​

​

​

​

​

​

​

​

Old Second Bancorp, Inc. Reports First Quarter 2022 Net Income of $12.0 Million,

or $0.27 per Diluted Share

​

AURORA, IL, April 27, 2022 – 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 first quarter of 2022.  Our net income was $12.0 million, or $0.27 per diluted share, for the first quarter of 2022, compared to a net loss of $9.1 million, or $0.26 per diluted share, for the fourth quarter of 2021, and net income of $11.9 million, or $0.40 per diluted share, for the first quarter of 2021. Adjusted net income, a non-GAAP financial measure that excludes $5.6 million of pre-tax acquisition-related costs related to our acquisition of West Suburban Bancorp, Inc. (“West Suburban”) on December 1, 2021, was $16.1 million, or $0.36 per diluted share, for the first 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 first quarter of 2022 was primarily due to net interest and dividend income of $41.2 million, which increased $12.6 million from the fourth quarter of 2021, and increased $17.7 million from the first quarter of 2021, as a full quarter of West Suburban loan and securities income, net of interest expense on acquired deposits, was included in the first quarter of 2022.  In addition, the first quarter of 2022 also included a $3.0 million pre-tax mark to market gain on mortgage servicing rights (“MSRs”), primarily due to the increase in market interest rates in early 2022.  This compares to a $1.5 million pre-tax gain on MSRs in the fourth quarter of 2021, and a $1.1 million pre-tax gain on MSRs in the first quarter of 2021.

Operating Results

1

President and Chief Executive Officer Jim Eccher said “We are pleased to begin the year with solid overall core results and are encouraged about the trends and momentum in our businesses with robust lending pipelines and improving levels of activity within our customer base. We are making solid progress on the integration of West Suburban and continue to believe the combination will deliver value to our stockholders with significant improvements in core profitability as redundancies are eliminated. 

​

“Looking forward, I am optimistic on loan growth trends in the near term and extremely excited on what we believe we can do over the intermediate term.  Loan originations were very strong in the first quarter with balance sheet growth mitigated by Paycheck Protection Program loan forgiveness and paydowns in acquired loan participations. We expect these pressures to lessen in coming quarters, and combined with the prospect of higher rates, offer the potential for expanding margins and strong earnings growth in the near term. We are excited for the future and believe we have the resources and momentum to focus on growth and building a better Old Second for our stockholders and communities.”   

​

​

COVID-19 Update

We continued to face branch disruptions due to labor shortages and COVID-19-related closures in the first quarter of 2022.  We assess customer needs daily, and announce any temporary branch closures internally for staff as well as with signage for customers.  In early 2022, due to the acquisition, we conducted a branch review to determine which of our branches were either lower volume facilities or overlapped with newly acquired branches.  As a result, we sold one branch and further branch closures are in process. We have notified all required regulatory agencies of any final branch closure determinations.

​

​

2

Capital Ratios

​

​

¹ Amounts 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

​

​

​

3

Net Interest Income

¹ Tax equivalent (TE) basis is calculated using a marginal tax rate of 21% in 2022 and 2021. See the discussion entitled “Non-GAAP Presentations” below and the tables beginning on page 17 that provides a reconciliation of each non-GAAP measures to the most comparable GAAP equivalent.

² Interest income from loans is shown on a tax equivalent basis, which is a non-GAAP financial measure as discussed in the table on page 17, and includes fees of $1.1 million, $1.5 million and $1.3 million for the first quarter of 2022, the fourth quarter of 2021, and the first quarter of 2021, respectively. Nonaccrual loans are included in the above stated average balances.

