Old Second Bancorp Earnings 2018-09-30

OSBC 10Q Quarterly Report

Balance Sheet	Income Statement	Cash Flow

10-Q 1 osbc-20180930x10q.htm 10-Q osbc-Current Folio_10Q

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
	THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2018


☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
	SECURITIES EXCHANGE ACT OF 1934

For transition period from to

Commission File Number 0-10537

(Exact name of Registrant as specified in its charter)


Delaware		36-3143493
(State or other jurisdiction		(I.R.S. Employer Identification Number)
of incorporation or organization)

37 South River Street, Aurora, Illinois 60507

(Address of principal executive offices) (Zip Code)

(630) 892-0202

(Registrant’s telephone number, including area code)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of ‘‘large accelerated filer,’’ ‘‘accelerated filer,’’ ‘‘smaller reporting company,’’ and ‘‘emerging growth company’’ in Rule 12b–2 of the Exchange Act.

Large accelerated filer☐Accelerated filer☒

Non-accelerated filer☐Smaller reporting company☐Emerging growth company☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).

Yes ☐ No ☒

As of November 2, 2018, the Registrant had 29,758,578 shares of common stock outstanding at $1.00 par value per share.

Table of Contents

OLD SECOND BANCORP, INC.

Form 10-Q Quarterly Report

Table of Contents

Cautionary Note Regarding Forward Looking Statements


	PART I
		Page Number
Item 1.	Financial Statements	4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	38
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	55
Item 4.	Controls and Procedures	56
	PART II

Item 1.	Legal Proceedings	56
Item 1.A.	Risk Factors	56
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	57
Item 3.	Defaults Upon Senior Securities	57
Item 4.	Mine Safety Disclosure	57
Item 5.	Other Information	57
Item 6.	Exhibits	57

	Signatures	58

Table of Contents

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This report and other publicly available documents of the Company, including the documents incorporated herein by reference, contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act, including, but not limited to, statements regarding management’s belief that we are positioned for future growth, expectations regarding future plans, strategies and financial performance, regulatory developments, industry and economic trends, and other matters. Forward-looking statements, which may be based upon beliefs, expectations and assumptions of the Company's management and on information currently available to management, can be identified by the inclusion of such qualifications as “expects,” “intends,” “believes,” “may,” “will,” “would,” “could,” “should,” “plan,” “anticipate,” “estimate,” “seeks,” “possible,” “likely” or other indications that the particular statements are not historical facts and refer to future periods. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and may be outside of the Company’s control. Actual events and results may differ significantly from those described in such forward-looking statements, due to numerous factors, including:

negative economic conditions that adversely affect the economy, real estate values, the job market and other factors nationally and in our market area, in each case that may affect our liquidity and the performance of our loan portfolio;

defaults and losses on our loan portfolio;

the anticipated benefits of the Company’s recent merger with Greater Chicago Financial Corp., including estimated cost savings and anticipated strategic gains, may be significantly harder or take longer to achieve than expected or may not be achieved in their entirety as a result of unexpected factors or events;

the integration of Greater Chicago Financial Corp.’s business and operations into the Company, which included conversion of Greater Chicago Financial Corp.’s operating systems and procedures, may have unanticipated adverse results relating to the Company’s existing businesses;

the Company’s ability to achieve anticipated results from the Greater Chicago Financial Corp. transaction is dependent on the state of the economic and financial markets going forward. Specifically, the Company may incur more credit losses than expected, cost savings may be less than expected and customer attrition may be greater than expected;

risks related to potential mergers and acquisitions including potential deposit attrition, higher than expected costs, customer loss and business disruption, including, without limitation, potential difficulties in maintaining relationships with key personnel and other integration related-matters, and the potential inability to identify and successfully negotiate and complete additional successful combinations with potential merger or acquisition partners;

the financial success and viability of the borrowers of our commercial loans;

market conditions in the commercial and residential real estate markets in our market area;

