21.10.2021 01:31

Old Second Reports Third Quarter Net Income of $8.4 million, or $0.29 per Diluted Share

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AURORA, Ill., Oct. 20, 2021 /PRNewswire/ -- Old Second Bancorp, Inc. (the "Company," "Old Second," "we," "us," and "our") (NASDAQ: OSBC), the parent company of Old Second National Bank (the "Bank"), today announced financial results for the third quarter of 2021.  Our net income was $8.4 million, or $0.29 per diluted share, for the third quarter of 2021, compared to net income of $8.8 million, or $0.30 per diluted share, for the second quarter of 2021, and net income of $10.3 million, or $0.34 per diluted share, for the third quarter of 2020.  Net income for the third quarter of 2021 reflected a $1.5 million pre-tax release of provision for credit losses, compared to a $3.5 million pre-tax release in the second quarter of 2021, and a $300,000 pre-tax provision expense in the third quarter of 2020.  Residential mortgage banking revenue totaled $2.7 million in the third quarter of 2021, compared to $1.6 million in the second quarter of 2021, and $6.1 million in the third quarter of 2020.  Mortgage servicing rights ("MSRs") experienced a mark to market loss of $282,000 during the third quarter of 2021, compared to a $1.0 million loss in the prior quarter and a $160,000 loss in the third quarter of 2020.  Net gain on sales of mortgage loans totaled $2.2 million in the third quarter of 2021, compared to $1.9 million in the second quarter of 2021, and $5.2 million in the third quarter of 2020, as mortgage origination and refinancing volumes declined in the current year. Noninterest expense included $425,000 of merger-related expenses in the third quarter of 2021 due to the pending merger with West Suburban Bancorp, Inc. and its wholly-owned subsidiary bank, which is anticipated to close in December 2021, subject to the satisfaction of customary closing conditions, including receipt of required approval by the stockholders of each company.

Operating Results

  • Third quarter 2021 net income was $8.4 million, reflecting a decrease in earnings of $409,000 from the second quarter of 2021, and a decrease of $1.9 million from the third quarter of 2020.
  • Net interest and dividend income was $22.6 million for the third quarter of 2021, an increase of $664,000, or 3.0%, from the second quarter of 2021, and an increase of $109,000, or 0.5%, from third quarter of 2020.
  • Interest and dividend income for the third quarter of 2021 was $24.8 million, an increase of $596,000 from the second quarter of 2021, but a decrease of $256,000 from the third quarter of 2020, primarily due to the reduction in market interest rates over the past year. Interest and dividend income was favorably impacted by a large prepayment penalty recorded on one commercial credit in the third quarter of 2021, in addition to loan fees earned on forgiven Paycheck Protection Program ("PPP") loans during the second and third quarters of 2021. We originated 746 PPP loans totaling $136.7 million in 2020, and as of September 30, 2021, $2.4 million on seven PPP loans originated during the first round of the PPP loan program remained outstanding. During the first and second quarters of 2021, we originated $62.3 million, or 574 loans, under the second round of the PPP loan program, of which $32.3 million, or 253 loans, remain outstanding as of September 30, 2021. Net loan interest and fee income recorded in 2021 year to date on all PPP loans totaled $2.7 million, and approximately $1.3 million of net PPP loan fees remain unearned as of September 30, 2021.
  • Interest expense for both the second and third quarters of 2021 totaled $2.2 million, compared to $2.5 million for the third quarter of 2020. The $365,000 decrease in interest expense in the third quarter of 2021, compared to the third quarter of 2020, was primarily due to the reduction in market interest rates year over year, which impacted all interest bearing deposit categories.
  • We recorded a $1.5 million release of provision expense in the third quarter of 2021, compared to a $3.5 million release of provision expense in the second quarter of 2021, and a $300,000 provision for credit losses in the third quarter of 2020, as the projected impact of the COVID-19 pandemic on future credit losses is currently anticipated to be less than prior projections. Our allowance for credit losses ("ACL") on loans in the third quarter of 2021 consisted of a release of the ACL on loans of $1.5 million, as well as $236,000 of net charge-offs recorded during the quarter. In addition, the ACL for unfunded commitments decreased by $47,000 in the third quarter of 2021, due to an updated forecast of credit line utilization rates.
  • Noninterest income was $9.3 million for the third quarter of 2021, an increase of $1.4 million, or 17.9%, compared to $7.9 million for the second quarter of 2021, but a decrease of $2.3 million, or 20.1%, compared to $11.7 million for the third quarter of 2020. The increase from the linked quarter was primarily driven by a $1.1 million increase in residential mortgage banking revenue, attributable to a $800,000 decrease in the mark to market loss on MSRs and a $300,000 increase in net gain on the sales of mortgage loans in the third quarter of 2021, compared to the prior quarter. In addition, increases of $146,000 in service charges on deposits and $242,000 in securities gains, net, were recorded in the third quarter of 2021 compared to the linked quarter. The decrease in noninterest income in the third quarter of 2021, compared to the third quarter of 2020, was primarily due to a $3.4 million decline in residential mortgage banking revenue, primarily due to a $3.1 million decrease in net gain on sales of mortgage loans, which was partially offset by an increase in wealth management income of $483,000, and securities gains, net, of $244,000 in the third quarter of 2021, compared to securities losses of $1,000 in the third quarter of 2020.
  • Noninterest expense was $22.1 million for the third quarter of 2021, an increase of $728,000, or 3.4%, compared to $21.4 million for the second quarter of 2021, and an increase of $1.9 million, or 9.2%, from $20.3 million for the third quarter of 2020. The increase from the linked quarter was primarily attributable to an increase in legal and professional services fees due to merger-related costs incurred of $425,000 in the third quarter of 2021, as well as an increase in occupancy, furniture and equipment expenses due to planned maintenance, and computer and data processing expense. The increase in noninterest expense in the year over year period was primarily due to salaries and employee benefits expense, occupancy, furniture and equipment expense, legal expense, card related expense and other expense.
  • The provision for income taxes expense was $2.9 million for the third quarter of 2021, compared to $3.2 million for the second quarter of 2021, and $3.4 million for the third quarter of 2020. The decrease in tax expense was due to lower pre-tax income for the third quarter of 2021, compared to both the linked quarter and the year over year period, partially offset by an increase in non-deductible expenses, primarily due to merger-related costs incurred in the third quarter of 2021.
  • On October 19, 2021, our Board of Directors declared a cash dividend of $0.05 per share payable on November 8, 2021, to stockholders of record as of October 29, 2021.