Net interest income (TE) was $41.6 million for the first quarter of 2022, which reflects an increase of $12.6 million compared to the fourth quarter of 2021, and an increase of $17.7 million compared to the first quarter of 2021.  The tax equivalent adjustment for the first quarter of 2022 was $396,000, compared to $358,000 for the fourth quarter of 2021, and $352,000 for the first quarter of 2021.  Average interest earning assets increased $1.84 billion to $5.86 billion for the first quarter of 2022, compared to the fourth quarter of 2021, and increased $2.95 billion in the first quarter of 2022, compared to the first quarter of 2021; both of these increases were primarily due to the West Suburban acquisition, as well as growth in interest earning deposits with financial institutions, taxable securities available-for-sale, and loans outside of the merger. Average loans, including loans held-for-sale, increased $1.01 billion for the first quarter of 2022, compared to the fourth quarter of 2021, and increased $1.39 billion compared to the first quarter of 2021.  The yield on loans for the first quarter of 2022 decreased three basis points compared to the fourth quarter of 2021, and decreased 14 basis points compared to the first quarter of 2021, primarily because the yield on acquired loans is lower.  

4

Growth in the average balance of securities for the first quarter of 2022, compared to the fourth quarter of 2021 and the first quarter of 2021, offset the decline in yields resulting in a $2.4 million increase in interest income (TE) on securities in the first quarter of 2022, compared to the fourth quarter of 2021, and a $3.6 million increase from the first quarter of 2021.  The average yield on total securities available-for-sale declined 95 basis points year over year.  We acquired $1.07 billion of securities with our acquisition of West Suburban in December 2021, and securities activity in the first quarter 2022 consisted of $266.3 million of purchases, partially offset by $75.7 million of paydowns, calls and maturities.  No security sales occurred in the first quarter of 2022.  Our overall yield on tax equivalent municipal securities was 3.77% for the first quarter of 2022, compared to 3.50% for the fourth quarter of 2021 and 3.51% for the first quarter of 2021.  

The yield on average earning assets decreased six basis points in the first quarter of 2022, compared to the fourth quarter of 2021, and decreased 56 basis points compared to the first quarter of 2021, primarily due to lower yielding loans in the first quarter of 2022, in addition to a higher amount of earning assets held in interest bearing deposits with financial institutions, which had an average yield of 17 basis points in the first quarter of 2022.      

Average interest bearing liabilities increased $1.57 billion in the first quarter of 2022, compared to the fourth quarter of 2021, driven by a $1.58 billion increase in interest bearing deposits.  Average interest bearing liabilities increased $2.43 billion in the first quarter of 2022, compared to the first quarter of 2021, primarily driven by a $2.41 billion increase in interest bearing deposits and a $59.2 million increase in subordinated debentures. Both the linked quarter and year over year quarter increases in interest bearing deposits were primarily due to the West Suburban acquisition, as well as continued deposit growth of our legacy customers.  The cost of interest bearing liabilities for the first quarter of 2022 decreased 13 basis points from the fourth quarter of 2021, and decreased 21 basis points from the first quarter of 2021. Growth in our average noninterest bearing demand deposits of $244.5 million from the linked quarter, and $500.8 million in the year over year period has assisted us in controlling our cost of funds stemming from average interest bearing deposits and borrowings; cost of funds, which includes the impact of noninterest bearing deposits, totaled 0.15% for the first quarter of 2022, 0.23% for the fourth quarter of 2021, and 0.27% for the first quarter of 2021. The cost of interest bearing liabilities totaled 0.20% for the first quarter of 2022, 0.33% for the fourth quarter of 2021, and 0.41% for the first quarter of 2021.

In the second quarter of 2021, we entered into Subordinated Note Purchase Agreements with certain qualified institutional buyers pursuant to which we sold and issued $60.0 million in aggregate principal amount of our 3.50% Fixed-to-Floating Rate Subordinated Notes due April 15, 2031 (the “Notes”).  The Notes bear interest at a fixed annual rate of 3.50% through April 14, 2026, payable semi-annually in arrears.  From April 15, 2026 forward, the interest rate on the Notes will generally reset quarterly to a rate equal to Three-Month Term SOFR (as defined by the Note) plus 273 basis points, payable quarterly in arrears.  The Notes have a stated maturity of April 15, 2031, and are redeemable, in whole are in part, on April 15, 2026, or any interest payment date thereafter, and at any time upon the occurrence of certain events.    

