OLD SECOND BANCORP INC Q3 FY2024 earnings call

Key Points from Jim Eccher - Net income was $23M ($0.50 per diluted share) with return on assets 1.63% and return on average tangible common equity 17.14%. - Balance sheet strengthened with tangible equity ratio at 10.14% and common equity Tier-1 at 12.86%. - Dividend increased by 20%. - Loan growth of $14.5M from prior linked quarter, driven by commercial, lease, and construction. - Credit quality improved with substandard and criticized loans down from peak levels. - Non-interest income had flat growth with various components. - Expense discipline strong, efficiency ratio excellent when excluding certain items. ### From Brad Adams - Net interest income increased to $60.6 million, NIM increased 1 basis point. - Deposit flows stable, average deposits decreased by $91 million quarter over linked quarter. - Mentioned impact of rate cuts on margin and upcoming branch acquisition closing in early December. - Discussed capital deployment and focus on balance sheet optimization.

Net income for the third quarter of 2024 was $23 million or $0.50 per diluted share, with a return on assets of 1.63% and return on average tangible common equity of 17.14%. The tax equivalent efficiency ratio was 53.38%. Total loans increased by $14.5 million from the prior linked quarter end, driven by growth in commercial, lease, and construction portfolios. Loan-to-deposit ratio was 89% as of September 30, 2024. Non-interest income was relatively flat, while non-interest expense increased primarily due to incentive accruals and acquisition costs.

Margin Impact - Anticipates margin impact from rate cuts, with approximately 7 basis points per 25 basis point cut impact. - Upcoming branch acquisition expected to mitigate margin decline to some extent. ### Loan Growth - Confident in mid-single-digit organic loan growth in 2025. ### Capital and M&A - Open to capital deployment through buybacks or inorganic growth, with interest in acquiring $500 million to $3 billion potential partners.

Risks - Market volatility, including election results and interest rate movements, impacting loan growth and margin. - Credit risks related to loan portfolio, though asset quality metrics improving. - Inflation and fiscal factors affecting expense and deposit pricing. - Uncertainty around economic conditions and its impact on profitability.

Q: Talk about loan pipelines today and thoughts on organic loan growth over the next several quarters for the bank.

A: Jim Eccher said pipelines are softer than second and third quarters but better than a year ago, expecting mid-single-digit organic loan growth in 2025.

Q: Question on expenses, technology spending, and core expense growth next year.

A: Brad Adams said salary and benefits likely to drive mid-single-digit expense growth next year, with modest technology spend.

Q: 7 basis points per cut mapping to margin, thoughts on terminal margin.

A: Brad Adams stated Old Second could be north of a 4% margin given its balance sheet construction.

Q: On capital, buyback timing, and inorganic opportunities.

A: Jim Eccher said capital deployment options including buybacks and inorganic growth are on the table, interested in $500M to $3B partners.

Q: On loan pipelines, criticized loans, and provisioning.

A: Jim Eccher discussed loan pipeline softness, criticized loan movements, and expected provisioning in $2 million range per quarter.

Q: On margin outlook and branch deal offset.

A: Brad Adams said branch deal impact on margin is highly dependent on redeployment of proceeds, with flexibility in short and variable rate investments.

Q: On M&A, stock buyback, and capital build.

A: Brad Adams said buybacks and M&A can happen simultaneously, with capital levels affected by branch purchase but organic capital build ongoing.

Q: On non-accrual loans, industry, and credit resolutions.

A: Jim Eccher discussed a C&I credit in the scrapping industry as a main non-accrual inflow, with expectations of less costly credit resolutions.

Q: On deposit flows, seasonality, and non-interest-bearing deposits.

A: Brad Adams said deposit flows stable, with non-interest-bearing deposit flows being liquidity and seasonality related, not significant.

Q: On balance sheet optimization and margin guidance.

A: Brad Adams stated aim to earn excess spread on marginal balance sheet growth and was cautious on tax rate guidance for next quarter.