Old Second Bancorp Inc.

AURORA, IL / ACCESSWIRE / July 21, 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 second quarter of 2021. Our net income was $8.8 million, or $0.30 per diluted share, for the second quarter of 2021, compared to net income of $11.9 million, or $0.40 per diluted share, for the first quarter of 2021, and net income of $9.2 million, or $0.31 per diluted share, for the second quarter of 2020. Net income for the second quarter of 2021 reflected a $3.5 million pre-tax release of provision for credit losses, compared to a $3.0 million pre-tax release in the first quarter of 2021, and a $2.1 million pre-tax provision expense in the second quarter of 2020. Mortgage banking income totaled $1.6 million in the second quarter of 2021, compared to $5.7 million in the first quarter of 2021, and $5.1 million in the second quarter of 2020. Mortgage servicing rights experienced a mark to market loss of $1.0 million during the second quarter of 2021, compared to a $1.1 million gain in the prior quarter and a $445,000 loss in the second quarter of 2020. Net gain on sales of mortgage loans totaled $1.9 million in the second quarter of 2021, compared to $3.7 million in the first quarter of 2021, and $4.6 million in the second quarter of 2020, as mortgage origination and refinancing volumes declined in the current period.

Operating Results

• Second quarter 2021 net income was $8.8 million, reflecting a decrease in earnings of $3.1 million from the first quarter of 2021, and a decrease of $418,000 from the second quarter of 2020.
• Net interest and dividend income was $22.0 million for the second quarter of 2021, a decrease of $1.6 million, or 6.8%, from the first quarter of 2021, and a decrease of $754,000, or 3.3%, from second quarter of 2020.
• Interest and dividend income for the second quarter of 2021 was $24.2 million, or $1.2 million less than the first quarter of 2021, and $1.5 million less than the second quarter of 2020, primarily due to a decrease in market interest rates over the past year. Interest and dividend income was favorably impacted by loan fees earned on forgiven Paycheck Protection Program ("PPP") loans during the first and second quarters of 2021. We originated 746 PPP loans totaling $136.7 million in 2020, and as of June 30, 2021, $11.6 million on 35 PPP loans originated during the first round of the PPP loan program remained outstanding. During the first and second quarters of 2021, we originated $62.3 million, or 574 loans, under the second round of the PPP loan program, of which $58.6 million, or 483 loans, remain outstanding as of June 30, 2021. Net loan interest and fee income recorded in 2021 year to date on all PPP loans totaled $1.6 million, and approximately $2.3 million of net PPP loan fees remain unearned as of June 30, 2021.
• Interest expense for the second quarter of 2021 totaled $2.2 million, compared to $1.8 million for the first quarter of 2021, and $3.0 million for the second quarter of 2020. The $393,000 increase in interest expense in the second quarter of 2021, compared to the first quarter of 2021, was primarily due to the April 6, 2021, issuance of $60.0 million of 3.50% Fixed-to-Floating Rate Subordinated Notes due April 15, 2031, which bear interest at a fixed annual rate of 3.50% until April 14, 2026. The reduction in interest expense in the year over year period was due to a decrease in market interest rates, which impacted all interest bearing deposit categories.
• We recorded a $3.5 million release of provision expense in the second quarter of 2021, compared to a $3.0 million release of provision expense in the first quarter of 2021, and a $2.1 million provision for credit losses in the second quarter of 2020, as the projected impact of the COVID-19 pandemic on future credit losses is currently anticipated to be less than prior projections. Our allowance for credit losses ("ACL") on loans in the second quarter of 2021 consisted of a release of the ACL on loans of $2.3 million, as well as $65,000 of net charge-offs recorded during the quarter. In addition, the ACL for unfunded commitments decreased by $1.2 million in the second quarter of 2021, due to an updated forecast of credit line utilization rates.
• Noninterest income was $7.9 million for the second quarter of 2021, a decrease of $3.4 million, or 29.9%, compared to $11.3 million for the first quarter of 2021, and a decrease of $2.8 million, or 26.0%, compared to $10.7 million for the second quarter of 2020. The decrease from the linked quarter was primarily driven by a $4.1 million decline in residential mortgage banking revenue, attributable to a $2.1 million decrease in the mark to market adjustment on MSRs and a $1.8 million decrease in net gain on the sales of mortgage loans in the second quarter of 2021, compared to the prior quarter. These decreases to noninterest income were partially offset by a $238,000 increase in wealth management income and a $218,000 increase in card related income in the current quarter compared to the linked quarter. The decrease in noninterest income in the second quarter of 2021, compared to the second quarter of 2020, was primarily due to a $3.5 million decline in residential mortgage banking revenue, attributable to a $588,000 increase in mark to market loss on MSRs and a $2.7 million decrease in net gain on sales of mortgage loans in the second quarter of 2021, compared to the second quarter of 2020.
• Noninterest expense was $21.4 million for the second quarter of 2021, a decrease of $337,000, or 1.6%, compared to $21.7 million for the first quarter of 2021, and an increase of $2.5 million, or 13.3%, from $18.9 million for the second quarter of 2020. The decrease from the linked quarter was primarily attributable to a decrease in salaries and employee benefits expense stemming from additional officer incentive compensation expenses paid out in early 2021, and the related increase in payroll taxes and 401K company match expense. In addition, a decrease in occupancy, furniture and equipment costs was related to snow removal costs and building maintenance due to weather conditions in February 2021. The increase in noninterest expense in the year over year period was primarily due to salaries and employee benefits expense, occupancy, furniture and equipment expenses, card related expense and other expense.
• The provision for income taxes expense was $3.2 million for the second quarter of 2021, compared to $4.2 million for the first quarter of 2021, and $3.1 million for the second quarter of 2020. The decrease in tax expense for the linked quarter was due to lower pre-tax income in the second quarter of 2021, and the increase in tax expense for the year over year period was primarily due to a decrease in tax-deductible expenses in the second quarter of 2021 compared to the second quarter of 2020.
• During the second quarter of 2021, we repurchased 310,900 shares of our common stock at a weighted average price of $13.55 per share, pursuant to our stock repurchase program.
• On July 20, 2021, our Board of Directors declared a cash dividend of $0.05 per share payable on August 9, 2021, to stockholders of record as of July 30, 2021.

