Old Second Bancorp, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Interim financial statements are unaudited. Old Second is an Illinois-based bank holding company operating through Old Second National Bank; the results include West Suburban Bancorp, acquired December 1, 2021.
Financial performance and position
| Metric | Q3 2022 / September 30, 2022 | Comparison |
|---|---|---|
| Net income | $19.5 million; diluted EPS $0.43 | Q3 2021: $8.4 million; $0.29 diluted EPS |
| Net interest income | $55.6 million; net interest margin 3.93% | Q3 2021: $22.6 million; 2.91% margin |
| Interest and dividend income | $58.0 million | Q3 2021: $24.8 million |
| Noninterest income / expense | $11.5 million / $36.0 million | Q3 2021: $9.3 million / $22.1 million |
| Total assets | $5.97 billion | $6.21 billion at December 31, 2021 |
| Loans / deposits | $3.87 billion / $5.28 billion | Loans up $448.5 million and deposits down $184.9 million from year-end 2021 |
| Stockholders’ equity | $433.7 million | $502.0 million at December 31, 2021 |
| Cash and cash equivalents | $116.2 million | $752.1 million at December 31, 2021 |
| Total borrowings | $200.1 million | $198.9 million at December 31, 2021 |
For the first nine months, net income was $43.8 million versus $29.1 million in 2021; diluted EPS was $0.97 versus $0.99. Net interest income was $142.1 million versus $68.1 million, and net interest margin was 3.31% versus 3.02%. Operating cash flow was $60.1 million; investing cash outflow was $506.4 million and financing cash outflow was $189.7 million. Cash declined by $636.0 million, reflecting loan funding and deposit outflows.
Material changes and notable items
- West Suburban added substantial scale: at acquisition, it contributed approximately $1.50 billion in loans, $1.07 billion in securities and $2.69 billion in deposits. The acquisition is a major factor in year-over-year increases in income, expenses, assets and loans.
- Q3 provision for credit losses was $4.5 million, compared with a $1.5 million release in Q3 2021. The nine-month provision was $5.1 million, versus an $8.0 million release in 2021.
- Q3 noninterest expense rose 62.6% year over year, chiefly from acquired staff and branches, integration and operating costs. Nine-month acquisition-related expenses were $9.5 million. Management reported Q3 adjusted net income of $19.6 million, a non-GAAP measure.
- Available-for-sale securities had $131.0 million of gross unrealized losses at September 30, 2022, versus $5.1 million at year-end 2021. Nine-month after-tax other comprehensive loss was $107.2 million, contributing to the decline in equity. The company reported no securities credit impairment or related provision at quarter-end.
- Nonperforming loans were $52.9 million, or 1.4% of loans, versus $44.7 million and 1.3% at year-end. Classified assets were $115.3 million, up $38.2 million from year-end, with much of the increase associated with acquired or newly classified commercial real estate credits. Net charge-offs were $68,000 in Q3.
Outlook, risks and contingencies
The filing provides no specific earnings or financial guidance. Management said it expects higher inflation and interest rates to be favorable to near-term net interest margin, while noting that inflation may raise operating costs and weaken borrowers’ financial condition. At September 30, the company’s modeled net interest income increased 8.9% under an immediate 1% rate increase and declined 9.4% under a 1% decrease; management cautions that actual results may differ and the model excludes possible management actions.
Key risks include inflation and economic weakness, interest-rate and market-value changes, credit performance (particularly commercial and real estate lending), deposit and funding competition, acquisition integration, and continued LIBOR transition. Management reported that all COVID-related loan deferrals had resumed payments or paid off. The Bank exceeded regulatory capital requirements; its total capital ratio was 12.64% and leverage ratio 9.24%. It reported $536.7 million in excess collateral available to secure FHLB borrowings and an undrawn $30 million line of credit. The company declared a $0.05-per-share dividend payable November 7, 2022. Management said ordinary-course legal matters are not expected to have a material adverse effect; no material changes to previously disclosed risk factors were reported.
Most important facts for investors to verify
- How much of the earnings and margin improvement is sustainable versus acquisition-related, market-rate-driven or nonrecurring?
- Whether loan growth, deposit outflows and the sharp reduction in cash affect funding costs and liquidity as rates change.
- Trends in commercial real estate classifications, past-due loans, credit-loss reserves and charge-offs, including acquired credits.
- The effect of further rate movements on securities values, accumulated other comprehensive loss, capital ratios and reported equity.
- Progress and remaining costs to integrate West Suburban, including branch dispositions and systems conversion.