| | Exhibit 99.1 |
| | |
Old Second Bancorp, Inc. | | For Immediate Release |
(Nasdaq: OSBC) | | February 14, 2007 |
Contact: | | J. Douglas Cheatham |
| | Chief Financial Officer |
| | (630) 906-5484 |
Old Second Bancorp, Inc. Announces Revised Fourth Quarter Earnings Due to Accounting Adjustment
AURORA, Illinois — Old Second Bancorp, Inc. (Nasdaq: OSBC) today announced revised fourth quarter earnings of $0.47 per diluted share, on earnings of $6.2 million. This represented an increase of $0.06 per diluted share over fourth quarter earnings previously announced on January 19, 2007. The revised fourth quarter diluted earnings per share were down from the fourth quarter of 2005, in which the Company earned $0.57 per diluted share on net income of $7.7 million. The earnings per diluted share for 2006 were also revised upward by $0.06 to $1.75 on $23.7 million in net income. This compared with $2.03 per diluted share in 2005, on $27.7 million in net income.
Adjustments to Income
In September 2006, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (“SAB 108”). SAB 108 requires that both an income statement approach and a balance sheet approach be used when evaluating whether an error is material to an entity’s financial statements, based on all relevant quantitative and qualitative factors. The SEC issued SAB 108 to address what they identified as diversity in practice whereby entities were using either an income statement approach or a balance sheet approach, but not both. The Company consistently used the income statement approach in prior periods. SAB 108 became effective December 31, 2006, and any material adjustments arising from the adoption of SAB 108 are to be recorded as a cumulative effect adjustment to beginning retained earnings.
The Company’s management performed an analysis under SAB 108 using both the income statement and balance sheet approaches, and as a result, concluded that the Company had no prior year misstatements that were material to our financial statements. However, in the process of performing the review, management elected to record certain prior year adjustments along with refinements to current year accruals to a number of income statement line items as well as recording a refined market valuation on available for sale securities that were not significant on an individual or aggregate basis. The Company recorded adjustments in the fourth quarter of 2006 to correct these items, and the entries effecting net income are enumerated in the table below and are referred to as “4Q06 adjustments” in this earnings release.
4Q06 adjustments to income (In thousands) | | Increase (decrease) | |
| | to net income | |
Interest on other short-term borowings | | $ | 961 | |
Net interest income | | 961 | |
Secondary mortgage fees | | 1 | |
Total noninterest income | | 1 | |
Salaries and employee benefits | | 115 | |
Occupancy expense, net | | (50 | ) |
Furniture and equipment expense | | 19 | |
Total noninterest expenses | | 84 | |
Income before income taxes | | 1,046 | |
Income taxes on above items | | (409 | ) |
Income tax credit on QZAB, net | | 110 | |
Total income taxes | | (299 | ) |
Net income | | $ | 747 | |
Management recorded adjustments to interest expense due to a reduction in the estimated accrual for other short-term borrowings. Approximately $528,000 of the interest expense reduction listed above related to 2006. Management recorded a net reduction to salaries and employee benefits expense primarily as a result of a reduction in accrual relating to salary and bonus payments earned in 2005, but disbursed in 2006. Management recorded additional rent expense for leases with escalation clauses that had previously been recorded as billed by the lessor. The adjustment to furniture and equipment expense related to a reduction to 2006 depreciation expense. In addition to the income tax effect on the above adjustments, a net federal tax credit was recorded for qualified zone academy bonds (“QZABs”) that also primarily related to 2006. A refinement to the market valuation of the QZAB bonds also increased the value of securities available for sale by approximately $1.3 million as reflected in the consolidated 2006 balance sheet. The comparative narrative that follows includes the 4Q06 adjustments detailed in the above table.
Revised Financial Presentation
The amended 2006 operating results include the previously reported balance sheet growth and increases in noninterest income, and these items continued to be 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 five new branches. As previously reported, a verdict for approximately $2.0 million was entered in the Circuit Court of LaSalle County on January 17, 2007 in favor of Old Second Bank — Yorkville, a wholly owned subsidiary of the Company, and against an insurance company. The liable insurance company continues to have the right to appeal the judgment. As a result, the Company will not record any amount of the judgment as income until all appeals have been exhausted and the matter has been concluded in the Company’s favor.
