AURORA, IL / ACCESSWIRE / January 24, 2024 / 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 2023. Our net income was $18.2 million, or $0.40 per diluted share, for the fourth quarter of 2023, compared to net income of $24.3 million, or $0.54 per diluted share, for the third quarter of 2023, and net income of $23.6 million, or $0.52 per diluted share, for the fourth quarter of 2022. Adjusted net income, a non-GAAP financial measure that excludes nonrecurring litigation related expenses and Visa portfolio liquidation and deconversion costs, as applicable, was $19.1 million, or $0.42 per diluted share, for the fourth quarter of 2023, compared to $24.8 million, or $0.55 per diluted share, for the third quarter of 2023. 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. Noteworthy items impacting fourth quarter 2023 results include a $1.2 million litigation reserve related to prior years' overdraft fee compliance and $1.3 million in expense related to the fair value of mortgage servicing rights.
Net income decreased $6.1 million in the fourth quarter of 2023 compared to the third quarter of 2023. The decrease was primarily due to the increase of $5.0 million in provision for credit losses, a $1.3 million increase in interest expense, and a decrease in noninterest income of $1.1 million in the fourth quarter of 2023, which were partially offset by a $397,000 decrease in noninterest expense and a $1.4 million decrease in provision for income taxes. Net income decreased $5.4 million in the fourth quarter of 2023 compared to the fourth quarter of 2022, primarily due to an increase in provision for credit losses of $6.5 million and a decrease in net interest income of $2.9 million year over year due to rising market interest rates, which also resulted in an $8.8 million increase in interest expense. These decreases to net income in the fourth quarter of 2023 were partially offset by a decrease in noninterest expenses of $2.7 million. The fourth quarter of 2023 was minimally impacted by a pre-tax net loss on the call of securities of $2,000, compared to more significant pre-tax net losses on the sale of securities of $924,000 and $910,000 in the third quarter of 2023 and the fourth quarter of 2022, respectively.
Operating Results
- Fourth quarter 2023 net income was $18.2 million, reflecting a $6.1 million decrease from the third quarter 2023, and a decrease of $5.4 million from the fourth quarter of 2022. Adjusted net income, as defined above, was $19.1 million for the fourth quarter of 2023, a decrease of $5.7 million from adjusted net income for the third quarter of 2023, and a decrease of $4.9 million from adjusted net income for the fourth quarter of 2022.
- Net interest and dividend income was $61.2 million for the fourth quarter of 2023, reflecting a decrease of $1.8 million, or 2.8%, from the third quarter of 2023, and a decrease of $2.9 million, or 4.5%, from the fourth quarter of 2022.
- We recorded a net provision for credit losses of $8.0 million in the fourth quarter of 2023, compared to a net provision for credit losses of $3.0 million in the third quarter of 2023, and a net provision for credit losses of $1.5 million in the fourth quarter of 2022.
- Noninterest income was $8.7 million for the fourth quarter of 2023, a decrease of $1.1 million, or 11.6%, compared to $9.9 million for the third quarter of 2023, and a decrease of $217,000, or 2.4%, compared to $8.9 million for the fourth quarter of 2022.
- Noninterest expense was $37.0 million for the fourth quarter of 2023, a decrease of $397,000, or 1.1% compared to $37.4 million for the third quarter of 2023, and a decrease of $2.7 million, or 6.7%, compared to $39.7 million for the fourth quarter of 2022.
- We had a provision for income tax of $6.7 million for the fourth quarter of 2023, compared to a provision for income tax of $8.1 million for the third quarter of 2023 and a provision of $8.2 million for the fourth quarter of 2022. The effective tax rate for each of the periods presented was 26.9%, 25.1%, and 25.9%, respectively.
- On January 16, 2024, our Board of Directors declared a cash dividend of $0.05 per share payable on February 5, 2024, to stockholders of record as of January 26, 2024.
