OSBC

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Old Second Bancorp (OSBC) delivered a solid Q1 2026 with net income of 25.6 million dollars and an impressive 5.14% net interest margin. The quarter results were influenced by 9.8 million dollars in net charge-offs, including a significant 3.9 million dollar write-down on a Chicago office property and seasonal losses in the powersports lending segment. Despite these credit challenges, the bank maintained a 14.2% ROTCE and a strong efficiency ratio of 52.4%. The balance sheet saw a deliberate reduction in high-cost deposits and a slight dip in loan balances, though management guides for mid-single-digit loan growth for the full year. Capital return was aggressive, with 23.1 million dollars spent on share repurchases, and management indicated a likely renewal of the buyback authorization. While nonperforming loans increased, total classified assets decreased, suggesting the credit cycle may be stabilizing. Analysts focused on the sustainability of the NIM and the noise in the credit portfolio. Overall, leadership expressed confidence that the bank strong earnings power will continue to outweigh isolated credit setbacks as they optimize the balance sheet for a shifting rate environment, eventually targeting a 5% margin floor.

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OLD SECOND BANCORP INC: Administrative Filing Status Quo with Minimal Forensic Footprint

Full Earnings Call Transcript — Q1 • 2026-04-23

Operator: Good morning, everyone, and thank you for joining us today for Old Second Bancorp, Inc. First Quarter 2026 Earnings Call. On the call today are James L. Eccher, the company's Chairman, President and CEO; Bradley S. Adams, the company's COO and CFO; Darin Campbell, the company's Head of National Specialty Lending; and Gary Collins, the Vice Chairman of our Board. I will start with a reminder that Old Second Bancorp, Inc.'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. 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 home page under the Investor Relations tab. Now I will turn it over to James L. Eccher.
James L. Eccher: Hey. Good morning, and thank you for joining us. I have several prepared opening remarks. I will give you my overview of the quarter and then turn it over to Brad for additional color. We will then conclude with certain summary comments and thoughts about the future before we open it up to Q&A. From a GAAP perspective, net income was 25.6 million dollars, or $0.48 per diluted share in the first quarter, and return on assets was 1.51%. First quarter 2026 return on average tangible common equity was 14.2%, and the tax-equivalent efficiency ratio was 52.4%. Excluding all adjustments, which include MSR valuation adjustments and costs related to the 2025 acquisition of Bancorp Financial and its wholly owned subsidiary Evergreen Bank Group, net income for the first quarter was 26 million dollars, or $0.49 per diluted share. First quarter 2026 earnings were impacted by 9.8 million dollars of net loan charge-offs, which primarily included a commercial real estate investor charge-off of 3.9 million dollars for an office property located in Downtown Chicago. The property experienced some vacancy and an updated valuation that was approximately 50% lower than prior estimates. The property now cash flows adequately at the new carrying value after a restructuring. A commercial and industrial charge-off of 1.3 million dollars in the warehousing and distribution space has seen its cash flow position deteriorate over the last year. And lastly, net charge-offs related to the powersport business totaled 3.9 million dollars, a relatively higher-than-normal level due to some seasonality and continuing consumer lending softness consistent with what is being seen in the broader economy. Tangible book value per share increased to $14.35 as of 03/31/2026 from $14.12 as of 12/31/2025. The tangible equity ratio increased 5 basis points from last quarter, from 11.02% to 11.07%, and is 73 basis points higher than the like period one year ago. Common Equity Tier 1 was 13.13% in the first quarter, increasing from 12.99% last quarter, but decreasing 34 basis points from a year ago. Our financial performance continued to reflect an exceptionally strong net interest margin at 5.14% for the first quarter. That is a 5 basis point improvement from last quarter and a 26 basis point increase over the prior like quarter on a tax-equivalent basis. Pre-provision net revenues decreased in the first quarter from the prior quarter primarily due to day count, lower loan balances, and a decline in rates overall. Cost of deposits was 105 basis points for the first quarter compared to 115 basis points for the prior linked quarter and 83 basis points for 2025. For 2026 compared to last quarter, tax-equivalent income on average earning assets decreased 4 million dollars, while interest expense on average interest-bearing liabilities decreased 2.1 million dollars. The loan-to-deposit ratio was 93.2% as of 03/31/2026, compared to about 94% last quarter and 81.2% as of 03/31/2025. The first quarter of 2026 experienced a decrease in total loans of 66.9 million dollars from last quarter. Tax-equivalent loan yields declined 5 basis points during 2026 compared to the linked quarter but reflected a 48 basis point increase from the quarter year-over-year. The decrease in yield in comparison to the prior quarter is primarily a function of Fed rate cuts working through the portfolio. Asset quality trends softened during the quarter. Nonperforming loans increased to 22.7 million dollars, but classified assets declined by 2.8 million dollars. In general, our collateral position is very good on quarter one downgraded credits. We recorded 9.8 million dollars in net loan charge-offs in the first quarter, with the majority stemming from the powersports portfolio and one relationship each in commercial real estate investor and commercial. The allowance for credit losses on loans was 72.1 million dollars as of March 31, or 1.39% of total loans, compared to 72.3 million dollars at year-end, which was 1.38% of total loans. Unemployment and GDP forecast views and future loss rate