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I

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 March 31, 2022

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For transition period from          to          

Commission File Number 000-10537

Graphic

(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, AuroraIllinois     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 filerAccelerated filer

Non-accelerated filerSmaller reporting companyEmerging 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 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock

OSBC

The Nasdaq Stock Market

As of May 5, 2022, the Registrant has 44,461,045 shares of common stock outstanding at $1.00 par value per share.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This report and other publicly available documents of the Company contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act, including, but not limited to, management’s expectations regarding future plans, strategies and financial performance, including regulatory developments, industry and economic trends and estimates and assumptions underlying accounting policies.  Forward-looking statements are based on our current beliefs, expectations and assumptions and on information currently available and, can be identified by the use of words such as “expects,” “intends,” “believes,” “may,” “will,” “would,” “could,” “should,” “plan,” “anticipate,” “estimate,” “possible,” “likely” or the negative thereof as well as other similar words and expressions of the future. Forward-looking statements are subject to risks, uncertainties and assumptions that are difficult to predict as to timing, extent, likelihood and degree of occurrence, which could cause our actual results to differ materially from those anticipated in or by such statements. Potential risks and uncertainties include, but are not limited to, the following:

our ability to execute our growth strategy;
the continuing impact of COVID-19 and its variants on our business, including the impact of the actions taken by governmental authorities to try and contain the virus or address the impact of the virus on the United States economy and the resulting effect of these items on our operations, liquidity and capital position, and on the financial condition of our borrowers and other customers;
negative economic conditions, including inflation, that may 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;
risks with respect to our ability to successfully expand and integrate businesses and operations that we acquire, such as the recent acquisition of West Suburban Bancorp, Inc., as well our ability to identify and complete future mergers or acquisitions;
the financial success and viability of the borrowers of our commercial loans;
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;
the transition away from LIBOR to an alternative reference rate;
competitive pressures from other financial service businesses and from nontraditional financial technology (“FinTech”) companies;
any negative perception of our reputation or financial strength;
our ability to raise additional capital on acceptable terms when needed;
our ability to raise cost-effective funding to support business plans when needed;
our 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 system 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 and those vendors performing a service on the Company’s behalf;
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 and other counter-party risk;
changes in accounting standards, rules and interpretations and the related impact on our financial statements, including assumptions surrounding the ongoing impact of our adoption of the Current Expected Credit Losses (“ CECL”) model, which are subject to change based on a number of factors including changes in our macroeconomic forecasts, credit quality, loan composition and other factors;
our ability to receive dividends from our subsidiaries;
a decrease in our regulatory capital ratios or negative changes in our capital position;
adverse federal or state tax assessments, or changes in tax laws or policies;
risks associated with actual or potential litigation or investigations by customers, regulatory agencies or others;
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  changes as a result of the current presidential administration and Democratic control of Congress;
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 (including COVID-19), war or terrorist activities, such as the war in Ukraine, essential utility outages, deterioration in the global economy, instability in the credit markets, disruptions in our customers’ supply chains or disruption in transportation;
changes in trade policy and any related tariffs; and
each of the factors and risks under the heading “Risk Factors” in our 2021 Annual Report on Form 10-K and in subsequent filings we make 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, except as required by applicable law.

3

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Balance Sheets

(In thousands, except share data)

(unaudited)

March 31, 

December 31, 

    

2022

    

2021

Assets

Cash and due from banks

$

41,511

$

38,565

Interest earning deposits with financial institutions

593,166

713,542

Cash and cash equivalents

634,677

752,107

Securities available-for-sale, at fair value

1,816,450

1,692,488

Federal Home Loan Bank Chicago ("FHLBC") and Federal Reserve Bank Chicago ("FRBC") stock

21,974

13,257

Loans held-for-sale

8,075

4,737

Loans

3,402,370

3,421,948

Less: allowance for credit losses on loans

44,308

44,281

Net loans

3,358,062

3,377,667

Premises and equipment, net

86,156

88,005

Other real estate owned

2,374

2,356

Mortgage servicing rights, at fair value

10,376

7,097

Goodwill

86,332

86,332

Core deposit intangible

15,639

16,304

Bank-owned life insurance ("BOLI")

105,424

105,300

Deferred tax assets, net

22,628

6,100

Other assets

55,579

60,439

Total assets

$

6,223,746

$

6,212,189

Liabilities

Deposits:

