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Old Second Bancorp, Inc. Reports Third Quarter 2024 Net Income of $23.0 Million,

or $0.50 per Diluted Share

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AURORA, IL, October 16, 2024 – Old Second Bancorp, Inc. (the “Company,” “Old Second,” “we,” “us,” and “our”) (NASDAQ: OSBC), the parent company of Old Second National Bank (the “Bank”), today announced financial results for the third quarter of 2024.  Our net income was $23.0 million, or $0.50 per diluted share, for the third quarter of 2024, compared to net income of $21.9 million, or $0.48 per diluted share, for the second quarter of 2024, and net income of $24.3 million, or $0.54 per diluted share, for the third quarter of 2023. Adjusted net income, a non-GAAP financial measure that excludes certain nonrecurring items, as applicable, was $23.3 million, or $0.51 per diluted share, for the third quarter of 2024, compared to $21.0 million, or $0.46 per diluted share, for the second quarter of 2024, and $24.8 million, or $0.55 per share, for the third quarter of 2023. Adjusting items impacting the third quarter of 2024 included $471,000 of transaction-related expenses due to the pending purchase of five branches from First Merchants Bank (“FRME”), which is expected to close near year-end 2024. The adjusting item impacting the second quarter of 2024 was an $893,000 death benefit related to BOLI; the adjusting item impacting the third quarter of 2023 results included $629,000 of deconversion and liquidation costs from the 2022 sale of our Visa credit card portfolio.  See the discussion entitled “Non-GAAP Presentations” below and the tables beginning on page 17 that provide a reconciliation of each non-GAAP measure to the most comparable GAAP equivalent.

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Net income increased $1.1 million in the third quarter of 2024 compared to the second quarter of 2024. The increase was primarily due to a $1.8 million decrease in provision for credit losses. Credit quality stabilized this quarter and we recorded net recoveries of $155,000, compared to net charge-offs of $5.8 million in the second quarter of 2024, and $6.6 million in the prior year like quarter. In addition, net interest and dividend income increased $888,000 in the third quarter of 2024, compared to the prior linked quarter, and a $399,000 decrease in provision for income taxes was recorded, partially offset by a $546,000 decrease in noninterest income and a $1.4 million increase in noninterest expense. Net income decreased $1.4 million in the third quarter of 2024 compared to the third quarter of 2023, primarily due to a decrease in net interest income of $2.5 million year over year driven by a $4.3 million increase to interest expense as a result of higher interest rates offered on deposits, partially offset by a $1.8 million increase in interest and dividend income.

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Operating Results

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Financial Highlights

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1 See the discussion entitled “Non-GAAP Presentations” below and the table on page 18 that provides a reconciliation of this non-GAAP financial measure to the most comparable GAAP equivalent.

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2 Both the Company and the Bank ratios are inclusive of a capital conservation buffer of 2.50%, and both are subject to the minimum capital adequacy guidelines of 7.00%, 8.50%, 10.50%, and 4.00% for the Common equity tier 1, Tier 1 risk-based, Total risk-based and Tier 1 leverage ratios, respectively.

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3 The prompt corrective action provisions are applicable only at the Bank level, and are 6.50%, 8.00%, 10.00%, and 5.00% for the Common equity tier 1, Tier 1 risk-based, Total risk-based and Tier 1 leverage ratios, respectively.

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Chairman, President and Chief Executive Officer Jim Eccher said “Old Second reported strong results in the third quarter of 2024 with exceptional profitability and positive trends in a number of verticals. Tangible book value per share increased by more than thirty percent on both a year over year and linked quarter annualized basis. Problem loan levels are continuing to trend in the right direction and we remain pleased with the progress thus far in resolving a number of loans identified in prior periods despite ongoing stress in a number of real estate focused lending verticals.  On an overall basis, Old Second continues to perform exceptionally well with peer-leading performance in our net interest margin and profitability. Third quarter return on average assets and return on average tangible common equity were 1.63% and 17.14%, respectively, the net interest margin was stable at 4.64% and the efficiency ratio is a very healthy 53.38%. This strong bottom-line performance and a well-positioned balance sheet drove an increase in the tangible common equity capital ratio to 10.14% from 9.39% last quarter. In light of the strength of the balance sheet and resilient income statement trends, Old Second elected in the fourth quarter of 2024 to increase the common dividend by 20%, and we will strive to continue to regularly deliver dividend growth commensurate with the strength and growth of the bank. In summary, we are proud of the sustainability of our performance this year and believe we are well positioned to capitalize on growth opportunities that may come our way in the near future.”

