UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF |
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THE SECURITIES EXCHANGE ACT OF 1934 |
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For the quarterly period ended June 30, 2006 |
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OR |
o |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE |
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SECURITIES EXCHANGE ACT OF 1934 |
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For transition period from to |
OLD SECOND BANCORP, INC.
(Exact name of Registrant as specified in its charter)
Delaware |
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36-3143493 |
(State or other jurisdiction |
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(I.R.S. Employer Identification Number) |
of incorporation or organization) |
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37 South River Street, Aurora, Illinois 60507 |
(Address of principal executive offices) (Zip Code) |
(630) 892-0202
(Registrants telephone number, including area code)
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 o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act.
Large accelerated filer o |
Accelerated filer x |
Non-accelerated filer o |
Indicate
by check mark whether the registrant is a shell company (as defined in Exchange
Act Rule 12b-2).
Yes o No x
Indicate the number of shares outstanding of each of the issuers classes of common stock as of the latest practicable date: As of July 25, 2006, the Registrant had outstanding 13,413,598 shares of common stock, $1.00 par value per share.
OLD SECOND BANCORP, INC.
Form 10-Q Quarterly Report
Table of Contents
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2
PART I - FINANCIAL INFORMATION
Old Second Bancorp, Inc. and Subsidiaries
Consolidated Balance Sheets
(In thousands, except share data)
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(Unaudited) |
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June 30, |
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December 31, |
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||
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2006 |
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2005 |
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Assets |
|
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|
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Cash and due from banks |
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$ |
86,677 |
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$ |
65,010 |
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Interest bearing deposits with banks |
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108 |
|
105 |
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Cash and cash equivalents |
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86,785 |
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65,115 |
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||
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Securities available for sale |
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463,363 |
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470,431 |
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Federal Home Loan Bank and Federal Reserve Bank Stock |
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8,783 |
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8,418 |
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Loans held for sale |
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11,433 |
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11,397 |
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Loans |
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1,746,536 |
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1,704,382 |
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Allowance for loan losses |
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16,093 |
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15,329 |
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Net loans |
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1,730,443 |
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1,689,053 |
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Premises and equipment, net |
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43,534 |
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42,485 |
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Other real estate owned |
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333 |
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251 |
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Mortgage servicing rights |
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2,721 |
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2,271 |
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Goodwill |
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2,130 |
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2,130 |
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Core deposit intangible assets, net |
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178 |
|
355 |
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Bank owned life insurance |
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42,588 |
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41,627 |
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Accrued interest and other assets |
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30,848 |
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34,297 |
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Total assets |
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$ |
2,423,139 |
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$ |
2,367,830 |
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Liabilities |
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Deposits: |
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Demand |
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$ |
255,937 |
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$ |
264,124 |
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Savings, NOW, and money market |
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802,196 |
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795,028 |
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Time |
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949,888 |
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876,126 |
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Total deposits |
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2,008,021 |
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1,935,278 |
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Securities sold under repurchase agreements |
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43,615 |
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57,625 |
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Other short-term borrowings |
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162,386 |
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171,825 |
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Junior subordinated debentures |
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31,625 |
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31,625 |
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Note payable |
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5,075 |
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3,200 |
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Accrued interest and other liabilities |
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17,089 |
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16,015 |
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Total liabilities |
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2,267,811 |
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2,215,568 |
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Stockholders Equity |
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Preferred stock, no par value; authorized 300,000 shares; none issued |
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Common stock, $1.00 par value; authorized 20,000,000 shares; issued 16,629,803 in 2006 and 16,592,301 in 2005; outstanding 13,412,575 in 2006 and 13,520,073 in 2005 |
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16,630 |
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16,592 |
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Additional paid-in capital |
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14,658 |
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13,746 |
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Retained earnings |
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185,660 |
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176,824 |
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Accumulated other comprehensive loss |
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(6,848 |
) |
(4,562 |
) |
||
Treasury stock, at cost, 3,217,228 in 2006 and 3,072,228 in 2005 |
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(54,772 |
) |
(50,338 |
) |
||
Total stockholders equity |
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155,328 |
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152,262 |
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Total liabilities and stockholders equity |
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$ |
2,423,139 |
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$ |
2,367,830 |
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See accompanying notes to unaudited consolidated financial statements.
3
Old Second Bancorp, Inc. and Subsidiaries
Consolidated Statements of Income
(In thousands, except share data. Unaudited)
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Three Months Ended |
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Six Months Ended |
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June 30, |
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June 30, |
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2006 |
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2005 |
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2006 |
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2005 |
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Interest and Dividend Income |
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Loans, including fees |
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$ |
30,700 |
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$ |
24,946 |
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$ |
59,677 |
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$ |
47,960 |
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Loans held for sale |
|
131 |
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189 |
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226 |
|
362 |
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Securities: |
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Taxable |
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3,167 |
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2,842 |
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6,351 |
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5,592 |
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Tax-exempt |
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1,259 |
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1,207 |
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2,491 |
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2,331 |
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Federal funds sold |
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3 |
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3 |
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3 |
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||||
Interest bearing deposits with banks |
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1 |
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1 |
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2 |
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1 |
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Total interest and dividend income |
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35,258 |
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29,188 |
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68,750 |
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56,249 |
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Interest Expense |
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Savings, NOW, and money market deposits |
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4,152 |
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2,672 |
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7,830 |
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4,951 |
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Time deposits |
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9,828 |
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5,942 |
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18,957 |
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11,632 |
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Repurchase agreements |
|
507 |
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296 |
|
994 |
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507 |
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Other short-term borrowings |
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2,011 |
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1,176 |
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3,413 |
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1,785 |
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Junior subordinated debentures |
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616 |
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597 |
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1,233 |
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1,214 |
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Note payable |
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54 |
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27 |
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98 |
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50 |
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Total interest expense |
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17,168 |
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10,710 |
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32,525 |
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20,139 |
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Net interest income |
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18,090 |
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18,478 |
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36,225 |
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36,110 |
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Provision for loan losses |
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400 |
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400 |
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844 |
|
363 |
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Net interest income after provision for loan losses |
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17,690 |
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18,078 |
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35,381 |
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35,747 |
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Noninterest Income |
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Trust income |
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2,053 |
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1,629 |
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3,787 |
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3,278 |
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Service charges on deposits |
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2,047 |
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2,109 |
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4,003 |
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3,909 |
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Gain on sale of loans |
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935 |
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1,450 |
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1,906 |
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2,828 |
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Secondary mortgage fees |
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159 |
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287 |
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312 |
|
471 |
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Mortgage servicing income |
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117 |
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34 |
|
215 |
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50 |
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Securities gains (losses), net |
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191 |
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(1 |
) |
418 |
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(5 |
) |
||||
Increase in cash surrender value of bank owned life insurance |
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489 |
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215 |
|
961 |
|
434 |
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Other income |
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1,374 |
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1,382 |
|
2,838 |
|
2,612 |
|
||||
Total noninterest income |
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7,365 |
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7,105 |
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14,440 |
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13,577 |
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Noninterest Expense |
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Salaries and employee benefits |
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8,926 |
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8,980 |
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18,457 |
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18,100 |
|
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Occupancy expense, net |
|
1,098 |
|
983 |
|
2,190 |
|
1,594 |
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Furniture and equipment expense |
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1,258 |
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1,183 |
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2,540 |
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2,449 |
|
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Amortization of core deposit intangible assets |
|
88 |
|
89 |
|
177 |
|
178 |
|
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Advertising expense |
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512 |
|
459 |
|
976 |
|
838 |
|
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Other expense |
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3,765 |
|
3,716 |
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7,455 |
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7,250 |
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Total noninterest expense |
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15,647 |
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15,410 |
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31,795 |
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30,409 |
|
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Income before income taxes |
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9,408 |
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9,773 |
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18,026 |
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18,915 |
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Provision for income taxes |
|
3,042 |
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3,203 |
|
5,555 |
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6,156 |
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Net income |
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$ |
6,366 |
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$ |
6,570 |
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$ |
12,471 |
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$ |
12,759 |
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Share and per share information: |
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Ending number of shares |
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13,412,575 |
|
13,497,889 |
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13,412,575 |
|
13,497,889 |
|
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Average number of shares |
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13,524,276 |
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13,496,502 |
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13,526,947 |
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13,474,437 |
|
||||
Diluted average number of shares |
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13,700,186 |
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13,660,414 |
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13,704,869 |
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13,646,301 |
|
||||
Basic earnings per share |
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$ |
0.47 |
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$ |
0.49 |
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$ |
0.92 |
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$ |
0.95 |
|
Diluted earnings per share |
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$ |
0.46 |
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$ |
0.48 |
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$ |
0.91 |
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$ |
0.94 |
|
See accompanying notes to unaudited consolidated financial statements.
