AURORA, IL / ACCESSWIRE / January 27, 2021 / Old Second Bancorp, Inc. (the "Company," "we," "us," and "our") (NASDAQ: OSBC), the parent company of Old Second National Bank (the "Bank"), today announced financial results for the fourth quarter of 2020. Our net income was $8.0 million, or $0.27 per diluted share, for the fourth quarter of 2020, compared to net income of $10.3 million, or $0.34 per diluted share, for the third quarter of 2020, and net income of $9.5 million, or $0.31 per diluted share, for the fourth quarter of 2019. Net income for the fourth quarter of 2020 reflects a decrease in noninterest income year over year primarily due to an increase in mark to market losses on mortgage servicing rights ("MSRs"), a reduction in service charges on deposits stemming from a decline in customer spending during the COVID-19 pandemic, a decrease in the death benefit realized on BOLI, as a death claim of $872,000 was received in the prior year period which was not repeated in the current period, and an increase in noninterest expense of $1.4 million, primarily driven by growth in salaries and employee benefits expense. Partially offsetting this reduction to fourth quarter net income year over year was an increase in net interest income due to loan fees recorded on forgiven SBA Paycheck Protection Program ("PPP") loans and a decrease in interest expense on deposits due to market interest rate reductions. In addition, growth in mortgage banking income due to an increase in mortgage originations and refinances stemming from the low interest rate environment contributed a positive $1.0 million pretax, or $0.03 per diluted share.
- Fourth quarter 2020 net income was $8.0 million, reflecting a decrease in earnings of $2.2 million from the third quarter of 2020, and a decrease in earnings of $1.5 million from the fourth quarter of 2019.
- Net interest and dividend income was $23.9 million for the fourth quarter of 2020, an increase of $1.4 million, or 6.1%, from the third quarter of 2020, and an increase of $688,000, or 3.0%, from fourth quarter of 2019. Net interest and dividend income in the year over year period was favorably impacted by loan fees earned on forgiven PPP loans during the fourth quarter of 2020, as well as a reduction in interest expense due to a decrease in market interest rates. We originated 746 PPP loans totaling $136.7 million in 2020, and as of December 31, 2020, $74.1 million on 428 PPP loans remains outstanding. Net loan fee income recorded year to date on PPP loans totaled $2.2 million, and approximately $420,000 of net PPP loan fees remain unearned as of December 31, 2020.
- We recorded no provision for credit losses in the fourth quarter of 2020, compared to $300,000 in the third quarter of 2020, both under the current expected credit losses accounting standard ("CECL"), which was adopted on January 1, 2020, and considers potential credit losses related to the ongoing COVID-19 pandemic, compared to $150,000 in the fourth quarter of 2019, under the incurred loss model. Allowance for credit losses on loans activity in the fourth quarter of 2020 consisted of a reclassification from the allowance on unfunded commitments of $993,000, as well as $55,000 of net charge-off activity for the quarter.
- Noninterest income was $8.8 million for the fourth quarter of 2020, a decrease of $2.9 million, or 24.8%, compared to $11.7 million for the third quarter of 2020, and a decrease of $457,000, or 4.9%, compared to $9.2 million for the fourth quarter of 2019. The decrease from the linked quarter was primarily driven by a $3.1 million decline in residential mortgage banking revenue, attributable to a $1.9 million decrease in net gain on sales of mortgage loans and a $1.1 million increase in mark to market losses on MSRs in the fourth quarter of 2020, compared to the prior quarter. The decrease in noninterest income in the fourth quarter of 2020, compared to the fourth quarter of 2019, was primarily due to a $1.5 million increase in mark to market losses on MSRs, a $530,000 reduction in service charges on deposits, and an $872,000 reduction in death benefit realized on BOLI. These year over year declines were materially offset by a net $1.0 million increase in residential mortgage banking revenue, primarily comprised of a $2.3 million increase in net gain on sales of mortgage loans and a $236,000 increase in secondary mortgage fees in the fourth quarter of 2020, compared to the fourth quarter of 2019.
