AURORA, IL / ACCESSWIRE / January 25, 2023 / Old Second Bancorp, Inc. (the "Company," "Old Second," "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 2022. Our net income was $23.6 million, or $0.52 per diluted share, for the fourth quarter of 2022, compared to net income of $19.5 million, or $0.43 per diluted share, for the third quarter of 2022, and a net loss of $9.1 million, or $0.26 per diluted share, for the fourth quarter of 2021. Adjusted net income, a non-GAAP financial measure that excludes pre-tax amounts of $645,000 of acquisition related costs, and net of gains totaling $28,000 from branch sales, all related to our acquisition of West Suburban Bancorp, Inc. ("West Suburban") on December 1, 2021, was $24.1 million, or $0.53 per diluted share, for the fourth quarter of 2022. See the discussion entitled "Non-GAAP Presentations" below and the tables beginning on page 17 that provide a reconciliation of each non-GAAP measure to the most comparable GAAP equivalent.
The increase in net income in the fourth quarter of 2022 was primarily due to net interest and dividend income of $64.1 million, which increased $8.5 million from the third quarter of 2022 primarily due to the impact of market interest rate increases on loans and securities, and increased $35.5 million from the fourth quarter of 2021. The fourth quarter of 2022 also included pre-tax net losses on the sale of securities of $910,000 and a $431,000 pre-tax mark to market loss on mortgage servicing rights ("MSRs"), compared to a $548,000 pre-tax gain on MSRs in the third quarter of 2022, and a $1.5 million pre-tax gain on MSRs in the fourth quarter of 2021.
Operating Results
- Fourth quarter 2022 net income was $23.6 million, reflecting an increase in earnings of $4.1 million from the third quarter 2022, and an increase of $32.7 million from the fourth quarter of 2021. Adjusted net income, a non-GAAP financial measure that excludes acquisition-related costs, net of gains on branch sales, was $24.1 million for the fourth quarter of 2022, an increase of $4.4 million from adjusted net income for the third quarter of 2022, and an increase of $11.6 million from adjusted net income for the fourth quarter of 2021.
- Net interest and dividend income was $64.1 million for the fourth quarter of 2022, an increase of $8.5 million, or 15.3%, from the third quarter of 2022, and an increase of $35.5 million, or 124.1%, from fourth quarter of 2021.
- Interest and dividend income for the fourth quarter of 2022 was $67.7 million, an increase of $9.7 million from the third quarter of 2022, and an increase of $37.0 million from the fourth quarter 2021. Growth in interest and dividend income in 2022 reflected the market interest rate increases in 2022, as well as the inclusion of West Suburban loan and securities income.
- Interest expense for the fourth quarter of 2022 was $3.7 million, an increase of $1.2 million from the third quarter of 2022, and an increase of $1.5 million from the fourth quarter of 2021. The year-over-year increase in interest expense stems primarily from an increase in average interest bearing deposits and the interest paid on short-term FHLB advances during the fourth quarter of 2022, which were partially offset by the pay down of $10.1 million of notes payable and other borrowings year over year.
- We recorded a net provision for credit losses of $1.5 million in the fourth quarter of 2022, compared to a net provision for credit losses of $4.5 million in the third quarter of 2022, and a net provision for credit losses of $12.3 million in the fourth quarter of 2021. The decrease in the net provision in the fourth quarter of 2022 compared to the linked quarter was primarily due to a reduction in loan growth and improved credit metrics, and the reduction from the prior year like quarter was due to the higher provision level recorded in the fourth quarter of 2021 stemming from the Day Two accounting adjustments applied to the West Suburban loan portfolio acquired on December 1, 2021.
- Noninterest income was $8.9 million for the fourth quarter of 2022, a decrease of $2.6 million, or 22.2%, compared to $11.5 million for the third quarter of 2022, and a decrease of $1.8 million, or 16.4%, compared to $10.7 million for the fourth quarter of 2021. The $2.6 million decrease from the prior quarter was primarily due to a decrease in net mortgage banking income of $1.1 million, an increase in securities losses, net, of $909,000, and an $871,000 decrease in other income, primarily due to gains recorded in the third quarter of 2022 on the sale of a Visa credit card portfolio and the sale of a land trust portfolio. The $1.8 million decrease in the fourth quarter of 2022, compared to the fourth quarter of 2021, was primarily due to a decrease in net mortgage banking income of $3.2 million, primarily due to a decline in the volume of mortgages being originated due to rising market interest rates in 2022, as well as a $431,000 pre-tax mark to market loss recorded in the fourth quarter of 2022 compared to a $1.5 million pre-tax gain recorded in the fourth quarter of 2021. This reduction was partially offset by an increase of $880,000 in service charges on deposits, and an $819,000 increase in card related income in the fourth quarter of 2022, compared to the like quarter of 2021, due to a full quarter of West Suburban activity in the current year.