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Asset Quality & Earning Assets

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Net Interest Income

1 Tax equivalent (TE) basis is calculated using a marginal tax rate of 21% in 2024 and 2023. See the discussion entitled “Non-GAAP Presentations” below and the tables beginning on page 17 that provides a reconciliation of each non-GAAP measure to the most comparable GAAP equivalent.

2 Interest income from loans is shown on a tax equivalent basis, which is a non-GAAP financial measure as discussed in the table on page 17, and includes loan fee expense of $155,000 for the third quarter of 2024, loan fee expense of $936,000 for the second quarter of 2024, and loan fee expense of $780,000 for the third quarter of 2023. Nonaccrual loans are included in the above stated average balances.

The increased yield of 16 basis points on interest earning assets compared to the linked period was driven by repricing within the loan and taxable securities portfolios. Changes in the market interest rate environment impact earning assets at varying intervals depending on the repricing timeline of loans, as well as the securities maturity, paydown and purchase activities.

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The year over year increase of 34 basis points on interest earning assets was primarily driven by overall increases to benchmark interest rates over the past twelve months, primarily impacting variable rate loans and securities. Average balances of securities available for sale decreased $121.3 million in the third quarter of 2024 compared to the prior year like quarter, while the tax equivalent yield on the securities available for sale portfolio increased 38 basis points year over year due to variable security rate resets.

Average balances of interest-bearing deposit accounts have decreased steadily since the second quarter of 2024 through the third quarter of 2024, from $2.81 billion to $2.79 billion, as NOW, money market, and savings account average balances decreased while time deposits average balances increased due to CD rate specials. We have continued to control the cost of funds over the periods reflected by slowing the pace of change, however the rate of overall interest-bearing deposits increased to 148 basis points for the quarter ended September 30, 2024, from 133 basis points for the quarter ended June 30, 2024, and from 65 basis points for the quarter ended September 30, 2023. A 17 basis point increase in the cost of money market funds for the quarter ended September 30, 2024 compared to the prior linked quarter, and a 90 basis point increase compared to the prior year like quarter were both due to select deposit account exception pricing, and drove a significant portion of the overall increase. Although there was a decrease in transactional account average balances from the prior year like quarter for NOW, and savings accounts, average rates paid on these balances increased. Average rates paid on time deposits for the quarter ended September 30, 2024 increased by 11 basis points and 169 basis points in the quarter over linked quarter and year over year quarters, respectively, primarily due to CD rate specials we offered.

Borrowing costs increased in the third quarter of 2024, compared to the second quarter of 2024, primarily due to the $62.6 million increase in average other short-term borrowings stemming from an increase in average daily FHLB advances over the prior quarter. The decrease of $121.7 million year over year of average FHLB advances was based on daily liquidity needs, and was the primary driver of the $1.7 million decrease to interest expense on other short-term borrowings. Subordinated and junior subordinated debt interest expense were essentially flat over each of the periods presented.

Our net interest margin, for both GAAP and TE presentations, was relatively static over the periods presented above.  The impact of the Federal Reserve Bank (Federal Open Market Committee, or “FOMC”) fed funds rate reduction made in mid-September 2024 will not have a material impact on our financials until 30-, 60-, and 90-day rate resets are reached on our securities and loans, and deposit exception pricing is lowered. Our net interest margin (GAAP) increased two basis points to 4.62% for the third quarter of 2024, compared to 4.60% for the second quarter of 2024, and decreased two basis point compared to 4.64% for the third quarter of 2023.  Our net interest margin (TE) increased one basis point to 4.64% for the third quarter of 2024, compared to 4.63% for the second quarter of 2024, and decreased two basis points compared to 4.66% for the third quarter of 2023.  The increase in the third quarter of 2024, compared to the prior quarter, was driven by market interest rates as well as the composition of assets and liabilities as interest income and expense both increased compared to the prior quarter while there was only a $2.9 million increase in interest earning assets. The net interest margin decrease in the third quarter of 2024, compared to the prior year like quarter, is primarily due to an increase in market interest rates, and the related increase in costs of interest-bearing deposits. See the discussion entitled “Non-GAAP Presentations” and the tables beginning on page 17 that provide a reconciliation of each non-GAAP measure to the most comparable GAAP equivalent.