changes in U.S. monetary policy, the level and volatility of interest rates, the capital markets and other market conditions that may affect, among other things, our liquidity and the value of our assets and liabilities;

competitive pressures in the financial services business;

any negative perception of our reputation or financial strength;

ability to raise additional capital on acceptable terms when needed;

ability to use technology to provide products and services that will satisfy customer demands and create efficiencies in operations;

adverse effects on our information technology systems resulting from failures, human error or cyberattacks;

adverse effects of failures by our vendors to provide agreed upon services in the manner and at the cost agreed, particularly our information technology vendors;

the impact of any claims or legal actions, including any effect on our reputation;

losses incurred in connection with repurchases and indemnification payments related to mortgages;

the soundness of other financial institutions;

changes in accounting standards, rules and interpretations and the impact on our financial statements;

our ability to receive dividends from our subsidiaries;

a decrease in our regulatory capital ratios;

legislative or regulatory changes, particularly changes in regulation of financial services companies;

increased costs of compliance, heightened regulatory capital requirements and other risks associated with changes in regulation and the current regulatory environment, including the Dodd-Frank Act;

the impact of heightened capital requirements; and

each of the factors and risks under the heading “Risk Factors” in our 2017 Form 10-K and Form 10-Qs filed with the SEC.

Because the Company’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain, there can be no assurances that future actual results will correspond to any forward-looking statements and you should not rely on any forward-looking statements. Additionally, all statements in this Form 10-Q, including forward-looking statements, speak only as of the date they are made, and the Company undertakes no obligation to update any statement in light of new information or future events.

Table of Contents

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Balance Sheets

(In thousands, except share data)


	(unaudited)
	September 30,		December 31,
	2018		2017
Assets
Cash and due from banks	$	34,366	$	37,444
Interest bearing deposits with financial institutions		15,956		18,389
Cash and cash equivalents		50,322		55,833
Securities available-for-sale, at fair value		542,338		541,439
Federal Home Loan Bank Chicago ("FHLBC") and Federal Reserve Bank Chicago ("FRBC") stock		10,511		10,168
Loans held-for-sale		2,911		4,067
Loans		1,834,949		1,617,622
Less: allowance for loan and lease losses		19,328		17,461
Net loans		1,815,621		1,600,161
Premises and equipment, net		42,752		37,628
Other real estate owned		6,964		8,371
Mortgage servicing rights, net		8,131		6,944
Goodwill and core deposit intangible		21,947		8,922
Bank-owned life insurance ("BOLI")		61,506		61,764
Deferred tax assets, net		25,116		25,356
Other assets		24,354		22,776
Total assets	$	2,612,473	$	2,383,429

Liabilities
Deposits:
Noninterest bearing demand	$	621,580	$	572,404
Interest bearing:
Savings, NOW, and money market		1,045,886		967,750
Time		464,904		382,771
Total deposits		2,132,370		1,922,925
Securities sold under repurchase agreements		44,333		29,918
Other short-term borrowings		81,875		115,000
Junior subordinated debentures		57,674		57,639
Senior notes		44,133		44,058
Notes payable and other borrowings		18,050		-
Other liabilities		15,908		13,539
Total liabilities		2,394,343		2,183,079

Stockholders’ Equity
Common stock		34,717		34,626
Additional paid-in capital		118,625		117,742
Retained earnings		167,140		142,959
Accumulated other comprehensive (loss) income		(6,058)		1,479
Treasury stock		(96,294)		(96,456)
Total stockholders’ equity		218,130		200,350
Total liabilities and stockholders’ equity	$	2,612,473	$	2,383,429


	September 30, 2018		December 31, 2017
	Common		Common
	Stock		Stock
Par value	$	1.00	$	1.00
Shares authorized		60,000,000		60,000,000
Shares issued		34,716,589		34,625,734
Shares outstanding		29,747,078		29,627,086
Treasury shares		4,969,511		4,998,648

See accompanying notes to consolidated financial statements.