- Noninterest expense was $39.7 million for the fourth quarter of 2022, an increase of $3.7 million, or 10.3% compared to $36.0 million for the third quarter of 2022, and an increase of $1.2 million, or 3.0%, compared to $38.5 million for the fourth quarter of 2021. The increase from the third quarter of 2022 is the result of an increase in salary and employee benefits and computer and data processing expense, partially offset by lower card related expenses. The increase from the fourth quarter of 2021 is primarily due to growth in salaries and employee benefits expenses recorded in the fourth quarter of 2022, primarily stemming from a full quarter of the additional employees included due to the West Suburban acquisition, as well as higher salary rates being paid in 2022, partially offset by reductions in consulting and management fees, occupancy, furniture and equipment, and computer and data processing.
- We had a provision for income tax of $8.2 million for the fourth quarter of 2022, compared to a provision for income tax of $7.1 million for the third quarter of 2022 and an income tax benefit of $2.5 million for the fourth quarter of 2021. The increase in tax expense for the fourth quarter of 2022 over both prior periods was due to an increase in pre-tax income.
- On January 17, 2023, our Board of Directors declared a cash dividend of $0.05 per share payable on February 6, 2023, to stockholders of record as of January 27, 2023.
President and Chief Executive Officer Jim Eccher said "Old Second reported strong results in the fourth quarter as we earned $23.6 million in net income and an ROATCE of 28%, while strengthening the balance sheet and making prudent investments in the future of the franchise. This robust earnings growth demonstrates the strength of our core deposit franchise highlighted by 67 basis points of linked quarter tax equivalent net interest margin expansion to 4.63%. Loans were essentially unchanged in the fourth quarter but up 13% compared to December 31, 2021, and we remain confident in our ability to grow loans meaningfully in 2023. The efficiency ratio in the fourth quarter was approximately 52% on a GAAP basis and reflects not only the cost saves from our most recent acquisition, but also tremendous success in realizing returns on the investments in lending teams and sales people over the last twelve months. Fourth quarter return on average assets and return on average equity were 1.58% and 21.09%, respectively, and represent a return to the type of performance we had been accustomed to prior to the pandemic. We are pleased with both the improvement and absolute levels of credit metrics this quarter, though we remain mindful and diligent in monitoring trends both within the portfolio and more broadly.
"The return of relatively higher market interest rates has allowed us the opportunity to demonstrate the strength of the franchise that we are building here at Old Second. Asset repricing should continue in the coming quarters which will allow for additional improvement in our core trends. Deposit repricing is expected to remain excellent but will be modestly higher in the near future as we respond to competitors and take the necessary steps to protect our greatest strength. Continuing strong results should allow us to compound book value and continue to quickly build capital back to our targeted levels following our acquisition late last year. I feel reasonably safe in commenting that Old Second delivered upon most of the goals we set for ourselves this past year and believe we have excellent momentum for the future. Our focus next year is squarely on customer acquisition and capitalizing on growth opportunities in our markets while making the investments to manage risk and provide quality service and customer experience. We are excited for the opportunities ahead of us and believe we have the resources and momentum to focus on growth and building a better Old Second for our stockholders, communities and customers. We are second because they come first."
Capital Ratios
| Minimum Capital | Well Capitalized | |||||||||||||||||||
| Adequacy with | Under Prompt | |||||||||||||||||||
| Capital Conservation | Corrective Action | December 31, | September 30, | December 31, | ||||||||||||||||
| Buffer, if applicable1 | Provisions2 | 2022 | 2022 | 2021 | ||||||||||||||||
The Company | ||||||||||||||||||||
Common equity tier 1 capital ratio | 7.00 | % | N/A | 9.67 | % | 9.16 | % | 9.46 | % | |||||||||||
Total risk-based capital ratio | 10.50 | % | N/A | 12.52 | % | 11.99 | % | 12.55 | % | |||||||||||
Tier 1 risk-based capital ratio | 8.50 | % | N/A | 10.20 | % | 9.68 | % | 10.06 | % | |||||||||||
Tier 1 leverage ratio | 4.00 | % | N/A | 8.14 | % | 7.70 | % | 7.81 | % | |||||||||||
The Bank | ||||||||||||||||||||
Common equity tier 1 capital ratio | 7.00 | % | 6.50 | % | 11.70 | % | 11.60 | % | 12.41 | % | ||||||||||
Total risk-based capital ratio | 10.50 | % | 10.00 | % | 12.75 | % | 12.64 | % | 13.46 | % | ||||||||||
Tier 1 risk-based capital ratio | 8.50 | % | 8.00 | % | 11.70 | % | 11.60 | % | 12.41 | % | ||||||||||
Tier 1 leverage ratio | 4.00 | % | 5.00 | % | 9.32 | % | 9.24 | % | 9.58 | % | ||||||||||
1Amounts are shown inclusive of a capital conservation buffer of 2.50%.