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Noninterest Income

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N/M - Not meaningful.

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Noninterest income decreased $546,000, or 4.9%, in the third quarter of 2024, compared to the second quarter of 2024, and increased $704,000, or 7.1%, compared to the third quarter of 2023.  The decrease from the second quarter of 2024 was primarily driven by a $715,000 decrease in residential mortgage banking revenue primarily due to a decrease of $726,000 in MSRs mark to market valuation. Also contributing to the decrease during the quarter was the $893,000 death benefit realized on BOLI that was recorded in the second quarter of 2024; the third quarter BOLI death benefit of $12,000 reflected a minor true-up to proceeds actually received. Partially offsetting the decrease in noninterest income from the prior quarter was a $138,000 increase in service charges on deposits, a $40,000 increase in the cash surrender value of BOLI, and an $853,000 increase in other income primarily due to a $245,000 refund received from a vendor with whom we cancelled services, a $155,000 recognition of a refund related to the advance reserves held for our VISA card portfolio which was sold in 2023, and a $78,000 incentive bonus from a vendor for certain transactional levels being attained.

The increase in noninterest income of $704,000 in the third quarter of 2024, compared to the third quarter of 2023, is primarily due to a $312,000 increase in wealth management income primarily due to growth in advisory fees, a $142,000 increase in service charges on deposits, a $1,000 loss on the call of securities in the third quarter of 2024 compared to losses on the sale of securities of $924,000 in the third quarter of 2023 and a $571,000 increase in other income due to a $245,000 refund received from a vendor due to cancellation of services, a $155,000 recognition of a refund related to the sold VISA credit card advance reserves, and a $78,000 incentive bonus from a vendor based on certain transactional levels which were attained. These increases were partially offset by a $1.2 million decrease in residential mortgage banking revenue mainly due to a decrease of $1.2 million in MSRs mark to market valuation, and a $59,000 decrease in the cash surrender value of BOLI due to changes in market interest rates.

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Noninterest Expense

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N/M - Not meaningful.

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1 The efficiency ratio shown in the table above is a GAAP financial measure calculated as noninterest expense, excluding amortization of core deposits and OREO expenses, divided by the sum of net interest income and total noninterest income less net gains or losses on securities, death benefit realized on BOLI, and mark to market gains or losses on MSRs.

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2 The adjusted efficiency ratio shown in the table above is a non-GAAP financial measure calculated as noninterest expense, excluding amortization of core deposits, OREO expenses, acquisition expense, and liquidation and deconversion costs of the sold Visa card portfolio, if applicable, divided by the sum of net interest income on a fully tax equivalent basis, total noninterest income less net gains or losses on securities, death benefit realized on BOLI, mark to market gains or losses on MSRs, and includes a tax equivalent adjustment on the change in cash surrender value of BOLI.  See the discussion entitled “Non-GAAP Presentations” below and the table on page 17 that provides a reconciliation of this non-GAAP financial measure to the most comparable GAAP equivalent.

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Noninterest expense for the third quarter of 2024 increased $1.4 million, or 3.8%, compared to the second quarter of 2024, and increased $1.9 million, or 5.0%, compared to the third quarter of 2023.  The increase in the third quarter of 2024 compared to the second quarter of 2024 was attributable to a $1.3 million increase in salaries and employee benefits, with increases reflected primarily in officers’ incentives due to a higher projection of year end accruals based on our bank’s performance, and deferred executive compensation due to changes in market interest rates.  Also contributing to the growth in noninterest expense in the third quarter of 2024 was a $191,000 increase in computer and data processing expenses due to transaction-related costs incurred related to our pending purchase of five bank branches from FRME, a $135,000 increase in card related expenses, and a $329,000 increase in other real estate owned expense, net, as a gain of $259,000 was recorded on an OREO sale in the second quarter of 2024; no like gain was recorded in the third quarter of 2024. Partially offsetting the increases in noninterest expense in the third quarter of 2024 compared to the second quarter of 2024 was a $173,000 decrease in advertising expense primarily due to an overdraft disclosure mailed to retail deposit customers during the second quarter of 2024, a $36,000 decrease in legal fees, and a $317,000 decrease in consulting & management fees as the second quarter of 2024 included costs of a one-time compliance review project.