4
Old Second Bancorp, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Six Months Ended June 30, 2006 and 2005
(In thousands, unaudited)
|
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2006 |
|
2005 |
|
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Cash flows from operating activities |
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|
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|
||
Net income |
|
$ |
12,471 |
|
$ |
12,759 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
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|
||
Depreciation |
|
1,855 |
|
1,744 |
|
||
Amortization of mortgage servicing rights |
|
211 |
|
57 |
|
||
Provision for loan losses |
|
844 |
|
363 |
|
||
Origination of loans held for sale |
|
(139,736 |
) |
(192,346 |
) |
||
Proceeds from sale of loans held for sale |
|
140,945 |
|
198,302 |
|
||
Gain on sale of loans held for sale |
|
(1,906 |
) |
(2,828 |
) |
||
Increase in cash surrender value of bank owned life insurance |
|
(961 |
) |
(434 |
) |
||
Change in current income taxes receivable |
|
2,015 |
|
(651 |
) |
||
Change in accrued interest receivable and other assets |
|
2,951 |
|
(3,997 |
) |
||
Change in accrued interest payable and other liabilities |
|
954 |
|
8,272 |
|
||
Net premium amortization on securities |
|
1,441 |
|
1,970 |
|
||
Securities losses (gains), net |
|
(418 |
) |
5 |
|
||
Amortization of core deposit intangible assets |
|
177 |
|
178 |
|
||
Tax benefit from stock options exercised |
|
|
|
408 |
|
||
Net cash provided by operating activities |
|
20,843 |
|
23,802 |
|
||
Cash flows from investing activities |
|
|
|
|
|
||
Proceeds from matured or called securities available for sale |
|
39,340 |
|
62,525 |
|
||
Proceeds from sales of securities available for sale |
|
339 |
|
349 |
|
||
Purchases of securities available for sale |
|
(37,437 |
) |
(66,188 |
) |
||
Purchase of FHLB stock |
|
(365 |
) |
(1,261 |
) |
||
Net change in loans |
|
(42,234 |
) |
(123,160 |
) |
||
Net change in other real estate |
|
(82 |
) |
(76 |
) |
||
Net purchases of premises and equipment |
|
(2,904 |
) |
(3,622 |
) |
||
Net cash used in investing activities |
|
(43,343 |
) |
(131,433 |
) |
||
Cash flows from financing activities |
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|
|
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|
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Net change in deposits |
|
72,743 |
|
110,671 |
|
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Net change in repurchase agreements |
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(14,010 |
) |
6,889 |
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||
Net change in other short-term borrowings |
|
(9,439 |
) |
(2,633 |
) |
||
Proceeds from note payable |
|
1,875 |
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|
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Proceeds from exercise of stock options |
|
693 |
|
917 |
|
||
Tax benefit from stock options exercised |
|
257 |
|
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|
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Dividends paid |
|
(3,515 |
) |
(3,230 |
) |
||
Purchase of treasury stock |
|
(4,434 |
) |
|
|
||
Net cash provided by financing activities |
|
44,170 |
|
112,614 |
|
||
Net change in cash and cash equivalents |
|
21,670 |
|
4,983 |
|
||
Cash and cash equivalents at beginning of period |
|
65,115 |
|
58,662 |
|
||
Cash and cash equivalents at end of period |
|
$ |
86,785 |
|
$ |
63,645 |
|
Supplemental cash flow information |
|
|
|
|
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Income taxes paid |
|
$ |
3,571 |
|
$ |
6,807 |
|
Interest paid |
|
31,290 |
|
19,677 |
|
See accompanying notes to unaudited consolidated financial statements.
5
Old Second Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Table amounts in thousands, except per share data, unaudited)
The accounting policies followed in the preparation of interim financial statements are consistent with those used in the preparation of annual financial information. The interim financial statements reflect all normal and recurring adjustments, which are necessary, in the opinion of management, for a fair statement of results for the interim periods presented. Results for the periods ended June 30, 2006 are not necessarily indicative of the results that may be expected for the year ending December 31, 2006. These interim financial statements should be read in conjunction with the audited financial statements and notes included in Old Second Bancorp, Inc.s (the Company) 2005 Form 10-K. Unless otherwise indicated, amounts in the tables contained in the notes are in thousands. Certain items in prior periods have been reclassified to conform to the current presentation.
The Companys consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles and follow general practices within the banking industry. Application of these principles requires management to make estimates, assumptions, and judgments that affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions, and judgments are based on information available as of the date of the financial statements. Future changes in information may affect these estimates, assumptions, and judgments, which, in turn, may affect amounts reported in the financial statements.
All significant accounting policies are presented in Note A to the consolidated financial statements included in the Companys annual report on Form 10-K for the year ended December 31, 2005. These policies, along with the disclosures presented in the other financial statement notes and in this discussion, provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined.
In February 2006, the FASB issued Statement 155 (SFAS 155), Accounting for Certain Hybrid Financial Instrumentsan amendment of FASB Statements No. 133 and 140. This Statement will be effective for all financial instruments acquired, issued, or subject to a remeasurement event after the beginning of fiscal years beginning after September 15, 2006. Earlier adoption was permitted as of the beginning of 2006, provided an entity has not yet issued financial statements, including financial statements for any interim period, for that fiscal year. The Company did not elect early adoption, and is evaluating the potential impact in future periods.
In March 2006, the FASB issued Statement (SFAS 156), Accounting for Servicing of Financial Assetsan amendment of FASB Statement No. 140. This Statement will be effective as of the beginning of fiscal years beginning after September 15, 2006. Earlier adoption is permitted as of the beginning of an entitys fiscal year, provided the entity has not yet issued financial statements, including interim financial statements, for any period of that fiscal year. The Company did not elect early adoption, and is evaluating the potential impact in future periods.
In July 2006, the Financial Accounting Standards Board issued Interpretation No. 48,
6
Accounting for Uncertainty in Income Taxes, (FIN 48). FIN 48 will be effective for fiscal years beginning after December 15, 2006. FIN 48 applies to all income tax positions subject to Financial Accounting Standards Board Statement No. 109, Accounting for Income Taxes, (SFAS 109), including tax positions considered to be routine and those with a high degree of uncertainty. The Company is evaluating the potential impact in future periods.
Note 2 Securities
Securities available for sale are summarized as follows:
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Gross |
|
Gross |
|
|
|
|||||
|
|
Amortized |
|
Unrealized |
|
Unrealized |
|
Fair |
|
||||
|
|
Cost |
|
Gains |
|
Losses |
|
Value |
|
||||
June 30, 2006: |
|
|
|
|
|
|
|
|
|
||||
U.S. Treasuries |
|
$ |
10,013 |
|
$ |
|
|
$ |
(632 |
) |
$ |
9,381 |
|
U.S. Government agencies |
|
316,817 |
|
5 |
|
(7,117 |
) |
309,705 |
|
||||
States and political subdivisions |
|
147,768 |
|
610 |
|
(4,231 |
) |
144,147 |
|
||||
Equity securities |
|
130 |
|
|
|
|
|
130 |
|
||||
|
|
$ |
474,728 |
|
$ |
615 |
|
$ |
(11,980 |
) |
$ |
463,363 |
|
December 31, 2005: |
|
|
|
|
|
|
|
|
|
||||
U.S. Treasuries |
|
$ |
11,010 |
|
$ |
|
|
$ |
(273 |
) |
$ |
10,737 |
|
U.S. Government agencies |
|
318,560 |
|
51 |
|
(4,940 |
) |
313,671 |
|
||||
States and political subdivisions |
|
148,371 |
|
932 |
|
(3,332 |
) |
145,971 |
|
||||
Equity securities |
|
52 |
|
|
|
|
|
52 |
|
||||
|
|
$ |
477,993 |
|
$ |
983 |
|
$ |
(8,545 |
) |
$ |
470,431 |
|
Recognition of other than temporary impairment was not necessary in the first six months of 2006. The increase in unrealized losses resulted from an increase in interest rates.