Net interest income decreased from $74.0 million in 2005 to $71.2 million in 2006. Fourth quarter net interest income declined from $19.0 million in 2005, to $17.7 million in 2006. The growth in earning assets for both the quarter and year to date periods were offset by a lower net interest margin. Average earning assets grew $111.0 million or 5.3% from December 31, 2005 to end of year 2006. Similarly, average earning assets in the fourth quarter of 2006 were $62.4 million, or 2.9%, higher than in the same period in 2005. Despite that growth, the net interest margin (tax equivalent basis) including 4Q06 adjustment was 3.27% in the fourth quarter of
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2006 and 3.34% for 2006. This compares with 3.60% in the fourth quarter of 2005 and 3.64% for 2005.
On a year-to-year comparative basis, the average tax-equivalent yield on earning assets increased from 5.84% in 2005 to 6.53% in 2006, which was a 69 basis point increase. However, during the same period the cost of funds increased from 2.53% to 3.63%, or 110 basis points. Changes in deposit funding composition continued to have the effect of increasing interest costs and lowering the net interest margin in 2006. The average balances of lower-cost sources of funds such as interest-bearing transaction accounts and savings accounts declined $20.3 million, or 2.5%, from December 31, 2005 to December 31, 2006. At the same time, noninterest-bearing deposits increased by a nominal amount while higher-cost sources of funds such as time deposits increased $128.2 million, or 15.7%. Average non-deposit funding costs also increased for the year as other short-term borrowings and notes payable increased $14.3 million, or 12.5%, and $5.0 million, or 171.6%, respectively.
The Company recorded no provision for loan losses in the fourth quarter of 2006, leaving the year-to-date provision at $1,244,000. The Company recorded a negative provision of $460,000 in the fourth quarter of 2005, which resulted in a total provision expense of $353,000 for that year. Provisions for loan losses are made to provide for probable and estimable losses inherent in the loan portfolio. Management determines the amount to provide for in the allowance for loan losses based upon a number of factors including loan growth, the quality of the loan portfolio and loan loss experience. Net charge offs in 2006 and 2005 were $380,000 and $519,000 respectively. Non-performing assets decreased from $6.8 million at year-end 2005 to $2.3 million at year-end 2006. Total loans increased from $1.70 billion at year-end 2005 to $1.76 billion at year-end 2006. This loan growth was one of the factors considered when determining the amount provided in 2006.
Noninterest income was $7.4 million during the fourth quarter of 2006, an increase of $195,000, or 2.7%, compared to the fourth quarter of 2005. Non-interest income was $28.7 million during 2006, an increase of $558,000, or 2.0%, compared to 2005. Trust income increased to $2.1 million during the fourth quarter of 2006 and to $7.6 million for the year. These are increases of $315,000 and $951,000, respectively, from the prior year. The increases in trust income for both the quarter and the year were primarily associated with higher estate fees and increased levels of assets under management. Assets under management were $1.0 billion and $959.5 million at December 31, 2006 and 2005, respectively.
Aggregate mortgage banking income included gains on sales of mortgage loans, secondary market fees, and servicing income, and as a category declined $235,000, or 16.0%, from the fourth quarter of 2005 to the fourth quarter of 2006. For the year 2006, mortgage-banking income was down $1,849,000, or 27.6%, from 2005 levels. In general, the higher borrowing costs associated with an increased interest rate environment through much of 2006 resulted in a decline in mortgage loan demand and related mortgage banking income.
There were no securities sales in the fourth quarter of 2006 and a small loss of $9,000 was recorded in the same period of 2005. In 2006, securities gains totaled $418,000 compared with a $14,000 loss in 2005. Bank owned life insurance (“BOLI”) income increased from $305,000 to $493,000 in the fourth quarter of 2006, and from $957,000 to $1,937,000 for the year 2006 because of additional BOLI purchases made late in 2005. Other income decreased $81,000, or
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5.6%, from the fourth quarter of 2005, but remained substantially unchanged for 2006 from 2005.
Noninterest expense was $16.2 million during the fourth quarter of 2006, an increase of $1.2 million, or 7.5%, from $15.0 million in the fourth quarter of 2005. Noninterest expense was $65.1 million during the year 2006, an increase of $4.6 million, or 7.7%, from $60.5 million in the prior year.