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The year over year increase in noninterest expense is primarily attributable to a $1.6 million increase in salaries and employee benefits, primarily due to increases in annual base salary rates, restricted stock expense, and deferred employee compensation due to market interest rate changes.  Also contributing to the increase was a $370,000 increase in occupancy, furniture and equipment due to facilities improvements year over year, a $453,000 increase in computer and data processing primarily due to transaction-related costs incurred related to our pending branch purchase from FRME, a $206,000 increase in advertising expense, a $111,000 increase in card related expense, a $105,000 increase in legal fees mainly due to FRME merger-related costs, and a $269,000 increase in OREO related expenses. Partially offsetting the increases in noninterest expense in the third quarter of 2024, compared to the third quarter of 2023, was a $112,000 decrease in FDIC insurance, and a $1.0 million decrease in other expenses primarily due to $629,000 of liquidation costs recorded in the third quarter of 2023 from the September 2023 Visa credit card portfolio servicing deconversion.

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Earning Assets

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1 Other class includes consumer loans and overdrafts.

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Total loans increased by $14.5 million at September 30, 2024, compared to June 30, 2024, and decreased $38.5 million for the year over year period.  The increase in total loans in the third quarter of 2024 compared to the prior linked quarter was due to increased originations, net of paydowns, over the third quarter, primarily in commercial real estate-investor and construction loans. The year over year reductions in loans is primarily due to paydowns, net of originations, in commercial real estate – owner occupied of $90.8 million, commercial of $20.2 million, real estate – owner occupied of $19.2 million, offset by lease originations, net of paydowns, of $103.5 million and a slower pace origination in the portfolio. Increases were noted in the leases segment in the third quarter of 2024 compared to the prior linked quarter and compared to the prior year like period primarily due to an expansion of this product line over the past year.

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Our securities available-for-sale portfolio totaled $1.19 billion as of September 30, 2024, reflecting an increase of $17.2 million from June 30, 2024, and a decrease of $38.8 million since September 30, 2023. The portfolio’s increase  in the third quarter of 2024, compared to the prior quarter-end, was due to purchases of $22.7 million, primarily consisting of collateralized loan obligations and collateralized mortgage obligations, as well as a decrease in unrealized loss of $26.4 million, partially offset by $31.3 million in paydowns and calls. Net unrealized losses at September 30, 2024 were $56.2 million, compared to $82.6 million at June 30, 2024 and $120.5 million at September 30, 2023. The year over year decrease in net unrealized losses is due to changes in the market interest rate environment as well as the impact of security paydowns and purchases undertaken to further reduce the portfolio’s interest rate sensitivity. The portfolio continues to consist of high quality fixed-rate and floating-rate securities, with more than 99% of publicly issued securities rated AA or better.

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Asset Quality

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N/M - Not meaningful.

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Nonperforming loans consist of nonaccrual loans and loans 90 days or more past due and still accruing interest.  Purchased credit-deteriorated (“PCD”) loans acquired in our acquisitions of West Suburban and ABC Bank totaled $17.9 million, net of purchase accounting adjustments, at September 30, 2024.  PCD loans that meet the definition of nonperforming loans are included in our nonperforming disclosures.  Nonperforming loans to total loans was 1.3% as of September 30, 2024, 1.2% as of June 30, 2024, and 1.6% as of September 30, 2023. Nonperforming assets to total loans plus OREO was 1.5% as of September 30, 2024, 1.4% as of June 30, 2024, and 1.6% as of September 30, 2023. Our allowance for credit losses to total loans was 1.1% as of September 30, 2024 and June 30, 2024, and 1.3% as of September 30, 2023.  

The following table shows classified loans by segment, which include nonaccrual loans, PCD loans if the risk rating so indicates, and all other loans considered substandard, for the following periods.

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N/M - Not meaningful.

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1 Other class includes consumer loans and overdrafts.