Financial Highlights
| Quarters Ended | ||||||||||||
(Dollars in thousands) | December 31, | September 30, | December 31, | |||||||||
| 2023 | 2023 | 2022 | ||||||||||
Balance sheet summary | ||||||||||||
Total assets | $ | 5,722,799 | $ | 5,758,156 | $ | 5,888,317 | ||||||
Total securities available-for-sale | 1,192,829 | 1,229,618 | 1,539,359 | |||||||||
Total loans | 4,042,953 | 4,029,543 | 3,869,609 | |||||||||
Total deposits | 4,570,746 | 4,614,320 | 5,110,723 | |||||||||
Total liabilities | 5,145,518 | 5,225,598 | 5,427,176 | |||||||||
Total equity | 577,281 | 532,558 | 461,141 | |||||||||
Total tangible assets | $ | 5,625,104 | $ | 5,659,858 | $ | 5,788,161 | ||||||
Total tangible equity | 479,586 | 434,260 | 360,985 | |||||||||
Income statement summary | ||||||||||||
Net interest income | $ | 61,235 | $ | 63,030 | $ | 64,091 | ||||||
Provision for credit losses | 8,000 | 3,000 | 1,500 | |||||||||
Noninterest income | 8,729 | 9,877 | 8,946 | |||||||||
Noninterest expense | 37,026 | 37,423 | 39,684 | |||||||||
Net income | 18,225 | 24,335 | 23,615 | |||||||||
Effective tax rate | 26.92 | % | 25.09 | % | 25.86 | % | ||||||
Profitability ratios | ||||||||||||
Return on average assets (ROAA) | 1.27 | % | 1.67 | % | 1.58 | % | ||||||
Return on average equity (ROAE) | 13.18 | 18.21 | 21.09 | |||||||||
Net interest margin (tax-equivalent) | 4.62 | 4.66 | 4.63 | |||||||||
Efficiency ratio | 50.82 | 50.08 | 52.44 | |||||||||
Return on average tangible common equity (ROATCE) | 16.43 | 22.80 | 27.80 | |||||||||
Tangible common equity to tangible assets (TCE/TA) | 8.53 | 7.67 | 6.24 | |||||||||
Per share data | ||||||||||||
Diluted earnings per share | $ | 0.40 | $ | 0.54 | $ | 0.52 | ||||||
Tangible book value per share | 10.73 | 9.72 | 8.10 | |||||||||
Company capital ratios 1 | ||||||||||||
Common equity tier 1 capital ratio | 11.37 | % | 11.00 | % | 9.67 | % | ||||||
Tier 1 risk-based capital ratio | 11.89 | 11.52 | 10.20 | |||||||||
Total risk-based capital ratio | 14.06 | 13.84 | 12.52 | |||||||||
Tier 1 leverage ratio | 10.06 | 9.62 | 8.14 | |||||||||
Bank capital ratios 1, 2 | ||||||||||||
Common equity tier 1 capital ratio | 12.32 | % | 12.49 | % | 11.70 | % | ||||||
Tier 1 risk-based capital ratio | 12.32 | 12.49 | 11.70 | |||||||||
Total risk-based capital ratio | 13.24 | 13.57 | 12.75 | |||||||||
Tier 1 leverage ratio | 10.41 | 10.43 | 9.32 | |||||||||
1 Both the Company and the Bank ratios are inclusive of a capital conservation buffer of 2.50%, and both are subject to the minimum capital adequacy guidelines of 7.00%, 8.50%, 10.50%, and 4.00% for the Common equity tier 1, Tier 1 risk-based, Total risk-based and Tier 1 leverage ratios, respectively.
2 The prompt corrective action provisions are applicable only at the Bank level, and are 6.50%, 8.00%, 10.00%, and 5.00% for the Common equity tier 1, Tier 1 risk-based, Total risk-based and Tier 1 leverage ratios, respectively.
