OLD SECOND BANCORP INC Q1 FY2025 earnings call

Financial Performance

• Net income was $19.8 million or $0.43 per diluted share, ROA was 1.42%, return on average tangible common equity was 14.70%, and tax equivalent efficiency ratio was 55.48%.

Impacted Factors

• MSR mark - to - market losses were $575,000, merger - related expenses were $446,000, and provision for credit losses was $2.4 million.

Balance Sheet

• Tangible common equity ratio increased from 10.04% to 10.34%, common equity Tier 1 was 13.47%. Net interest margin was strong despite market rate decline; tax equivalent income on average earning assets increased $221,000 or 0.3% year - over - year, and interest expense on average interest - bearing liabilities decreased $2.9 million or 21.3%.

Loan Portfolio

• Total loans decreased by $41.1 million from prior linked quarter; purchase participation portfolio declined $46 million. $4.4 million gross loan charge - offs in first quarter, nonperforming assets decreased 27.2% since year - end 2024, criticized and substandard loans decreased.

Noninterest Income

• Wealth management fees and service charges on deposits grew; mortgage banking income was affected by MSR but flat excluding that impact; other income increased.

Expense Control

• Total noninterest expense was $183,000 more than prior linked quarter; efficiency ratio was excellent. Focus on managing liquidity, capital, and building commercial loan origination capability for the rest of the year.

Net income was $19.8 million or $0.43 per diluted share in the first quarter of 2025, with ROA at 1.42%. Return on average tangible common equity was 14.70% and the tax equivalent efficiency ratio was 55.48%. Net interest income increased by $1.3 million or 2.1% to $62.9 million for the quarter, an increase of $3.1 million or 5.2% from the year - ago quarter. Total loans decreased by $41.1 million from the prior linked quarter in the first quarter of 2025, primarily due to net paydowns in commercial real estate owner occupied and multifamily portfolios, and the purchase participation portfolio declined $46 million. Total cost of deposits was 82 basis points for the first quarter of 2025. $4.4 million of gross loan charge - offs were recorded in the first quarter of 2025. Nonperforming assets decreased by 27.2% since year - end 2024. Noninterest income saw growth in wealth management fees ($528,000 or 20.6% increase) and service charges on deposits ($304,000 or 12.6% increase), while mortgage banking income was affected by MSR mark - to - market valuations but flat excluding that impact. Total noninterest expense for the first quarter of 2025 was $183,000 more than the prior linked quarter.

Future Focus

• Focus on managing liquidity, capital, and building commercial loan origination capability to create a more stable long - term balance sheet mix with more loans and less securities.
• Brad believes inflation and political factors may affect rate cuts, but net interest margin is more optimistic due to deposit growth and Evergreen merger impact.
• Expect loan growth to be better in the second half of the year than the first half, considering risk - adjusted returns and being cautious with loan issuance, and may consider loan purchases for growth.

• Market interest rate volatility risk affecting net interest margin and asset value.
• Global tariff uncertainties impacting economy and customer loan demand.
• Evergreen merger may bring higher loss history than peers risk.
• Credit risk despite criticized and substandard loans decrease, macroeconomic weakness still may lead to losses.

Q: Chris McGratty asked Brad about the margin outperformance and the impact of future rate cuts.

A: Brad said he doesn't think there will be three rate cuts as inflation is sticky and political factors are at play, and he is significantly more bullish on the margin than before, with deposit pickup and Evergreen merger contributing to margin levers.

Q: Chris McGratty asked about the loan participations and if the loan book has bottomed.

A: James Eccher said they have been aggressively pushing out the purchase participation book which represents about 25% of classified loans and have made good progress with another $200 million looking to be exited over the next 24 months.

Q: Terry McEvoy asked about new segments emerging in CRE or C&I.

A: James Eccher said there are a couple of credits in C&I on their radar, they have proactively taken reserves against some credits, and criticized and substandard loans are declining, with credit outlook better.

Q: Terry McEvoy asked about trends among lower balance deposit customers.

A: Bradley Adams said card transactions have been down significantly for almost a year, average balances on the low end have moved down, and stress is moving up the income stratification.

Q: David Long asked about commercial clients' sentiment regarding tariffs and loan demand expectation.

A: James Eccher said commercial clients are on the sidelines waiting and seeing, not projecting much growth in the second quarter but hopeful for an uptick in the second half.

Q: David Long asked about the math behind the reserve at quarter end.

A: Bradley Adams said criticized, classified, and nonperforming assets have been trending down significantly, and they have been aggressive in addressing weak credits, not seeing a second wave of stress currently.

Q: Nathan Race asked about charge - off trajectory and Evergreen's loss history.

A: James Eccher said they took final charge on a large C&I credit and future quarters should have better charge - offs, Evergreen historically has losses between 1% and 1.5% but has higher contribution margins.

Q: Nathan Race asked about expense growth expectation.

A: Bradley Adams said they are hopeful to get back to 4% expense growth for the year.

Q: Jeff Rulis asked about full - year loan growth expectation and margin average in March.

A: James Eccher said the second half may be better than the first half considering risk - adjusted returns, and Bradley Adams said net interest margin in March trended higher than February due to deposit generation.

Q: Jeff Rulis asked about the buyback and tax rate.

A: Bradley Adams said受Reg M限制在交易完成前无法活跃进行回购, and tax rate is around 24%.

Q: Brian Martin asked about net interest margin bottom and credit quality improvement.

A: Bradley Adams said deposit flows have raised the margin floor by 10 basis points, and credit quality will continue to improve with incremental improvements throughout the rest of the year.