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Classified loans as of September 30, 2024 decreased by $9.6 million from June 30, 2024, and decreased by $40.4 million from September 30, 2023. The net decrease from the second quarter of 2024 was primarily driven by outflows of $20.8 million of loan upgrades, $20.7 million of paid off loans, $2.5 million of principal reductions from payments, $1.3 million transferred to OREO, and $99,000 of loan charge offs. The decrease in classified loans in the third quarter was offset by additions of $35.6 million, primarily consisting of nine separate relationships, totaling $19.8 million, and five commercial real estate – owner occupied loans totaling $14.2 million. Remediation work continues on these credits, with the goal of cash flow improvements with increased tenancy.

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Allowance for Credit Losses on Loans and Unfunded Commitments

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At September 30, 2024, our allowance for credit losses (“ACL”) on loans totaled $44.4 million, and our ACL on unfunded commitments, included in other liabilities, totaled $2.5 million.  In the third quarter of 2024, we recorded provision expense of $2.0 million based on historical loss rate updates, our assessment of nonperforming loan metrics and trends, as well as estimated future credit losses. The third quarter’s provision expense consisted of a $2.0 million provision for credit losses on loans, and a $2,000 provision for credit losses on unfunded commitments.  The increase in ACL on unfunded commitments was primarily due to an adjustment of historical benchmark assumptions, such as funding rates and the period used to forecast those rates, within the ACL calculation.  We recorded net recoveries of $155,000 in the third quarter of 2024 primarily within the commercial real estate portfolio. The second quarter 2024 provision expense of $3.8 million consisted of a $3.9 million provision for credit losses on loans, and a $199,000 reversal of provision for credit losses on unfunded commitments. We recorded net charge-offs of $5.8 million in the second quarter of 2024. In the third quarter of 2023, we recorded provision expense of $3.0 million, which consisted of a $3.0 million provision for credit losses on loans and a $11,000 reversal of provision for credit losses on unfunded commitments. We recorded net charge-offs of $6.6 million in the third quarter of 2023. Our ACL on loans to total loans was 1.1% as of September 30, 2024 and June 30, 2024, and 1.3% as of September 30, 2023.

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The ACL on unfunded commitments totaled $2.5 million as of September 30, 2024 and June 30, 2024, and $2.9 million as of September 30, 2023.

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Net Charge-off Summary

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1 Other class includes consumer loans and overdrafts.

2 Represents the percentage of net charge-offs attributable to each category of loans.

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Gross charge-offs for the third quarter of 2024 were $165,000, compared to $6.0 million for the second quarter of 2024 and $6.9 million for the third quarter of 2023.  Gross recoveries were $320,000 for the third quarter of 2024, compared to $217,000 for the second quarter of 2024, and $339,000 for the third quarter of 2023.  Continued recoveries are indicative of the ongoing aggressive efforts by management to effectively manage and resolve prior charge-offs, however recoveries cannot be forecasted or expected at the same pace in the future.  

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Deposits

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Total deposits were $4.47 billion at September 30, 2024, a decrease of $56.3 million, or 1.2%, compared to $4.52 billion at June 30, 2024, primarily due to a decrease in noninterest bearing deposits of $59.5 million driven by a few larger customers, a decrease of $22.9 million in savings, and a decrease of $12.8 million in NOW and money market accounts. These declines were partially offset by an increase in time deposits of $38.9 million, primarily due to CD specials offered. Total quarterly average deposits for the year over year period decreased $172.6 million, or 3.7%, driven by declines in our average demand deposits of $175.8 million, and savings, NOW and money markets combined of $182.3 million, partially offset by an increase of $185.4 in average time deposits. The decline in total deposits in the third quarter of 2024 was less than the decline in the third quarter of 2023, and third quarter declines in deposit balances for both 2024 and 2023 were primarily due to depositor real estate tax payments and other seasonal reductions.

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Borrowings

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As of September 30, 2024, we had $335.0 million in other short-term borrowings due to short-term FHLB advances, compared to $330.0 million at June 30, 2024, and $435.0 million as of September 30, 2023.  

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Non-GAAP Presentations

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Management has disclosed in this earnings release certain non-GAAP financial measures to evaluate and measure our performance, including the presentation of adjusted net income, net interest income and net interest margin on a fully taxable equivalent basis, and our efficiency ratio calculations on a taxable equivalent basis. The net interest margin fully taxable equivalent is calculated by dividing net interest income on a tax equivalent basis by average earning assets for the period.  Consistent with industry practice, management has disclosed the efficiency ratio including and excluding certain items, which is discussed in the noninterest expense presentation on page 7.  