Note 3 Loans
Major classifications of loans were as follows:
|
June 30, |
|
December 31, |
|
|||
|
|
2006 |
|
2005 |
|
||
Commercial and industrial |
|
$ |
168,970 |
|
$ |
168,314 |
|
Real estate - commercial |
|
621,736 |
|
590,328 |
|
||
Real estate - construction |
|
356,045 |
|
361,859 |
|
||
Real estate - residential |
|
573,504 |
|
550,823 |
|
||
Installment |
|
28,401 |
|
35,236 |
|
||
|
|
1,748,656 |
|
1,706,560 |
|
||
Unearned origination fees, net |
|
(2,120 |
) |
(2,178 |
) |
||
|
|
$ |
1,746,536 |
|
$ |
1,704,382 |
|
Note 4 Allowance for Loan Losses
Changes in the allowance for loan losses as of June 30, are summarized as follows:
|
2006 |
|
2005 |
|
|||
Balance, January 1 |
|
$ |
15,329 |
|
$ |
15,495 |
|
Provision for loan losses |
|
844 |
|
363 |
|
||
Loans charged-off |
|
(344 |
) |
(737 |
) |
||
Recoveries |
|
264 |
|
404 |
|
||
Balance, end of period |
|
$ |
16,093 |
|
$ |
15,525 |
|
7
Note 5 Deposits
Major classifications of deposits as of June 30, 2006, and December 31, 2005 were as follows:
|
2006 |
|
2005 |
|
|||
Demand |
|
$ |
255,937 |
|
$ |
264,124 |
|
Savings |
|
116,619 |
|
117,849 |
|
||
NOW accounts |
|
286,306 |
|
244,727 |
|
||
Money market accounts |
|
399,271 |
|
432,452 |
|
||
Certificates of deposit of less than $100,000 |
|
580,998 |
|
554,618 |
|
||
Certificates of deposit of $100,000 or more |
|
368,890 |
|
321,508 |
|
||
|
|
$ |
2,008,021 |
|
$ |
1,935,278 |
|
Note 6 Short-Term Borrowings and Note Payable
The following table is a summary of borrowings as of June 30, 2006 and December 31, 2005:
|
2006 |
|
2005 |
|
|||
Federal funds purchased and other short-term borrowings |
|
$ |
100,588 |
|
$ |
169,575 |
|
FHLB advances |
|
60,000 |
|
|
|
||
Treasury tax and loan notes |
|
1,798 |
|
2,250 |
|
||
|
|
$ |
162,386 |
|
$ |
171,825 |
|
The Company enters into sales of securities under agreements to repurchase (repurchase agreements). These repurchase agreements are treated as financings. The dollar amounts of securities underlying the agreements remain in the asset accounts. Securities sold under agreements to repurchase consisted of U.S. government agencies at June 30, 2006 and December 31, 2005, and are held in third party pledge accounts.
The Companys borrowings at the FHLB are limited to the lesser of 35% of total assets or 60% of the book value of certain mortgage loans. In addition, these notes were collateralized by FHLB stock of $7.3 million at December 31, 2005, and $7.8 million as of June 30, 2006. As of June 30, 2006, a $30 million FHLB advance was scheduled to mature on July 3, 2006, and another $30 million FHLB advance was scheduled to mature on July 26, 2006. New short-term FHLB advances replaced these advances upon maturity.
At June 30, 2006 and December 31, 2005, respectively, the period to date average balance of Federal funds purchased and other short-term borrowings totaled $180.4 million at a weighted average rate of 4.9% and $160.6 million at a weighted average rate of 3.5%.
The Company is a Treasury Tax & Loan (TT&L) depository for the Federal Reserve Bank (FRB), and as such, it accepts TT&L deposits. The Company is allowed to hold these deposits for the FRB until they are called. The interest rate is the federal funds rate less 25 basis points. Securities with a face value greater than or equal to the amount borrowed are pledged as a condition of borrowing TT&L deposits
8
The Company had a $20 million line of credit available with Marshall & Ilsley under which there was a $3.2 million outstanding balance as of December 31, 2005 and $5.1 million as of June 30, 2006. A revolving business note dated April 30, 2005 secures the line of credit and is guaranteed by the Company. The note provides that any outstanding principal will bear interest at the Companys option, at the rate of either 1.00% over the previous month average (Federal Reserve targeted rate) federal funds rate or 0.90% over the adjusted interbank rate with a minimum interest rate of 2.20%. This borrowing is for general corporate purposes, including funding loans held for sale at the Old Second Mortgage Company subsidiary.
Note 7 Long-Term Incentive Plan
The Long-Term Incentive Plan (the Incentive Plan) authorizes the issuance of up to 1,333,000 shares of the Companys common stock, including the granting of qualified stock options (Incentive Stock Options), nonqualified stock options, restricted stock and stock appreciation rights. Stock based awards may be granted to selected directors and officers or employees at the discretion of the board of directors. The Incentive Plan requires the exercise price of any incentive stock option issued to an employee to be at least equal to the fair market value of Company common stock on the date the option is granted. All stock options were granted for a term of ten years. Vesting of stock options granted in 2004 and prior years was accelerated to immediately vest all options as of December 20, 2005. The accelerated vesting eliminated the future compensation expense that the Company would otherwise recognize with respect to these options, in accordance with Statement of Financial Accounting Standards No. 123 (revised 2004) Share - Based Payment, (SFAS No. 123) issued by the Financial Accounting Standards Board, effective for reporting periods beginning after January 1, 2006. Options granted in 2005 were immediately vested and restricted stock vests three years from the grant date.
Nonqualified stock options may be granted to directors based upon a formula. These and other awards under the Incentive Plan may be granted subject to a vesting requirement and would become fully vested upon a merger or change in control of the Company. There were no stock options granted in the first six months of 2006.
A summary of activity in the Incentive Plan and options outstanding is included below:
|
|
Six Months June 30, 2006 |
|
||||||||
|
|
|
|
|
|
Weighted |
|
|
|
||
|
|
|
|
Weighted |
|
Average |
|
|
|
||
|
|
|
|
Average |
|
Remaining |
|
Aggregate |
|
||
|
|
|
|
Exercise |
|
Contractual |
|
Intrinsic |
|
||
|
|
Shares |
|
Price |
|
Life |
|
Value |
|
||
|
|
|
|
|
|
|
|
(In thousands) |
|
||
Beginning outstanding |
|
655,613 |
|
$ |
21.71 |
|
|
|
|
|
|
Granted |
|
|
|
|
|
|
|
|
|
||
Exercised |
|
(39,002 |
) |
15.16 |
|
|
|
|
|
||
Expired |
|
|
|
|
|
|
|
|
|
||
Ending outstanding |
|
616,611 |
|
$ |
22.13 |
|
81 Months |
|
$ |
5,909 |
|
9
All options were exercisable at the end of the period. The total intrinsic value of options exercised during the first quarter of 2006 and 2005 was $647,000 and $1,476,000, respectively. There were no exercises in the second quarter of either 2005 or 2006.
The following pro forma information presents net income and earnings per share had the fair value method of SFAS No. 123 been used to measure compensation cost for stock option plans in 2005.
|
Three Months |
|
Six Months |
|
|||
|
|
Ended |
|
Ended |
|
||
|
|
June 30, 2005 |
|
June 30, 2005 |
|
||
Net income as reported |
|
$ |
6,570 |
|
$ |
12,759 |
|
Pro forma net income |
|
6,437 |
|
12,492 |
|
||
Basic earnings per share as reported |
|
0.49 |
|
0.95 |
|
||
Pro forma basic earnings per share |
|
0.48 |
|
0.93 |
|
||
Diluted earnings per share as reported |
|
0.48 |
|
0.94 |
|
||
Pro forma diluted earnings per share |
|
0.47 |
|
0.92 |
|
||
Restricted stock was granted beginning December 20, 2005 under the Incentive Plan. These shares are subject to forfeiture until certain restrictions have lapsed including employment for a specific period. The fair value of the restricted stock grant was $640,000 on the date of grant. Compensation expense for restricted shares is recognized on a straight-line basis over the vesting period. Included in the determination of net income as reported for the six-month period ended June 30, 2006 is compensation expense for restricted shares of $101,000, with a related tax benefit of $40,000. As of June 30, 2006, the total compensation cost related to nonvested awards not yet recognized was $501,000. The Company expects to recognize this cost over a remaining period of thirty months.
