Old Second Bancorp's Q1 2025: Navigating Contradictions in Rate Cuts, Loan Growth, and Deposit Strategies

Rate cut expectations and impact on margins, loan growth expectations, deposit growth and outlook, deposit pricing strategy, and changes in loan growth expectations are the key contradictions discussed in Old Second Bancorp's latest 2025Q1 earnings call.



Profitability and Margin Expansion:
- Old Second Bancorp reported net income of $19.8 million or $0.43 per diluted share for Q1 2025, with an ROA of 1.42%.
- The tax equivalent net interest margin improved by 20 basis points compared to the prior linked quarter and 30 basis points year-over-year.
- The margin expansion was driven by favorable funding conditions and the payoff of higher-rate borrowings, leading to a more favorable margin despite market interest rate changes.

Loan Portfolio Management:
- Total loans decreased by $41.1 million from the prior linked quarter, primarily due to net paydowns in commercial real estate and multifamily portfolios.
- The company deliberately reduced its purchase participation portfolio, which declined by $46 million or more than 10% in the quarter.
- This strategy reflects a deliberate repositioning of the loan book, focusing on reducing exposure to riskier areas and reallocating resources to more stable segments.

Credit Quality Improvements:
- OREO balances declined by $18.7 million linked quarter, contributing to a 27.2% reduction in nonperforming assets since year-end 2024.
- Criticized loans decreased by 42% or $84 million from one year ago, reflecting the lowest levels in three years.
- These improvements were due to proactive credit remediation efforts, including addressing significant credits and selling OREO properties.

Deposit Growth and Balance Sheet Strengthening:
- Period-end total deposits increased by $84 million, reflecting strong deposit growth accelerated throughout the quarter.
- The loan-to-deposit ratio improved to 81.2%, compared to 83.5% last quarter and 86.1% a year ago.
- This growth in deposits, along with favorable funding conditions, enhanced the company's balance sheet flexibility and positioned it to absorb assets from the pending merger with Evergreen.