Old Second Bancorp (OSBC) Q1 2025 Earnings Call April 24, 2025 10:00 AM ET Company Participants James Eccher - President, CEO & Chairman of the BoardBradley Adams - EVP, COO & CFOChristopher Mcgratty - MD & Head of U.S. Bank ResearchTerry Mcevoy - Managing DirectorDavid Long - Managing DirectorBrian Martin - Director - Banks & Thrifts Conference Call Participants Nathan Race - Managing Director & Senior Research AnalystJeffrey Rulis - MD & Senior Research Analyst Operator Good morning, everyone, and thank y ...

Core Insights - Old Second Bancorp (OSBC) reported revenue of $73.11 million for Q1 2025, a 4% year-over-year increase, and an EPS of $0.45, down from $0.47 a year ago [1] - The revenue exceeded the Zacks Consensus Estimate of $70.55 million by 3.62%, while the EPS fell short of the consensus estimate of $0.46 by 2.17% [1] Financial Performance Metrics - Efficiency Ratio stood at 56.5%, better than the average estimate of 57.2% from three analysts [4] - Net Interest Margin was reported at 4.9%, surpassing the average estimate of 4.6% [4] - Total noninterest income was $10.20 million, below the average estimate of $10.55 million [4] - Net Interest Income (TE) reached $63.25 million, exceeding the average estimate of $60.65 million [4] - Net gain on sales of mortgage loans was $0.46 million, slightly above the average estimate of $0.40 million [4] Stock Performance - Shares of Old Second Bancorp have declined by 9.8% over the past month, compared to a 6.6% decline in the Zacks S&P 500 composite [3] - The stock currently holds a Zacks Rank 2 (Buy), indicating potential for outperformance in the near term [3]

Group 1: Earnings Performance - Old Second Bancorp reported quarterly earnings of $0.45 per share, missing the Zacks Consensus Estimate of $0.46 per share, and down from $0.47 per share a year ago, representing an earnings surprise of -2.17% [1] - The company posted revenues of $73.11 million for the quarter ended March 2025, surpassing the Zacks Consensus Estimate by 3.62%, compared to year-ago revenues of $70.28 million [2] - Over the last four quarters, Old Second Bancorp has surpassed consensus EPS estimates just once, but has topped consensus revenue estimates four times [2] Group 2: Stock Performance and Outlook - Old Second Bancorp shares have lost about 14.2% since the beginning of the year, while the S&P 500 has declined by -10.1% [3] - The company's earnings outlook is crucial for investors, as it includes current consensus earnings expectations for upcoming quarters and any recent changes to these expectations [4] - The current consensus EPS estimate for the coming quarter is $0.47 on $71.7 million in revenues, and $1.85 on $287.1 million in revenues for the current fiscal year [7] Group 3: Industry Context - The Zacks Industry Rank for Banks - Midwest is currently in the top 13% of over 250 Zacks industries, indicating a favorable outlook for the sector [8] - Empirical research shows a strong correlation between near-term stock movements and trends in earnings estimate revisions, suggesting that tracking these revisions can be beneficial for investors [5] - The favorable estimate revisions trend for Old Second Bancorp has resulted in a Zacks Rank 2 (Buy) for the stock, indicating expected outperformance in the near future [6]

