Old Second Bancorp, Inc. — Q1 2024 Form 10-Q
Business context and reporting period. Old Second Bancorp is an Illinois bank holding company operating through Old Second National Bank, with 48 banking centers and retail, commercial, treasury, fiduciary, and wealth-management services. This unaudited filing covers the three months ended March 31, 2024; income and cash flow are compared with Q1 2023, while balance-sheet figures are compared with December 31, 2023. Dollar amounts below are in millions unless otherwise noted.
Key financial results and condition
| Metric | Q1 2024 / March 31, 2024 | Comparable period / change |
|---|---|---|
| Interest and dividend income | $73.3 | $70.2 in Q1 2023 |
| Net interest income | $59.8 | $64.1 in Q1 2023; down $4.3 |
| Net interest margin (GAAP) | 4.55% | 4.72% in Q1 2023; 4.59% in Q4 2023 |
| Noninterest income / expense | $10.5 / $38.2 | $7.4 / $35.9 in Q1 2023 |
| Provision for credit losses | $3.5 | $3.5 in Q1 2023 |
| Net income / diluted EPS | $21.3 / $0.47 | $23.6 / $0.52 in Q1 2023 |
| Total assets | $5,616.1 | Down $106.7 from year-end 2023 |
| Total loans / net loans | $3,969.4 / $3,925.3 | Total loans down $73.5 from year-end |
| Total deposits | $4,608.3 | Up $37.5 from year-end; down $288.9 year over year |
| Cash and cash equivalents | $98.1 | Down $2.1 from year-end |
| Total borrowings | $338.7 | Down from $516.6 at year-end; includes $220.0 of short-term FHLB advances |
| Stockholders’ equity | $596.2 | Up $18.9 from year-end |
Operating cash flow was $47.3 million, investing cash flow was positive $93.9 million, and financing cash flow was negative $143.2 million. Cash declined by $2.1 million during the quarter. The GAAP efficiency ratio was 53.59%, versus 47.52% a year earlier. The dividend declared was $0.05 per share.
Material changes versus comparable periods
- Net income fell $2.3 million year over year as interest expense rose $7.5 million, outweighing higher loan income. Net interest income declined $4.3 million and GAAP net interest margin fell 17 basis points.
- Interest-bearing deposit costs increased: the average rate was 1.18% in Q1 2024 versus 0.25% in Q1 2023. Management attributed pressure to higher market rates, deposit repricing, and borrowing costs.
- Noninterest income rose $3.2 million year over year, helped by lower securities losses, stronger mortgage-banking revenue, higher wealth-management income, and increased bank-owned life insurance income. The Q1 2023 comparison included $1.7 million of securities losses and a one-time vendor credit in other income.
- Noninterest expense increased $2.3 million, or 6.5%, mainly from salaries and benefits, occupancy, and data-processing expenses.
- Loans contracted $73.5 million from year-end, primarily from commercial, investor CRE, and multifamily paydowns, partly offset by growth in leases. Securities available-for-sale declined $24.0 million from year-end and $286.3 million year over year.
Credit, liquidity, capital, outlook, and risks
- Credit quality: Nonperforming loans were $65.1 million, or 1.6% of loans, at March 31, down from $68.8 million at year-end. Classified assets rose to $140.6 million, up 1.9% from year-end and 11.1% year over year. Net charge-offs were $3.7 million, primarily reflecting a $3.9 million partial charge-off on a commercial real estate owner-occupied loan. The allowance for loan losses was $44.1 million, or 1.1% of loans. Management cited higher historical loss rates, charge-offs, and downward risk-rating migration in setting the provision.
- Portfolio concentrations: Real-estate-related lending represented 68.7% of loans. Management noted that recent downgrades and nonaccrual increases were mainly in owner-occupied and investor CRE, including office and healthcare exposures. Securities had $86.1 million of gross unrealized losses, which management attributed to market factors and not credit deterioration; no securities credit-loss provision was recorded.
- Liquidity and funding: Management described liquidity as strong and actively monitored. The company had $98.1 million of cash, an outsized securities portfolio, borrowing capacity at the FHLB, and an undrawn $30 million correspondent-bank line. Estimated uninsured deposits were $1,146.1 million at quarter-end. Securities valued at $804.9 million were pledged. Deposit balances increased modestly during the quarter, but remained below the prior-year level.
- Capital and debt: The Bank’s March 31 Tier 1 leverage ratio was 10.89% and total risk-based capital ratio was 14.03%; both exceeded the company’s stated internal thresholds. The consolidated tangible common equity-to-tangible-assets ratio was 9.08% on the company’s non-GAAP calculation. Subordinated debentures were $59.4 million and junior subordinated debentures were $25.8 million. The $45 million senior notes were redeemed in June 2023.
- Outlook: No quantified earnings or margin guidance was provided. Management said it believes the Bank is positioned for loan growth in 2024, likely at a slower pace than in recent years. It described the balance sheet as moderately asset-sensitive and modeled annual pretax income gains of 3.9% for an immediate 0.5% rate increase and 7.9% for a 1.0% increase; modeled results are not forecasts and exclude potential management actions.
- Risks and contingencies: Key risks include economic weakness, real-estate values and borrower performance, interest-rate and funding pressures, deposit competition and uninsured-depositor behavior, liquidity, acquisitions, technology and cybersecurity, regulation, and litigation. Management said ordinary-course legal matters are not expected to have a material adverse effect; no material changes to previously disclosed risk factors were reported. Inflation-related cost and borrower-credit pressures remain possible.
- Other items: The Board declared a $0.05-per-share dividend on April 16, payable May 6, 2024. A repurchase program authorized up to 2,234,896 shares through December 31, 2024, subject to stated limits and regulatory non-objection; no shares were repurchased under it in Q1. Disclosure controls were deemed effective, with no material change in internal control over financial reporting.
Most important facts for investors to verify
- Whether deposit retention and mix, particularly uninsured and rate-sensitive balances, remain stable and how deposit costs affect net interest margin.
- Trends in classified and nonaccrual CRE loans, especially office and healthcare exposures, and whether charge-offs or required credit provisions rise.
- How loan balances and yields evolve against management’s slower-growth expectation, and whether securities paydowns or sales continue to reduce interest income.
- The sensitivity of earnings and capital to interest rates, credit losses, and the sizable unrealized loss position in the securities portfolio.
- Use of FHLB advances and other funding, available collateral and liquidity sources, and any material change in capital ratios or dividend/repurchase plans.