Old Second Bancorp Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
April 18, 2024

There are 6 speakers on the call.

Operator

Good morning, everyone, and thank you for joining us today for Old Second Bancorp's First Quarter 2024 Earnings Call. On the call today are Jim Eckert, the company's Chairman, President and CEO Brad Adams, the company's COO and CFO and Gary Collins, the Vice Chairman of our Board. I will start with a reminder that Old Second's comments today will contain forward looking statements about the company's business, strategies and prospects, which are based on management's existing expectations in the current economic environment. These statements are not a guarantee of future performance and results may differ materially from those projected. Management would ask you to refer to the company's SEC filings for a full discussion of the company's risk factors.

Operator

The company does not undertake any duty to update such forward looking statements. On today's call, we will also be discussing certain non GAAP financial measures. These non GAAP measures are described and reconciled to their GAAP counterparts in our earnings release, which is available on our website at oldsecond.com on the homepage and under the Investor Relations tab. Now, I will turn it over to Jim Ecker. The floor is yours.

Speaker 1

Hey, good morning and thank you for joining us. As customary, I have several prepared opening remarks and will give my overview of the quarter and then turn it over to Brad for additional color. I will then conclude with certain summary comments and thoughts about the future before we open it up for questions. Net income was $21,300,000 or $0.47 per diluted share in the Q1. Return on assets was 1.51 percent.

Speaker 1

The Q1 2024 return on average tangible common equity was 17.8% and the tax equivalent efficiency ratio was 53.09%. 1st quarter earnings were negatively impacted by $3,500,000 of provision for credit losses, which reduced after tax earnings by $0.06 per share. However, profitability of the segment remains exceptionally strong and balance sheet strengthening continues with our tangible common equity ratio increasing by 51 basis points linked quarter to 9.04%. Common Equity Tier 1 crossed 12% this quarter and we feel very good about profitability and our balance sheet positioning at this point. Our financials continue to be positively impacted by higher market interest rates, pre provision net revenues remain stable and exceptionally strong.

Speaker 1

For the Q1 of 2024 compared to the prior late year period, income on earning assets increased $3,200,000 or 4.5 percent, while interest expense increased $7,500,000 The increase in both cases is rate driven. However, exception pricing and certain commercial deposits as well as growth in average balances on other short term borrowings compared to the prior year like period caused a net decrease in net interest margin, which is attributable to both interest rate and volume factors on the liability side. Q1 of 2024 reflected a decrease in total loans of $73,500,000 from the prior linked quarter end, primarily due to a few payoffs and some large credits towards the end of the quarter. The historical trend for our bank is really softer Q1 of originations due to limited new projects and construction during the winter season. 2023 was an anomaly as the savvy commercial customers realized interest rates were about to increase and sought funding prior to those market rate increases in late Q1 2023.

Speaker 1

Our loan growth was much larger in the year ago like period compared to the Q1 of 2024. Activity within our loan committee remains modest relative to prior periods due to both the higher interest rate environment, lower demand and seasonal impacts. Our net interest margin compressed slightly this quarter driven by higher funding costs. Loan yields reflected a 7 basis point increase during the Q1 compared to the linked quarter and 37 basis points increase year over year. Funding costs increased due to the increases in both rates and growth and time deposit balances.

Speaker 1

The tax equivalent net interest margin 4.58% for the Q1 compared to 4.62% for the 4th quarter and 4.74% in the 1st quarter 2023. The net interest margin decreased 16 basis points in the year over year quarter due to the impact of rising rates on the cost of funds, which is partially mitigated by growth in interest income driven by the variable portion of the loan and securities portfolio. The loan to deposit ratio is 86% at March 31, 2024 compared to 88% last quarter and 82% a year ago. As we said last quarter, our focus continues to be balance sheet optimization and I'll let Brad talk about more of that in a minute. Q1 of 2024 reflected stable asset quality metrics and much more moderate actions taken on substandard credits compared to the Q4 of 2023.

