Old Second Bancorp(OSBC) - 2024 Q1 - Quarterly Results

Financial Highlights & Executive Summary The company reported strong financial results for the quarter, highlighting key performance indicators and strategic achievements First Quarter 2024 Performance Overview Old Second Bancorp reported strong Q1 2024 results with net income of $21.3 million, driven by profitability and capital growth | Metric | Q1 2024 | Q4 2023 | Q1 2023 | | :--- | :--- | :--- | :--- | | Net Income (GAAP) | $21.3 million | $18.2 million | $23.6 million | | Diluted EPS (GAAP) | $0.47 | $0.40 | $0.52 | | Adjusted Net Income (Non-GAAP) | $21.3 million | $19.1 million | $23.4 million | | Adjusted Diluted EPS (Non-GAAP) | $0.47 | $0.42 | $0.52 | - The sequential increase in net income from Q4 2023 was primarily driven by a $4.5 million decrease in the provision for credit losses and a $1.8 million increase in noninterest income. The year-over-year decrease was mainly due to a $4.3 million decline in net interest income caused by securities portfolio contraction and higher funding costs[16] - CEO Jim Eccher emphasized the company's strong performance, noting exceptional profitability (ROAA 1.51%, ROATCE 17.8%), a resilient net interest margin, and favorable asset quality trends. He also highlighted a 25% year-over-year increase in tangible book value per share and a Common Equity Tier 1 ratio exceeding 12%[26] - The Board of Directors declared a cash dividend of $0.05 per share of common stock, payable on May 6, 2024[23] Operating Results Analysis Analysis of the company's operational performance, including net interest income, noninterest income, and expenses Net Interest Income Net interest income decreased to $59.8 million in Q1 2024, with NIM compressing to 4.55% due to rising funding costs | Metric | Q1 2024 | Q4 2023 | Q1 2023 | | :--- | :--- | :--- | :--- | | Net Interest Income (GAAP) | $59.8 million | $61.2 million | $64.1 million | | Net Interest Margin (GAAP) | 4.55% | 4.59% | 4.72% | | Net Interest Margin (TE) | 4.58% | 4.62% | 4.74% | - The yield on interest-earning assets increased by 6 basis points compared to the linked quarter, driven by loan portfolio repricing. However, this was more than offset by rising funding costs[34] - The cost of interest-bearing deposits increased to 1.18% in Q1 2024, up from 0.89% in Q4 2023 and 0.25% in Q1 2023. This was driven by exception pricing on select money market accounts and higher rates offered on time deposits to attract funds[38] - Borrowing costs decreased quarter-over-quarter due to a $58.5 million reduction in the average balance of other short-term borrowings (FHLB advances)[39] Noninterest Income Noninterest income significantly increased to $10.5 million in Q1 2024, driven by MSR adjustments and BOLI income | Noninterest Income Component | Q1 2024 | Q4 2023 | Q1 2023 | | :--- | :--- | :--- | :--- | | Wealth management | $2,561 thousand | $2,600 thousand | $2,270 thousand | | Service charges on deposits | $2,415 thousand | $2,527 thousand | $2,424 thousand | | Residential mortgage banking revenue | $946 thousand | ($358 thousand) | $356 thousand | | MSRs mark to market gain (loss) | $94 thousand | ($1,277 thousand) | ($525 thousand) | | Securities gains (losses), net | $1 thousand | ($2 thousand) | ($1,675 thousand) | | Change in cash surrender value of BOLI | $1,172 thousand | $541 thousand | $242 thousand | | Total Noninterest Income | $10,501 thousand | $8,729 thousand | $7,350 thousand | - The $1.8 million sequential increase was primarily driven by a $1.3 million positive swing in residential mortgage banking revenue (due to MSRs mark-to-market gains) and a $631,000 increase in BOLI income[42] Noninterest Expense Noninterest expense rose to $38.2 million in Q1 2024, primarily due to increased salaries and benefits, impacting the efficiency ratio | Noninterest Expense Component | Q1 2024 | Q4 2023 | Q1 2023 | | :--- | :--- | :--- | :--- | | Salaries and employee benefits | $24,312 thousand | $21,405 thousand | $22,248 thousand | | Occupancy, furniture and equipment | $3,927 thousand | $3,817 thousand | $3,475 thousand | | Computer and data processing | $2,255 thousand | $2,291 thousand | $1,774 thousand | | Total Noninterest Expense | $38,241 thousand | $37,026 thousand | $35,922 thousand | | Efficiency Ratio (GAAP) | 53.59% | 50.82% | 47.52% | - The sequential increase was primarily attributable to a $2.9 million rise in salaries and employee benefits, driven by restricted stock expense, officers' incentives, payroll taxes, and deferred executive compensation[50] - The year-over-year increase was mainly due to a $2.1 million increase in salaries and benefits, a $452,000 increase in occupancy expenses, and a $481,000 increase in computer and data processing costs[44] Provision for Credit Losses Provision for credit losses decreased to $3.5 million in Q1 2024, with net charge-offs of $3.7 million from a single CRE borrower - The company recorded a provision for credit losses of $3.5 million in Q1 2024, compared to $8.0 million in Q4 2023 and $3.5 million in Q1 2023[19] - The Q1 provision consisted of a $3.5 million provision for loans and a $44,000 reversal of provision for unfunded commitments[60] - Net charge-offs were $3.7 million in Q1 2024. The majority of these charge-offs were specific to one commercial real estate borrower, for which a $3.9 million specific allocation existed within the ACL at the end of 2023[60] Balance Sheet and Asset Quality Analysis Overview of the company's financial position, focusing on loan portfolio, asset quality, and funding sources Loans and Securities Total loans decreased to $3.97 billion due to payoffs, and the securities portfolio contracted with widened unrealized losses | Loan Category | March 31, 2024 | Dec 31, 2023 | Change (%) | | :--- | :--- | :--- | :--- | | Commercial | $796.6 million | $841.7 million | (5.4)% | | Commercial real estate – investor | $1,018.4 million | $1,034.4 million | (1.6)% | | Commercial real estate – owner occupied | $782.6 million | $796.5 million | (1.7)% | | Leases | $425.6 million | $398.2 million | 6.9% | | Total Loans | $3,969.4 million | $4,043.0 million | (1.8)% | - The quarterly reduction in total loans was attributed to $59.4 million in payoffs on seven larger loans and a typical seasonal decline in first-quarter originations[52] - The securities portfolio decreased by $24.0 million QoQ to $1.17 billion. Net unrealized losses were $85.0 million at quarter-end, compared to $84.2 million at December 31, 2023[53] Asset Quality Asset quality remained stable, with nonperforming loans decreasing to $65.1 million and classified loans modestly increasing | Asset Quality Metric | March 31, 2024 | Dec 31, 2023 | March 31, 2023 | | :--- | :--- | :--- | :--- | | Nonperforming loans | $65.1 million | $68.8 million | $64.5 million | | Nonperforming loans to total loans | 1.6% | 1.7% | 1.6% | | Allowance for credit losses (ACL) | $44.1 million | $44.3 million | $53.4 million | | ACL to total loans | 1.1% | 1.1% | 1.3% | - The decrease in nonperforming loans during Q1 2024 was driven by a partial charge-off of $3.9 million for a commercial real estate-owner occupied loan[27] - Classified loans increased by $2.7 million from the prior quarter, primarily due to additions of $15.9 million (largely three relationships), which were partially offset by $6.4 million in upgrades and $3.9 million in charge-offs[59] Deposits and Borrowings Total deposits grew to $4.61 billion, driven by CDs, while non-interest bearing deposits declined and borrowings decreased - Total deposits increased by $37.5 million (0.8%) QoQ to $4.61 billion. The growth was led by a $58.7 million increase in certificates of deposits, while non-interest bearing deposits declined by $35.0 million[65] - Short-term borrowings, consisting