The following table is a summary of restricted stock activity.
|
|
|
Weighted |
|
||
|
|
|
|
Average |
|
|
|
|
|
|
Grant Date |
|
|
|
|
Shares |
|
Fair Value |
|
|
Nonvested shares at December 31, 2004 |
|
|
|
|
|
|
Granted |
|
20,406 |
|
$ |
31.34 |
|
Vested |
|
|
|
|
|
|
Forfeited |
|
|
|
|
|
|
Nonvested shares at December 31, 2005 |
|
20,406 |
|
$ |
31.34 |
|
Granted |
|
|
|
|
|
|
Vested |
|
|
|
|
|
|
Forfeited |
|
(1,500 |
) |
$ |
31.34 |
|
Nonvested shares at June 30, 2006 |
|
18,906 |
|
$ |
31.34 |
|
10
Note 8 Earnings Per Share
Earnings per share is included below as of June 30, (share data not in thousands):
|
|
Three Months Ended |
|
Six Months Ended |
|
||||||||
|
|
June 30, |
|
June 30, |
|
||||||||
|
|
2006 |
|
2005 |
|
2006 |
|
2005 |
|
||||
Basic earnings per share: |
|
|
|
|
|
|
|
|
|
||||
Weighted-average common shares outstanding |
|
13,524,276 |
|
13,496,502 |
|
13,526,947 |
|
13,474,437 |
|
||||
Net income available to common stockholders |
|
$ |
6,366 |
|
$ |
6,570 |
|
$ |
12,471 |
|
$ |
12,759 |
|
Basic earnings per share |
|
$ |
0.47 |
|
$ |
0.49 |
|
$ |
0.92 |
|
$ |
0.95 |
|
Diluted earnings per share: |
|
|
|
|
|
|
|
|
|
||||
Weighted-average common shares outstanding |
|
13,524,276 |
|
13,496,502 |
|
13,526,947 |
|
13,474,437 |
|
||||
Dilutive effect of restricted shares |
|
18,906 |
|
|
|
18,906 |
|
|
|
||||
Dilutive effect of stock options |
|
157,004 |
|
163,912 |
|
159,016 |
|
171,864 |
|
||||
Diluted average common shares outstanding |
|
13,700,186 |
|
13,660,414 |
|
13,704,869 |
|
13,646,301 |
|
||||
Net income available to common stockholders |
|
$ |
6,366 |
|
$ |
6,570 |
|
$ |
12,471 |
|
$ |
12,759 |
|
Diluted earnings per share |
|
$ |
0.46 |
|
$ |
0.48 |
|
$ |
0.91 |
|
$ |
0.94 |
|
|
|
|
|
|
|
|
|
|
|
||||
Number of antidilutive options excluded from the diluted earnings per share calculation |
|
211,000 |
|
137,000 |
|
211,000 |
|
137,000 |
|
||||
Number of antidilutive restricted shares excluded from the diluted earnings per share calculation |
|
|
|
|
|
|
|
|
|
11
Note 9 Other Comprehensive Income (Loss)
Other comprehensive income (loss) is included below:
|
|
Three Months Ended |
|
Six Months Ended |
|
||||||||
|
|
2006 |
|
2005 |
|
2006 |
|
2005 |
|
||||
Change in net holding gains (losses) on available for sale securities arising during the period |
|
$ |
(1,892 |
) |
$ |
3,134 |
|
$ |
(3,385 |
) |
$ |
(1,947 |
) |
Related tax benefit |
|
542 |
|
(1,249 |
) |
1,351 |
|
773 |
|
||||
Net unrealized gains / (losses) |
|
(1,350 |
) |
1,885 |
|
(2,034 |
) |
(1,174 |
) |
||||
|
|
|
|
|
|
|
|
|
|
||||
Less: Reclassification adjustment for the net gains (losses) realized during the period |
|
|
|
|
|
|
|
|
|
||||
Realized gains |
|
191 |
|
5 |
|
418 |
|
5 |
|
||||
Realized losses |
|
|
|
(6 |
) |
|
|
(10 |
) |
||||
Net realized gains (losses) |
|
191 |
|
(1 |
) |
418 |
|
(5 |
) |
||||
Income tax benefit (expense) on net realized gains (losses) |
|
(76 |
) |
|
|
(166 |
) |
2 |
|
||||
Net realized gains (losses) after tax |
|
115 |
|
(1 |
) |
252 |
|
(3 |
) |
||||
Total other comprehensive income (loss) |
|
$ |
(1,465 |
) |
$ |
1,886 |
|
$ |
(2,286 |
) |
$ |
(1,171 |
) |
Note 10 Retirement Plans
The Company has a tax-qualified noncontributory defined benefit retirement plan covering substantially all full-time and regular part-time employees of the Company. Generally, benefits are based on years of service and compensation. Certain participants in the defined benefit plan are also covered by an unfunded supplemental retirement plan. The purpose of the supplemental retirement plan is to extend full retirement benefits to individuals without regard to statutory limitations under tax-qualified plans.
As of December 31, 2005, the defined benefit and supplemental retirement plans were terminated. Prior to December 31, 2005 all amounts due were paid to participants of the supplemental executive retirement plan (SERP). Following receipt of all regulatory approvals, all accrued benefits will be distributed to the participants of the defined benefit plan either in one lump sum payment or by the purchase of an annuity contract. The liabilities are expected to exceed assets at the time of distribution of all benefits by approximately $1.1 million. A contribution of the shortfall amount is required to be made before the defined benefit plan is liquidated, which is anticipated to be in the third quarter of 2006.
12
|
|
Six Months Ended June, |
|
|||||||
|
|
Pension Benefits |
|
SERP |
|
|||||
|
|
2006 |
|
2005 |
|
2005 |
|
|||
Service cost |
|
$ |
|
|
$ |
851 |
|
$ |
38 |
|
Interest cost |
|
181 |
|
466 |
|
48 |
|
|||
Expected return on plan assets |
|
(178 |
) |
(435 |
) |
|
|
|||
Amortization of transition obligation |
|
|
|
|
|
|
|
|||
Amortization of prior service (benefit) cost |
|
|
|
(2 |
) |
9 |
|
|||
Recognized net actuarial loss |
|
|
|
142 |
|
24 |
|
|||
Net periodic benefit cost |
|
$ |
3 |
|
$ |
1,022 |
|
$ |
119 |
|
|
|
|
|
|
|
|
|
|||
Key Assumptions: |
|
|
|
|
|
|
|
|||
Discount rate |
|
5.25 |
% |
5.50 |
% |
5.50 |
% |
|||
Long-term rate of return on assets |
|
5.00 |
% |
7.50 |
% |
7.50 |
% |
|||
Salary increases |
|
0.00 |
% |
5.00 |
% |
5.00 |
% |
The Company maintains tax-qualified contributory and non-contributory profit sharing plans covering substantially all full-time and regular part-time employees. The expense of these plans was $1,130,000 and $721,000 in the first six months of 2006 and 2005, respectively.
13
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Overview
Old Second Bancorp, Inc. (the Company) is a financial services company with its main headquarters located in Aurora, Illinois. The Company has offices located in Kane, Kendall, DeKalb, DuPage, LaSalle, and Will counties in Illinois. The Company provides financial services through its three subsidiary banks at its twenty-eight banking locations. Old Second Mortgage, which also conducts business as Maple Park Mortgage, provides mortgage-banking services at its three offices. Old Second Financial, Inc. provides insurance products. The Old Second National Bank of Aurora, the Companys lead subsidiary bank, also engages in trust operations.
Results of Operations
Net income for the second quarter of 2006 was $6.4 million, or $ 0.46 diluted earnings per share, compared with $6.6 million, or $0.48 diluted earnings per share, in the second quarter of 2005. Earnings for the first half of 2006 were 91 cents per diluted share, on $12.5 million in net income, compared with 94 cents per diluted share in the first half of 2005, on earnings of $12.8 million. The return on equity decreased from 18.34% in the first half of 2005, to 16.05% in the first half of 2006.
