Old Second Bancorp(US:OSBC)2025-05-09 16:00Cautionary Note Regarding Forward-Looking Statements This section outlines potential risks and uncertainties, including economic conditions, strategic execution, and the pending Bancorp Financial merger, that could materially affect Old Second Bancorp's actual results - Key risks include economic conditions (inflation, real estate values), ability to execute growth strategies, integration of acquired businesses, and changes in U.S. monetary policy and interest rates10 - The company highlights specific risks related to its pending merger with Bancorp Financial, Inc., such as failure to obtain regulatory or stockholder approvals, not realizing anticipated benefits, and potential business disruptions12 - Operational and market risks mentioned include competitive pressures from FinTech companies, cybersecurity threats, vendor failures, and the impact of geopolitical events like the war in Ukraine and conflicts in the Middle East10 PART I – FINANCIAL INFORMATION Financial Statements The unaudited consolidated financial statements for Q1 2025 show total assets increased to $5.73 billion, with net income decreasing to $19.8 million from $21.3 million in Q1 2024 Consolidated Balance Sheets As of March 31, 2025, total assets increased to $5.73 billion, driven by higher cash, while net loans slightly decreased and total deposits grew to $4.85 billion Consolidated Balance Sheet Highlights (in thousands) | Account | March 31, 2025 | December 31, 2024 | | :--- | :--- | :--- | | Cash and cash equivalents | $256,121 | $99,329 | | Net loans | $3,898,681 | $3,937,717 | | Total assets | $5,727,686 | $5,649,377 | | Total deposits | $4,852,791 | $4,768,731 | | Total liabilities | $5,033,195 | $4,978,343 | | Total stockholders' equity | $694,491 | $671,034 | Consolidated Statements of Income For Q1 2025, net income was $19.8 million ($0.43 per diluted share), down from $21.3 million ($0.47 per diluted share) in Q1 2024, primarily due to higher noninterest expenses despite increased net interest income Income Statement Summary (in thousands, except per share data) | Metric | Q1 2025 | Q1 2024 | | :--- | :--- | :--- | | Net interest and dividend income | $62,904 | $59,783 | | Provision for credit losses | $2,400 | $3,500 | | Noninterest income | $10,201 | $10,501 | | Noninterest expense | $44,505 | $38,241 | | Net income | $19,830 | $21,312 | | Diluted earnings per share | $0.43 | $0.47 | Consolidated Statements of Cash Flows Cash and cash equivalents increased by $156.8 million in Q1 2025, driven by net cash inflows from investing activities ($76.7 million) and financing activities ($62.2 million), partially offset by operating activities Cash Flow Summary (in thousands) | Activity | Three Months Ended March 31, 2025 | Three Months Ended March 31, 2024 | | :--- | :--- | :--- | | Net cash provided by operating activities | $17,838 | $47,389 | | Net cash provided by investing activities | $76,737 | $93,890 | | Net cash provided by (used in) financing activities | $62,217 | ($143,330) | | Net change in cash and cash equivalents | $156,792 | ($2,051) | Notes to Consolidated Financial Statements The notes detail accounting policies, acquisitions, and financial instruments, highlighting the December 2024 branch acquisition and the pending Bancorp Financial merger announced in February 2025 - On December 6, 2024, the Company acquired five branches from First Merchants Bank, recording $24.8 million in assets and $268.0 million in deposits, resulting in $6.8 million of goodwill3233 - A merger agreement was signed with Bancorp Financial, Inc. on February 24, 2025, with the transaction expected to close in the third quarter of 2025, pending regulatory and stockholder approvals3840 - The allowance for credit losses (ACL) on loans was $41.6 million as of March 31, 2025, or 1.05% of total loans, with a provision of $2.4 million recorded in Q1 202557210 - The Company and its subsidiary bank exceeded all regulatory capital requirements to be considered 'well capitalized' as of March 31, 202598101 Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q1 2025 financial results, noting a decrease in net income to $19.8 million due to higher noninterest expenses, despite growth in net interest income and improved asset quality Overview Net income for Q1 2025 was $19.8 million ($0.43 per diluted share), a decrease from Q1 2024, primarily due to a $6.3 million rise in noninterest expense Quarterly Financial Highlights | Metric | Q1 2025 | Q1 2024 | | :--- | :--- | :--- | | Net Income | $19.8M | $21.3M | | Diluted EPS | $0.43 | $0.47 | | Net Interest Income | $62.9M | $59.8M | | Noninterest Expense | $44.5M | $38.2M | - Adjusted net income (a non-GAAP measure) was $20.6 million for Q1 2025, compared to $21.2 million for Q1 2024160162 - Classified assets decreased by 22.5% to $88.4 million at March 31, 2025, from $114.1 million at December 31, 2024165 Results of Operations Pretax income for Q1 2025 decreased to $26.2 million, mainly due to a $6.3 million increase in noninterest expense, partially offset by a $3.1 million rise in net interest income - Net interest income increased by $3.1 million year-over-year, primarily due to a significant decrease in interest