PDF ATTACHED: OSBC Company Update 1-11-17
Close $10.55 / “Market-Perform”/ $10.50 Price Target / HQ= Aurora, IL/ $303 Mil. Mkt. Cap
- OSBC issued $45 Mil. in 5.75% Senior Notes to repay a similar amount of Senior Term & Sub Debt
- Adjusting 2017 and 2018 EPS lower by $0.03 to reflect higher interest cost
- Minimal impact to RBC ratio as only 20% of sub debt qualified for favorable regulatory capital treatment
- Increasing Price Target by $2 to $10.50
On December 13th OSBC announced the issuance of $45 Million in 10 Year Fixed-to-Floating Senior Notes. The notes are fixed at a rate of 5.75% for the first five years and then float at 3 Month LIBOR plus 385 bps for the next five years.
OSBC intends to use the $44.3 Million in proceeds along with existing cash on hand to repay $45 Million of Subordinated Debt and $500,000 of Senior Secured Term Debt. The cost of the new debt (5.75% for first five years) exceeds the cost of existing Subordinated Debt (3Month LIBOR + 150 bps) and Senior Secured Debt (3 Month LIBOR + 90 bps) by approximately 325 and 385 bps, respectively. We estimate this will clip earnings by $1.4 Mil. or $0.03 per share, annually. Presumably, management opted to refinance today rather than wait until March 2018—the maturity date of Subordinated Debt; given the possibility that rates could be higher at that time given the recent increase in long term rates following the presidential election. Further, the existing Subordinated Debt was approaching maturity and as such only $9 Mil. or 20% of the Debt was receiving favorable regulatory capital treatment. We estimate the Pro Forma Risk Based Capital ratio at 3Q16 will approximate 14.8% vs. the originally reported 15.42%.
We are lowering our 2017 and 2018 EPS to $0.61 and $0.68 from $0.64 and $0.71, respectively, to reflect the higher interest payments. Our model assumes no change in the current effective tax rate (~36%) though we estimate each 1% drop in the rate could add ~$0.01 to our 2018 EPS. We are maintaining our Market Perform rating and boosting our Price Target by $2 to $10.50 to reflect increased industry valuations. Our Price Target reflects ~17x our 2017 EPS and 170% of forward Tangible Book Value.