Old Second Bancorp, Inc. (NASDAQ:OSBC) Q1 2024 Earnings Call Transcript

Nathan Race: Right. And can you just remind us how much cash flow you’re coming off or maturing.

Brad Adams: So just natural amortization of the portfolio would throw off about $25 million to $50 million per quarter.

Operator: Your next question is coming from Chris McGratty with KBW.

Nick Moutafakis: This is Nick Moutafakis on for Chris. Maybe just on the — given the speed of the capital builds, you could speak to the priorities on buybacks versus M&A? Any specific level of the stock for you guys to lean more into the buybacks from here?

Brad Adams: So we talked about this a little bit last quarter. It’s not one variable, but I would say that, one, it’s very difficult to do M&A if you trade at 7x 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, 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 that 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. I alluded in the prepared comments that we are very close to that threshold.

Nick Moutafakis: All right. And then maybe one more just on the NIB outflows towards the end of the quarter, I think the higher for longer kind of became more consensus. I guess, are you seeing any more deposit outflows towards the end of the quarter? Or do you think that narrowed a bit largely.

Brad Adams: And I tried to allude to this as well. It’s purely seasonal factors. We don’t have a deposit base that’s made up of people doing interest rate speculation. It’s $5,000 and $10,000 checking accounts, and it’s just a function of when pay periods occur, when is payday versus when are bills due and tax payments and tax refunds and normal people stuff.

Operator: [Operator Instructions] Your next question is coming from Terry McEvoy with Stephens Inc.

Brandon Rud: This is Brandon Rud on for Terry. I just have a quick one. Can you expand on the impacts of the market rates have on the salaries and benefits lines? And then also what would occur going forward? If rates remain unchanged and you maintain these current, high levels of profitability.

Brad Adams: It’s not interest rates on the salaries and benefits line. It’s a couple of items that drive it higher. One, you’ve got bonuses that are paid out in the first quarter. 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. Those of you that listened 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 million 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 health care 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 first quarter one-off type stuff.

Brandon Rud: 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?

Jim Eccher: Yes. I think certainly, our focus with asset quality continues to be on office and health care. Those are the 2 main areas that we’re seeing some stress. Nothing new has cropped up in office or health care for that matter in the last quarter or two. We continue to work through that. I think one of the other things we’re struggling with is 1/3 of our classified loans are almost 1/3 are purchase participations and some are SNC 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 1/3 of your classified and criticized declining almost 31% from a year ago, that certainly bodes well for future migration.

Operator: Your next question is coming from Brian Martin with Janney.

Brian Martin: 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 the classified was, but just the criticized level in the quarter, was it about $200 million? Is that what you said? Or do you have that number?

Jim Eccher: Yes, we have that. It sounds right, Brian.

Brian Martin: Okay. And maybe just while you’re looking — go ahead.

Jim Eccher: Yes. It’s $200 million.

Brian Martin: Okay. $200 million a quarter. Okay. And then just for Brad, on the securities repricing, it sounds like it’s maybe $100 million or so this year. Are those mostly treasury securities, Brad? I thought that’s what — I don’t know…

Brad Adams: 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 and 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 common. I didn’t answer that first question totally right, somebody asked what the cash coming up the portfolio. Normal amortization is 25 to 50, but we’ve still got some lumpy things coming at us over the next 6 months. So we got to find the 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.