Speaker 1

Our hope and belief remains that the prior quarter represented an inflection point in our credit trends. Old Second began substantially downgrading large amounts commercial real estate loans, including office and healthcare at the end of 2021 and accelerating through 2022. Substandard and criticized loans went from approximately $60,000,000 or a little more than 1% of loans at Q3 of 20 21 to a peak of nearly $300,000,000 or over 7% of loans in the Q1 of 2023. As of the end of the Q1 of 2024, substandard and criticized loans are down to 200,000,000 dollars which is approximately $3,200,000 less than year end 2023, and the trend expectation remains for further improvement through the remainder of the year. Encouragingly, our special mention loans are now at their lowest level in over 2 years.

Speaker 1

We continue to expect realization of a relatively costly resolution on a number of non performers in the near future, and we remain hopeful we can recover some of the losses realized in the second half of twenty twenty three. The reality is that commercial real estate valuations are heavily dependent upon the market level of interest rates as a primary determinant of cash flows for a given property. A movement in rates such as we have seen is substantial enough to significantly impair the equity positions and a large percentage of commercial real estate credits. Additionally, the residual stress brought upon by the pandemic in office and healthcare is not abated. We believe we are being proactive and realistic in addressing commercial real estate loans facing deterioration from higher interest rates, declining appraisal values and cash flow pressures.

Speaker 1

As we discussed last quarter on the call and consistent with our expectations, we recorded net charge offs of 3,700,000 in the quarter. One specific current period charge off of 3,900,000 on a previously allocated loan was partially offset by approximately 159,000 of net recoveries during the Q1. The one charge off was due to the receipt of an updated appraisal on a healthcare property. The good news is that criticized and classified loans are declining and the remainder of the portfolio remains well behaved. Continued stress testing at renewal rates has not raised any new red flags for us and the bulk of our loan portfolio has transitioned and is seasoning into the higher rate environment.

Speaker 1

Being short duration on the asset side has obviously helped us immensely in terms of interest rate risk management, but probably put us at the forefront in terms of commercial real estate stress. The belief is reinforced by the experience that a significant percentage of our substandard loans are acquired secondary participations. The allowance for credit losses on loans decreased to $44,100,000 as of March 31, 2024 or 1.1% of total loans from $44,300,000 at year end 2023, which was also 1.1% of total loans. Unemployment and GDP forecast used in the future loss rate assumptions remain fairly static from last quarter. The change in provision level quarter over linked quarter reflects the reduction in our allowance allocations on substandard loans, which largely relates to the 31% reduction in criticized assets since March 31, 2023.

Speaker 1

I think investors should know that we are continuing with our level of strong profitability and we will be aggressive in addressing weak credits and that we remain confident in the strength of our portfolios. Non interest income continue to perform well with growth noted quarter over linked quarter and BOLI and mortgage banking income. BOLI income bounced back from a weak Q4 due to changes in market conditions. Mortgage banking income increased $1,300,000 quarter over linked quarter, primarily due to minimal MSR gains recorded in the Q1 of 'twenty four compared to the MSR losses of $1,300,000 for the prior quarter. Expense discipline continues to be strong with the usual seasonal uptick noted in the Q1 of 2024 compared to the prior linked quarter, primarily due to the annual increase in wage rates as well as growth in payroll related taxes and 401 company match due to payout of employee related annual incentives in the Q1 of 2024.

Speaker 1

In addition, our occupancy costs have increased quarter over the linked quarter due to the rollout of multiple updated branches at our corporate office. Our efficiency ratio continues to be excellent. As we look forward, we are continuing on doing more of the same, which is managing liquidity, building capital and also building commercial loan origination capability for the long term. The goal is obviously to continue to build towards a more stable long term balance sheet mix featuring more loans and less securities in order to maintain the returns on equity commensurate with our recent performance. I'll now turn it over to Brad for additional color in his comments.