Noninterest bearing demand

$

1,461,712

$

1,428,055

Interest bearing:

Savings, NOW, and money market

3,605,457

3,534,367

Time

477,556

503,810

Total deposits

5,544,725

5,466,232

Securities sold under repurchase agreements

33,521

50,337

Junior subordinated debentures

25,773

25,773

Subordinated debentures

59,233

59,212

Senior notes

44,506

44,480

Notes payable and other borrowings

17,992

19,074

Other liabilities

31,678

45,054

Total liabilities

5,757,428

5,710,162

Stockholders’ Equity

Common stock

44,705

44,705

Additional paid-in capital

203,190

202,443

Retained earnings

261,807

252,011

Accumulated other comprehensive (loss) income

(37,484)

8,768

Treasury stock

(5,900)

(5,900)

Total stockholders’ equity

466,318

502,027

Total liabilities and stockholders’ equity

$

6,223,746

$

6,212,189

March 31, 2022

December 31, 2021

Common

Common

Stock

    

Stock

Par value

$

1.00

$

1.00

Shares authorized

60,000,000

60,000,000

Shares issued

44,705,150

44,705,150

Shares outstanding

44,461,045

44,461,045

Treasury shares

244,105

244,105

See accompanying notes to consolidated financial statements.

4

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Income

(In thousands, except per share data)

(unaudited)

Three Months Ended March 31, 

    

2022

    

2021

    

Interest and dividend income

Loans, including fees

$

36,376

$

22,207

Loans held-for-sale

57

55

Securities:

Taxable

5,047

1,615

Tax exempt

1,433

1,307

Dividends from FHLBC and FRBC stock

153

115

Interest bearing deposits with financial institutions

269

92

Total interest and dividend income

43,335

25,391

Interest expense

Savings, NOW, and money market deposits

397

241

Time deposits

277

500

Securities sold under repurchase agreements

11

31

Junior subordinated debentures

280

280

Subordinated debentures

546

-

Senior notes

485

673

Notes payable and other borrowings

103

123

Total interest expense

2,099

1,848

Net interest and dividend income

41,236

23,543

Release of credit losses

-

(3,000)

Net interest and dividend income after release of credit losses

41,236

26,543

Noninterest income

Wealth management

2,698

2,151

Service charges on deposits

2,090

1,195

Secondary mortgage fees

139

322

Mortgage servicing rights mark to market gain

2,978

1,113

Mortgage servicing income

518

567

Net gain on sales of mortgage loans

1,495

3,721

Change in cash surrender value of BOLI

124

334

Card related income

2,550

1,447

Other income

901

450

Total noninterest income

13,493

11,300

Noninterest expense

Salaries and employee benefits

19,967

13,506

Occupancy, furniture and equipment

3,733

2,467

Computer and data processing

6,228

1,298

FDIC insurance

410

201

General bank insurance

315

276

Amortization of core deposit intangible

665

120

Advertising expense

182

60

Card related expense

534

593

Legal fees

294

55

Consulting & management fees

605

416

Other real estate (gain) expense, net

(12)

36

Other expense

5,365

2,710

Total noninterest expense

38,286

21,738

Income before income taxes

16,443

16,105

Provision for income taxes

4,423

4,226

Net income

$

12,020

$

11,879

Basic earnings per share

$

0.27

$

0.41

Diluted earnings per share

0.27

0.40

Dividends declared per share

0.05

0.01

See accompanying notes to consolidated financial statements.

5

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Comprehensive (Loss) Income

(In thousands)

(unaudited)

Three Months Ended March 31, 

    

2022

    

2021

    

Net Income

$

12,020

$

11,879

Unrealized holding losses on available-for-sale securities arising during the period

(64,829)

(4,813)

Related tax benefit

18,153

1,371

Holding losses, after tax, on available-for-sale securities

(46,676)

(3,442)

Less: Reclassification adjustment for the net gains (losses) realized during the period

Net realized gains (losses)

-

-

Related tax benefit (expense)

-

-

Net realized gains (losses) after tax

-

-

Other comprehensive loss on available-for-sale securities

(46,676)

(3,442)

Changes in fair value of derivatives used for cash flow hedges

589

2,703

Related tax expense

(165)

(757)

Other comprehensive income on cash flow hedges

424

1,946

Total other comprehensive loss

(46,252)