We consider the use of select non-GAAP financial measures and ratios to be useful for financial and operational decision making and useful in evaluating period-to-period comparisons.  We believe that these non-GAAP financial measures provide meaningful supplemental information regarding our performance by excluding certain expenditures or assets that we believe are not indicative of our primary business operating results or by presenting certain metrics on a fully taxable equivalent basis.  We believe these measures provide investors with information regarding balance sheet profitability, and we believe that management and investors benefit from referring to these non-GAAP financial measures in assessing our performance and when planning, forecasting, analyzing, and comparing past, present and future periods.

These non-GAAP financial measures should not be considered as a substitute for GAAP financial measures, and we strongly encourage investors to review the GAAP financial measures included in this earnings release and not to place undue reliance upon any single financial measure. In addition, because non-GAAP financial measures are not standardized, it may not be possible to compare the non-GAAP financial measures presented in this earnings release with other companies’ non-GAAP financial measures having the same or similar names. The tables beginning on page 17 provide a reconciliation of each non-GAAP financial measure to the most comparable GAAP equivalent.  

Cautionary Note Regarding Forward-Looking Statements

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This earnings release and statements by our management may contain forward-looking statements within the Private Securities Litigation Reform Act of 1995. Forward looking statements can be identified by words such as “should,” “anticipate,” “expect,” “estimate,” “intend,” “believe,” “may,” “likely,” “will,” “forecast,” “project,” “looking forward,” “optimistic,” “hopeful,” “potential,” “progress,” “prospect,” “remain,” “deliver,” “continue,” “trend,” “momentum,” “remainder,” “beyond,” “and “near” or other statements that indicate future periods. Examples of forward-looking statements include, but are not limited to, statements regarding the economic outlook, loan growth, deposit trends and funding, asset-quality trends, balance sheet growth, and building capital. Such forward-looking statements are subject to risks, uncertainties, and other factors, which could cause actual results to differ materially from future results expressed or implied by such forward-looking statements. The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements, (1) the strength of the United States economy in general and the strength of the local economies in which we conduct our operations may be different than expected; (2) the rate of delinquencies and amounts of charge-offs, the level of allowance for credit loss, the rates of loan growth, or adverse changes in asset quality in our loan portfolio, which may result in increased credit risk-related losses and expenses; (3) changes in legislation, regulation, policies, or administrative practices, whether by judicial, governmental, or legislative action; (4) risks related to pending or future acquisitions, if any, including execution and integration risks; (5) adverse conditions in the stock market, the public debt market and other capital markets (including changes in interest rate conditions) could have a negative impact on us; (6) changes in interest rates, which has and may continue to affect our deposit and funding costs, net income, prepayment penalty income, mortgage banking income, and other future cash flows, or the market value of our assets, including our investment securities; (7) elevated inflation which causes adverse risk to the overall economy, and could indirectly pose challenges to our clients and to our business; and (8) the adverse effects of events beyond our control that may have a destabilizing effect on financial markets and the economy, such as epidemics and pandemics, war or terrorist activities, essential utility outages, deterioration in the global economy, instability in the credit markets, disruptions in our customers’ supply chains or disruption in transportation, and disruptions caused from widespread cybersecurity incidents.

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Additional risks and uncertainties are contained in the “Risk Factors” and forward-looking statements disclosure in our most recent Annual Report on Form 10-K, and Quarterly Reports on Form 10-Q. The inclusion of this forward-looking information should not be construed as a representation by us or any person that future events, plans, or expectations contemplated by us will be achieved. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by law.

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Conference Call

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We will host a call on Thursday, October 17, 2024, at 10:00 a.m. Eastern Time (9:00 a.m. Central Time) to discuss our third quarter 2024 financial results.  Investors may listen to our call via telephone by dialing 888-506-0062, using Entry Code: 232873.  Investors should call into the dial-in number set forth above at least 10 minutes prior to the scheduled start of the call.

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A replay of the call will be available until 10:00 a.m. Eastern Time (9:00 a.m. Central Time) on October 24, 2024, by dialing 877-481-4010, using Conference ID: 51325.

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Old Second Bancorp, Inc. and Subsidiaries

Consolidated Balance Sheets

(In thousands)

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