of FHLB advances, decreased significantly to $220.0 million as of March 31, 2024, compared to $405.0 million at the end of 2023[66] Capital Position Review of the company's capital adequacy and regulatory ratios, demonstrating financial strength Capital Ratios The company's capital position strengthened, with CET1 ratio improving to 12.02% and TCE/TA ratio increasing to 9.04% | Capital Ratio | March 31, 2024 | Dec 31, 2023 | March 31, 2023 | | :--- | :--- | :--- | :--- | | Company Ratios | | | | | Common equity tier 1 | 12.02% | 11.37% | 9.91% | | Tier 1 risk-based capital | 12.55% | 11.89% | 10.43% | | Total risk-based capital | 14.79% | 14.06% | 12.79% | | Tier 1 leverage | 10.47% | 10.06% | 8.56% | | Other Ratios | | | | | TCE / TA | 9.04% | 8.53% | 6.83% | | Tangible book value per share | $11.13 | $10.73 | $8.90 | Financial Statements Presentation of the company's consolidated financial statements, including balance sheets and income statements Consolidated Balance Sheets Unaudited consolidated balance sheets show total assets at $5.62 billion, a decrease driven by lower loans and securities | (In thousands) | March 31, 2024 | Dec 31, 2023 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $98,094 | $100,145 | | Securities available-for-sale | $1,168,797 | $1,192,829 | | Net loans | $3,925,298 | $3,998,689 | | Total assets | $5,616,072 | $5,722,799 | | Liabilities & Equity | | | | Total deposits | $4,608,275 | $4,570,746 | | Other short-term borrowings | $220,000 | $405,000 | | Total liabilities | $5,019,913 | $5,145,518 | | Total stockholders' equity | $596,159 | $577,281 | Consolidated Statements of Income Unaudited consolidated statements of income show Q1 2024 net income at $21.3 million, impacted by lower net interest income and higher noninterest expense | (In thousands, except per share) | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :--- | :--- | :--- | | Net interest and dividend income | $59,783 | $64,086 | | Provision for credit losses | $3,500 | $3,501 | | Noninterest income | $10,501 | $7,350 | | Noninterest expense | $38,241 | $35,922 | | Income before income taxes | $28,543 | $32,013 | | Net income | $21,312 | $23,607 | | Diluted earnings per share | $0.47 | $0.52 | Quarterly Financial Data Key unaudited financial data for the past five quarters shows declining total assets and moderating net income | (In thousands) | Q1 2024 | Q4 2023 | Q3 2023 | Q2 2023 | Q1 2023 | | :--- | :--- | :--- | :--- | :--- | :--- | | Total Assets | $5,676,723 | $5,694,734 | $5,778,518 | $5,911,491 | $5,898,647 | | Total Deposits | $4,580,424 | $4,577,734 | $4,658,064 | $4,794,068 | $4,998,349 | | Net Interest Income | $59,783 | $61,235 | $63,030 | $63,580 | $64,086 | | Net Income | $21,312 | $18,225 | $24,335 | $25,562 | $23,607 | Non-GAAP Reconciliations Reconciliation of non-GAAP financial measures to their most comparable GAAP equivalents for enhanced transparency Reconciliation of Non-GAAP Measures Detailed reconciliations of non-GAAP financial measures to GAAP counterparts provide additional insight into performance - The company considers select non-GAAP financial measures useful for decision-making and evaluating period-to-period comparisons by excluding items not indicative of primary business operating results[2] | Reconciliation (In thousands) | Q1 2024 | Q4 2023 | Q1 2023 | | :--- | :--- | :--- | :--- | | Net Income (GAAP) | $21,312 | $18,225 | $23,607 | | Pre-tax adjustments: | | | | | Litigation related expenses | - | $1,200 | - | | Losses/(gains) on branch sales, net | - | $19 | ($306) | | Adjusted Net Income (Non-GAAP) | $21,312 | $19,116 | $23,381 | | Performance Ratios (Non-GAAP) | Q1 2024 | Q4 2023 | Q1 2023 | | :--- | :--- | :--- | :--- | | Net interest margin (TE) | 4.58% | 4.62% | 4.74% | | Adjusted efficiency ratio | 53.09% | 48.76% | 47.66% | | Return on avg. tangible common equity | 17.80% | 16.43% | 25.54% |