President and Chief Executive Officer Jim Eccher said, "An improving economy and conservative positioning resulted in solid core earnings trends relative to last quarter featuring increased spread income, a stable margin and controlled expenses.  Loan growth remains a challenge in the face of low line utilization rates and tepid overall demand with continuing elevated prepayments.   The end result was flat total loan volumes relative to last quarter exclusive of PPP loan settlement activity.  Deposit inflows remain robust and resulted in a further increase in excess liquidity as evidenced by a $23.9 million increase in average cash on the balance sheet during the quarter.  We continue to deploy a portion of the excess liquidity on our balance sheet in short duration securities with yields far below the aggregate portfolio yield.  The combination of these factors largely resulted in a two basis point reported increase in our net interest margin over the linked quarter.  Our credit quality metrics and expectations have continued to improve as the Chicago area seems to be moving towards a more normalized environment and we recorded a $1.5 million reduction in the allowance for credit losses this quarter. Looking forward, I am optimistic on loan growth trends for the remainder of the year and continue to believe reported margin trends will be dominated by changes in liquidity levels on our balance sheet rather than any fundamental change in our business. I believe Old Second remains conservatively positioned to meet the challenges that may present themselves, as our expenses remain well-controlled, our business is well-diversified, customer activity is increasing and our underwriting has remained disciplined and consistent.  I would like to thank our employees for their continued hard work in delivering a solid quarter while focusing on exceptional customer service as we move towards a more normal routine."

Eccher continued, "In late July, we announced an agreement to acquire West Suburban Bancorp.  The pro forma company will have approximately $6.2 billion in assets, $5.3 billion in deposits and $3.4 billion in loans.  We believe the merger will significantly enhance our scale and geographic reach within the Chicago metropolitan area and will offer the potential to deliver exceptional value to the stockholders of both organizations.  We are working diligently to prepare for the closing of the transaction, including operational planning, the recent receipt of all required bank regulatory approvals and continuing investments in the expansion of our sales teams across several lending verticals.  We believe the combined company will feature a strong core deposit funding base with improved profitability and enhanced strategic positioning, including the scale to prioritize investments in technology and growth.  We are excited for the future and believe the combination will provide us with a tremendous opportunity to build a better bank for our stockholders, employees and the communities we serve."

