Old Second Bancorp, Inc. — 2023 Form 10-K
Reporting period: Fiscal year ended December 31, 2023. Old Second is a community bank holding company headquartered in Aurora, Illinois, operating 48 banking centers, principally in the Chicago area. Results are for the full year; the filing also reports quarterly results, including Q4.
Financial results and position
| Metric | 2023 | 2022 | Change / context |
|---|---|---|---|
| Net income | $91.7 million | $67.4 million | Up 36.1% |
| Diluted EPS | $2.02 | $1.49 | Up from $1.49 |
| Q4 net income / diluted EPS | $18.2 million / $0.40 | $23.6 million / $0.52 | Down year over year |
| Net interest income | $251.9 million | $206.2 million | Up 22.2%; higher rates and loan growth |
| Net interest margin | 4.64% | 3.63% | Up 101 basis points |
| Noninterest income | $34.2 million | $43.1 million | Down 20.7% |
| Noninterest expense | $145.2 million | $151.2 million | Down 4.0% |
| Provision for credit losses | $16.5 million | $6.6 million | Higher provision and charge-offs |
| Total assets | $5.72 billion | $5.89 billion | Down 2.8% |
| Gross loans | $4.04 billion | $3.87 billion | Up $173.3 million, or 4.5% |
| Deposits | $4.57 billion | $5.11 billion | Down $540.0 million, or 10.6% |
| Cash and cash equivalents | $100.1 million | $115.2 million | Down $15.0 million |
| Operating cash flow | $116.4 million | $97.3 million | Positive in both years |
| Stockholders’ equity | $577.3 million | $461.1 million | Up 25.2% |
Net interest income benefited from a 157-basis-point increase in average yields on earning assets, while interest expense rose substantially as deposit costs and short-term borrowing increased. The company recorded a $4.1 million net securities loss in 2023. The available-for-sale securities portfolio was $1.19 billion at fair value, with $84.2 million of pretax unrealized losses at year-end, improved from $123.5 million in 2022.
Material changes and credit quality
- Nonperforming assets increased to $73.9 million, or 1.29% of assets, from $34.5 million, or 0.59%, in 2022. Nonperforming loans rose to $68.8 million from $32.9 million.
- Net loan charge-offs increased to $23.3 million from $1.6 million, largely reflecting six sizable commercial real estate charge-offs, including exposures related to office buildings and senior or assisted-living facilities.
- Classified assets rose 24.8% to $137.9 million. Management identified office and assisted-living loans as areas of pressure and said it was monitoring classified credits and stress-testing real estate concentrations.
- The loan allowance declined to $44.3 million, or 1.09% of loans, from $49.5 million, or 1.28%. The filing attributes the decrease mainly to large fourth-quarter charge-offs, partly offset by economic factors.
- Deposits fell amid customer use of funds. Year-end short-term FHLB advances increased to $405 million from $90 million; management used borrowings to support loan growth and liquidity.
- The company redeemed $45 million of senior notes and repaid the remaining $9 million term note during 2023. Year-end borrowings totaled $516.6 million, including $59.4 million of subordinated debt.
Outlook, risks and unusual items
- The filing provides no specific earnings, revenue, margin or credit-cost guidance. Management cites continuing economic uncertainty into 2024 and says it may increase the allowance for credit losses in future periods.
- Management describes the balance sheet as moderately asset-sensitive: its model estimates pretax income would rise 7.6% for an immediate 1% rate increase and fall 7.3% for a 1% decrease. The filing cautions that modeled outcomes are not forecasts and exclude possible management actions.
- Liquidity resources included $700.1 million of unused borrowing capacity at the FHLB, Federal Reserve and correspondent banks, plus $382.6 million of unencumbered available-for-sale securities. The company reported $1.19 billion of uninsured deposits; 19.5% of uninsured deposits were collateralized public funds.
- Real estate lending represented 68.8% of loans; commercial real estate was 45.3%. Non-owner-occupied CRE loans and undrawn commitments were 286.9% of Tier 1 capital plus the loan allowance, below the 300% supervisory guideline cited by the company.
- A $1.2 million litigation expense was recorded in Q4 2023 for a pending claim concerning prior-years’ overdraft-fee compliance. Management believes pending legal matters will not materially affect the company, but outcomes remain uncertain.
- Adjusted net income of $92.9 million is a non-GAAP measure; GAAP net income was $91.7 million. The company’s audited financial statements and internal control over financial reporting received unqualified opinions.
Most important facts for investors to verify
- Whether CRE problem loans, especially office and assisted-living exposures, produce further charge-offs, nonperforming assets or reserve increases.
- Whether deposit outflows stabilize and FHLB borrowing levels and related funding costs decline or continue to rise.
- How net interest margin and earnings respond to rate changes, deposit repricing and the maturities or paydowns of securities and loans.
- Whether the $44.3 million loan allowance and $2.7 million allowance for unfunded commitments adequately reflect expected losses.
- Developments and any additional costs related to the overdraft-fee compliance claim, and the execution and funding implications of the authorized share-repurchase program, under which no shares were repurchased in 2023.