Old Second Bancorp, Inc. (OSBC) has demonstrated its ability to adapt and thrive in the face of a dynamic interest rate environment. With a strong focus on balance sheet optimization, credit quality management, and operational efficiency, the company has positioned itself to deliver consistent financial performance.

Financials

For the fiscal year ended December 31, 2023, Old Second Bancorp reported annual net income of $91,729,000, annual revenue of $325,750,000, annual operating cash flow of $116,401,000, and annual free cash flow of $104,025,000. These robust financial metrics underscore the company's ability to generate sustainable earnings and cash flow, even in a challenging economic landscape.

In the second quarter of 2024, Old Second Bancorp reported net income of $21.9 million, or $0.48 per diluted share, reflecting a return on assets of 1.57% and a return on average tangible common equity of 17.66%. The company's tax-equivalent efficiency ratio for the quarter stood at 53.29%, showcasing its disciplined approach to expense management.

The company's net interest margin (NIM) increased slightly in the second quarter, reaching 4.63% on a tax-equivalent basis, compared to 4.58% in the previous quarter. This was driven by higher yields on variable securities and loans, partially offset by increased funding costs. Management expects NIM trends to remain relatively flat for the remainder of the year, with the potential for a slight decline if interest rate cuts materialize.

Old Second Bancorp's loan portfolio grew by $7.2 million in the second quarter, primarily due to increases in the commercial, lease, and construction segments. The company's loan-to-deposit ratio stood at 88% as of June 30, 2024, up from 86% in the previous quarter and 85% a year earlier. Management remains focused on balance sheet optimization, with plans to continue building the loan portfolio while managing the securities portfolio.

Asset Quality

The company's asset quality metrics showed continued improvement in the second quarter. Nonaccrual loans decreased by $22 million, or 23%, from the prior quarter, while substandard and criticized loans declined by $15.9 million, or 7.8%, from year-end 2023. The allowance for credit losses on loans decreased to $42.3 million, or 1.1% of total loans, as of June 30, 2024.

Noninterest Income and Expenses

Noninterest income performed well in the second quarter, with growth noted in wealth management fees, card-related income, and mortgage banking revenue (excluding the impact of mortgage servicing rights mark-to-market). The company also realized a $893,000 death benefit from a BOLI contract during the quarter.

Expense discipline remains a priority for Old Second Bancorp, with total noninterest expense decreasing by $364,000 from the previous quarter, primarily due to reductions in salaries and employee benefits and a gain on the sale of an OREO property. The company's efficiency ratio of 53.29% in the second quarter reflects its commitment to operational excellence.

Outlook

Looking ahead, the company remains focused on managing liquidity, building capital, and enhancing its commercial loan origination capabilities. Management believes the goal of a more stable long-term balance sheet, featuring a higher proportion of loans and fewer securities, will help maintain returns on equity consistent with recent performance.

Business Overview

Old Second Bancorp's geographic footprint is primarily concentrated in the Midwest region, with a strong presence in Illinois. The company's diversified business model, which includes commercial banking, wealth management, and mortgage banking, has helped it navigate the evolving interest rate landscape.

Risks and Challenges

The company's risk management practices have been instrumental in addressing the challenges posed by the commercial real estate sector. Old Second Bancorp has been proactive in addressing loans facing deterioration due to higher interest rates, declining appraisal values, and cash flow pressures. The company's nonperforming assets and criticized loans have declined significantly from their peak levels, reflecting the effectiveness of its credit risk management strategies.

Liquidity

In terms of liquidity, Old Second Bancorp maintains a strong balance sheet, with a loan-to-deposit ratio of 88% as of June 30, 2024. The company's capital position has also strengthened, with the tangible common equity ratio improving by 35 basis points in the second quarter to 9.39%. This provides the company with the flexibility to pursue strategic initiatives, including potential M&A opportunities, while also considering the option of returning capital to shareholders through share repurchases or dividend increases.

Conclusion

Overall, Old Second Bancorp's performance in the second quarter of 2024 demonstrates its ability to navigate the evolving interest rate environment and maintain a strong financial position. The company's focus on balance sheet optimization, credit quality management, and operational efficiency has positioned it well to continue delivering consistent financial results and creating value for its shareholders.