8-K: Old Second Bancorp Reports $21.9 Million Net Income for Second Quarter 2024

Old Second Bancorp announced a net income of $21.9 million, or $0.48 per diluted share, for the second quarter of 2024, showing a slight increase from the previous quarter but a decrease compared to the same period last year.

Summary

• Old Second Bancorp reported a net income of $21.9 million for the second quarter of 2024, which translates to $0.48 per diluted share.
• This is an increase of $579,000 compared to the first quarter of 2024, where net income was $21.3 million, or $0.47 per diluted share.
• However, net income decreased by $3.7 million compared to the second quarter of 2023, which saw a net income of $25.6 million, or $0.56 per diluted share.
• The decrease in year-over-year net income was primarily due to a $3.9 million decrease in net interest income, driven by higher interest expenses on deposits and a reduction in the securities portfolio.
• Noninterest income increased by $626,000 compared to the first quarter of 2024 and $2.9 million compared to the second quarter of 2023, boosted by an $893,000 death benefit on a BOLI contract.
• Noninterest expense decreased by $364,000 compared to the first quarter of 2024 but increased by $3.0 million compared to the second quarter of 2023.
• The company's net interest margin increased by five basis points to 4.63% for the second quarter of 2024 compared to the previous quarter.
• Nonperforming loans decreased to $46.9 million at June 30, 2024, down from $65.1 million at March 31, 2024.
• Total loans increased slightly to $3.98 billion at June 30, 2024, up from $3.97 billion at March 31, 2024, but down from $4.02 billion at June 30, 2023.
• Total deposits decreased to $4.52 billion at June 30, 2024, down from $4.61 billion at March 31, 2024.

Sentiment

Score: 6

Explanation: The sentiment is moderately positive due to the quarter-over-quarter improvement in net income and asset quality, but tempered by the year-over-year decline in net income and net interest income. The management's optimism about future growth is a positive sign, but the risks mentioned in the forward-looking statements need to be considered.

Positives

• Net income saw a quarter-over-quarter increase of $579,000.
• Noninterest income increased significantly due to a death benefit on a BOLI contract and growth in wealth management and card-related income.
• Noninterest expenses decreased by $364,000 compared to the previous quarter.
• The net interest margin increased by five basis points to 4.63% quarter over quarter.
• Nonperforming loans decreased significantly from $65.1 million to $46.9 million.
• The company's tangible book value per share increased by 19% linked quarter annualized and 26% year over year.
• The company reported strong profitability and significant improvement in asset quality metrics.

Negatives

• Net income decreased by $3.7 million compared to the same quarter last year.
• Net interest income decreased by $3.9 million year-over-year due to higher interest expenses on deposits and a reduction in the securities portfolio.
• The provision for credit losses increased by $1.8 million compared to the same quarter last year.
• Noninterest expense increased by $3.0 million compared to the same quarter last year.
• Total deposits decreased by $86.5 million compared to the previous quarter.
• Loan growth has been tepid through the second quarter.

Risks

• The company faces risks related to the strength of the U.S. economy and local economies where it operates.
• There are risks associated with delinquencies, charge-offs, and adverse changes in asset quality.
• Changes in legislation, regulation, and policies could impact the company.
• Fluctuations in interest rates could affect deposit and funding costs, net income, and the market value of assets.
• Elevated inflation poses a risk to the overall economy and could indirectly affect the company's clients and business.
• Events beyond the company's control, such as epidemics, war, and cybersecurity incidents, could destabilize financial markets and the economy.

Future Outlook

The company believes its current level of performance is sustainable and that its balance sheet is well-positioned to capitalize on future growth opportunities. They are optimistic that loan growth trends are improving based on recent activity and the strength of their pipelines.

Management Comments

• Chairman, President and Chief Executive Officer Jim Eccher said Old Second reported strong results in the second quarter with exceptional profitability and significant improvement in asset quality metrics.
• He noted that nonperforming and classified assets are at their lowest levels since year end 2022 and expects further improvement this year.
• He believes Old Second has been proactive in identifying and addressing potential problems in real estate lending verticals.
• He stated that the company's focus remains on compounding tangible book value and maintaining strong returns on equity.

Industry Context

The announcement comes at a time when the banking industry is experiencing significant stress in real estate lending, making Old Second's proactive approach to identifying and addressing potential problems noteworthy. The company's focus on maintaining strong returns on equity and compounding tangible book value aligns with industry best practices for long-term value creation.

Comparison to Industry Standards

• Old Second's return on average assets (ROAA) of 1.57% is comparable to regional banks such as First Midwest Bancorp (now part of Old National Bancorp) which has historically reported ROAA in the 1.2-1.6% range.
• The return on average tangible common equity (ROATCE) of 17.66% is strong, exceeding the average ROATCE of many regional banks, which often fall in the 10-15% range, such as Wintrust Financial Corporation.
• The net interest margin of 4.63% is also competitive, aligning with the higher end of the range for regional banks, which typically see margins between 3.5% and 4.5%, similar to companies like Associated Banc-Corp.
• The decrease in nonperforming loans to 1.2% of total loans is a positive sign, indicating better asset quality management compared to some peers that have seen increases in nonperforming assets, such as some smaller community banks facing challenges in commercial real estate.
• The efficiency ratio of 53.29% is within the typical range for regional banks, although there is room for improvement compared to more efficient banks like U.S. Bancorp, which often operate with efficiency ratios below 50%.

Stakeholder Impact

• Shareholders will receive a cash dividend of $0.05 per share.
• Employees may be impacted by changes in salaries and benefits, as well as ongoing system projects.
• Customers may be affected by changes in deposit rates and loan offerings.
• Creditors may be impacted by changes in the company's borrowing activities.
• Suppliers may be affected by changes in the company's operational expenses.

Next Steps

• The company will host a conference call on July 18, 2024, to discuss the second quarter 2024 financial results.
• The company will continue to monitor trends in real estate lending and work to resolve problem loans.
• The company will focus on compounding tangible book value and maintaining strong returns on equity.
• The company may continue to buy and sell strategically identified securities as opportunities arise.

Key Dates

Keywords

net income, financial results, noninterest income, net interest margin, nonperforming loans, loan portfolio, deposits, asset quality, credit losses, Bancorp