Speaker 2

Thank you, Jim. Not a lot of surprises from us this quarter, which I think is good news. Net interest income decreased by $1,500,000 or 2.4 percent to $59,800,000 for the quarter relative to the prior quarter of $61,200,000 a decrease of $4,300,000 or 7% from the year ago like quarter. Loan yields were 7 basis points higher in the 1st quarter and securities yields were flat. Total yield on interest earning assets increased 6 basis points over the linked quarter to 561 basis points, but that was offset by 29 basis point increase in the cost of interest bearing deposits and an 18 basis point increase in interest bearing liabilities in aggregate.

Speaker 2

The end result was the expected 4 basis point decrease in the tax equivalent NIM to 4.58 from 4.62 last quarter, which we believe continues to be exceptional margin performance. The core margin was a little bit stronger than that as we saw a decrease in accretable yield of a few $100,000 I'm pretty certain we're pretty much done with that at this point. We've only got about 600,000 or so left to accrete. So from this point forward, core margin is actual margin for us. Deposit flows this quarter continued to display signs of stabilization and actually some growth.

Speaker 2

Average deposits increased only $3,000,000 over the linked quarter, but period end total deposits increased by $38,000,000 It's not really anything that we did on rates. I think others being kind of anticipatory of rate cuts have peeled back some time deposit pricing making ours relatively more attractive And you can see that showing up in the balances. I would say that we are still some 30 basis points to 40 basis points below market leaders in that pricing, but others have fallen off. So I guess as an alternative, we've picked up more dollars on that front. Our interest rate outlook hasn't really changed on that front and we haven't peeled back pricing at all in anticipation of any rate cuts.

Speaker 2

Deposit pricing overall remains exceptionally aggressive relative to the treasury curve and is still largely pricing off of overnight borrowing pricing. We did add some time deposits as I mentioned since others had peeled back. I'm not a lover of time deposits, but they aren't exactly garbage either and the rate cut expectations that were in the marketplace as we discussed this last quarter were quite simply wrong. The growth here remains short. We are largely pricing less than a year and does offer significant value relative to overnight borrowing rates.

Speaker 2

You can see our reliance there has fallen somewhat significantly relative to prior quarters. We are continuing to add duration and expect margin trends from the bounce back end market rate indices to be absorbed by projected growth in the securities portfolio beginning in the Q2 of 2024. We aren't going to lurch at anything, but we are looking to add more fixed rate product. As we've seen longer rates tick back up here recently, it's going to give us another opportunity to move some variable rate product out of the portfolio as we've been consistently doing over the last 18 months. Incrementally, I'm more bullish on margin than I was at this time last quarter, but I highly expect that we'll give back the upside on in terms of reducing further duration.

Speaker 2

I think that's prudent at this point. The concentration of variable rate securities will resume its decline if the market continues to move on the path that it has been on in recent weeks. I would be remiss if I didn't point out that all of the relatively minor margin compression that we have seen to date is attributable to balance sheet actions to reduce this asset sensitivity, specifically and most notably the reduction in variable rate securities. In totality, marginal spreads remain unattractive at this point, and we don't feel the pressure to swell in order to overcome expected margin pressures. Marginal returns on allocated equity remain poor for outsized growth, but I still think we can see relatively flat net interest income performance for the year.

Speaker 2

We have made a ton of progress in reducing asset sensitivity over the last year and we are extending duration in the loan portfolio at this point as well. I'm pleased markets have lost some of the inexplicable bloodlust for rate cuts that we were talking about last quarter and I look forward to more rational Fed speak in the face of persistent inflationary trends, ex the extent of my soapboxing on rates for this quarter, but margin trends for the remainder of the year expected to be relatively flat, maybe slightly down. If I'm wrong and a couple of rate cuts actually occur, we would lose a few basis points. The loan to deposit ratio remains low at 86.1% and our ability to support liquidity from the securities portfolio continues as the fair value adjustment on the portfolio was only $800,000 loss over the prior linked quarter from $84,200,000 to 85,000,000 dollars This total unrealized loss remains high, but will be recaptured relatively quickly. The net result is that Old Second should continue to build capital quickly, as evidenced by the 51 basis point improvement in the TCE ratio over the linked quarter, which means that we have added an astonishing 2 21 basis points of TCE and $2.23 of tangible book value over the last 12 months.