Salaries and benefits expense was $8.6 million during the fourth quarter of 2006, a decrease of $180,000 from the fourth quarter of 2005. For the year 2006, salaries and benefits were $35.9 million compared to $35.7 million in 2005, an increase of $233,000 or 1.0%. The full time equivalent employee count increased from 548 at December 31, 2005 to 582 at December 31, 2006 as staffing requirements were fulfilled at five new banking locations. The amount of change in this category should be viewed in the context of recent changes in the Company’s benefit structure. The Company completed the distribution of assets from its defined benefit pension plan in December 2006 after terminating the plan in December of 2005. In addition to the December 2005 pension plan termination, the Company paid all amounts due to participants of the supplemental retirement plan (SERP) in 2005. The combined pension and SERP expense for the fourth quarter and year 2005 were $716,000 and $2.4 million, respectively, and were included in the salaries and employee benefits category for that year. As noted separately, the loss on settlement of the benefit obligation relating to the termination was $109,000 in the fourth quarter of 2006 and $1,467,000 for the year. A reduction in estimated accrual for bonus programs was also recorded in 2006.
Net occupancy and furniture and equipment expenses increased $202,000 from the fourth quarter of 2005 to the fourth quarter of 2006, or 8.7%. For the year 2006, net occupancy and furniture and equipment expenses increased $1.1 million, or 12.5% from 2005. The Company expanded its market presence in 2006, which also increased the related facility expenses. There were thirty-two branches in operation at December 31, 2006 compared to twenty-seven banking locations at December 31, 2005. Other expense increased $807,000, or 23.4%, from the fourth quarter of 2005, to $4.3 million in the fourth quarter of 2006. Other expenses increased $1.5 million, or 10.8%, in the year 2006, to $15.5 million. Increases in other expense for the year were primarily due to costs associated with the amortization and valuation of mortgage servicing rights, increased audit and compliance related to Sarbanes-Oxley mandates, loan production related expenditures, rising costs associated with automatic teller machine operations and new employee recruitment fees.
The provision for income tax as a percentage of pretax income decreased from 33.6% as of the fourth quarter of 2005 to 30.0% as of the fourth quarter of 2006. Income tax as a percentage of pretax income decreased from 33.0% for the year 2005 to 29.4% for 2006. The reduction in effective tax rate was primarily due to additional tax-exempt BOLI income and the formation of a real estate investment trust (REIT) in the third quarter of 2006. In addition to income tax benefits, which lowered the effective tax rate, the REIT ownership structure also provides the Company with an alternate vehicle for raising future capital as desired.
Total assets were $2.46 billion as of December 31, 2006, an increase of $91.3 million, or 3.9%, from $2.37 billion as of December 31, 2005. Total loans were $1.76 billion as of December 31, 2006, an increase of $59.5 million, or 3.5%, from $1.70 billion as of December 31, 2005. The largest increase was in residential real estate loans, which rose $36.1 million, or 6.6%, since
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December 31, 2005. Commercial real estate and construction and development loans increased $14.8 million and $12.8 million, respectively, since December 31, 2005. These changes reflected the continuing loan demand in the Company’s markets. The loan portfolio generally reflects the economic profile of the communities in which the Company operates. Because the Company is located in growing areas, real estate lending (including commercial, residential, and construction) is a significant portion of the portfolio. These categories comprised 88.8% of the portfolio as of December 31, 2006 compared to 88.2% of the portfolio as of December 31, 2005.
Total deposits increased $127.4 million, or 6.6%, during 2006. Noninterest-bearing deposits increased $16.5 million, or 6.2%, while savings deposits decreased $13.6 million, or 11.6%. At the same time, NOW and money market accounts increased $12.8 million, or 5.2%, and $13.8 million, or 3.2%, respectively. In 2006, time deposits increased $98.0 million, or 11.2%. Pricing and sales strategies targeted the 2006 growth in NOW and money market accounts and capitalized on depositor preference for check accessibility. Depositors also continued to favor certificates of deposits to lock in rates during the rising interest rate environment. The increases in interest-bearing transaction account pricing and the continued shift into certificates of deposit resulted in a higher cost of funds, which adversely impacted the net interest margin. At the same time, however, these successful sales efforts resulted in an increase in core funding sources and new account relationships, provided funding for loan growth and allowed the Company to reduce reliance on other short-term borrowings, which typically have a higher interest rate.
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 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 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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