Financial Performance - Net income for Q1 2025 was $19.8 million, a $720,000 increase from Q4 2024, but a decrease of $1.5 million from Q1 2024[1][2][4] - Adjusted net income for Q1 2025 was $20.6 million, reflecting a $639,000 increase from Q4 2024, but a decrease of $637,000 from Q1 2024[1][4] - Basic earnings per share decreased to $0.44 from $0.48, reflecting a decline of 8.33%[58] - Net income for the first quarter of 2025 was $19,830 thousand, down 6.95% from $21,312 thousand in the first quarter of 2024[58] - Net income (GAAP) for the quarter ended March 31, 2025, was $19,830 million, an increase from $19,110 million in the previous quarter[65] Income and Revenue - Net interest and dividend income increased to $62.9 million in Q1 2025, up $1.3 million (2.1%) from Q4 2024 and up $3.1 million (5.2%) from Q1 2024[4][5] - Noninterest income decreased to $10.2 million in Q1 2025, down $1.4 million (12.1%) from Q4 2024 and down $300,000 (2.9%) from Q1 2024[5][6] - Total interest and dividend income for Q1 2025 was $73,565 million, a slight decrease from $75,279 million in Q4 2024[62] - Noninterest income for Q1 2025 was $10,201 million, down from $11,610 million in Q4 2024, indicating a decrease of 12.1%[62] Expenses - Noninterest expense was $44.5 million in Q1 2025, an increase of $183,000 (0.4%) from Q4 2024 and an increase of $6.3 million (16.4%) from Q1 2024[5][6] - Total noninterest expense for Q1 2025 was $44,505 million, an increase from $44,322 million in Q4 2024, representing a 0.4% rise[64] - Salaries and employee benefits increased by $2.7 million year-over-year, primarily due to higher base salary rates and officers' incentives[29] Assets and Loans - Total assets as of March 31, 2025, were $5.73 billion, an increase from $5.65 billion at December 31, 2024[6] - Total loans decreased to $3.94 billion as of March 31, 2025, down $41.1 million from December 31, 2024, and down $29.2 million from March 31, 2024[11] - Total classified loans decreased by $7.0 million from December 31, 2024, and by $50.4 million from March 31, 2024, totaling $85.0 million as of March 31, 2025[39] Credit Quality - Nonperforming loans totaled $34.8 million at March 31, 2025, compared to $30.3 million at December 31, 2024, and $65.1 million at March 31, 2024[11] - The allowance for credit losses was $41.6 million, representing 1.1% of total loans as of March 31, 2025[33] - Net charge-offs for the first quarter of 2025 were $4.4 million, compared to $4.9 million in the fourth quarter of 2024[45] - Nonperforming loans to total loans was 0.9% as of March 31, 2025, down from 1.6% as of March 31, 2024[35] Tax and Equity - The effective tax rate for Q1 2025 was 24.3%, compared to 24.7% for Q4 2024 and 25.3% for Q1 2024[9] - Total stockholders' equity increased to $694,491 thousand, up 3.46% from $671,034 thousand[56] Strategic Developments - The company announced an agreement to acquire Evergreen Bank Group, a $1.5 billion bank holding company, to enhance consumer lending capabilities[10] - The company plans to continue remediation work on classified loans to improve cash flow and tenancy[39]

Core Viewpoint - Purcell & Lefkowitz LLP is investigating Old Second Bancorp, Inc. to determine if its directors breached fiduciary duties related to recent corporate actions [1] Group 1 - The investigation is on behalf of Old Second Bancorp's shareholders [1] - Shareholders can obtain additional information regarding their rights and options at no cost [2] - Purcell & Lefkowitz LLP specializes in representing shareholders affected by securities fraud and corporate misconduct [3]