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Income

(In thousands, except per share data)


	(unaudited)				(unaudited)
	Three Months Ended September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017
Interest and dividend income
Loans, including fees	$	23,377	$	18,208	$	64,625	$	52,202
Loans held-for-sale		39		34		94		95
Securities:
Taxable		2,491		2,424		7,053		7,994
Tax exempt		2,064		1,628		6,239		4,188
Dividends from FHLBC and FRBC stock		121		94		338		271
Interest bearing deposits with financial institutions		84		37		230		91
Total interest and dividend income		28,176		22,425		78,579		64,841
Interest expense
Savings, NOW, and money market deposits		642		239		1,487		695
Time deposits		1,568		1,077		4,187		3,081
Securities sold under repurchase agreements		140		4		323		10
Other short-term borrowings		311		220		916		472
Junior subordinated debentures		930		930		2,784		3,073
Senior notes		672		672		2,016		2,017
Notes payable and other borrowings		173		-		268		-
Total interest expense		4,436		3,142		11,981		9,348
Net interest and dividend income		23,740		19,283		66,598		55,493
Provision for loan and lease losses		-		300		728		1,050
Net interest and dividend income after provision for loan and lease losses		23,740		18,983		65,870		54,443
Noninterest income
Trust income		1,644		1,468		4,784		4,564
Service charges on deposits		1,923		1,722		5,284		4,955
Secondary mortgage fees		199		195		556		594
Mortgage servicing rights mark to market (loss) gain		(11)		(194)		189		(756)
Mortgage servicing income		471		451		1,550		1,330
Net gain on sales of mortgage loans		965		1,095		3,122		3,715
Securities gains (losses), net		13		102		360		(165)
Increase in cash surrender value of BOLI		347		362		946		1,071
Death benefit realized on bank-owned life insurance		-		-		1,026		-
Debit card interchange income		1,135		1,075		3,279		3,131
Gain on disposal and transfer of fixed assets, net		-		-		-		10
Other income		1,128		1,567		3,755		3,739
Total noninterest income		7,814		7,843		24,851		22,188
Noninterest expense
Salaries and employee benefits		11,165		10,049		33,727		31,167
Occupancy, furniture and equipment		1,782		1,482		4,992		4,510
Computer and data processing		1,247		1,081		5,332		3,283
FDIC insurance		162		199		483		512
General bank insurance		230		246		780		780
Amortization of core deposit intangible		136		24		254		74
Advertising expense		492		255		1,325		1,093
Debit card interchange expense		320		285		902		1,033
Legal fees		243		162		688		450
Other real estate expense, net		(370)		680		232		1,928
Other expense		3,304		2,455		9,636		8,128
Total noninterest expense		18,711		16,918		58,351		52,958
Income before income taxes		12,843		9,908		32,370		23,673
Provision for income taxes		3,201		1,831		6,978		6,023
Net income available to common stockholders	$	9,642	$	8,077	$	25,392	$	17,650

Basic earnings per share	$	0.32	$	0.27	$	0.85	$	0.60
Diluted earnings per share		0.32		0.27		0.84		0.59
Dividends declared per share		0.01		0.01		0.03		0.03

See accompanying notes to consolidated financial statements.

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income

(In thousands)


	(unaudited)				(unaudited)
	Three Months Ended September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017
Net Income	$	9,642	$	8,077	$	25,392	$	17,650

Unrealized holding (losses) gains on available-for-sale securities arising during the period		(2,801)		2,971		(12,999)		13,798
Related tax benefit (expense)		788		(1,191)		3,664		(5,556)
Holding (losses) gains after tax on available-for-sale securities		(2,013)		1,780		(9,335)		8,242

Less: Reclassification adjustment for the net gains (losses) realized during the period
Net realized gains (losses)		12		102		360		(165)
Related tax (expense) benefit		(2)		(42)		(100)		24
Net realized gains (losses) after tax		10		60		260		(141)
Other comprehensive (loss) income on available-for-sale securities		(2,023)		1,720		(9,595)		8,383

Changes in fair value of derivatives used for cash flow hedges		628		19		2,422		(445)
Related tax (expense) benefit		(176)		8		(683)		192
Other comprehensive income on cash flow hedges		452		27		1,739		(253)

Total other comprehensive (loss) income		(1,571)		1,747		(7,856)		8,130
Total comprehensive income	$	8,071	$	9,824	$	17,536	$	25,780

See accompanying notes to consolidated financial statements.