assumptions remain fairly static from last quarter, with no material changes in the unemployment assumptions on the upper end of the range based on recent Fed data projections. The impact of global tariff volatility and the war in Iran continues to be considered within our modeling. Provision levels quarter-over-linked quarter increased by 6.5 million dollars to 9.5 million dollars and were largely driven by the powersports portfolio net loan charge-offs as well as the two larger credits that we mentioned earlier. Noninterest income reflected a 476 thousand dollar increase in the first quarter compared to the prior linked quarter and a 2.4 million dollar increase from the prior year linked quarter. Mortgage banking income increased 225 thousand dollars compared to the linked quarter and increased 574 thousand dollars compared to the like prior year period, primarily due to volatility of mortgage servicing rights mark-to-market valuations. Excluding the impact of mortgage servicing rights mark-to-market adjustments, mortgage banking income decreased 51 thousand dollars over the prior linked quarter but increased 156 thousand dollars from the prior year like period. Other income increased 358 thousand dollars in the first quarter compared to the prior linked quarter and 714 thousand dollars compared to the prior year linked quarter, driven largely by powersport loan service fees and dealer chargebacks. Total noninterest expense for 2026 declined 2.7 million dollars from the prior linked quarter as the first quarter experienced 349 thousand dollars in acquisition costs compared to 2.3 million dollars in the fourth quarter last year. Our efficiency ratio continues to be excellent, as the tax-equivalent efficiency ratio adjusted to exclude core deposit intangible amortization, OREO costs, and the adjustments to net income as noted earlier, was 51.7% for the first quarter compared to 51.28% for 2025. On the credit front, we are obviously disappointed in the level of charge-offs in the quarter, but otherwise trends at Old Second Bancorp, Inc. remain excellent. Commercial real estate office continues to be under pressure broadly, with valuations coming in at steep discounts to prior levels and rents declining broadly. The good news is that we do not have very much of it on a relative basis and do not see circumstances in other credits similar to this credit that declined in value this quarter. I would say that the last office credit we are generally worried about is a participation loan that came with us via acquisition in 2021 that we unfortunately acquired an additional piece of with the Evergreen transaction. I would like to call your attention to page six of our loan portfolio disclosures for more color on our office portfolio. With respect to the aforementioned C&I relationship, we are working through that one. There is underlying cash flow and value in that business. More broadly, our focus continues to be on the optimization of the balance sheet to perform and withstand the variability of current and future interest rates, as well as diligent oversight of commercial credits and assessment of potential collateral shortfalls. We continue to reduce reliance on wholesale funding as we allow the legacy Evergreen Bank brokered CDs to run off and reprice higher-cost deposits in the falling interest rate environment. With that, I will turn it over to Brad for more color.
Bradley S. Adams: Thank you, Jim. As Jim mentioned, revenue trends were generally excellent with only a modest decline in net interest income relative to last quarter. That is pretty unusual. To the prior year quarter, net interest income increased by 18 million dollars, or 29%. Tax-equivalent loan yields decreased by only 5 basis points, but securities yields increased 4 basis points in the first quarter relative to last quarter. Overall, total yield on interest-earning assets declined 3 basis points, and cost of interest-bearing deposits decreased 15 basis points. Total interest-bearing liabilities decreased by 12 basis points. The end result was a 5 basis point increase in the tax-equivalent NIM to 5.14%, relative to 5.09% last quarter. Obviously, we believe this continues to be exceptional margin performance. Tax-equivalent NIM for 2026 increased 26 basis points compared to 4.88% last year. Average loans decreased by 70 million dollars, or 1.3% quarter-over-linked quarter, and average deposits decreased by 162 million dollars. Deposit runoff is largely concentrated in high-beta, effectively wholesale, deposit captions as planned. Loan origination activity in the first quarter was seasonally slower, but the pipeline remained strong. Certainly, the market environment, including ongoing pricing challenges due to tariffs and the uncertainty with war, results in reluctance on borrowers to invest in capital projects. Our lending teams are working with their customers to ensure we can meet their needs and offer loans at a good price when the demand is there. From a stock repurchase perspective, we acquired 1.2 million shares at an average price of $19.63, resulting in a reduction in equity and a growth in treasury stock of 23.1 million dollars for 2026. That enhanced EPS by about $0.01 for the quarter. We are a little more than halfway through the existing buyback authorization. We expect to continue to remain active. Obviously, capital still managed to grow in the quarter despite the size of this capital return, and that is due to the exceptional earnings power that is inherent in this balance sheet right now. It is pretty remarkable that we can have a couple of stumbles in credit and still produce this level of earnings, with an ROTCE still in the mid-teens. Margin trends still feel very good and stable in the near term. I do think later in the year we will start to trend back towards 5%. Loan growth for the remainder of the year is still being targeted in the mid-single-digit level. Expense growth will continue to be modest in the quarters ahead. As you can see, as I mentioned, stock buyback will continue to be an attractive alternative for us as our capital continues to grow. That is it from my end. So with that, I will turn the call back over to Jim.
