Old Second Bancorp, Inc. — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. Financial statements are unaudited. The company is an Illinois-focused banking holding company operating through Old Second National Bank.
Financial performance and condition
| Metric | Q2 2018 / June 30, 2018 | Comparable period / prior date |
|---|---|---|
| Net income | $6.3 million; diluted EPS $0.21 | Q2 2017: $5.1 million; $0.17 |
| Six-month net income | $15.8 million; diluted EPS $0.52 | H1 2017: $9.6 million; $0.32 |
| Net interest and dividend income | $23.2 million | Q2 2017: $18.7 million |
| Noninterest income / expense | $8.5 million / $22.3 million | Q2 2017: $7.3 million / $18.0 million |
| Provision for loan and lease losses | $1.45 million | Q2 2017: $0.75 million |
| Net interest margin | 3.99% on a tax-equivalent basis | Q2 2017: 3.71% |
| Total assets | $2.65 billion | December 31, 2017: $2.38 billion |
| Total loans / deposits | $1.85 billion / $2.16 billion | December 31, 2017: $1.62 billion / $1.92 billion |
| Cash and cash equivalents | $65.3 million | December 31, 2017: $55.8 million |
| Total borrowings | $255.9 million | December 31, 2017: $246.6 million |
| Stockholders’ equity | $209.8 million | December 31, 2017: $200.4 million |
For the six months ended June 30, operating cash flow was $27.6 million, investing cash flow was $23.3 million, and financing cash flow was negative $41.5 million. Cash and cash equivalents increased $9.5 million from year-end.
The Bank reported a 10.75% Tier 1 leverage ratio and a 13.51% total capital ratio, above its stated internal objectives of 8% and 12%, respectively. The company’s GAAP common equity-to-assets ratio was 7.92%; its tangible common equity-to-tangible assets ratio was 7.14% (7.19% under management’s non-GAAP presentation).
Material changes and drivers
- Net income rose year over year in Q2 and H1. Higher loan balances and rates, securities repositioning, lower federal corporate tax rates, and the April 20 acquisition of Greater Chicago Financial Corp. (GCFC) contributed. H1 results also included a $1.0 million tax-free bank-owned life insurance death benefit.
- GCFC/ABC Bank added four Chicago-area branches, $227.6 million of loans and $248.5 million of deposits, net of purchase-accounting adjustments. Acquisition-related costs were $3.4 million pretax for H1; Q2 acquisition costs were about $3.2 million. Preliminary purchase accounting recorded $9.9 million of goodwill and a $3.1 million core deposit intangible.
- Total loans increased 14.3% from year-end, primarily because of the acquisition. Real estate-related lending represented 78.8% of the loan portfolio.
- Q2 noninterest expense increased 23.9% year over year, primarily reflecting acquisition costs. The GAAP efficiency ratio was 69.16%; the company’s adjusted non-GAAP ratio was 57.88%.
- The effective tax rate was 22.1% in Q2 versus 28.9% in Q2 2017, reflecting the federal rate reduction to 21%. H1 tax expense also benefited from a tax credit related to vesting restricted stock.
- Available-for-sale securities were $543.6 million. Accumulated other comprehensive loss increased, mainly reflecting unrealized securities losses associated with interest-rate movements; management reported no credit-quality deterioration requiring impairment.
Outlook, risks and contingencies
The filing provides no specific earnings or financial guidance. Management described the franchise as positioned for growth, while noting competitive pressure on loan pricing and continuing to emphasize underwriting standards and local-market growth. It characterized interest-rate risk as moderate; modeled annual pretax income increased 1.5% under an immediate 0.5% rate rise and declined 2.1% under a 0.5% fall. Management cautioned that these simulations are not forecasts and exclude mitigating actions.
Key risks include credit losses and real-estate market conditions, rising funding costs and interest-rate changes, and execution of the GCFC integration, including cost savings, customer retention and systems conversion. Nonperforming loans were $11.9 million, or 0.6% of loans, versus $15.6 million and 1.0% at June 30, 2017; however, classified loans increased to $26.3 million from $17.5 million at year-end, partly due to acquired loans. The allowance was $19.3 million, or 162.7% of nonperforming loans. OREO was $8.9 million, including properties held for five years or more with a reported value of $4.7 million.
Other exposures include a loan portfolio concentrated in real estate, interest-rate and liquidity risk, and acquisition fair-value estimates that remain preliminary and may be revised during the measurement period. The company reported ordinary-course legal matters and did not expect them to have a material adverse effect. No material changes to previously disclosed risk factors were reported. A $0.01-per-share dividend was declared after quarter-end.
Important facts for investors to verify
- Whether GCFC integration, customer retention and expected cost savings progress as planned, and how much acquisition expense remains.
- Performance of acquired loans, including PCI cash-flow estimates, purchase discounts and subsequent credit provisioning; also track the increase in classified loans.
- Whether loan and deposit growth sustains net interest margin as competition and rising deposit and borrowing costs affect funding economics.
- Capital and tangible-equity measures after acquisition-related goodwill and intangible assets, alongside regulatory capital headroom.
- Valuation and concentration risks in the securities portfolio, including student-loan-backed asset securities, and the sensitivity of earnings to changing rates.