Speaker 2

As of March 31, 2020 4, we have approximately $880,000,000 in undrawn borrowing capacity and additional $365,000,000 in unpledged securities. In short, liquidity at the bank is excellent and the holding company is in a very strong position as well. I mentioned last quarter that we received non objection from the Fed in December 2023 to re resume stock repurchases. We haven't done anything yet, but it's getting very close based on the rationale I discussed last quarter. Non interest expense increased $1,200,000 from the previous quarter, primarily due to growth in salaries and employee benefits as well as a small increase in occupancy costs due to seasonal maintenance and depreciation on new office and remodeled branches.

Speaker 2

Salaries and employee benefits reflected the annual increase in base salary rates paid to employees in the Q1, as well as an increase in payroll taxes, 401 matches and employee benefit costs over the prior linked quarter. I expect quarterly wages and benefits to be lower than $23,000,000 going forward in the near term. Given the revenue performance, employee investment costs have been running high, but we will maintain the ability to dial back as conditions warrant. Say this quarter that we saw $200,000 or $300,000 kind of $300,000 to $400,000 items within salaries that make it kind of linked quarter artificially high. Those include better than expected performance on performance based stock issuance that also had an impact on the tax rate as well.

Speaker 2

With that, I'd like to turn the call back over to Jim.

Speaker 1

Okay. Thanks, Brad. In closing, we are confident in our balance sheet and the opportunities that are ahead for Old Second. Our primary focus today remains on assessing and monitoring risks within the loan portfolio and optimizing the earning asset mix in order to reduce our overall sensitivity to interest rates. Net interest margin trends are stable and income statement efficiency remains at record levels.

Speaker 1

The expectation for continuing efficiency gives me confidence that we are well positioned to deliver another strong year in 2024. That concludes our prepared comments this morning. So I'll turn it over the moderator and we'll open it up for questions.

Operator

Certainly. The floor is now open for questions. Your first question is coming from Nathan Race with Piper Sandler. Please pose your question. Your line is live.

Speaker 1

Hi, guys. Good morning. Thanks for taking my question.

Speaker 3

Just curious to

Speaker 1

kind of get your updated thoughts on how we should be thinking about charge offs going forward. Obviously, you had some stability in MPA and classified loan levels in the quarter. So first, we'd just be curious to hear the driver of the charge offs this quarter look like it came from the owner occupied CRE bucket. So I'm not sure if these are some of the loans that we've been talking about in past quarters recently and just generally kind of what you're seeing in terms

Speaker 2

of loss content over the next quarter or 2? If you refer back to last quarter's call, we had said that we expected a $3,000,000 to $4,000,000 loss. We had thought that charge off would could fall into last quarter, but the timing of things didn't allow make that possible. So this charge off was expected in terms of what we were trying to communicate anyway. We may have a 1,000,000 or 2 next quarter, but I view that as kind of 50% likely.

Speaker 2

Absent that, I don't see significant losses absent something changing or a surprise propping up. We tried to communicate that we had reached an inflection point last quarter. We haven't seen anything in the 3 month since that would lead us to change that communication.

Speaker 1

The only other thing I'd add Nate is, we haven't really seen any new problems crop up here in the last quarter or so and any future charge offs that we will realize will more than likely be in previously allocated credits. Okay, great. And can you guys just remind us kind of how you're thinking about loan growth going forward? I understand demand is low and I imagine the pipeline slowed as well as I believe you touched on Jim, but just any thoughts on how you see kind of the cadence of loan growth and also how you guys are expecting deposits to trend over the course of 2024? Yes, I can touch on the loan pipeline.