​

Our net interest margin (GAAP) increased three basis points to 2.85% for the first quarter of 2022, compared to 2.82% for the fourth quarter of 2021, but decreased 42 basis points compared to 3.27% for the first quarter of 2021. Our net interest margin (TE) increased two basis points to 2.88% for the first quarter of 2022, compared to 2.86% for the fourth quarter of 2021, but decreased 44 basis points compared to 3.32% for the first quarter of 2021. The reductions year over year were due primarily to the lower level of market interest rates over the majority of the past twelve months, the related rate resets on loans and securities during the past year, and the increase in liquidity on the balance sheet. See the discussion entitled “Non-GAAP Presentations” and the tables beginning on page 17 that provide a reconciliation of each non-GAAP measure to the most comparable GAAP equivalent.

5

​

Noninterest Income

​

N/M - Not meaningful.

Noninterest income increased $2.8 million, or 26.4%, in the first quarter of 2022, compared to the fourth quarter of 2021, and increased $2.2 million, or 19.4%, compared to the first quarter of 2021.  The increase from the linked quarter was primarily driven by a $1.4 million increase in residential mortgage banking revenue, attributable to a $1.5 million increase in mark to market gain on MSRs stemming from market interest rate changes, partially offset by a $71,000 decrease in secondary mortgage fees in the first quarter of 2022, compared to the fourth quarter of 2021.  In addition, we had increases in wealth management fees of $276,000, service charges on deposit accounts of $466,000, and card related income of $583,000 in the first quarter of 2022, as compared to the linked quarter, due to the inclusion of a full quarter of West Suburban noninterest income in 2022.  These increases were partially offset by a decrease in the cash surrender value of BOLI of $103,000 in the first quarter of 2022, compared to the fourth quarter of 2021.

The increase in noninterest income in the first quarter of 2022, compared to the first quarter of 2021, is primarily due to a $1.1 million increase in card related income, stemming from the inclusion of a full quarter of West Suburban card-related activity, partially offset by a $593,000 decrease in residential mortgage banking revenue, due to a decrease in mortgage origination volumes in the first quarter of 2022.  Also contributing to the increase in noninterest income in the first quarter of 2022, compared to the first quarter of 2021, were increases in wealth management fees of $547,000, service charges on deposits of $895,000, and other income of $451,000, primarily due to the inclusion of a full quarter of West Suburban activity. Partially offsetting these increases to noninterest income in the year over year period was a decrease in the cash surrender value of BOLI of $210,000.

​

6

​

Noninterest Expense

​

​

¹ The efficiency ratio shown in the table above is a GAAP financial measure calculated as noninterest expense, excluding amortization of core deposits and OREO expenses, divided by the sum of net interest income and total noninterest income less net gains or losses on securities and mark to market gains or losses on MSRs.

² The adjusted efficiency ratio shown in the table above is a non-GAAP financial measure calculated as noninterest expense, excluding amortization of core deposits, OREO expenses, and acquisition-related costs, divided by the sum of net interest income on a fully tax equivalent basis, total noninterest income less net gains or losses on securities and mark to market gains or losses on MSRs, and includes a tax equivalent adjustment on the change in cash surrender value of BOLI.  See the discussion entitled “Non-GAAP Presentations” below and the table on page 18 that provides a reconciliation of this non-GAAP financial measure to the most comparable GAAP equivalent.