Loan Portfolio and Originations - The total loan portfolio decreased by $61.6 million year-over-year, with approximately $1.03 billion in loan originations in 2024, excluding renewals [23]. - Commercial real estate loans represented approximately 44.3% of the loan portfolio as of December 31, 2024, down from 45.3% at year-end 2023 [24]. - The company originated approximately $98.8 million in residential mortgage loans in 2024, with proceeds from sales to third parties totaling $58.8 million [23]. - Commercial loans decreased from $841.7 million in 2023 to $800.5 million in 2024, focusing on lower middle market private equity-backed businesses [25]. - As of December 31, 2024, approximately $683.3 million, or 38.8% of the total commercial real estate loan portfolio, consisted of loans secured by owner-occupied real estate [29]. - The construction and development portfolio increased from $165.4 million at December 31, 2023, to $201.7 million at December 31, 2024, reflecting a growth in organic originations [35]. - Total real estate lending was $2.68 billion, approximately 67.2% of the loan portfolio as of December 31, 2024, down from $2.78 billion or 68.8% in 2023 [154]. Mergers and Acquisitions - The merger with Bancorp Financial is expected to be completed in the third quarter of 2025, subject to regulatory approvals and stockholder approval [18]. - Each Bancorp Financial stockholder will receive 2.5814 shares of Old Second common stock and $15.93 in cash for each share owned [17]. - The merger with Bancorp Financial may face delays or denials due to required approvals, potentially impacting stockholder ownership and voting power [139]. - Regulatory scrutiny of mergers and acquisitions could delay or restrict expansion plans [132]. - The integration of acquired businesses may present challenges that could prevent the company from achieving expected benefits from mergers and acquisitions [184]. Capital and Regulatory Compliance - The Company is required to maintain a CET1 capital ratio of 7.0%, a Tier 1 risk-based capital ratio of 8.5%, and a total risk-based capital ratio of 10.5% due to Basel III capital standards [58]. - As of December 31, 2024, the Bank was well-capitalized, exceeding the Federal Reserve's requirements and meeting Basel III Rule requirements [64]. - The Company has opted for a five-year transition period for the Current Expected Credit Loss (CECL) model, with a Day One impact of CECL adoption amounting to $3.8 million [60]. - Recent regulatory initiatives have focused on strengthening capital requirements and liquidity risk management in response to banking sector instability in 2023 [54]. - The Federal Reserve's capital guidelines suggest that additional capital may be required based on specific risk profiles and growth expectations [62]. - The Company is subject to periodic examination by the Federal Reserve and must file reports regarding its operations [66]. - The Company must comply with the Basel III Rule, which requires maintaining a 2.5% capital conservation buffer to pay dividends [81]. - The bank's concentration in commercial real estate loans is 273.3%, which is below the 300% guideline for non-owner occupied commercial real estate loans [118]. - The bank's management continues to evaluate changes to the CRA regulations and their potential impact on operations [108]. - The Dodd-Frank Act has significantly increased the burden of regulatory compliance, potentially disadvantaging the company compared to competitors [194]. Economic and Market Conditions - Economic conditions, including inflation and market volatility, may adversely affect loan demand and credit quality [132]. - Rising interest rates could negatively impact net interest margins and increase default rates among borrowers [132]. - Inflationary pressures in 2023 have led to higher costs for consumers, potentially impacting the company's financial position and results of operations [141]. - Recent bank failures have caused market volatility and investor caution, potentially affecting the company's financial condition and results of operations [189]. - The Federal Reserve raised the target Federal Funds rate to between 5.25% and 5.50% in response to inflationary pressures, impacting net interest income [157]. Risk Management - The underwriting process for loans includes independent appraisals, environmental due diligence, and assessments of property conditions to mitigate risks [30]. - The company regularly performs stress testing on both commercial real estate and multifamily portfolios to establish appropriate reserve levels and ensure adequate capital [34]. - The allowance for credit losses (ACL) may need to increase due to economic uncertainty, which could adversely affect net income and capital [152]. - The company maintains a disciplined approach to credit risk management, but failures in this area could lead to increased loan defaults and charge-offs [150]. - The company faces operational risks from dependence on third-party vendors for key systems and services [132]. - The company is exposed to risks from climate change, including physical impacts and transition risks, which could adversely affect financial condition and operations [147][148]. Technology and Cybersecurity - The company’s future success depends on its ability to keep pace with technological changes in the financial services industry [172]. - The company faces significant risks related to cyber-attacks and security breaches, which could materially affect its business operations and financial condition [173]. - Increased spending on fraud detection and prevention systems is necessary due to the rising sophistication of fraudulent activities [171]. - The development and use of Artificial Intelligence (AI) present risks, including compliance costs and potential legal liabilities, which could harm the company's reputation and operations [177]. - The final rule for cybersecurity incidents mandates banks to notify their primary federal regulator within 36 hours of discovering a significant incident [120]. Competition and Market Position - The company faces substantial competition from larger financial institutions, which may require offering higher interest rates to attract deposits [162]. - The company’s profitability is highly dependent on net interest income, which is affected by changes in interest rates and competition for deposits [158]. - The competitive landscape includes various financial institutions, with the company focusing on client service and responsiveness to attract and retain customers [43]. Human Capital and Workforce - The company employed 877 full-time equivalent employees as of December 31, 2024, indicating a focus on human capital resources [48]. - Labor market conditions have shown signs of stabilization, improving workforce availability, but talent retention remains a concern [165]. Consumer Protection and Regulatory Changes - Compliance with consumer protection laws is a critical factor in the approval of proposed expansionary proposals [128]. - The CFPB issued a final rule requiring banks to provide consumers access to their financial transaction data upon request, expected to require updates by 2026 [122]. - Nine states have passed consumer privacy protection laws, with some exempting entities regulated under GLBA [121].

Core Viewpoint - Old Second National Bancorp, Inc. (OSBC) has entered into a definitive merger agreement to acquire Bancorp Financial, Inc. and its subsidiary Evergreen Bank Group for approximately $197 million, with the consideration being 75% stock and 25% cash [1][2]. Acquisition Details - OSBC will pay $15.93 per share in cash and 2.5814 OSBC shares for each share of Evergreen, with the merger expected to close in Q3 2025, pending regulatory and shareholder approvals [2]. - Bancorp Financial operates two branches in the west and one in the south Chicago suburbs, with total assets of about $1.5 billion, gross loans of $1.2 billion, and deposits of $1.2 billion as of December 31, 2024 [3]. Post-Merger Structure - After the merger, the combined entity will have approximately $7.1 billion in total assets, $5.2 billion in total loans, and $6 billion in total deposits [4]. Strategic Rationale - The acquisition is expected to enhance OSBC's deposit mix and scale, making it the second-largest community bank under $10 billion in assets in the Chicago market, while also expanding its market reach through Evergreen's Powersport lending business [5]. - The CEO of OSBC highlighted the opportunity to enhance consumer lending capabilities and improve the balance sheet profile through the merger [6]. Financial Projections - The deal is projected to be 16% accretive to OSBC's 2026 earnings per share, with expected cost savings of 30% of Evergreen's 2025 non-interest expenses [7][6]. - Tangible book value is anticipated to dilute by 5.9%, with a three-year earn-back period, and improvements in return metrics are expected by 2026 [8]. Growth Strategy - This acquisition aligns with OSBC's inorganic growth strategy, following a previous acquisition of five Illinois branches in December 2024, aimed at expanding its presence in the Chicago region [9]. Market Performance - OSBC shares have increased by 7.8% over the past six months, outperforming the industry growth of 7.1% [10].

