Old Second Bancorp, Inc. — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. Unaudited consolidated results; dollar amounts below are in millions unless noted. Old Second is an Illinois-based bank holding company operating through Old Second National Bank. The December 2021 West Suburban acquisition materially increased the scale of the business and affects year-over-year comparisons.
Key financial results
| Metric | Q2 2022 | Comparable period / change |
|---|---|---|
| Interest and dividend income | $47.4 | $24.2 in Q2 2021 |
| Net interest income | $45.3 | $22.0 in Q2 2021 |
| Net interest margin (GAAP) | 3.16% | 2.88% in Q2 2021; 2.85% in Q1 2022 |
| Noninterest income | $9.2 | $7.9 in Q2 2021 |
| Noninterest expense | $37.2 | $21.4 in Q2 2021 |
| Income before tax | $16.7 | $12.0 in Q2 2021 |
| Net income | $12.2 | $8.8 in Q2 2021 |
| Diluted earnings per share | $0.27 | $0.30 in Q2 2021 |
| Adjusted net income (non-GAAP) | $13.8 | $8.8 in Q2 2021; adjusted diluted EPS was $0.31 |
For the six months, net income was $24.3 million versus $20.7 million; diluted EPS was $0.54 versus $0.70. The lower per-share results despite higher net income reflect the substantially larger share count following the West Suburban transaction.
- Balance sheet at June 30: Assets were $6.01 billion, down $206.6 million from year-end 2021. Loans were $3.63 billion, up $204.3 million; deposits were $5.34 billion, down $123.4 million. Cash and cash equivalents were $281.3 million, down $470.8 million from year-end.
- Cash flow, first six months: Operating activities provided $27.1 million; investing activities used $349.7 million, including $200.0 million of net loan growth; financing activities used $148.2 million, largely reflecting deposit outflows. Cash declined $470.8 million overall.
- Debt and liquidity: Reported borrowings totaled $178.2 million, including $37.6 million of repurchase agreements, $59.3 million of subordinated debentures, $44.5 million of senior notes, and $11.0 million of other borrowings. The company also reported a $30 million undrawn line of credit and $479.3 million of excess collateral available to secure FHLB borrowing.
- Capital: The Bank’s Tier 1 leverage ratio was 8.94% and total risk-based capital ratio was 13.25%; both exceeded the company’s stated internal objectives. Consolidated tangible common equity to tangible assets was 5.89% GAAP and 5.93% on the company’s non-GAAP basis, down from 6.54% and 6.59%, respectively, at year-end.
- Credit: The allowance for credit losses on loans was $45.4 million, or 1.3% of loans. Nonperforming loans were $42.1 million (1.2% of loans), down from $44.7 million (1.3%) at year-end. Classified loans rose to $103.2 million from $74.7 million; classified assets including OREO were $104.8 million.
Material changes and notable items
- West Suburban, acquired December 1, 2021, added approximately $2.94 billion of assets, including $1.50 billion of loans and $1.07 billion of securities, and $2.69 billion of deposits at acquisition. The acquisition drove much of the year-over-year growth in interest income, fee income, loans, deposits, and operating expenses.
- Q2 noninterest expense increased 74% year over year, with higher staffing, branch, data-processing, FDIC insurance, and integration costs. West Suburban acquisition-related expenses were $3.3 million in Q2 and $8.9 million in the first six months. Q2 adjusted results exclude merger-related costs net of branch-sale gains; the adjusted measures are non-GAAP.
- Available-for-sale securities had $90.8 million of gross unrealized losses at June 30, versus $5.1 million at year-end. After tax, the six-month reduction in accumulated other comprehensive income was $74.0 million, primarily reflecting rising interest rates. This contributed to the decline in stockholders’ equity to $448.9 million from $502.0 million.
- The Q2 provision for credit losses was $550,000, versus a $3.5 million provision release in Q2 2021. Management attributed the current-period provision principally to loan growth and credit assessments, partly offset by a reduction in reserves for unfunded commitments. No credit losses were identified in the securities portfolio.
- The company sold five branches during the first half, recording $1.4 million of net gains; five additional branches designated as held for sale had a $9.6 million net book value at June 30.
Outlook, risks, and contingencies
- No quantified earnings, revenue, or margin guidance is provided. Management said it expected to be affected by the COVID-19 pandemic through the remainder of 2022 and described near-term higher inflation and rising interest rates as potentially favorable to margin, while noting that inflation may also raise expenses and weaken borrowers’ financial condition.
- At June 30, modeled net interest income sensitivity indicated a 12.5% increase under an immediate 1% rate rise and a 24.2% increase under a 2% rise; a 1% decline indicated a 13.3% decrease. The filing cautions that simulations are not forecasts and exclude management actions.
- Key stated risks include inflation and economic weakness, rate volatility, borrower and real-estate credit performance, acquisition integration, deposit and funding costs, liquidity, cybersecurity and vendor disruptions, regulation, and the LIBOR transition. Real-estate-related loans were 71.0% of the portfolio.
- Management reported no material changes to previously disclosed risk factors, no material changes to internal control over financial reporting, and no legal proceedings expected to have a material adverse effect. The Board declared a $0.05-per-share dividend payable August 8, 2022.
Important facts for investors to verify
- How quickly West Suburban integration costs decline and whether anticipated acquisition synergies materialize.
- Whether deposit balances and funding costs stabilize as liquidity declines and market rates change.
- How unrealized securities losses, including the $74.0 million after-tax first-half AOCI decline, affect tangible equity and capital over time.
- Whether classified loan growth—particularly in commercial real estate—and loan-loss reserves remain manageable as economic conditions evolve.
- The definitions and reconciliations of adjusted earnings, adjusted EPS, efficiency ratios, and tangible-equity measures, which are non-GAAP and not substitutes for GAAP results.