Speaker 1

I'll let Brad talk about deposit flows. But if you throw out 2023, historically our Q1 loan origination is usually pretty moderate. That was the case again this year coupled with the fact that we had some significant large payoffs and paydowns due to sales of some properties. Loan demand, I would say, is somewhat muted relative to last year activity in our loan committee is picking up. We feel we still have the organic loan origination capacity internally to produce still in the low to mid single digit loan growth this year.

Speaker 1

The teams are performing well and certainly marginal returns on some of the opportunities we're looking at are not overly attractive in some cases. So we're to Brad's point before, we're not looking to swallow the balance sheet to mitigate margin compression. We're being very selective and opportunistic. We still feel low to mid single digits is achievable this year. I'll let Brad talk about deposit flows.

Speaker 2

Yes, the game is getting easier. So I think one thing that if you look at our industry and the flows from non interest bearing into other deposit captions. For us, as I mentioned, the open to close ratio is positive for the first time in a long time and Old Second has historically been a net grower of checking accounts absent the period of volatility coming out of acquisitions. Our deposit attrition within that caption is more a function demographically I think than anything else, just the struggle that's seen at the lower end of the pay scale and lower demographics. We are seeing some pricing pressure in commercial account balances, but nothing that we can't match and certainly at rates well below overnight borrowing levels.

Speaker 2

The speed of the mix shift that we saw coming into time deposits and coming out of overnight borrowing surprised us

Speaker 1

a little

Speaker 2

bit. I don't know if that will continue, but certainly you can see a fair amount of volatility in market rate interest rate expectations and it does make sense for some volatility to bleed through into deposit markets as well from that. I'm more bullish than I expected to be on deposit funding, I can tell you that.

Speaker 1

And I think we're certainly in a fortunate position at 40% of our deposit portfolio and DDA non interest bearing that obviously is going to provide us a nice floor for any future margin compression.

Speaker 2

It doesn't help our stated goal of reducing asset sensitivity to have that overnight borrowing position halved in a period of weeks. That was certainly interesting, but things feel very good on the deposit front at this point.

Speaker 1

Okay, great. And then just turn to the margin, Brad, I think you alluded to greater stability in a higher for longer rate environment in here over lease perhaps next quarter or 2. And just within that context, I understand you guys obviously have a pretty short duration securities book. So just curious how much cash flow is coming off those securities portfolio over the next couple of quarters and how you guys are thinking about redeploying that just given the fairly soft environment for growth in loans.

Speaker 2

If things keep trending like they're trending out of a mine to grow the securities portfolio at this point, it won't be significant, maybe $100,000,000 or so, maybe $300,000,000 over a period over the next 12 months. I think that there is value coming when the thing is when there is this kind of volatility in interest rate markets, it creates opportunity. And I expect at least right now that it's going to continue trending in our favor in terms of there will be more rate further out the curve. And my bias will be to continue to sell variable and buy fixed. So we'll see if we get that opportunity.

Speaker 2

If we don't, that's okay too. What we've tried to communicate over the last 12 months to 18 months is that there certainly could have been additional margin upside. What you've gotten instead is margin stability as we've taken asset sensitivity off the table. I expect that trend to continue. Right.

Speaker 1

Can you just remind us how much cash flow you have coming off or maturing?

Speaker 2

So just natural amortization of the portfolio would draw off about $25,000,000 to $50,000,000 per quarter.

Speaker 1

Okay, great. I'll step back. Thanks. Thanks guys.

Operator

Your next question is coming from Chris McGratty with KBW. Please proceed with your question. Your line is live.

Speaker 4

Hi, this is Nick Matosikas on for Chris. Good morning, guys.

Speaker 1

Hey, Nick. Good morning, Nick.

Speaker 4

Maybe just on the given the speed of the capital build, you could speak to the priorities on buybacks versus M and A. Any specific level of the stock where you guys would lean more into the buybacks from here?