Noninterest expense for the first quarter of 2022 decreased $247,000, or 0.6%, compared to the fourth quarter of 2021, and increased $16.5 million, or 76.1%, compared to the first quarter of 2021.  The linked quarter decrease was primarily attributable to $5.6 million of West Suburban acquisition-related costs for the first quarter of 2022, compared to $12.8 million for the fourth quarter of 2021.  These acquisition-related costs included a $2.4 million increase in computer and data processing expense in the first quarter of 2022, primarily due to acquisition-related core system conversion costs, and a $1.8 million increase in other expense due to ancillary teller and mobile banking systems conversion costs, compared to the linked quarter.  Amortization of core deposits also increased $369,000 in the first quarter of 2022, compared to the prior quarter, as a full quarter of amortization on the newly acquired West Suburban deposits was recorded.  These increases were offset by a $2.7 million decrease in occupancy, furniture and equipment expense, due to fixed asset writedowns in the fourth quarter of 2021, a $3.5 million decrease in consulting and management fees due to acquisition-related costs paid in late 2021, and a $166,000 decrease in legal fees due to costs incurred upon closing of the West Suburban acquisition.  Of the $31.0 million in projected acquisition-related costs announced when we entered into the merger agreement with West Suburban in July 2021, $30.7 million in total has been expensed cumulatively to date by the Company or West Suburban as of March 31, 2022.  Additional acquisition-related expenses are anticipated to be recorded in the second quarter of 2022, as we complete our data and systems conversions.

The year over year increase in noninterest expense is primarily attributable to a $6.5 million increase in salaries and employee benefits, a $1.3 million increase in occupancy, furniture and equipment, a $4.9 million increase in computer and data processing expense, and a $2.7 million increase in other expense. Officer incentive compensation decreased $659,000 in the first quarter of 2022, compared to the first quarter of 2021, as incentive accruals in 2021 were at a higher rate than the current year.  Employee benefits expense increased $738,000 in the first quarter of 2022, compared to the first quarter of 2021, due to increases stemming from additional employees from our acquisition of West Suburban and increases in employee insurance costs as more employees returned to more routine medical appointments, many of which were on hold during the COVID-19 pandemic in 2020 and part of 2021. The increase in

7

occupancy, furniture and equipment expense year over year was due to the addition of 34 West Suburban branches in late 2021. The increase in computer and data processing expense was primarily due to core system conversion costs of $3.2 million, relating to the West Suburban acquisition.  Finally, the increase in other expense was due primarily to growth in net teller banking and bill paying fees of $1.2 million, which was due to acquisition-related costs in the first quarter of 2022.    

Earning Assets

​

​

¹ Other class includes consumer and overdrafts.

​

Total loans decreased by $19.6 million at March 31, 2022, compared to December 31, 2021, and increased $1.44 billion for the year over year period.  Loan growth of $1.50 billion in the year over year period was driven by the acquisition of West Suburban, which was reduced by loan payoffs, net of originations, during the same period.  During the first quarter of 2022, $27.2 million of PPP loans were forgiven or paid off.  As required by ASU 2016-13, per adoption of the Current Expected Credit Losses accounting standard (“CECL”), the balance (or amortized cost basis) of PCD loans acquired in our acquisitions are carried on a gross basis (rather than net of the associated credit loss estimate), and the expected credit losses for PCD loans are estimated and separately recognized as part of the allowance for credit losses.

​

​

​

​

Our securities portfolio totaled $1.82 billion as of March 31, 2022, an increase of $124.0 million from $1.69 billion as of December 31, 2021, and an increase of $1.22 billion from $593.3 million as of March 31, 2021. The increase in the portfolio during the first quarter of 2022, compared to the prior quarter, was driven by purchases of $266.3 million, primarily of U.S. government treasuries, collateralized mortgage obligations, and asset-backed securities, less paydowns, calls and maturities of $75.7 million, to continue to position our portfolio into higher credit quality, shorter duration issuances.  The increase in the securities portfolio in the year over year period was primarily due to $1.07 billion of securities acquired in our acquisition of West Suburban, as well as $1.04 billion of purchases in the last twelve months, less $605.6 million of sales in that same period, to utilize our excess cash on hand. We recorded no security sales in the first quarter of 2022 and 2021, compared to $570.5 million of sales in the fourth quarter of 2021.

​

8

​

​

Asset Quality

​