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(In thousands)


	(Unaudited)
	Nine Months Ended September 30,
	2018		2017
Cash flows from operating activities
Net income	$	25,392	$	17,650
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation of fixed assets and amortization of leasehold improvements		1,778		1,760
Change in fair value of mortgage servicing rights		(189)		756
Provision for loan and lease losses		728		1,050
Provision for deferred tax expense		6,777		5,682
Originations of loans held-for-sale		(107,947)		(113,077)
Proceeds from sales of loans held-for-sale		111,169		119,059
Net gains on sales of mortgage loans		(3,122)		(3,715)
Net discount (accretion)/premium amortization of purchase accounting adjustment on loans		(776)		(1,115)
Change in current income taxes receivable		671		111
Increase in cash surrender value of BOLI		(946)		(1,071)
Change in accrued interest receivable and other assets		533		(6,849)
Change in accrued interest payable and other liabilities		2,432		4,571
Net premium amortization/discount (accretion) on securities		2,128		1,320
Securities (gains) losses, net		(360)		165
Amortization of core deposit intangible		254		74
Amortization of junior subordinated debentures issuance costs		35		36
Amortization of senior notes issuance costs		75		77
Stock based compensation		1,641		897
Net gains on sale of other real estate owned		(716)		(454)
Provision for other real estate owned valuation losses		485		1,630
Net losses on disposal and transfer of fixed assets		-		(10)
Net cash provided by operating activities		40,042		28,547
Cash flows from investing activities
Proceeds from maturities and calls including pay down of securities available-for-sale		32,890		105,327
Proceeds from sales of securities available-for-sale		94,663		152,476
Purchases of securities available-for-sale		(71,488)		(246,971)
Net disbursements/proceeds from sales (purchases) of FHLBC stock		2,627		(2,475)
Net disbursements/proceeds from (purchases) sales of FRB stock		(1,421)		-
Net change in loans		9,988		(118,711)
Proceeds from claims on BOLI, net of premiums paid		1,204		-
Improvements in other real estate owned		(59)		-
Proceeds from sales of other real estate owned, net of participation purchase		4,292		5,512
Proceeds from disposition of premises and equipment		-		13
Net purchases of premises and equipment		(1,563)		(852)
Cash paid for acquisition, net of cash and cash equivalents retained		(35,711)		-
Net cash provided by (used in) investing activities		35,422		(105,681)
Cash flows from financing activities
Net change in deposits		(39,053)		22,330
Net change in securities sold under repurchase agreements		8,792		1,138
Net change in other short-term borrowings		(44,000)		55,000
Payment of senior note issuance costs		-		(42)
Net change in notes payable and other borrowings		(5,317)		-
Dividends paid on common stock		(892)		(888)
Purchase of treasury stock		(505)		(236)
Net cash (used in) provided by financing activities		(80,975)		77,302
Net change in cash and cash equivalents		(5,511)		168
Cash and cash equivalents at beginning of period		55,833		47,334
Cash and cash equivalents at end of period	$	50,322	$	47,502

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Cash Flows - Continued

(In thousands)



	Nine Months Ended September 30,
Supplemental cash flow information	2018		2017
Income taxes paid, net	$	-	$	230
Interest paid for deposits		5,381		3,802
Interest paid for borrowings		5,482		4,890
Non-cash transfer of loans to other real estate owned		2,194		3,701
Non-cash transfer of premises to other real estate owned		-		95

See accompanying notes to consolidated financial statements.