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 $32.9 million at December 31, 2022 and $44.7 million at December 31, 2021. Nonperforming loans with a total net book value of $23.8 million were acquired through our acquisition of West Suburban in December 2021. Credit metrics reflected decreases in nonperforming loans from the linked quarter and year over year due to remediation efforts that are ongoing, and management is carefully monitoring loans considered to be in a classified status. Nonperforming loans, as a percent of total loans were 0.9% at December 31, 2022, 1.4% at September 30, 2022, and 1.3% at December 31, 2021.
- OREO assets totaled $1.6 million at both December 31, 2022 and September 30, 2022 compared to $2.4 million at December 31, 2021. There were no transfers to OREO from loans and there were no properties sold during the fourth quarter of 2022. Nonperforming assets, as a percent of total loans plus OREO, was 0.9% at December 31, 2022, and 1.4% at both September 30, 2022 and December 31, 2021.
- Total loans were $3.87 billion at December 31, 2022, reflecting an increase of $275,000 compared to September 30, 2022, and an increase of $448.8 million compared to December 31, 2021. The increase in the year over year quarter was largely driven by commercial real estate and lease growth. Average loans (including loans held-for-sale) for the fourth quarter of 2022 totaled $3.88 billion, reflecting an increase of $125.1 million from the third quarter of 2022 and an increase of $1.49 billion from the fourth quarter of 2021.
- Available-for-sale securities totaled $1.54 billion at December 31, 2022, compared to $1.61 billion at September 30, 2022, and $1.69 billion at December 31, 2021. Total securities available-for-sale decreased compared to the linked quarter due to paydowns and maturities of $48.4 million, sales of $27.7 million resulting in realized net losses of $910,000, which were partially offset by $7.5 million in unrealized gains during the quarter. No securities were purchased in the fourth quarter of 2022. The decrease in the year over year period is due to a combination of paydowns and maturities, as well as sales and unrealized losses. The unrealized mark to market loss on securities totaled $123.5 million as of December 31, 2022, compared to $131.0 million as of September 30, 2022, and an unrealized mark to market gain of $15.5 million as of December 31, 2021, due to market interest rate increases as well as changes year over year in the composition of the securities portfolio.
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 adjusted net income, net interest income and net interest margin on a fully taxable equivalent basis, and our efficiency ratio calculations 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. Consistent with industry practice, management has disclosed the efficiency ratio including and excluding certain items, which is discussed in the noninterest expense presentation on page 7.
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 beginning on page 17 provide a reconciliation of each non-GAAP financial measure to the most comparable GAAP equivalent.
Cautionary Note Regarding 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 "should," "anticipate," "expect," "estimate," "intend," "believe," "may," "likely," "will," "forecast," "project," "looking forward," "optimistic," "hopeful," "potential," "progress," "prospect," "remain", "trend," "momentum" or other statements that indicate future periods. Examples of forward-looking statements include, but are not limited to, statements regarding the economic outlook, loan growth, pipelines and customer activity, statements regarding our expectations with respect to the yield curve, and statements regarding the potential for expanded margins and future growth. 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 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; (4) risks related to future acquisitions, if any, including execution and integration risks; (5) 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; (6) 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; (7) with respect to the acquisition of West Suburban, the possibility that the anticipated benefits of the transaction, including anticipated cost savings and strategic gains, are not realized when expected or at all, including as a result of the impact of, or problems arising from, the continued integration of the two companies or as a result of other unexpected factors or events; and (8) the adverse effects of events beyond our control that may have a destabilizing effect on financial markets and the economy, such as epidemics and pandemics, war or terrorist activities, essential utility outages, deterioration in the global economy, instability in the credit markets, disruptions in our customers' supply chains or disruption in transportation. 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.
Conference Call
We will host a call on Thursday, January 26, 2023, at 11:00 a.m. Eastern Time (10:00 a.m. Central Time) to discuss our fourth quarter 2022 financial results. Investors may listen to our call via telephone by dialing 888-506-0062, using Entry Code 685093. 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 call will be available until 11:00 a.m. Eastern Time (10:00 a.m. Central Time) on February 2, 2023, by dialing 877-481-4010, using Conference ID: 47379.
CONTACT:
Bradley S. Adams
Chief Financial Officer
(630) 906-5484
SOURCE: Old Second Bancorp Inc.
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