Speaker 1

So we talked about this

Speaker 2

a little bit last quarter. It's not one variable, but I would say that, one, it's very difficult to do M and A if you trade at 7 times earnings. That math is if you're in a kind of a PE arbitrage game that's a crappy trade. So our stock becomes relatively attractive when you talk about buying a lower quality balance sheet at say 1.5x just pulling the number out of a hat versus buying a higher quality balance sheet at 1.2x. So the methodology we communicated last quarter was projecting earnings 12 months forward, what's tangible book value per share and are we below that in terms of the current trading price, I think that's a level that's very attractive to us and that remains the case.

Speaker 2

I alluded in the prepared comments that we are very close to that threshold.

Speaker 4

Great. Thank you for that. And then maybe one more just on the NID outflows towards the end of the quarter. I think the higher for longer kind of became more consensus. I guess, were you seeing any more deposit outflows towards the end of the quarter?

Speaker 4

And or do you think that narrative is largely

Speaker 2

and I tried to allude to this as well. It's purely seasonal factors. We don't have a deposit MACE that's made up of people doing interest rate speculation. It's $510,000 checking accounts and it's just a function of when pay periods occur, when's payday versus when are bills due and tax payments and tax refunds and normal people stuff.

Speaker 4

Okay. I'll step back. Thank you, guys.

Speaker 1

Yes. Thanks,

Operator

Nick. Your next question is coming from Terry McEvoy with Stephens Inc. Please proceed your question. Your line is live.

Speaker 5

Good morning. This is Brandon Root on for Terry. Hi Brandon. I just have a quick one. Can you expand on the impact of the market rates had on the salaries and benefits lines?

Speaker 5

And then also what would occur going forward if rates remain unchanged and you maintain these current high levels of profitability?

Speaker 2

We it's not interest rates on the salaries and benefits line. It's a couple of items that drive it higher. 1, you've got bonuses that are paid out in the Q1, so you're fully maxing out FICA for your higher paid employees, So you've got a higher share there. And then I mentioned earlier that performance based restricted stock vesting came in above target based on old second performing at the 90th percentile of the peer group on ROTCE and efficiency. That increased share issuance related to those performance stock also has an impact on the tax rate, which is what it was a little bit lower this quarter.

Speaker 2

Those of you that listen know I'm loathed to talk about tax rate because I'm always wrong about it. I had said that salaries and benefits are expected to be kind of closer or even below $23,000,000 per quarter going forward. The only thing that can make us wrong on that is if, say, there's a virus and a bunch of people get sick and healthcare claims go through the roof. That's the kind of stuff that I can't predict, but there's no step change here. It's just a Q1 one off e type stuff.

Speaker 5

Okay, got it. And maybe one, your classified multifamily loans are pretty low. I'm just curious, can you talk about what you're seeing in your markets and trends in your own portfolio?

Speaker 1

Yes. I think certainly our focus with asset quality continues to be on office and healthcare. Those are the 2 main areas that we're seeing some stress. Nothing new has cropped up in office or healthcare for that matter in the last quarter or 2. We continue to work through that.

Speaker 1

I think one of the other things we're struggling with is a third of our classified loans are almost a third are purchase participations and some are SMIC credits whereby we don't have a voice at the table. So, working out of those is going to be a challenge. It's going to take time, but I think the good news is when you have a third of your classifieds and criticized declining almost 31% from a year ago that certainly bodes well for future migration.

Speaker 5

Okay. Those are my questions. I appreciate you answering them.

Speaker 2

Thanks, Brandon. Thanks, Brandon.

Operator

Your next question is coming from Brian Martin with Janney. Please proceed with your question. Your line is live.

Speaker 3

Hey, good morning, guys.

Speaker 2

Hey, Brian. Hey, Brian.

Speaker 3

Hey, Jim. Maybe I missed it just in your comments, just to be clear on the I know it's down, but just the level of criticized loans in the quarter, I know what the classified was, but just to criticize level in the quarter, was it about $200,000,000 Is that what you said or do you have that number?

Speaker 1

Yes, I have that. It sounds right, Brian.

Speaker 3

Okay. Maybe just while you're looking go ahead.