Chairman, President and Chief Executive Officer Jim Eccher said "Profitability at Old Second remains exceptionally strong and balance sheet strengthening continues with our tangible common equity to tangible assets ratio increasing by 86 basis points linked quarter to 8.53%. We believe we are being proactive in addressing commercial real estate loans facing deterioration from higher interest rates, declining appraisal values and cash flow pressures. Importantly, the total of substandard and criticized loans are now at their lowest levels since June 2022 as we have seen previously identified loans work toward resolution and the pace of downgrades has improved dramatically. The loan portfolio, exclusive of office CRE and healthcare, has remained well behaved and we remain confident in our credit quality overall. Absent a significant recession, I am optimistic that this quarter will mark the inflection point in our asset quality trends as we have seen the bulk of our loan portfolio reprice and transition into the current interest rate environment. This expectation comes despite Old Second maintaining an economic view that is significantly more cautious than consensus market forecasts. Our focus therefore remains on assessing and monitoring risks within the loan portfolio and optimizing the earning asset mix in order to reduce our overall sensitivity to interest rates. Net interest margin trends are stable and income statement efficiency remains at record levels. Marginal spreads in deposit and lending markets remain exceptionally tight but balance sheet flexibility and the expectation for continuing record efficiency gives me confidence we are well positioned to deliver another strong year in 2024. I look forward to the opportunity to demonstrate the strength of the franchise we have built."
Asset Quality & Earning Assets
- Nonperforming loans, comprised of nonaccrual loans plus loans past due 90 days or more and still accruing, and, prior to January 1, 2023, performing troubled debt restructurings, totaled $68.8 million at December 31, 2023, $63.3 million at September 30, 2023, and $32.9 million at December 31, 2022. Nonperforming loans, as a percent of total loans, were 1.7% at December 31, 2023, 1.6% at September 30, 2023, and 0.9% at December 31, 2022. The increase in the fourth quarter of 2023 is driven by the downgrade of a few credits during the quarter, due primarily to office-related loans and assisted living properties within the commercial real estate-investor portfolio and debt service coverage shortfalls.
- Total loans were $4.04 billion at December 31, 2023, reflecting an increase of $13.4 million compared to September 30, 2023, and an increase of $173.3 million compared to December 31, 2022. The increase year over year was largely driven by the growth in leases, commercial real estate-investor, and multifamily portfolios. Average loans (including loans held-for-sale) for the fourth quarter of 2023 totaled $4.02 billion, reflecting an increase of $5.6 million from the third quarter of 2023 and an increase of $138.3 million from the fourth quarter of 2022.
- Available-for-sale securities totaled $1.19 billion at December 31, 2023, compared to $1.23 billion at September 30, 2023, and $1.54 billion at December 31, 2022. The unrealized mark to market loss on securities totaled $84.2 million as of December 31, 2023, compared to $120.5 million as of September 30, 2023, and $123.5 million as of December 31, 2022, due to market interest rate fluctuations as well as changes year over year in the composition of the securities portfolio. During the quarter ended December 31, 2023, there were no securities sold, however $55.9 million of maturities and calls resulted in net realized losses of $2,000, compared to sales of $65.6 million during the quarter ended September 30, 2023, which resulted in net realized losses of $924,000, and security sales of $27.7 million for the quarter ended December 31, 2022, which resulted in net realized losses of $910,000. We may continue to sell strategically identified securities as opportunities arise.
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 of the full filing of this release; see the investor relations tab at oldsecond.com for this full release.
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 17of the full filing of this release provide a reconciliation of each non-GAAP financial measure to the most comparable GAAP equivalent; see the investor relations tab at oldsecond.com for this full release.
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," "deliver," "continue," "trend," "momentum," "remainder," "beyond," "and "near" 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, deposit trends and funding, asset-quality trends, balance sheet growth, and building capital. 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; (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 has and may continue to affect our deposit and funding costs, 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) elevated inflation which causes adverse risk to the overall economy, and could indirectly pose challenges to our clients and to our business; 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 25, 2024, at 11:00 a.m. Eastern Time (10:00 a.m. Central Time) to discuss our fourth quarter 2023 financial results. Investors may listen to our call via telephone by dialing 888-506-0062, using Entry Code: 675276. 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 1, 2024, by dialing 877-481-4010, using Conference ID: 49609.
Contact:
Bradley S. Adams
Chief Financial Officer
(630) 906-5484
SOURCE: Old Second Bancorp Inc.
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