- Noninterest expense was $21.3 million for the fourth quarter of 2020, an increase of $987,000, or 4.9%, compared to $20.3 million for the third quarter of 2020, and an increase of $1.4 million, or 7.2%, from $19.8 million for the fourth quarter of 2019. The increase compared to the linked quarter was primarily attributable to an increase in salaries stemming from a decrease in deferrals of new loan origination costs related to PPP loans, growth in occupancy, furniture and equipment costs due to scheduled building repairs, and increases in other expense, which included losses due to fraud and an ATM robbery in the fourth quarter of 2020, as well as an increase in loan related costs, such as appraisals and loan servicing expense. The increase compared to the year over year period was primarily attributable to increases in salaries and employee benefits largely resulting from growth in full time equivalent employees, increases in employee insurance costs, and annual employee merit increases in early 2020, as well as increases in FDIC insurance costs, as 2019's expense for this item reflected assessment credits.
- The provision for income taxes expense was $3.4 million for the fourth quarter of 2020, compared to $3.4 million for the third quarter of 2020, and $2.9 million for the fourth quarter of 2019. The increase in tax expense for the year over year period was due to year-end adjustments to record select disallowed items for our 2020 tax return, such as employee parking expenses, and a true up for the prior year's tax return filed.
- During the fourth quarter of 2020, we repurchased 122,862 shares of our common stock at a weighted average price of $9.10 per share pursuant to our stock repurchase program.
- On January 19, 2021, our Board of Directors declared a cash dividend of $0.01 per share payable on February 8, 2021, to stockholders of record as of January 29, 2021.
COVID-19 Operational Update
During this unprecedented time, the health and safety of our customers and employees remains our top priority.
- We established client assistance programs, including offering commercial, consumer, and mortgage loan payment deferrals for certain clients. We also suspended late fees for consumer loans through June 30, 2020, and, although consumer late fees have been reinstated, we will continue to re-evaluate late fee assessments based on the ongoing COVID-19 pandemic.
- Late in the first quarter of 2020, we began granting loan payment deferrals to certain borrowers affected by the pandemic. As of December 31, 2020, our clients had requested loan payment deferrals on 499 loans totaling $231.3 million. As of December 31, 2020, 448 loans, representing $198.6 million outstanding, or 85.8% of the original loan balances deferred, have resumed payments or paid off. Active payment deferrals remain on 51 loans, with $32.7 million of balances outstanding.
- We are participating in the Coronavirus Aid, Relief and Economic Security Act ("CARES" Act). During 2020, we processed 746 loan applications for the PPP loans, representing a total of $136.7 million. Early in the fourth quarter of 2020, we started to submit applications for PPP loan forgiveness to the SBA, and as of year-end 2020, $62.6 million on 318 loans has been forgiven. We anticipate receiving funds for PPP loan forgiveness from the SBA through the first quarter of 2021.
President and Chief Executive Officer Jim Eccher said "I'm proud of the year Old Second had in 2020 amid the many challenges of the pandemic. We posted solid financial results, grew loans and deposits, delivered positive operating leverage, and significantly strengthened our capital position. Despite this performance, net income declined as we built substantial reserves to address the possibility of losses based on probability weighted economic scenarios and stresses created by the pandemic. These losses may or may not occur at the severity levels our models predict. Regardless, I believe Old Second is conservatively positioned to meet challenges as they occur. Expenses are well controlled, our businesses are well diversified and underwriting has remained disciplined and consistent. I would like to thank our employees for their continued hard work in delivering a solid year and in meeting the needs of our customers and communities during these challenging times."
