Exhibit 99.1
Old Second Bancorp, Inc. | For Immediate Release |
(Nasdaq: OSBC) | April 20, 2007 |
Contact: | J. Douglas Cheatham
Chief Financial Officer
(630) 906-5484 |
Old Second Bancorp, Inc. Announces First Quarter Earnings
AURORA, Illinois — Old Second Bancorp, Inc. (Nasdaq: OSBC) today announced first quarter earnings of $0.43 per diluted share, on earnings of $5.75 million. Diluted earnings per share were down from the first quarter of 2006, in which the Company earned $0.45 per diluted share on net income of $6.1 million. Noninterest income increased, but that increase was offset by a lower net interest margin and increased personnel and facility costs. The Company made no provision for loan losses in the first quarter of 2007 whereas there was a $444,000 provision made in the first quarter of 2006.
Net interest income decreased from $18.1 million in the first quarter of 2006 to $16.5 million in the first quarter of 2007. Average earning assets grew $67.8 million or 3.1% from March 31, 2006 to March 31, 2007. Despite that growth, the net interest margin (tax equivalent basis), expressed as a percentage of average earning assets, declined from 3.49% in the first quarter of 2006 to 3.10% in the first quarter of 2007. The average tax-equivalent yield on earning assets increased from 6.32% to 6.72%, or 40 basis points. At the same time, the cost of interest-bearing liabilities increased from 3.23% to 4.13%, or 90 basis points.
Changes in deposit funding composition continued to cause an increase in interest costs and a decline of the net interest margin in the first quarter of 2007. The aggregate average balances of demand deposits and lower-cost sources of funds such as NOW accounts and savings accounts decreased nominally in the first quarter of 2007 as compared to the first quarter of 2006. At the same time, deposit growth occurred primarily in higher-cost sources of funds, such as money market and time deposit accounts, which increased on average by $47.5 million, or 11.4%, and $27.3 million, or 2.87%, respectively. Average non-deposit funding costs also increased $126,000, or 4.9%, in the first quarter of 2007 as compared to the first quarter of 2006 primarily due to a general increase in interest rates and an increase in the average note payable balance outstanding in the first quarter of 2007. The proceeds from that note were primarily used to repurchase common stock.
The Company recorded no provision for loan losses in first quarter of 2007 as compared to a $444,000 provision for loan losses in the first quarter of 2006. Loan portfolio quality remained strong as nonperforming loans decreased to $1.7 million at March 31, 2007 from $7.0 million at March 31, 2006. The ratio of the allowance for loan losses to nonperforming loans was 932.8% as of March 31, 2007, compared with 227.1% as of March 31, 2006. Net recoveries were $56,000 and $118,000 in the first quarter of 2007 and 2006, respectively. Management determines the amount to provide for in the allowance for loan losses based upon a number of factors including loan growth, the quality and composition of the loan portfolio and loan loss experience. While the amount of nonperforming loans has decreased in the first quarter of 2007, management detected a general deceleration in real estate building and development activity in 2006 from the high levels of the previous several years. While borrowers have generally continued to perform on their commercial real estate obligations, management believes that the slowdown in this sector combined with the Company’s concentration in commercial real estate and construction loans represents increased risk when assessing the adequacy of the allowance for loan losses. Despite the market slowdown, management concluded that no provision adjustment was necessary in the first quarter of 2007. When measured as a percentage of loans outstanding, the allowance for loan losses was .91% at both March 31, 2006 and 2007.
Noninterest income was $8.0 million during the first quarter of 2007 and $7.1 million during the first quarter of 2006, an increase of $899,000, or 12.7%. Trust income increased $442,000, or 25.5%, to $2.2 million in the first quarter of 2007 primarily due to higher estate fees. Mortgage banking income, including net gain on sales of mortgage loans, secondary market fees, and servicing income, was $1.4 million, an increase of $146,000, or 12.0%, from the first quarter of 2006. The largest increase in income from mortgage operations was in net gain on sale, which resulted primarily from increased volume and better secondary market execution. All of the remaining noninterest income categories increased in 2007 with the exception of the other income category. Other income decreased in the first quarter of 2007 as compared to the first quarter of 2006 due to a nonrecurring gain on sale of property of $157,000 that was included in 2006. Realized gains on sales of securities were $482,000 in the first quarter of 2007, compared with $227,000 in the first quarter of 2006. Service charges on deposits increased $94,000, or 4.8%, to $2,050,000, which is in line with the Company’s modest deposit growth and current pricing strategies. Interchange income from debit card usage also increased $44,000, or 10.5%, in the first quarter of 2007 as customers continue to show a preference for this payment method.
Noninterest expense was $16.6 million during the first quarter of 2007, an increase of $437,000, or 2.7%, from $16.1 million in the first quarter of 2006. Salaries and benefits expense was $9.9 million during the first quarter of 2007, an increase of $381,000, or 4.0%, from $9.5 million in the first quarter of 2006. The increase in personnel expenses resulted from the combination of normal annual increases in compensation rates and increased staffing levels. The full time equivalent employee count rose from 556 in the first quarter of 2006 to 579 in the first quarter of 2007 due to the opening of five new retail branches over the course of 2006. Management expects this trend to reverse in 2007 as it announced on April 13, 2007 that the number of available positions within the Company is being reduced by approximately 8.5%. While this will principally be completed in the second quarter, management anticipates that the full effect will not be realized until the third quarter of 2007.