COVID-19 Update

  • Late in the first quarter of 2020, we began granting loan payment deferrals to certain borrowers affected by the pandemic. For the period of April 1, 2020 through September 30, 2021, our clients had requested loan payment deferrals on 506 loans totaling $237.8 million. As of September 30, 2021, 494 loans, representing $229.0 million outstanding, or 96.3% of the original loan balances deferred, have resumed payments or paid off. Active payment deferrals remain on 12 loans, with $8.8 million of balances outstanding.
  • We are participating in the Coronavirus Aid, Relief and Economic Security Act ("CARES" Act). During 2021, we processed 574 loan applications for PPP loans, representing a total of $62.3 million. As of September 30, 2021, we had $2.4 million of PPP loans outstanding that were originated under the first round of the PPP loan program in 2020, and $32.3 million of PPP loans outstanding that were originated under the second round of the PPP loan program in 2021. Early in the fourth quarter of 2020, we started to submit applications for PPP loan forgiveness to the SBA, and as of September 30, 2021, $164.3 million on 1,060 loans have been forgiven. We anticipate receiving the remaining funds for our first round of PPP loan forgiveness from the SBA through the end of 2021, and will also continue the forgiveness process for our second round of PPP loans during the remainder of 2021 and into early 2022.

Capital Ratios


Minimum Capital


Well Capitalized











Adequacy with


Under Prompt 











Capital Conservation


Corrective Action


September 30, 


June 30, 


September 30, 


Buffer, if applicable1


Provisions2


2021


2021


2020

The Company















Common equity tier 1 capital ratio

7.00

%


N/A



12.99

%


12.72

%


11.97

%

Total risk-based capital ratio

10.50

%


N/A



17.80

%


17.60

%


14.33

%

Tier 1 risk-based capital ratio

8.50

%


N/A



14.10

%


13.83

%


13.08

%

Tier 1 leverage ratio

4.00

%


N/A



9.81

%


9.68

%


10.07

%
















The Bank















Common equity tier 1 capital ratio

7.00

%


6.50

%


15.65

%


15.23

%


14.24

%

Total risk-based capital ratio

10.50

%


10.00

%


16.69

%


16.33

%


15.49

%

Tier 1 risk-based capital ratio

8.50

%


8.00

%


15.65

%


15.23

%


14.24

%

Tier 1 leverage ratio

4.00

%


5.00

%


10.83

%


10.63

%


10.90

%


1Amounts are shown inclusive of a capital conservation buffer of 2.50%. Under the Federal Reserve's Small Bank Holding Company Policy Statement, the Company is not currently subject to the minimum capital adequacy and capital conservation buffer capital requirements at the holding company level, unless otherwise advised by the Federal Reserve (such capital requirements are applicable only at the Bank level). Although the minimum regulatory capital requirements are not applicable to the Company, we calculate these ratios for our own planning and monitoring purposes.

2 The prompt corrective action provisions are only applicable at the Bank level.

The ratios shown above exceed levels required to be considered "well capitalized."

Asset Quality & Earning Assets

  • Nonperforming loans totaled $29.0 million at September 30, 2021, compared to $23.1 million at June 30, 2021, and $20.8 million at September 30, 2020. Credit metrics reflect two large credits which totaled $7.4 million that moved to nonaccrual status in the third quarter of 2021, and management is carefully monitoring loans considered to be in a classified status. Nonperforming loans, as a percent of total loans were 1.5% at September 30, 2021, 1.2% at June 30, 2021, and 1.0% at September 30, 2020.
  • OREO assets totaled $1.9 million at both September 30, 2021 and June 30, 2021, compared to $2.7 million at September 30, 2020. In the third quarter of 2021, we recorded one property sale of $37,000 net book value, one property transfer into OREO of $69,000 net book value, and a net write up of $2,000, compared to write downs of $61,000 in the second quarter of 2021 and $46,000 in the third quarter of 2020. Nonperforming assets, as a percent of total loans plus OREO, were 1.7% at September 30, 2021, compared to 1.3% at June 30, 2021, and 1.2% at September 30, 2020.
  • Total loans were $1.87 billion at September 30, 2021, reflecting a decrease of $35.4 million compared to June 30, 2021, and a decrease of $162.4 million compared to September 30, 2020. Decreases in the linked quarter and year over year periods were primarily due to $164.3 million of PPP loan paydowns in our commercial portfolio, net of PPP loan originations of $62.3 million in 2021, as borrower liquidity is at a high level due to federal stimulus programs and there is a general lack of incentive for making capital expenditures. Average loans (including loans held-for-sale) for the third quarter of 2021 totaled $1.89 billion, reflecting a decrease of $41.3 million from the second quarter of 2021 and a decrease of $159.3 million from the third quarter of 2020.
  • Available-for-sale securities totaled $715.2 million at September 30, 2021, compared to $579.9 million at June 30, 2021, and $448.4 million at September 30, 2020. Total securities available-for-sale increased a net $135.2 million from the linked quarter due to purchases of $73.0 million of collateralized mortgage-backed securities, $48.3 million of asset-backed securities, $39.4 million of collateralized debt obligations, and $28.3 million of taxable agencies, partially reduced by sales of $26.9 million of corporate bonds and paydowns on various securities which totaled $23.8 million. The unrealized mark to market adjustment on securities decreased by $3.3 million since June 30, 2021, and decreased by $494,000 in the year over year period due to market interest rate fluctuations.