In comparing the first half of 2006 and the first half of 2005, there were several items that had an impact on earnings. In the first half of 2005, there was a reduction of $250,000 in the estimated accrual for real estate taxes. In the first half of 2006, an income tax adjustment of $175,000 and securities gains of $418,000 were recorded. At the same time, the provision for loan losses was $844,000 in the first half of 2006, compared with $363,000 in the first half of 2005.
Net Interest Income
Net interest income increased slightly in the first half of 2006, to $36.2 million in 2006, from $36.1 million in 2005. Second quarter net interest income declined from $18.5 million in 2005, to $18.1 million in 2006. For both the quarter and year to date periods, growth in earning assets was offset by a lower net interest margin. Average earning assets grew $152.0 million, or 7.4% from the first half of 2005 to the first half of 2006. At the same time, the tax-equivalent net interest margin declined from 3.68% in the first half of 2005 to 3.44% in the first half of 2006.
The average tax-equivalent yield on earning assets increased from 5.65% to 6.42%, or 77 basis points, from the first half of 2005 to the first half of 2006. At the same time, the cost of interest-bearing and noninterest-bearing funds increased from 2.29% to 3.39%, or 110 basis points. Changes in funding composition also had a significant impact on the net interest margin. Among lower-cost sources of funds, the average balance of interest-bearing transaction accounts and savings accounts declined from the first half of 2005 to the first half of 2006, and noninterest-bearing deposits increased slightly. At the same time, average balances of higher-cost sources of funds, including time deposits, repurchase agreements, and other short-term borrowings increased $184.0 million, or 19.4%, in the aggregate.
14
Management, in order to evaluate and measure performance, uses certain non-GAAP performance measures and ratios. These include taxable-equivalent net interest income (including its individual components) and net interest margin (including its individual components). Management believes that these measures and ratios provide users of the financial information with a more accurate view of the performance of the interest-earning assets and interest-bearing liabilities and of the Companys operating efficiency for comparison purposes. Other financial holding companies may define or calculate these measures and ratios differently. See the table below for supplemental data and the corresponding reconciliation to GAAP financial measures for the six months ended June 30, 2006 and 2005.
The following table sets forth certain information relating to the Companys average consolidated balance sheets and reflects the yield on average earning assets and cost of average liabilities for the periods indicated. The rates are determined by dividing the related interest by the average balance of assets or liabilities. Average balances are derived from daily balances.
15
ANALYSIS OF AVERAGE BALANCES,
TAX EQUIVALENT INTEREST AND RATES
Six Months Ended June 30, 2006 and 2005
(Dollar amounts in thousands- unaudited)
|
|
2006 |
|
2005 |
|
||||||||||||
|
|
Average |
|
|
|
|
|
Average |
|
|
|
|
|
||||
|
|
Balance |
|
Interest |
|
Rate |
|
Balance |
|
Interest |
|
Rate |
|
||||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Interest bearing deposits with banks |
|
$ |
750 |
|
$ |
2 |
|
0.54 |
% |
$ |
567 |
|
$ |
1 |
|
0.36 |
% |
Federal funds sold |
|
133 |
|
3 |
|
4.51 |
|
215 |
|
3 |
|
2.79 |
|
||||
Securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Taxable |
|
326,540 |
|
6,351 |
|
3.89 |
|
329,107 |
|
5,592 |
|
3.40 |
|
||||
Non-taxable (tax equivalent)(1) |
|
140,605 |
|
3,832 |
|
5.45 |
|
134,643 |
|
3,586 |
|
5.33 |
|
||||
Total securities |
|
467,145 |
|
10,183 |
|
4.36 |
|
463,750 |
|
9,178 |
|
3.96 |
|
||||
Loans and loans held for sale(2)(3) |
|
1,738,183 |
|
60,016 |
|
6.96 |
|
1,589,716 |
|
48,420 |
|
6.14 |
|
||||
Total interest earning assets |
|
2,206,211 |
|
70,204 |
|
6.42 |
|
2,054,248 |
|
57,602 |
|
5.65 |
|
||||
Cash and due from banks |
|
50,906 |
|
|
|
|
|
53,933 |
|
|
|
|
|
||||
Allowance for loan losses |
|
(15,824 |
) |
|
|
|
|
(15,517 |
) |
|
|
|
|
||||
Other noninterest-bearing assets |
|
120,439 |
|
|
|
|
|
86,532 |
|
|
|
|
|
||||
Total assets |
|
$ |
2,361,732 |
|
|
|
|
|
$ |
2,179,196 |
|
|
|
|
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Liabilities and Stockholders Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Interest bearing transaction accounts |
|
$ |
650,302 |
|
7,548 |
|
2.34 |
|
$ |
668,395 |
|
4,698 |
|
1.42 |
|
||
Savings accounts |
|
120,466 |
|
282 |
|
0.47 |
|
126,309 |
|
253 |
|
0.40 |
|
||||
Time deposits |
|
950,646 |
|
18,957 |
|
4.02 |
|
792,427 |
|
11,632 |
|
2.96 |
|
||||
Interest bearing deposits |
|
1,721,414 |
|
26,787 |
|
3.14 |
|
1,587,131 |
|
16,583 |
|
2.11 |
|
||||
Repurchase agreements |
|
49,291 |
|
994 |
|
4.07 |
|
42,571 |
|
507 |
|
2.40 |
|
||||
Other short-term borrowings |
|
131,148 |
|
3,413 |
|
5.25 |
|
112,104 |
|
1,785 |
|
3.21 |
|
||||
Junior subordinated debentures |
|
31,625 |
|
1,233 |
|
7.80 |
|
31,625 |
|
1,214 |
|
7.68 |
|
||||
Note payable |
|
3,442 |
|
98 |
|
5.74 |
|
2,700 |
|
50 |
|
3.73 |
|
||||
Total interest bearing liabilities |
|
1,936,920 |
|
32,525 |
|
3.39 |
|
1,776,131 |
|
20,139 |
|
2.29 |
|
||||
Noninterest bearing deposits |
|
253,372 |
|
|
|
|
|
248,092 |
|
|
|
|
|
||||
Accrued interest and other liabilities |
|
14,707 |
|
|
|
|
|
14,648 |
|
|
|
|
|
||||
Stockholders equity |
|
156,733 |
|
|
|
|
|
140,325 |
|
|
|
|
|
||||
Total liabilities and stockholders equity |
|
$ |
2,361,732 |
|
|
|
|
|
$ |
2,179,196 |
|
|
|
|
|
||
Net interest income (tax equivalent) |
|
|
|
$ |
37,679 |
|
|
|
|
|
$ |
37,463 |
|
|
|
||
Net interest income (tax equivalent) to total earning assets |
|
|
|
|
|
3.44 |
% |
|
|
|
|
3.68 |
% |
||||
Interest bearing liabilities to earnings assets |
|
87.79 |
% |
|
|
|
|
86.46 |
% |
|
|
|
|
Notes:
(1) Tax equivalent basis is calculated using a marginal tax rate of 35%.
(2) Nonaccrual loans are included in the above stated average balances.
(3) Loan fees, included in interest on loans and loans held for sale, were $1.9 million and $1.5 million in the first six months of 2006 and 2005, respectively.
Yields on certain asset categories and the net interest margin of the Company and its banking subsidiaries are reviewed on a fully taxable-equivalent basis (FTE). In this non-GAAP presentation, net interest income is adjusted to reflect tax-exempt interest income on an equivalent before-tax basis. This measure ensures comparability of net interest income arising from both taxable and tax-exempt sources.