President and Chief Executive Officer Jim Eccher said "An improving economy and conservative positioning resulted in solid bottom line earnings and a continued return of excess capital to our stockholders through the recent increase in the common dividend and continued share repurchases. While challenges remain, our credit quality metrics and expectations have continued to improve as the Chicago area moves towards a more normalized environment. Loan demand continued to remain soft in the second quarter with utilization rates remaining low and customers using excess liquidity to pay down existing debt. The end result was a somewhat disappointing $21.9 million linked quarter decline in loans and leases held for investment, exclusive of PPP loan activity. Deposit inflows remain robust and resulted in a further increase in excess liquidity as evidenced by a $140.0 million increase in average cash on the balance sheet during the quarter. We continue to deploy a portion of the excess liquidity on our balance sheet in short duration securities with yields far below the aggregate portfolio yield. The combination of these factors largely resulted in a 39 basis point sequential quarter decline in our net interest margin but a far more modest sequential decline in net interest income. Looking forward, I am more optimistic on loan growth for the remainder of the year and believe reported margin trends are more symptomatic of the profound increase in liquidity on our balance sheet rather than any fundamental change in our business. I believe Old Second remains conservatively positioned to meet these challenges, as our expenses remain well-controlled, our business is well diversified, customer activity is increasing and our underwriting has remained disciplined and consistent. I would like to thank our employees for their continued hard work in delivering a solid quarter while delivering exceptional customer service as we move towards a more normal routine."

COVID-19 Update

• Late in the first quarter of 2020, we began granting loan payment deferrals to certain borrowers affected by the pandemic. For the period April 1, 2020 through June 30, 2021, our clients had requested loan payment deferrals on 506 loans totaling $237.8 million. As of June 30, 2021, 488 loans, representing $228.7 million outstanding, or 96.2% of the original loan balances deferred, have resumed payments or paid off. Active payment deferrals remain on 18 loans, with $9.1 million of balances outstanding.
• We are participating in the Coronavirus Aid, Relief and Economic Security Act ("CARES" Act). During 2021, we processed 574 loan applications for PPP loans, representing a total of $62.3 million. As of June 30, 2021, we had $11.6 million of PPP loans outstanding that were originated under the first round of the PPP loan program, and $58.6 million of PPP loans outstanding that were originated under the second round of the PPP loan program. Early in the fourth quarter of 2020, we started to submit applications for PPP loan forgiveness to the SBA, and as of June 30, 2021, $128.8 million on 802 loans have been forgiven. We anticipate receiving the remaining funds for our first round of PPP loan forgiveness from the SBA through the third quarter of 2021, and will also continue the forgiveness process for our second round of PPP loans during the remainder of 2021.