Net occupancy and furniture and equipment expenses increased $346,000, or 14.6%, from the first quarter of 2006 to the first quarter of 2007. This increase is primarily attributable to the Company’s expansion and development into new markets with the five new 2006 retail locations and the resultant increase in the related facility expenses. In the first quarter of 2007, the Company completed a review of overlap in market area. Due in large part to the findings of this analysis, management announced on April 17, 2007 that three leased branch locations would be closed after completion of the appropriate regulatory processes. The Company also recently announced that it would be seeking regulatory approval to combine its two existing state bank charters—Old Second Bank — Kane County and Old Second Bank — Yorkville—into its national bank charter, The Old Second National Bank of Aurora, and rename the combined entity “Old Second National Bank” early in the third quarter of 2007. Other expense decreased $162,000, or 4.4%, from $3.7 million in the first quarter of 2006 to $3.5 million in the first quarter of 2007 as the Company emphasized overall cost control and review procedures.
The provision for income tax as a percentage of pretax income, or effective tax rate, decreased from 29.2% as of the first quarter of 2006 to 26.9% as of the first quarter of 2007. Increased levels of tax-exempt income from securities, including tax credits from qualified zone academy bonds, helped reduce income tax expense somewhat in the first quarter of 2007. The increased levels of tax-exempt income from securities was due to a 24 basis point increase in tax-equivalent yield combined with a 2.9% increase in average tax-exempt securities held by the Company as of March 31, 2007 compared to March 31, 2006. The reduction in effective tax rate was primarily attributable, however, to the formation of a real estate investment trust (REIT) in the third quarter of 2006 for the purpose of holding certain commercial real estate loans, residential real estate loans and other loans, as well as mortgage-backed investment securities, that were previously held by our main bank subsidiary. 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.
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Total assets were $2.44 billion as of March 31, 2007, compared with $2.46 billion as of December 31, 2006. Loans and securities available for sale grew $12.4 million and $14.3 million, respectively, during the first quarter of 2007, while cash and noninterest bearing due from banks declined $30.4 million. The largest changes by loan type included increases in commercial real estate and real estate construction loans of $8.7 million and $21.1 million, respectively, and a decrease of $14.5 million in residential loans.
Total deposits increased $3.2 million during the first quarter of 2007, to $2.07 billion as of March 31, 2007. Demand deposits decreased $21.3 million, to $259.3 million. The largest growth category of deposits at first quarter end 2007 was money market deposit accounts, which increased by $28.5 million, from $446.2 million to $474.7 million. Time deposits increased $4.3 million from $974.1 million to $978.4 million at March 31, 2007.
Depositors generally shifted out of demand and NOW accounts into money market accounts and certificates of deposit. The money market account offers the customer the advantage of liquidity while earning a higher rate of interest than a demand or NOW account and certificates of deposit allow the customer to lock in a fixed rate of interest for a period of time. This deposit shift contributed to a higher cost of funds and had a negative impact on the net interest margin. The net interest margin (tax equivalent basis) declined from 3.49% in the first quarter of 2006 to 3.10% in the first quarter of 2007. In comparing the first quarter of 2007 to the first quarter of 2006, the average cost of interest bearing funds increased 90 basis points.
The Company announced a tender offer on April 17, 2007 to purchase up to 833,333 shares, or approximately 6.4%, of the outstanding common stock at the price of $30.00 per share. The tender offer is set to expire on May 15, 2007, although it may be extended by the Company. If the Company purchases all 833,333 shares that it has offered to purchase, the total purchase price will be approximately $25,000,000. The Company intends to finance the tender offer from the aggregate net proceeds of a private placement of $25,000,000 of aggregate face value trust preferred securities issued by a trust established by the Company. The private placement of trust preferred securities is expected to close on April 30, 2007.
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, within the meaning of the Private Securities Litigation Reform Act of 1995, with respect to the financial condition, results of operations, plans, objectives, future performance and business of the Company. 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 report, 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 2006.