16
|
|
Three Months Ended |
|
Year to Date |
|
||||||||
|
|
2006 |
|
2005 |
|
2006 |
|
2005 |
|
||||
Net Interest Margin |
|
|
|
|
|
|
|
|
|
||||
Interest income (GAAP) |
|
$ |
35,258 |
|
$ |
29,188 |
|
$ |
68,750 |
|
$ |
56,249 |
|
Taxable-equivalent adjustment: |
|
|
|
|
|
|
|
|
|
||||
Loans |
|
56 |
|
52 |
|
113 |
|
98 |
|
||||
Investments |
|
678 |
|
648 |
|
1,341 |
|
1,255 |
|
||||
Interest income - FTE |
|
35,992 |
|
29,888 |
|
70,204 |
|
57,602 |
|
||||
Interest expense (GAAP) |
|
17,168 |
|
10,710 |
|
32,525 |
|
20,139 |
|
||||
Net interest income - FTE |
|
$ |
18,824 |
|
$ |
19,178 |
|
$ |
37,679 |
|
$ |
37,463 |
|
Net interest income - (GAAP) |
|
$ |
18,090 |
|
$ |
18,478 |
|
$ |
36,225 |
|
$ |
36,110 |
|
|
|
|
|
|
|
|
|
|
|
||||
Average interest earning assets |
|
$ |
2,222,331 |
|
$ |
2,088,855 |
|
$ |
2,206,211 |
|
$ |
2,054,248 |
|
Net interest margin (GAAP) |
|
3.26 |
% |
3.55 |
% |
3.31 |
% |
3.54 |
% |
||||
Net interest margin - FTE |
|
3.40 |
% |
3.68 |
% |
3.44 |
% |
3.68 |
% |
Provision for Loan Losses
The Company provided an additional $400,000 to the allowance for loan losses in the second quarter of 2006, unchanged from the second quarter of 2005. The Company provided $844,000 in the first half of 2006, compared with $363,000 in the first half of 2005, an increase of $481,000. The quality of the loan portfolio remained strong and charge-offs were low, and, after analyzing the allowance for loan losses, management has determined that the level reported as of June 30, 2006, was appropriate. In making this determination, both quantitative and qualitative factors are considered. Managements growing concern with the commercial real estate market generally, and the large concentration of commercial real estate loans held by the Company contributed to the increase in the provision for the first half of 2006 compared to 2005, in spite of the decline in nonperforming loans. Management has observed slower real estate building and development activity in the Companys market areas. Although the Companys borrowers continue to meet their obligations, management believes that the general risk in this sector has increased. The ratio of the allowance for loan losses to nonperforming loans was 410% as of June 30, 2006, compared with 245% as of June 30, 2005. Nonperforming loans were $3.9 million as of June 30, 2006, and $6.6 million as of June 30, 2005. Net charge-offs were $198,000 in the second quarter of 2006 and $289,000 in the second quarter of 2005. For the year to date, net charge-offs were $80,000 in the first half of 2006 and $333,000 in the first half of 2005.
The allowance for loan losses represents managements estimate of probable incurred credit losses inherent in the loan portfolio. Determining the amount of the allowance for loan losses requires significant judgment and the use of estimates related to the amount and timing of expected future cash flows on impaired loans, estimated losses on pools of homogeneous loans based on historical loss experience, and consideration of current economic trends and conditions, all of which may be susceptible to significant change. The loan portfolio also represents the largest asset type on the consolidated statements of condition.
The allowance for loan losses as a percentage of total loans was 0.92% as of June 30, 2006, compared to 0.90% as of December 31, 2005 and 0.95% as of June 30, 2005. In managements judgment, an adequate allowance for estimated losses has been established; however, there can be no assurance that such losses will not exceed the estimated amounts in the future.
17
Past due and nonaccrual loans for the periods ended June 30, 2006 and December 31, 2005 were as follows:
|
June 30, |
|
December 31, |
|
|||
|
|
2006 |
|
2005 |
|
||
Nonaccrual loans |
|
$ |
2,857 |
|
$ |
3,845 |
|
Interest income recorded on nonaccrual loans |
|
68 |
|
334 |
|
||
Interest income which would have been accrued on nonaccrual loans |
|
147 |
|
636 |
|
||
Loans 90 days or more past due and still accruing interest |
|
1,065 |
|
2,752 |
|
||
Noninterest Income
Noninterest income was $7.4 million during the second quarter of 2006 and $7.1 million during the second quarter of 2005, an increase of $260,000, or 3.7%. This increase occurred despite mortgage banking income, including gains on sales of mortgage loans, secondary market fees, and servicing income, declining $560,000, or 31.6%, from the second quarter of 2005 to the second quarter of 2006. For the year to date, mortgage banking income was down $916,000, or 27.4%, from the first half of 2005 to the first half of 2006. The higher cost of borrowing associated with an increase in interest rates has resulted in a decline in demand for mortgages and a decline in mortgage banking income.
Trust income was up $424,000, or 26.0%, from the second quarter of 2005 to the second quarter of 2006, to $2.1 million. Trust income was $3.8 million in the first six months of 2006, an increase of $509,000, or 15.5%, from the first half of 2005. Increases in trust income for both the quarter and the year to date period were primarily associated with estate fees. Securities gains were $191,000 in the second quarter of 2006 and $418,000 in the first half of 2006, compared with a $1,000 loss in the second quarter of 2005 and a loss of $5,000 in the first half of 2005. Bank owned life insurance (BOLI) income increased from $215,000 to $489,000 in the second quarter, and from $434,000 to $961,000 for the first half, when comparing 2006 and 2005, as a result of BOLI purchases.
Noninterest Expense
Noninterest expense was $15.6 million during the second quarter of 2006, an increase of $237,000, or 1.5%, from $15.4 million in the second quarter of 2005. Noninterest expense was $31.8 million during the first half of 2006, an increase of $1.4 million, or 4.6%, from $30.4 million in the first half of 2005. Salaries and benefits expense was $8.9 million during the second quarter of 2006, a decrease of $54,000 from $9.0 million in the second quarter of 2005. In the first half of the year, salaries and benefits were $18.5 million in 2006 and $18.1 million in 2005, an increase of $357,000, or 2.0%.
Pension expense, included in salaries and benefits, was $981,000 in the first half of 2005 and $357,000 in the first half of 2006. The Company is in the process of distributing the assets of its defined benefit pension plan after terminating the plan in December of 2005. The liabilities are expected to exceed assets at the time of distribution of all benefits by approximately $1.1 million. A contribution of the shortfall amount is required to be made before the defined benefit plan is liquidated. Distribution to participants began in July, and management expects the distribution to be substantially completed during the third quarter of 2006.
18
Net occupancy and furniture and equipment expenses increased $190,000 from the second quarter of 2005 to the second quarter of 2006, or 8.8%. Net occupancy and furniture and equipment expenses increased $687,000 from the first half of 2005 to the first half of 2006, or 17.0%. 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 half of 2005. As the Company has expanded into and developed new markets, related facility expenses have increased. Three new branches have opened since the beginning of 2005. Other expense increased $49,000, or 1.3%, from the second quarter of 2005, to $3.8 million in the second quarter of 2006. Other expenses increased $205,000, or 2.8% from the first half of 2005 to $7.5 million in the first half of 2006.
Income Taxes
The Companys provision for Federal and State of Illinois income taxes was $3.0 million and $3.2 million in the second quarters of 2006 and 2005 respectively. Income taxes totaled $5.6 million and $6.2 million in the first six months of 2006 and 2005, respectively. The average effective income tax rate for the first half of 2006 and 2005 was 30.8% and 32.5%, respectively. A change in tax advisors during the first quarter of 2006 resulted in a management decision to reduce the income tax provision by $175,000.
Financial Condition
Total assets were $2.42 billion as of June 30, 2006, compared with $2.37 billion as of December 31, 2005. Loans grew $42.2 million during the first half of 2006, while cash and cash equivalents increased $21.7 million and securities available for sale declined $7.1 million.
The loan category that increased the most in the first half of 2006 was commercial real estate, which increased $31.4 million. Construction loans declined $5.8 million and residential loans increased by $22.7 million. The loan portfolio generally reflects the 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 88.7% of the portfolio as of June 30, 2006 and 88.1% of the portfolio as of December 31, 2005.
Securities available for sale totaled $463.4 million as of June 30, 2006, a decline of $7.0 million from $470.4 million as of December 31, 2005. The Company also invests in bank-owned life insurance (BOLI). During December 2005, the Company purchased an additional $20 million in BOLI, bringing the total to $41.6 million as of December 31, 2005, and $42.6 million as of June 30, 2006. Net unrealized gains, net of deferred taxes, in the securities available for sale increased from a net unrealized loss of $4.6 million as of December 31, 2005 to a net unrealized loss of $6.8 million as of June 30, 2006.