Speaker 1

Yes, it's 200,000,000

Speaker 3

dollars Okay. So 200,000,000 quarter. Okay. And then just for Brad on the securities repricing, it sounds like it's maybe $100,000,000 or so this year. Are those mostly treasury securities Brad?

Speaker 3

I thought that's what I don't know, is that before?

Speaker 2

That is yes, that is almost entirely treasury. So we had bought a bunch of kind of 2 through 4 year treasuries back in 2021 2020. Just looking to get our money back if we were right about what rates we're going to do, which we were and we got our money back. So we've got a little bit more comment. I didn't answer that first question totally right.

Speaker 2

Somebody asked what the cash coming up portfolio. Normal amortization is the $25,000,000 to $50,000,000 but we still got some lumpy things coming at us over the next 6 months.

Speaker 3

Okay. We

Speaker 2

got a ton of cash coming out. We got plenty of opportunities for higher yields on that. I certainly like where we are today relative to where we were last quarter in terms of reinvestment opportunities. Okay.

Speaker 3

It seemed like last quarter there was about $100,000,000 on the treasury stuff that was coming due, but it sounds like now the expectation if loan demand is soft that maybe you just redeploy that into securities book and maybe grow it from that. Jim mentioned

Speaker 2

we still believe we can grow loans and there's no substitute for that. I don't have a problem with being at a $400,000,000 overnight borrowing level. No issue with that, especially as it gives us something that re prices if we're wrong about short rates. So I don't see any reason to shrink the balance sheet, I guess is the main takeaway here. This quarter came in light on a period end basis, a little better on an average basis, and I would guide you to the average balance sheet more so than the period end.

Speaker 3

Got you. Okay. That's helpful. And then maybe just on the capital, kind of the buyback versus the M and A. I mean, I guess, how is the market, given absent your stock price and the impact that has, but just as far as the level of opportunities you're seeing on the M and A side versus balancing that with stock price and then the potential for the earnings with where tangible book is heading to, just thinking about M and A as a potential?

Speaker 2

M and A is still challenging here, right. I mean there's an awful lot of people that certainly are struggling and are likely to under earn over the years ahead, especially in a higher for longer scenario. But those people also have a fair value problem in terms of where the balance sheet would be marked. So that kind of M and A takes an awful lot of capital. I'm not terribly opposed to it, but it is onerous.

Speaker 2

And I think that there is some equilibrium level of rates where it balances the level of fair value marks versus pricing expectations versus going it alone and hoping for rates to fall. I don't know where it is, but M and A activity is still muted. And the people that the easy transaction to do is somebody who's got an awful lot of undeployed deposits. I think we've seen one of those recently. But that's not something that we're going to be able to compete with on price at our current valuation.

Speaker 3

Got you.

Operator

I would now like to turn the floor back over to Jim Ecker for closing remarks.

Speaker 1

Okay. Thanks everyone for your interest in our company and for joining us this morning. And we look forward to speaking with you again next quarter. Goodbye.

Operator

Thank you everyone. This does conclude today's conference

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Key Takeaways

  • Old Second delivered net income of $21.3 million (EPS 47¢) in Q1, achieving a ROATCE of 17.8% and a 53.09% efficiency ratio, while tangible common equity rose 51 bps to 9.04% and CET1 crossed 12%.
  • Asset quality metrics improved as substandard and criticized loans declined to $200 million (from a peak of $300 million), special mention loans hit a two-year low, and management took a $3.5 million provision and one $3.9 million charge-off.
  • Net interest margin compressed to 4.58% from 4.62% last quarter as funding costs rose faster than earning asset yields, despite a 7 bps increase in loan rates and stable securities yields.
  • Balance sheet optimization remains a priority, with a short duration posture, selective low-to-mid single-digit loan growth, and plans to reinvest amortizing securities into higher-rate fixed-income.
  • Deposit flows stabilized with a $38 million period-end increase, supported by competitive pricing, and liquidity remains strong with $880 million in undrawn borrowings and $365 million of unpledged securities.
AI Generated. May Contain Errors.
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