Non-GAAP Presentations

Management has disclosed in this earnings release certain non-GAAP financial measures to evaluate and measure our performance, including the presentation of net interest income and net interest margin on a fully taxable equivalent basis, our efficiency ratio calculations and core net interest margin on a taxable equivalent basis. The net interest margin fully taxable equivalent is calculated by dividing net interest income on a tax equivalent basis by average earning assets for the period. 

We consider the use of select non-GAAP financial measures and ratios to be useful for financial and operational decision making and useful in evaluating period-to-period comparisons.  We believe that these non-GAAP financial measures provide meaningful supplemental information regarding our performance by excluding certain expenditures or assets that we believe are not indicative of our primary business operating results or by presenting certain metrics on a fully taxable equivalent basis.  We believe these measures provide investors with information regarding balance sheet profitability, and we believe that management and investors benefit from referring to these non-GAAP financial measures in assessing our performance and when planning, forecasting, analyzing and comparing past, present and future periods.

These non-GAAP financial measures should not be considered as a substitute for GAAP financial measures, and we strongly encourage investors to review the GAAP financial measures included in this earnings release and not to place undue reliance upon any single financial measure. In addition, because non-GAAP financial measures are not standardized, it may not be possible to compare the non-GAAP financial measures presented in this earnings release with other companies' non-GAAP financial measures having the same or similar names.

Additional Information About the Merger and Where to Find It

This communication is being made in respect of the proposed merger transaction between Old Second and West Suburban Bancorp, Inc. ("West Suburban"). In connection with the proposed merger, on October 1, 2021, Old Second filed with the Securities and Exchange Commission ("SEC") a Registration Statement on Form S-4 (Registration Statement No. 333-259964) that includes the Joint Proxy Statement of Old Second and West Suburban and a Prospectus of Old Second, as well as other relevant documents regarding the proposed transaction. A definitive Joint Proxy Statement/Prospectus will also be sent to Old Second stockholders and West Suburban shareholders.

INVESTORS ARE URGED TO READ THE REGISTRATION STATEMENT AND THE JOINT PROXY STATEMENT/PROSPECTUS REGARDING THE MERGER AND ANY OTHER RELEVANT DOCUMENTS FILED WITH THE SEC, AS WELL AS ANY AMENDMENTS OR SUPPLEMENTS TO THOSE DOCUMENTS, BECAUSE THEY WILL CONTAIN IMPORTANT INFORMATION.

This communication does not constitute an offer to sell or the solicitation of an offer to buy any securities or a solicitation of any vote or approval, nor shall there be any sale of securities in any jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of such jurisdiction.

A free copy of the Joint Proxy Statement/Prospectus, as well as other filings containing information about Old Second, may be obtained at the SEC's Internet site (http://www.sec.gov). You can also obtain these documents, free of charge, from Old Second by accessing Old Second's investor relations website, https://investors.oldsecond.com, under the heading "SEC Filings" or by directing a request to Old Second Stockholder Relations Manager, Shirley Cantrell, at Old Second Bancorp, Inc., 37 S. River St., Aurora, Illinois 60507, by calling 630-906-2303 or by sending an e-mail to scantrell@oldsecond.com.

Participants in the Solicitation

Old Second and West Suburban and certain of their respective directors and executive officers may be deemed to be participants in the solicitation of proxies from Old Second's stockholders and West Suburban's shareholders in connection with the proposed merger. Information regarding Old Second's directors and executive officers is contained in Old Second's definitive proxy statement on Schedule 14A, dated April 16, 2021 and in certain of its Current Reports on Form 8-K, which are filed with the SEC. Additional information regarding the interests of those participants and other persons who may be deemed participants in the transaction may be obtained by reading the Joint Proxy Statement/Prospectus regarding the proposed merger. Free copies of these documents may be obtained as described in the preceding paragraph.