expense on other short-term borrowings168 - Noninterest income decreased by $0.3 million year-over-year, mainly due to a $0.5 million decline in residential mortgage banking revenue and a $0.7 million decrease in the change in cash surrender value of BOLI165181 - Noninterest expense rose by $6.3 million (16.4%) year-over-year, driven by increases in salaries and benefits (+$2.7 million), OREO expense (+$1.8 million), and occupancy costs (+$0.6 million)167185 - The effective tax rate was 24.3% in Q1 2025, compared to 25.3% in Q1 2024187 Financial Condition Total assets increased to $5.73 billion due to higher cash, while total loans decreased and total deposits grew to $4.85 billion, with improved asset quality and strong capital ratios - Total loans decreased by $41.1 million in Q1 2025, primarily due to paydowns in the commercial and commercial real estate-owner occupied portfolios192 - Nonperforming loans increased to $34.8 million (0.9% of total loans) at Q1 2025 from $30.3 million (0.8% of total loans) at year-end 2024194 - Net charge-offs were $4.4 million in Q1 2025, primarily from one commercial relationship and one construction loan202 - Total deposits increased by $84.1 million in Q1 2025, with growth across non-interest bearing demand, savings, NOW, and money market accounts, partially offset by a decline in time deposits219 - The tangible common equity to tangible assets ratio (non-GAAP) increased to 10.40% at March 31, 2025, from 10.11% at December 31, 2024230231 Liquidity The company maintains strong liquidity, with cash and cash equivalents increasing to $256.1 million due to net cash inflows from financing and investing activities, supplemented by available credit lines - Cash and cash equivalents increased by $156.8 million during Q1 2025 to a total of $256.1 million233238 - Net cash from financing activities was a source of $62.2 million, primarily due to an $84.3 million increase in deposits, offset by a $20.0 million paydown of other short-term borrowings237 - The company has access to additional funding sources, including an undrawn $30.0 million line of credit with a third-party financial institution238 Quantitative and Qualitative Disclosures about Market Risk The company manages interest rate risk with a moderately asset-sensitive balance sheet, projecting a 7.7% increase in net interest income from a 100 basis point increase in rates - The company's balance sheet has a moderately asset-sensitive profile, where variable rate assets reprice faster than its deposit base243 Net Interest Income Sensitivity Analysis (March 31, 2025) | Immediate Rate Change | Dollar Change (in thousands) | Percent Change | | :--- | :--- | :--- | | +200 bps | $39,012 | 14.5% | | +100 bps | $20,661 | 7.7% | | -100 bps | $(21,166) | (7.9)% | | -200 bps | $(41,942) | (15.6)% | - Management believes the economic effect of recently enacted tariffs will manifest as higher prices, reversing the course of lower inflation, which could put upward pressure on expenses and weaken borrower financial conditions248 Controls and Procedures The CEO and CFO concluded that disclosure controls and procedures were effective, with no material changes to internal controls over financial reporting during Q1 2025 - The CEO and CFO concluded that as of March 31, 2025, the Company's disclosure controls and procedures were effective249 - No changes in internal control over financial reporting occurred during the quarter ended March 31, 2025, that have materially affected, or are reasonably likely to materially affect, these controls250 PART II – OTHER INFORMATION Legal Proceedings The company is involved in ordinary course legal actions, with management expecting no material adverse effect on its financial position - The Company is involved in legal actions arising from normal business activities, but management believes the ultimate liabilities will not have a material adverse effect on its financial position253 Risk Factors No material changes have occurred to the risk factors previously disclosed in the Company's 2024 Annual Report on Form 10-K - No material changes have occurred to the risk factors disclosed in the 2024 Annual Report on Form 10-K254 Unregistered Sales of Equity Securities and Use of Proceeds A stock repurchase program for up to 2,234,896 shares was authorized in December 2024, with no shares repurchased during Q1 2025 - A stock repurchase program for up to 2,234,896 shares was authorized in December 2024 and is effective until December 31, 2025255 - No shares were repurchased during the quarter ended March 31, 2025257258 Defaults Upon Senior Securities There were no defaults upon senior securities - There were no defaults upon senior securities259 Other Information No director or officer adopted or terminated a Rule 10b5-1 or non-Rule 10b5-1 trading arrangement in Q1 2025 - No director or officer adopted or terminated a Rule 10b5-1 or non-Rule 10b5-1 trading arrangement in Q1 2025261 Exhibits This section lists exhibits filed with the Form 10-Q, including the Bancorp Financial merger agreement and CEO/CFO certifications - Key exhibits include the merger agreement with Bancorp Financial, Inc., and certifications by the CEO and CFO pursuant to Sarbanes-Oxley264