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Changes in

Stockholders’ Equity

(In thousands)


							Accumulated
			Additional				Other				Total
	Common		Paid-In		Retained		Comprehensive		Treasury		Stockholders’
	Stock		Capital		Earnings		Income (Loss)		Stock		Equity
Balance, December 31, 2016	$	34,534	$	116,653	$	129,005	$	(8,762)	$	(96,220)	$	175,210
Net income						17,650						17,650
Other comprehensive income, net of tax								8,130				8,130
Dividends declared and paid, ($0.03 per share)						(888)						(888)
Vesting of restricted stock		92		(92)								-
Stock based compensation				897								897
Purchase of treasury stock										(236)		(236)
Balance, September 30, 2017	$	34,626	$	117,458	$	145,767	$	(632)	$	(96,456)	$	200,763

Balance, December 31, 2017	$	34,626	$	117,742	$	142,959	$	1,479	$	(96,456)	$	200,350
Net income						25,392						25,392
Other comprehensive loss, net of tax								(7,856)				(7,856)
Dividends declared and paid, ($0.03 per share)						(892)						(892)
Vesting of restricted stock		91		(758)						667		-
Reclassification of stranded tax effects						(319)		319				-
Stock based compensation				1,641								1,641
Purchase of treasury stock										(505)		(505)
Balance, September 30, 2018	$	34,717	$	118,625	$	167,140	$	(6,058)	$	(96,294)	$	218,130

See accompanying notes to consolidated financial statements.

Closing Price ($)	Shares Out (MM)	Market Cap ($MM)
$14.03	30	$418

10-Q	2018-09-30	Quarter: 2018-09-30
10-Q	2018-06-30	Quarter: 2018-06-30
10-Q	2018-03-31	Quarter: 2018-03-31
10-K	2017-12-31	Annual: 2017-12-31
10-Q	2017-09-30	Quarter: 2017-09-30
10-Q	2017-06-30	Quarter: 2017-06-30
10-Q	2017-03-31	Quarter: 2017-03-31
10-K	2016-12-31	Annual: 2016-12-31
10-Q	2016-09-30	Quarter: 2016-09-30
10-Q	2016-06-30	Quarter: 2016-06-30
10-Q	2016-03-31	Quarter: 2016-03-31
10-K	2015-12-31	Annual: 2015-12-31

8-K	2019-01-23	Earnings, Exhibits
8-K	2019-01-23	Earnings, Exhibits
8-K	2019-01-15
8-K	2019-01-02	Other Events
8-K	2018-10-24	Earnings, Exhibits
8-K	2018-10-16
8-K	2018-10-01	Other Events
8-K	2018-07-31	Regulation FD, Exhibits
8-K	2018-07-25	Earnings, Exhibits
8-K	2018-07-17
8-K	2018-07-02	Other Events
8-K	2018-05-16	Officers, Shareholder Vote, Regulation FD
8-K	2018-05-15	Regulation FD, Exhibits
8-K	2018-05-09	Regulation FD, Exhibits
8-K	2018-04-25	Earnings, Exhibits
8-K	2018-04-18	Other Events, Exhibits
8-K	2018-04-02	Other Events
8-K	2018-02-23	Exhibits
8-K	2018-01-24	Earnings, Exhibits
8-K	2018-01-17
8-K	2018-01-02	Other Events

ALLY	Ally Financial
VLY	Valley National Bancorp
CBU	Community Bank System
CADE	Cadence Bancorporation
PEBO	Peoples Bancorp
CNBKA	Century Bancorp
STXB	Spirit of Texas Bancshares
CBFV	CB Financial Services
LMST	Limestone Bancorp
UBCP	United Bancorp

EX-10.1	osbc-20180930ex101c30f56.htm
EX-31.1	osbc-20180930ex311ee7e18.htm
EX-31.2	osbc-20180930ex3120f0767.htm
EX-32.1	osbc-20180930ex321a5e017.htm
EX-32.2	osbc-20180930ex3220ed0da.htm