Financial Data and Key Metrics Changes - The company reported its Q4 2024 earnings, with management highlighting the importance of understanding the current economic environment and its impact on future performance [3][4] - Specific financial metrics and their changes were not detailed in the provided content [5] Business Line Data and Key Metrics Changes - No specific data regarding individual business lines was provided in the content [5] Market Data and Key Metrics Changes - The content does not include specific market data or key metrics changes [5] Company Strategy and Development Direction and Industry Competition - Management emphasized the forward-looking nature of their statements regarding business strategies and prospects, indicating a focus on adapting to the current economic landscape [3][4] - The company does not undertake any duty to update forward-looking statements, suggesting a cautious approach to future guidance [3] Management Comments on Operating Environment and Future Outlook - Management's comments were centered around the current economic environment and its implications for the company's performance, but specific insights were not detailed in the provided content [3][5] Other Important Information - The company discussed the use of non-GAAP financial measures, which are reconciled to GAAP counterparts in their earnings release [4] Q&A Session Summary - No specific questions or answers from the Q&A session were provided in the content [5]

Core Insights - Old Second Bancorp (OSBC) reported a revenue of $73.19 million for the quarter ended December 2024, reflecting a year-over-year increase of 4.6% [1] - The earnings per share (EPS) for the quarter was $0.44, slightly up from $0.42 in the same quarter last year, but below the consensus estimate of $0.49, resulting in an EPS surprise of -10.20% [1] - The reported revenue exceeded the Zacks Consensus Estimate of $69.85 million, leading to a revenue surprise of +4.79% [1] Financial Metrics - Net Interest Margin stood at 4.7%, surpassing the average estimate of 4.5% from three analysts [4] - The Efficiency Ratio was reported at 57.1%, higher than the average estimate of 54.6% from three analysts [4] - Total noninterest income reached $11.61 million, exceeding the estimated $10.94 million from three analysts [4] - Net interest and dividend income was $75.28 million, compared to the average estimate of $59.24 million from two analysts [4] - Wealth management income was reported at $3.30 million, above the average estimate of $2.85 million from two analysts [4] - Net gain on sales of mortgage loans was $0.52 million, slightly above the average estimate of $0.44 million from two analysts [4] Stock Performance - Shares of Old Second Bancorp have returned +4.8% over the past month, outperforming the Zacks S&P 500 composite's +2.1% change [3] - The stock currently holds a Zacks Rank 2 (Buy), indicating potential for outperformance in the near term [3]

Company Performance - Old Second Bancorp (OSBC) reported quarterly earnings of $0.44 per share, missing the Zacks Consensus Estimate of $0.49 per share, but showing an increase from $0.42 per share a year ago, resulting in an earnings surprise of -10.20% [1] - The company posted revenues of $73.19 million for the quarter ended December 2024, surpassing the Zacks Consensus Estimate by 4.79% and increasing from $69.96 million year-over-year [2] - Over the last four quarters, Old Second Bancorp has surpassed consensus revenue estimates four times, but has only exceeded consensus EPS estimates once [2] Stock Performance - Old Second Bancorp shares have increased approximately 4.9% since the beginning of the year, outperforming the S&P 500's gain of 2.9% [3] - The current consensus EPS estimate for the upcoming quarter is $0.46 on revenues of $69.95 million, and for the current fiscal year, it is $1.86 on revenues of $281.75 million [7] Industry Outlook - The Zacks Industry Rank for Banks - Midwest, which includes Old Second Bancorp, is currently in the top 16% of over 250 Zacks industries, indicating a favorable outlook for the industry [8] - Empirical research shows a strong correlation between near-term stock movements and trends in earnings estimate revisions, suggesting that the stock's performance may be influenced by these revisions [5][6]