Capital Ratios

		Minimum Capital Adequacy with Capital Conservation Buffer, if applicable1				Well Capitalized Under Prompt Corrective Action Provisions2				June 30, 2021				March 31, 2021				June 30, 2020
The Company
Common equity tier 1 capital ratio			7.00	%			N/A				12.72	%			12.43	%			11.31	%
Total risk-based capital ratio			10.50	%			N/A				17.60	%			14.73	%			13.63	%
Tier 1 risk-based capital ratio			8.50	%			N/A				13.83	%			13.53	%			12.39	%
Tier 1 leverage ratio			4.00	%			N/A				9.68	%			10.02	%			10.06	%
The Bank
Common equity tier 1 capital ratio			7.00	%			6.50	%			15.23	%			14.59	%			13.46	%
Total risk-based capital ratio			10.50	%			10.00	%			16.33	%			15.80	%			14.71	%
Tier 1 risk-based capital ratio			8.50	%			8.00	%			15.23	%			14.59	%			13.46	%
Tier 1 leverage ratio			4.00	%			5.00	%			10.63	%			10.78	%			10.86	%

¹Amounts 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 currently 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 $23.1 million at June 30, 2021, compared to $21.2 million at March 31, 2021, and $20.2 million at June 30, 2020. 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 1.2% at June 30, 2021, 1.1% at March 31, 2021, and 1.0% at June 30, 2020.
• OREO assets totaled $1.9 million at June 30, 2021, compared to $2.2 million at March 31, 2021, and $5.1 million at June 30, 2020. We recorded two property sales of $530,000 net book value in the second quarter of 2021, and write-downs of $61,000, compared to write downs of $6,000 in the first quarter of 2021, and $60,000 in the second quarter of 2020. Nonperforming assets, as a percent of total loans plus OREO, were 1.3% at June 30, 2021, compared to 1.2% at both March 31, 2021, and June 30, 2020.
• Total loans were $1.90 billion at June 30, 2021, reflecting a decrease of $56.3 million compared to March 31, 2021, and a decrease of $149.0 million compared to June 30, 2020. Decreases in the linked quarter and year over year periods were primarily due to $128.8 million of PPP loan paydowns in our commercial portfolio, net of PPP loan originations of $62.3 million in 2021, as borrower liquidity is at a high level due to federal stimulus programs and there is a general lack of incentive for making capital expenditures. Average loans (including loans held-for-sale) for the second quarter of 2021 totaled $1.93 billion, reflecting a decrease of $83.8 million from the first quarter of 2021 and a decrease of $121.1 million from the second quarter of 2020.
• Available-for-sale securities totaled $579.9 million at June 30, 2021, compared to $593.3 million at March 31, 2021, and $447.4 million at June 30, 2020. Total securities available-for-sale decreased a net $13.4 million from the linked quarter due to maturities of $50.9 million of mortgage-backed securities, partially offset by purchases of $30.1 million of collateralized mortgage-backed securities and $17.4 million of asset-backed securities, net of calls and paydowns. The unrealized mark to market adjustment on securities increased by $3.3 million since March 31, 2021, and increased by $8.6 million in the year over year period due to market interest rate fluctuations.

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.

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," "forecast," "project," or other statements that indicate future periods. Examples of forward-looking statements include, but are not limited to, statements regarding the economic outlook, our expectations regarding future loan growth, trends in our net interest margin, the adequacy of our allowance and our belief that we are conservatively positioned, as well as statements regarding asset quality trends and the anticipated timing of our receipt of funds for PPP loan forgiveness. 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) 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; 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.

Conference Call

We will host a call on Thursday, July 22, 2021, at 11:00 a.m. Eastern Time (10:00 a.m. Central Time) to discuss our second quarter 2021 financial results. Investors may listen to our 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 call will be available until 11:00 a.m. Eastern Time (10:00 a.m. Central Time) on July 29, 2021, by dialing 877-481-4010, using Conference ID: 42068.

Contact:

Bradley S. Adams
Chief Financial Officer
(630) 906-5484

SOURCE: Old Second Bancorp Inc.

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