19
Deposits and Borrowings
Total deposits increased $72.7 million during the first half of 2006, to $2.01 billion as of June 30, 2006. Demand deposits decreased $8.2 million, to $255.9 million. Savings deposits decreased $1.2 million, to $116.6 million. Time deposits increased $73.8 million, or 8.4%, from $876.1 million to $949.9 million. Money market accounts declined from $432.5 million to $399.3 million in the first half of 2006.
Generally, depositors shifted somewhat from transaction accounts to certificates of deposits in the first half of 2006. While this had the effect of moving funds out of interest sensitive deposits into more stable pricing, this deposit shift resulted in a higher cost of funds and a negative impact on the net interest margin. The tax-equivalent net interest margin declined from 3.68% in the first half of 2005 to 3.44% in the first half of 2006. In comparing the first half of 2006 to the first half of 2005, the average cost of interest-bearing funds increased 110 basis points.
Securities sold under repurchase agreements, which are typically of short-term duration, decreased from $57.6 million as of December 31, 2005, to $43.6 million as of June 30, 2006. Other short-term borrowings decreased from $171.8 million to $162.4 million. Advances from the Federal Home Loan Bank of Chicago were $60.0 million as of June 30, 2006, while there were no advances as of December 31, 2005. The Company is currently maintaining liquid assets and delivering consistent growth in core deposits to provide funding for loan growth.
The Company and its three subsidiary banks are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines provide for five classifications, the highest of which is well capitalized. The Company and its subsidiary banks were categorized as well capitalized as of June 30, 2006. The accompanying table shows the capital ratios of the Company and Old Second National Bank, the Companys lead subsidiary bank, as of June 30, 2006 and December 31, 2005.
20
Capital levels and minimum required levels:
|
|
|
|
|
|
Minimum Required |
|
Minimum Required |
|
|||||||
|
|
|
|
|
|
for Capital |
|
to be Well |
|
|||||||
|
|
Actual |
|
Adequacy Purposes |
|
Capitalized |
|
|||||||||
|
|
Amount |
|
Ratio |
|
Amount |
|
Ratio |
|
Amount |
|
Ratio |
|
|||
June 30, 2006: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Total capital to risk weighted assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Consolidated |
|
$ |
207,214 |
|
10.99 |
% |
$ |
150,838 |
|
8.00 |
% |
$ |
188,548 |
|
10.00 |
% |
Old Second National Bank |
|
142,235 |
|
10.99 |
|
103,538 |
|
8.00 |
|
129,422 |
|
10.00 |
|
|||
Tier 1 capital to risk weighted assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Consolidated |
|
191,221 |
|
10.14 |
|
75,432 |
|
4.00 |
|
113,149 |
|
6.00 |
|
|||
Old Second National Bank |
|
131,372 |
|
10.15 |
|
51,772 |
|
4.00 |
|
77,658 |
|
6.00 |
|
|||
Tier 1 capital to average assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Consolidated |
|
191,221 |
|
8.05 |
|
95,017 |
|
4.00 |
|
118,771 |
|
5.00 |
|
|||
Old Second National Bank |
|
131,372 |
|
8.00 |
|
65,686 |
|
4.00 |
|
82,108 |
|
5.00 |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
December 31, 2005: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Total capital to risk weighted assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Consolidated |
|
$ |
200,981 |
|
10.91 |
% |
$ |
147,374 |
|
8.00 |
% |
$ |
184,217 |
|
10.00 |
% |
Old Second National Bank |
|
135,423 |
|
10.75 |
|
100,780 |
|
8.00 |
|
125,975 |
|
10.00 |
|
|||
Tier 1 capital to risk weighted assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Consolidated |
|
185,737 |
|
10.08 |
|
73,705 |
|
4.00 |
|
110,558 |
|
6.00 |
|
|||
Old Second National Bank |
|
125,301 |
|
9.94 |
|
50,423 |
|
4.00 |
|
75,634 |
|
6.00 |
|
|||
Tier 1 capital to average assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Consolidated |
|
185,737 |
|
8.02 |
|
92,637 |
|
4.00 |
|
115,796 |
|
5.00 |
|
|||
Old Second National Bank |
|
125,301 |
|
7.85 |
|
63,848 |
|
4.00 |
|
79,810 |
|
5.00 |
|
21
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Liquidity is the Companys ability to fund its operations, to meet depositor withdrawals, to provide for customers credit needs, to meet maturing obligations and its existing commitments, to withstand fluctuations in deposit levels, and to meet maturing obligations and existing commitments. The liquidity of the Company principally depends on cash flows from operating activities, investment in and maturity of assets, changes in balances of deposits and borrowings, and its ability to borrow funds in the money or capital markets.
Net cash inflows from operating activities were $20.8 million in the first six months of 2006, compared with net cash inflows of $23.8 million in the first six months of 2005. Interest received, net of interest paid, was the principal source use of operating cash inflows in both periods reported. Management of investing and financing activities, as well as market conditions, determines the level and the stability of net interest cash flows. Managements policy is to mitigate the impact of changes in market interest rates to the extent possible, so that balance sheet growth is the principal determinant of growth in net interest cash flows.
Net cash outflows from investing activities were $43.3 million in the six months ended June 30, 2006, compared to $131.4 million a year earlier. In the first half of 2006, securities transactions, including purchases of FHLB stock, accounted for a net inflow of $1.9 million, and net principal disbursed on loans accounted for net outflows of $42.2 million. In the first six months of 2005, securities transactions accounted for a net outflow of $4.6 million, and net principal disbursed on loans accounted for net outflows of $123.2 million. Cash outflows for property and equipment were $2.9 million in 2006 compared to $3.6 million in the first half of 2005.
In the first half of 2006, cash inflows from financing activities were $44.2 million, which included an increase in deposits of $72.7 million against a decline in repurchase agreements of $14.0 million and a decline in other short-term borrowings of $9.4 million. In the first half of 2005, net cash inflows from financing activities were $112.6 million. This included an increase in deposits of $110.7 million and an increase in repurchase agreements of $6.9 million, offset by a decrease in other short-term borrowings of $2.6 million.
The impact of movements in general market interest rates on a financial institutions financial condition, including capital adequacy, earnings, and liquidity, is known as interest rate risk. Interest rate risk is the Companys primary market risk. As a financial institution, accepting and managing this risk is an inherent aspect of the Companys business. However, safe and sound management of interest rate risk requires that it be maintained at prudent levels.
The Company analyzes interest rate risk by examining the extent to which assets and liabilities are interest rate sensitive. The interest sensitivity gap is defined as the difference between the amount of interest earning assets maturing or repricing within a specific time period, and the amount of interest-bearing liabilities maturing or repricing within that time period. A gap is considered positive when the amount of interest sensitive assets exceeds the amount of interest sensitive liabilities. A gap is considered negative when the amount of interest sensitive liabilities
22
exceeds the amount of interest sensitive assets. During a period of rising interest rates, a negative gap would tend to result in a decrease in net interest income, while a positive gap would tend to positively affect net interest income. The Companys policy is to manage the balance sheet so that fluctuations in the net interest margin are minimized, regardless of the level of interest rates.
The accompanying table does not necessarily indicate the future impact of general interest rate movements on the Companys net interest income, because the repricing of certain assets and liabilities is discretionary, and is subject to competitive and other pressures. As a result, assets and liabilities indicated as repricing within the same period may in fact reprice at different times and at different rate levels. Assets and liabilities are reported in the earliest time frame in which maturity or repricing may occur. Although securities available for sale are reported in the earliest time frame in which maturity or repricing may occur, these securities may be sold in response to changes in interest rates or liquidity needs.