Minimum Capital Adequacy with Capital Conservation Buffer, if applicable1
Well Capitalized Under Prompt Corrective Action Provisions2
December 31, 2020
September 30, 2020
December 31, 2019
Common equity tier 1 capital ratio
Total risk-based capital ratio
Tier 1 risk-based capital ratio
Tier 1 leverage ratio
Common equity tier 1 capital ratio
Total risk-based capital ratio
Tier 1 risk-based capital ratio
Tier 1 leverage ratio
1 Amounts 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 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 $23.0 million at December 31, 2020, compared to $20.8 million at September 30, 2020, and $15.8 million at December 31, 2019. Credit metrics continue to be relatively stable regarding nonperforming loan levels, and management is carefully monitoring loans considered to be in a classified status. Nonperforming loans, as a percent of total loans were 1.1% at December 31, 2020, 1.0% at September 30, 2020 and 0.8% at December 31, 2019. Our adoption of CECL on January 1, 2020, resulted in a change in the accounting for purchased credit impaired ("PCI") loans, which are now considered purchased credit deteriorated ("PCD") loans under CECL. Prior to January 1, 2020, past due and nonaccrual loans excluded PCI loans, even if contractually past due or if we did not expect to receive payment in full, as we were accreting interest income over the expected life of the loans. PCD loans acquired in our acquisition of ABC Bank totaled $10.9 million, net of purchase accounting adjustments, at December 31, 2020. PCD loans that meet the definition of nonperforming are now included in our nonperforming disclosures.
- OREO assets totaled $2.5 million at December 31, 2020, compared to $2.7 million at September 30, 2020, and $5.0 million at December 31, 2019. We recorded write-downs of $93,000 in the fourth quarter of 2020, compared to $46,000 in the third quarter of 2020 and $120,000 in the fourth quarter of 2020. Nonperforming assets, as a percent of total loans plus OREO, were 1.3% at December 31, 2020, 1.2% at September 30, 2020, and 1.1% at December 31, 2019.
- Total loans were $2.03 billion at December 31, 2020, reflecting an increase of $4.5 million compared to September 30, 2020, and $104.0 million compared to December 31, 2019. Growth in the year over year period was due primarily to an increase in our commercial portfolio stemming from PPP loan originations of $136.7 million, $74.1 million of which were outstanding at year end 2020, as well as organic growth primarily in our leases, commercial real estate-investor and construction portfolios. Average loans (including loans held-for-sale) for the fourth quarter of 2020 totaled $2.03 billion, reflecting a decrease of $16.2 million from the third quarter of 2020 and an increase of $129.5 million from the fourth quarter of 2019.
- Available-for-sale securities totaled $496.2 million at December 31, 2020, compared to $448.4 million at September 30, 2020, and $484.6 million at December 31, 2019. Total securities available-for-sale increased a net $47.8 million from the linked quarter due to a purchase of $50.5 million of asset backed securities and unrealized mark to market gains of $4.2 million, offset by $6.4 million of securities calls, maturities and paydowns. An increase in available for sale securities of $11.5 million was realized in the year over year period due primarily to purchases of $65.2 million and unrealized mark to market gains of $14.7 million partially offset by $66.1 million in security maturities and paydowns, and net amortization of $2.3 million recorded throughout 2020.
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. The tables on page 16 provide a reconciliation of each non-GAAP financial measure to the most comparable GAAP equivalent.
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" or other statements that indicate future periods. Examples of forward-looking statements include, but are not limited to, statements regarding the economic outlook, the adequacy of our allowance and our belief that we are conservatively positioned to meet challenges as they occur. 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 global coronavirus, ("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) 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; and (5) 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. 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 and Quarterly Reports on Form 10-Q. 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.
We will host an earnings call on Thursday, January 28, 2021, at 11:00 a.m. Eastern Time (10:00 a.m. Central Time). Investors may listen to our earnings call via telephone by dialing 877-407-9124. 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 earnings call will be available until 11:00 a.m. Eastern Time (10:00 a.m. Central Time) on February 4, 2021, by dialing 877-481-4010, using Conference ID: 39135.
Bradley S. Adams
Chief Financial Officer
SOURCE: Old Second Bancorp, Inc.
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