $1,444,000 on a year to date basis, when comparing 2006 and 2005, as a result of BOLI purchases.
Noninterest expense was $17.2 million during the third quarter of 2006, an increase of $2,127,000, or 14.1%, from $15.1 million in the third quarter of 2005. Noninterest expense was $49.0 million during the first nine months of 2006, an increase of $3,513,000, or 7.7%, from $45.5 million in the first nine months of 2005. Salaries and benefits expense was $9.2 million during the third quarter of 2006, an increase of $413,000, or 4.7% from $8.8 million in the third quarter of 2005. In the first nine months of the year, salaries and benefits were $27.3 million in 2006 and $26.9 million in 2005, an increase of $413,000 or 1.5%.
Net occupancy and furniture and equipment expenses increased $204,000 from the third quarter of 2005 to the third quarter of 2006, or 8.5%. Net occupancy and furniture and equipment expenses increased $891,000 from the first nine months of 2005 to the first nine months of 2006, or 13.8%. The increase in the year to date period is due, in part, to a reduction in the estimated accrual for occupancy related expenses in the first nine months of 2005. As the Company has expanded into and developed new markets, related facility expenses have increased. Two new branches opened in the first quarter of 2005, one branch opened in the first quarter of 2006 and two additional branch locations opened in the third quarter of 2006. Other expense increased
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$496,000, or 15.0%, from the third quarter of 2005, to $3.8 million in the third quarter of 2006. Other expenses increased $701,000, or 6.6% from the first nine months of 2005 to $11.3 million in the first nine months of 2006. Increases in other expense for both the quarter and the year to date basis, when comparing 2006 and 2005 primarily related to loan expenditures, amortization of mortgage servicing rights, and new employee recruitment fees.
The provision for income tax as a percentage of pretax income decreased from 33.0% as of the third quarter of 2005 to 25.0% as of the third quarter of 2006. Income tax as a percentage of pretax income decreased from 32.7% for the first nine months of 2005 to 29.3% for the first nine months of 2006. The percentage of pretax dollars used for income tax expense was reduced primarily due to the increased level of BOLI detailed in the noninterest income discussion above, and a new tax planning strategy that was implemented at the end of the third quarter of 2006.
Total assets were $2.41 billion as of September 30, 2006, compared with $2.37 billion as of December 31, 2005. Loans grew $81.0 million during the first nine months of 2006, while securities available for sale declined $25.0 million. Real estate loans to the commercial, construction and residential sectors increased $43.2 million (7.3%), $14.2 million (3.9%) and $30.5 (5.5%) respectively, in the first nine months of 2006.
Total deposits increased $82.6 million during the first nine months of 2006. Noninterest bearing and savings deposits decreased $5.7 million (2.2%) and $11.4 million (9.7%) respectively. At the same time, NOW and money market accounts increased $22.5 million (9.2%) and $7.5 million (1.7%) respectively. Year to date, time deposits increased $69.7 million, or 8.0%, from $876.1 million to $945.8 million. Pricing and sales strategies targeted the 2006 growth in NOW and money market accounts. Depositors also continued to migrate into term certificates of deposits to lock in rates from the rising interest rate environment. Increases in interest-bearing transaction account pricing and the continued shift into certificates of deposit resulted in a higher cost of funds and had a negative impact on the net interest margin.
Non-GAAP Presentations: Management uses certain non-GAAP ratios to evaluate and measure the Company’s performance. Management presents a net interest margin calculation. The net interest margin is calculated by dividing net interest income on a tax equivalent basis by average earning assets for the period. Management believes this measure provides investors with information regarding balance sheet profitability. Management also presents an efficiency ratio that is non-GAAP. The efficiency ratio is calculated by dividing adjusted non-interest expense by the sum of net interest income on a tax equivalent basis and adjusted non-interest income. Management believes this measure provides investors with information regarding the Company’s operating efficiency and how management evaluates performance internally. The tables provide a reconciliation of each non-GAAP measure to the most comparable GAAP equivalent.
Forward Looking Statements: This report may contain forward-looking statements. Forward looking statements are identifiable by the inclusion of such qualifications as expects, intends, believes, may, likely or other indications that the particular statements are not based upon facts but are rather based upon the company’s beliefs as of the date of this release. Actual events and results may differ significantly from those described in such forward looking statements, due to changes in the economy, interest rates or other factors. Additionally, all statements in this document, including forward-looking statements, speak only as of the date they are made, and the Company undertakes no obligation to update any statement in light of new information or future events. For additional information concerning the Company and its business, including
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other factors that could materially affect the Company’s financial results, please review our filings with the Securities and Exchange Commission, including the Company’s Form 10-K for 2005.
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