Cautionary Note Regarding Forward-Looking Statements

This earnings release and statements by our management may contain forward-looking statements within the Private Securities Litigation Reform Act of 1995.  Forward looking statements can be identified by words such  as "anticipate," "expect,"  "intend," "believe," "may," "likely," "will," "forecast," "project," "moving towards," "looking forward," "optimistic" or other statements that indicate future periods.  Examples of forward-looking statements include, but are not limited to, statements regarding the economic outlook, our expectations regarding future loan growth, trends in our net interest margin, the adequacy of our allowance, statements about our proposed merger with West Suburban, including the timing of the closing of the merger, and our belief that we are conservatively positioned, as well as statements regarding asset quality trends and the anticipated timing of our receipt of funds for PPP loan forgiveness. Such forward-looking statements are subject to risks, uncertainties, and other factors, which could cause actual results to differ materially from future results expressed or implied by such forward-looking statements.  The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements, (1) the strength of the United States economy in general and the strength of the local economies in which we conduct our operations may be different than expected, including, but not limited to, due to the negative impacts and disruptions resulting from the COVID-19 pandemic on the economies and communities we serve, which has had and may continue to have an adverse impact on our business, operations and performance, and could continue to have a negative impact on our credit portfolio, share price, borrowers, and on the economy as a whole, both domestically and globally; (2) the rate of delinquencies and amounts of charge-offs, the level of allowance for credit loss, the rates of loan growth, or adverse changes in asset quality in our loan portfolio, which may result in increased credit risk-related losses and expenses; (3) changes in legislation, regulation, policies, or administrative practices, whether by judicial, governmental, or legislative action, including, but not limited to, the Coronavirus Aid, Relief, and Economic Security Act, or the "CARES Act"; (4) risks related to future acquisitions, if any, including execution and integration risks; (5) adverse conditions in the stock market, the public debt market and other capital markets (including changes in interest rate conditions) could have a negative impact on us; (6) changes in interest rates, which may affect our net income, prepayment penalty income, mortgage banking income, and other future cash flows, or the market value of our assets, including our investment securities; and (7) with respect to the proposed merger with West Suburban: (a) the failure of either company to obtain stockholder approval for the proposed merger, the satisfaction of conditions to any regulatory approval, including the expiration of applicable waiting periods, or the failure of either company to satisfy any of the other closing conditions to the transaction on a timely basis or at all; (b) the occurrence of any event, change or other circumstances that could give rise to the right of one or both of the parties to terminate the merger agreement; (c) the occurrence of any event, change or other circumstances that causes the bank regulatory agencies to revoke their approvals of the transaction or otherwise impose conditions on such approvals that could adversely affect the combined company or the benefits of the transaction; and (d) the possibility that the anticipated benefits of the transaction, including anticipated cost savings and strategic gains, are not realized when expected or at all, including as a result of the impact of, or problems arising from, the integration of the two companies or as a result of the strength of the economy, competitive factors in the areas where Old Second and West Suburban do business, or as a result of other unexpected factors or events.  Additional risks and uncertainties are contained in the "Risk Factors" and forward-looking statements disclosure in our most recent Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and in Amendment No.1 to the Form S-4 Registration Statement filed with the SEC on October 19, 2021. The inclusion of this forward-looking information should not be construed as a representation by us or any person that future events, plans, or expectations contemplated by us will be achieved. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by law.

Conference Call

We will host a call on Thursday, October 21, 2021, at 11:00 a.m. Eastern Time (10:00 a.m. Central Time) to discuss our third quarter 2021 financial results.  Investors may listen to our call via telephone by dialing 888-506-0062, using Entry Code 775932.  Investors should call into the dial-in number set forth above at least 10 minutes prior to the scheduled start of the call.

A replay of the call will be available until 11:00 a.m. Eastern Time (10:00 a.m. Central Time) on October 28, 2021, by dialing 877-481-4010, using Conference ID: 43105.

Cision View original content:https://www.prnewswire.com/news-releases/old-second-reports-third-quarter-net-income-of-8-4-million-or-0-29-per-diluted-share-301405213.html

SOURCE Old Second National Bank

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