Expected Maturity of Interest-Earning Assets and Interest-Bearing Liabilities
|
|
Expected Maturity Dates |
|
|
|
|||||||||||||||||
June 30, 2006 |
|
1 Year |
|
2 Years |
|
3 Years |
|
4 Years |
|
5 Years |
|
Thereafter |
|
Total |
|
|||||||
Interest-earning Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Deposit with banks |
|
$ |
108 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
108 |
|
Average interest rate |
|
3.10 |
% |
0.00 |
% |
0.00 |
% |
0.00 |
% |
0.00 |
% |
0.00 |
% |
3.10 |
% |
|||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Securities |
|
$ |
115,714 |
|
$ |
68,619 |
|
$ |
44,443 |
|
$ |
39,024 |
|
$ |
10,970 |
|
$ |
193,376 |
|
$ |
472,146 |
|
Average interest rate |
|
3.42 |
% |
3.95 |
% |
4.50 |
% |
4.21 |
% |
3.44 |
% |
4.50 |
% |
4.11 |
% |
|||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Fixed rate loans |
|
$ |
134,851 |
|
$ |
105,127 |
|
$ |
142,165 |
|
$ |
169,487 |
|
$ |
195,961 |
|
$ |
121,629 |
|
$ |
869,220 |
|
Average interest rate |
|
6.89 |
% |
6.36 |
% |
5.94 |
% |
6.04 |
% |
6.50 |
% |
6.36 |
% |
6.34 |
% |
|||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Adjustable rate loans |
|
$ |
319,707 |
|
$ |
86,736 |
|
$ |
25,128 |
|
$ |
23,131 |
|
$ |
6,403 |
|
$ |
427,644 |
|
$ |
888,749 |
|
Average interest rate |
|
8.70 |
% |
8.11 |
% |
7.95 |
% |
7.96 |
% |
8.21 |
% |
6.42 |
% |
7.50 |
% |
|||||||
Total |
|
$ |
570,380 |
|
$ |
260,482 |
|
$ |
211,736 |
|
$ |
231,642 |
|
$ |
213,334 |
|
$ |
742,649 |
|
$ |
2,230,223 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Interest-bearing Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Interest-bearing deposits |
|
$ |
1,103,992 |
|
$ |
138,775 |
|
$ |
163,266 |
|
$ |
27,518 |
|
$ |
17,230 |
|
$ |
301,303 |
|
$ |
1,752,084 |
|
Average interest rate |
|
2.67 |
% |
2.16 |
% |
2.20 |
% |
1.18 |
% |
2.44 |
% |
1.25 |
% |
2.32 |
% |
|||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Repurchase agreements and |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
other short-term borrowings |
|
$ |
206,001 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
206,001 |
|
Average interest rate |
|
5.13 |
% |
0.00 |
% |
0.00 |
% |
0.00 |
% |
0.00 |
% |
0.00 |
% |
5.13 |
% |
|||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Note payable |
|
$ |
5,075 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
5,075 |
|
Average interest rate |
|
5.58 |
% |
0.00 |
% |
0.00 |
% |
0.00 |
% |
0.00 |
% |
0.00 |
% |
5.58 |
% |
|||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Junior subordinate debentures |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
31,625 |
|
$ |
31,625 |
|
Average interest rate |
|
0.00 |
% |
0.00 |
% |
0.00 |
% |
0.00 |
% |
0.00 |
% |
7.80 |
% |
7.80 |
% |
|||||||
Total |
|
$ |
1,315,068 |
|
$ |
138,775 |
|
$ |
163,266 |
|
$ |
27,518 |
|
$ |
17,230 |
|
$ |
332,928 |
|
$ |
1,994,785 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Period gap |
|
$ |
(744,688 |
) |
$ |
121,707 |
|
$ |
48,470 |
|
$ |
204,124 |
|
$ |
196,104 |
|
$ |
409,721 |
|
$ |
235,438 |
|
Cumulative gap |
|
(744,688 |
) |
(622,981 |
) |
(574,511 |
) |
(370,387 |
) |
(174,283 |
) |
235,438 |
|
|
|
23
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As required by Rules 13a-15(b) and 15d-15(b) under the Securities Exchange Act of 1934, management has evaluated, with the participation of the Companys Chief Executive Officers and Chief Financial Officer, the effectiveness of the Companys disclosure controls and procedures as of the end of the period covered by this report. Based on this evaluation, management concluded the Companys disclosure controls and procedures (as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e)) were effective as of June 30, 2006 to ensure that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms and were effective as of June 30, 2006. These disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act is accumulated and communicated to management, including the Companys Chief Executive Officer and Chief Financial Officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. There were no changes in the Companys internal control over financial reporting during the quarter ended June 30, 2006 that have materially affected or are reasonably likely to affect, the Companys internal control over financial reporting.
Forward-looking Statements
This document (including information incorporated by reference) contains, and future oral and written statements of the Company and its management may contain, forward-looking statements, within the meaning of such term in 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, which may be based upon beliefs, expectations and assumptions of the Companys management and on information currently available to management, are generally identifiable by the use of words such as believe, expect, anticipate, plan, intend, estimate, may, will, would, could, should or other similar expressions. 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.
The Companys ability to predict results or the actual effect of future plans or strategies is inherently uncertain. The factors, which could have a material adverse effect on the operations and future prospects of the Company and its subsidiaries are detailed in the Risk Factors section included under Item 1A. of Part I of the Companys Form 10-K. In addition to the risk factors described in that section, there are other factors that may impact any public company, including ours, which could have a material adverse effect on the operations and future prospects of the Company and its subsidiaries. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements.
24
The Company and its subsidiaries have, from time to time, collection suits in the ordinary course of business against its debtors and are defendants in legal actions arising from normal business activities. Management, after consultation with legal counsel, believes that the ultimate liabilities, if any, resulting from those actions will not have a material adverse effect on the consolidated financial position of the Company and its subsidiaries.
There have been no material changes from the risk factors set forth in Part I, Item 1.A. Risk Factors, of the Companys Form 10-K for the year ended December 31, 2005. Please refer to that section of the Companys Form 10-K for disclosures regarding the risks and uncertainties related to the Companys business.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table shows certain information relating to purchases of common stock for three months ended June 30, 2006, pursuant to our share repurchase plan:
Period |
|
Total |
|
Average |
|
Total Number |
|
Remaining |
|
|
April 1 April 30, 2006 |
|
|
|
|
|
|
|
|
|
|
May 1 May 31, 2006 |
|
50,000 |
|
$ |
29.90 |
|
50,000 |
|
|
|
June 1 June 30, 2006 |
|
95,000 |
|
$ |
30.94 |
|
95,000 |
|
|
|
Total |
|
145,000 |
|
$ |
30.58 |
|
145,000 |
|
355,000 |
|
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Stockholders of the Company was held on April 18, 2006. At the meeting, stockholders voted to elect five nominees to the board of directors having staggered terms of service.
At the meeting, the stockholders elected J. Douglas Cheatham, James Eccher, D. Chet McKee, Gerald Palmer and James Carl Schmitz to serve as directors with their terms expiring in 2009. Marvin Fagel, Barry Finn, William Kane, Kenneth Lindgren and Jesse Maberry will continue as directors with their terms expiring in 2008. Edward Bonifas, William Meyer and William B. Skoglund will continue as directors with their terms expiring in 2007. The matters approved by stockholders at the meeting and the number of votes cast for, against or withheld (as well as the number of abstentions) as to each matter are set forth below:
NOMINEE |
|
FOR |
|
WITHHOLD |
|
J. Douglas Cheatham |
|
11,699,643 |
|
182,669 |
|
James Eccher |
|
11,805,073 |
|
77,239 |
|
D. Chet McKee |
|
11,781,758 |
|
100,554 |
|
Gerald Palmer |
|
11,831,566 |
|
50,746 |
|
James Carl Schmitz |
|
11,779,658 |
|
105,654 |
|
25
None.
Exhibits:
31.1 Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a)
31.2 Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a)
32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
26
Pursuant to the requirements of Section 13 or 15(d) of the Securities and 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. |
||||
|
|
|
|||
|
|
|
|||
|
|
BY: |
|
/s/ William B. Skoglund |
|
|
|
|
|
William B. Skoglund |
|
|
|
|
|
|
|
|
|
|
|
Chairman of the Board, Director |
|
|
|
|
|
President and Chief Executive Officer |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BY: |
|
/s/ J. Douglas Cheatham |
|
|
|
|
|
J. Douglas Cheatham |
|
|
|
|
|
|
|
|
|
|
|
Senior Vice-President and |
|
|
|
|
|
Chief Financial Officer, Director |
|
|
|
|
|
(principal financial officer) |
|
|
|
|
|
|
|
|
|
|
|
|
|
DATE: August 9, 2006 |
|
|
|
|
|
27