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Financial Highlights (unaudited)
In thousands, except share data
| | Quarter Ended
March 31, | | Year ended
December 31, | |
| | 2007 | | 2006 | | 2006 | |
Summary Income Statement: | | | | | | | |
Net interest income | | $ | 16,479 | | $ | 18,135 | | $ | 71,199 | |
Provision for loan losses | | — | | 444 | | 1,244 | |
Noninterest income | | 7,974 | | 7,075 | | 28,707 | |
Noninterest expense | | 16,585 | | 16,148 | | 65,136 | |
Income taxes | | 2,120 | | 2,513 | | 9,870 | |
Net income | | 5,748 | | 6,105 | | 23,656 | |
| | | | | | | |
Key Ratios (annualized): | | | | | | | |
Return on average assets | | 0.96 | % | 1.06 | % | 0.99 | % |
Return on average equity | | 14.52 | % | 15.92 | % | 15.29 | % |
Net interest margin (tax equivalent) | | 3.10 | % | 3.49 | % | 3.34 | % |
Efficiency ratio | | 65.75 | % | 62.28 | % | 63.34 | % |
Tangible capital to assets | | 6.56 | % | 6.53 | % | 6.37 | % |
Total capital to risk weighted assets | | 10.86 | % | 10.98 | % | 10.82 | % |
Tier 1 capital to risk weighted assets | | 10.02 | % | 10.13 | % | 9.97 | % |
Tier 1 capital to average assets | | 7.96 | % | 8.12 | % | 7.90 | % |
| | | | | | | |
Per Share Data: | | | | | | | |
Basic earnings per share | | $ | 0.44 | | $ | 0.45 | | $ | 1.77 | |
Diluted earnings per share | | $ | 0.43 | | $ | 0.45 | | $ | 1.75 | |
Dividends declared per share | | $ | 0.14 | | $ | 0.13 | | $ | 0.55 | |
Book value per share | | $ | 12.37 | | $ | 11.56 | | $ | 12.08 | |
Tangible book value per share | | $ | 12.21 | | $ | 11.38 | | $ | 11.92 | |
Ending number of shares outstanding | | 13,110,423 | | 13,559,075 | | 13,127,292 | |
Average number of shares outstanding | | 13,134,897 | | 13,529,648 | | 13,367,062 | |
Diluted average shares outstanding | | 13,278,505 | | 13,708,648 | | 13,526,603 | |
| | | | | | | |
End of Period Balances: | | | | | | | |
Loans | | $ | 1,776,289 | | $ | 1,739,046 | | $ | 1,763,912 | |
Deposits | | 2,065,863 | | 2,004,479 | | 2,062,693 | |
Stockholders’ equity | | 162,221 | | 156,682 | | 158,555 | |
Total earning assets | | 2,282,769 | | 2,213,129 | | 2,267,768 | |
Total assets | | 2,444,031 | | 2,364,399 | | 2,459,140 | |
| | | | | | | |
Average Balances: | | | | | | | |
Loans | | $ | 1,758,891 | | $ | 1,708,967 | | $ | 1,748,328 | |
Deposits | | 2,050,118 | | 1,975,711 | | 1,992,249 | |
Stockholders’ equity | | 160,534 | | 155,477 | | 154,690 | |
Total earning assets | | 2,257,669 | | 2,189,911 | | 2,218,993 | |
Total assets | | 2,416,312 | | 2,344,939 | | 2,377,771 | |
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Financial Highlights, continued (unaudited)
In thousands, except share data
| | Quarter Ended
March 31, | | Year ended
December 31, | |
| | 2007 | | 2006 | | 2006 | |
Asset Quality | | | | | | | |
Charge-offs | | $ | 86 | | $ | 46 | | $ | 888 | |
Recoveries | | 142 | | 164 | | 508 | |
Net charge-offs (recoveries) | | $ | (56 | ) | $ | (118 | ) | $ | 380 | |
Provision for loan losses | | — | | 444 | | 1,244 | |
Allowance for loan losses to loans | | 0.91 | % | 0.91 | % | 0.92 | % |
| | | | | | | |
Nonaccrual loans | | $ | 1,598 | | $ | 3,802 | | $ | 1,632 | |
Restructured loans | | — | | — | | — | |
Loans past due 90 days | | 144 | | 3,194 | | 583 | |
Nonperforming loans | | 1,742 | | 6,996 | | 2,215 | |
Other real estate | | — | | 251 | | 48 | |
Nonperforming assets | | $ | 1,742 | | $ | 7,247 | | $ | 2,263 | |
| | | | | | | |
Major Classifications of Loans | | | | | | | |
Commercial and industrial | | $ | 169,216 | | $ | 164,329 | | $ | 175,621 | |
Real estate - commercial | | 613,750 | | 634,974 | | 605,098 | |
Real estate - construction | | 395,764 | | 342,786 | | 374,654 | |
Real estate - residential | | 572,483 | | 566,874 | | 586,959 | |
Installment | | 26,569 | | 32,141 | | 23,326 | |
| | 1,777,782 | | 1,741,104 | | 1,765,658 | |
Unearned origination fees | | (1,493 | ) | (2,058 | ) | (1,746 | ) |
| | $ | 1,776,289 | | $ | 1,739,046 | | $ | 1,763,912 | |
| | | | | | | |
Major Classifications of Deposits | | | | | | | |
Noninterest bearing | | $ | 259,349 | | $ | 249,324 | | $ | 280,630 | |
Savings | | 108,361 | | 123,816 | | 104,229 | |
NOW accounts | | 245,032 | | 240,164 | | 257,505 | |
Money market accounts | | 474,709 | | 405,841 | | 446,215 | |
Certificates of deposits of less than $100,000 | | 589,178 | | 608,238 | | 591,941 | |
Certificates of deposits of $100,000 or more | | 389,234 | | 377,096 | | 382,173 | |
| | $ | 2,065,863 | | $ | 2,004,479 | | $ | 2,062,693 | |
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