(1,496)

Total comprehensive (loss) income

$

(34,232)

$

10,383

Accumulated

Accumulated

Total

Unrealized Gain

Unrealized Gain

Accumulated Other

(Loss) on Securities

(Loss) on Derivative

Comprehensive

(unaudited)

Available-for -Sale

Instruments

Income/(Loss)

For the Three Months Ended

Balance, December 31, 2020

$

17,413

$

(2,651)

$

14,762

Other comprehensive (loss) income, net of tax

(3,442)

1,946

(1,496)

Balance, March 31, 2021

$

13,971

$

(705)

$

13,266

Balance, December 31, 2021

$

11,139

$

(2,371)

$

8,768

Other comprehensive (loss) income, net of tax

(46,676)

424

(46,252)

Balance, March 31, 2022

$

(35,537)

$

(1,947)

$

(37,484)

See accompanying notes to consolidated financial statements.

6

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(In thousands)

Three Months Ended March 31, 

2022

    

2021

    

Cash flows from operating activities

Net income

$

12,020

$

11,879

Adjustments to reconcile net income to net cash provided by operating activities:

Net premium / discount amortization on securities

1,809

534

Release of provision for credit losses

-

(3,000)

Originations of loans held-for-sale

(32,739)

(78,284)

Proceeds from sales of loans held-for-sale

30,791

85,914

Net gains on sales of mortgage loans

(1,495)

(3,721)

Mortgage servicing rights mark to market loss

(2,978)

(1,113)

Net accretion of discount on loans

(2,382)

(520)

Net change in cash surrender value of BOLI

(124)

(334)

Net gains on sale of other real estate owned

(49)

(20)

Provision for other real estate owned valuation losses

-

6

Depreciation of fixed assets and amortization of leasehold improvements

1,086

765

Amortization of core deposit intangibles

665

120

Change in current income taxes receivable

2,955

3,557

Deferred tax expense (benefit)

1,458

668

Change in accrued interest receivable and other assets

902

2,200

Accretion of purchase accounting adjustment on time deposits

(424)

-

Amortization of senior and subordinated debentures issuance costs

47

26

Change in accrued interest payable and other liabilities

(12,011)

(3,401)

Stock based compensation

747

114

Net cash provided by operating activities

278

15,390

Cash flows from investing activities

Proceeds from maturities and calls, including pay down of securities available-for-sale

75,650

7,259

Purchases of securities available-for-sale

(266,250)

(109,708)

Purchases of FHLBC/FRBC stock

(8,717)

-

Net change in loans

21,900

75,858

Proceeds from sales of other real estate owned, net of participations and improvements

118

325

Proceeds from disposition of fixed assets

1,250

-

Net purchases of premises and equipment

(487)

(343)

Net cash used in investing activities

(176,536)

(26,609)

Cash flows from financing activities

Net change in deposits

78,917

119,469

Net change in securities sold under repurchase agreements

(16,816)

10,341

Repayment of term note

(1,000)

(1,000)

Net change in notes payable and other borrowings, excluding term note

(81)

(78)

Dividends paid on common stock

(2,192)

(293)

Purchase of treasury stock

-

(6,178)

Net cash provided by financing activities

58,828

122,261

Net change in cash and cash equivalents

(117,430)

111,042

Cash and cash equivalents at beginning of period

752,107

329,903

Cash and cash equivalents at end of period

$

634,677

$

440,945

See accompanying notes to consolidated financial statements.

7

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Changes in

Stockholders’ Equity

(In thousands)

Accumulated

Additional

Other

Total

(unaudited)

Common

Paid-In

Retained

Comprehensive

Treasury

Stockholders’

    

Stock

    

Capital

    

Earnings

    

Income (Loss)

    

Stock

    

Equity

For the Three Months Ended

Balance, December 31, 2020

$

34,957

$

122,212

$

236,579

$

14,762

$

(101,423)

$

307,087

Net income

11,879

11,879

Other comprehensive loss, net of tax

(1,496)

(1,496)

Dividends declared and paid, ($0.01 per share)

(293)

(293)

Vesting of restricted stock

(2,251)

2,251

-

Stock based compensation

114

114

Purchase of treasury stock from taxes withheld on stock awards

(577)

(577)

Purchase of treasury stock from stock repurchase program