James L. Eccher: Okay. Thanks, Brad. In closing, obviously, a mixed quarter, especially as it relates to the two aforementioned credits. But the rest of the bank is performing exceptionally well, far ahead of expectation, and the earnings power is extremely strong. We remain optimistic about loan growth in the coming quarters and the potential for more strategic growth opportunities as well.
Operator: That concludes our prepared comments this morning.
James L. Eccher: I will now turn the call over to the moderator and open it up to Q&A.
Operator: Certainly. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Your first question for today is from Jeffrey Allen Rulis with D.A. Davidson. We will now open the call for questions.
Analyst: Thanks. Good morning. Just a question on the net charge-off expectations to realign where we are for the balance of the year. You had been bouncing around 40 basis points, and you have talked about that with the powersports book. Given this quarter's elevated level, is there any pull-forward on some of those losses, or should we revert back to that prior guide on net charge-offs?
James L. Eccher: Yes, good question, Jeff. I mean, I think the first thing is, as it relates to powersports, the absolute level of charge-offs is going to be a little bit higher. I would call your attention to page nine of our loan disclosure deck. You can see—and Darin can speak to this, certainly—but the absolute losses were higher this quarter, and the contribution margins were at an all-time high. So that is the trade-off here. We had an 8.3% net contribution margin after charge-offs. We think loss content will probably trend lower in the coming quarters due to normal seasonality. As it relates to commercial office—page six I mentioned before—we have a little over 3.5% of the loan book in office today, 68% loan-to-value based on updated appraisals. Only 3 million dollars is classified. There is one other credit that is not classified that we are keeping a close eye on, and we may see some pull-forward losses, but it is too early to tell at this point. So, roundabout way of saying, we think losses will trend lower in coming quarters, but just keep in mind that powersport losses will be a little more elevated than what we normally report.
Analyst: Appreciate it, Jim. I would take the positive side to the next question on the margin. I heard your comments, Brad, on expectations for the margin, but is there any residual, maybe positive impact on the sub debt payoff? Is that inclusive of your expectations? And the second piece of that is, are you assuming a kind of static rate environment?
Bradley S. Adams: What I would tell you at this point—and obviously notice is required to pay it off further—but what we have done for the go-forward is we paid down a portion of the sub debt that resulted in the gross dollar amount of interest expense remaining the same. Obviously, we have ample flexibility to pay it down further, or we could refinance depending on what we view our capital needs as. Capital needs are not urgent at this point, obviously, as you can see by looking at our balance sheet. But I do not think the name of the game is any different than what we have said for the last two years, Jeff. We have got lots of flexibility. The balance sheet is ridiculously strong. To be able to see the kind of delta that we have seen in rates along the curve and deliver this kind of margin stability has been something I am very proud of. I do not see a lot of volatility going in. I think we will see more consumer loan yields as it relates to powersports. In the near term, I think we will see some of that mitigated by the movement back up in rates with some of the macro uncertainty—what that has done to overnight index swap rates and so on and so forth. But all in all, this is about as upbeat and positive as I can sound on interest rates, and I realize I still sound monotone and boring, but it is about as upbeat as I can be.
Analyst: Appreciate it. Thanks.
Bradley S. Adams: Yep.
Operator: Your next question is from Brandon Rudd with Stephens Inc.
Analyst: Hi. Morning, guys. I think—thanks for the color on the charge-offs. Can we drill into the increase in the nonperforming loans? I think the press release mentions a few larger relationships. If you could provide a bit more color there.
James L. Eccher: Yes. Classifieds were lower. We did have an uptick in some substandard accruing loans. The largest was that aforementioned C&I credit that is cash-flow dependent. They have been hit pretty hard with supply chain disruption and tariff issues. That is really the largest one. We did have a little bit of an uptick in special mention—two or three credits—one of which we talked about was that office. One of them we repositioned. But, again, classifieds in total were down about 3 million dollars.
Analyst: Okay. Thank you. And then maybe if I put some pieces together here, the provision was a bit higher than expected. I am assuming that is to cover the charge-offs in this quarter, but the reserve ratio kind of held flat. Looking ahead, should we assume the reserve level—sorry, the ACL ratio—kind of holds flat at this level going forward?
James L. Eccher: Plus or minus, that is a reasonable expectation, Brandon, as these classifieds work through and they come down.
Analyst: Okay. Thank you. And then one last one, taking a step back, I think there is a new exhibit on slide four at the bottom showing the decline in participation and syndication exposure over time. Is there a level that you would like to get that down to over time?
James L. Eccher: Yes, that is a good point. I mean, that portfolio largely came over with the West Suburban acquisition. It peaked at right around 500 million dollars. We have done a real good job of reducing that portfolio. We have essentially more than halved it over the last couple of years. Yes, there is probably some room here; we would like to continue to wind that down. But it has created a headwind to growth the last few quarters. That is not a main line of business for us. We do not view that as franchise-enhancing type of business. So I think you can expect us to continue to wind that down. There is a certain level we will keep, but we would like to continue to wind this down even further.
Analyst: Got it. Okay. Thank you. Maybe just one last one on loan yields. Broadly, we have heard that spreads were a bit compressed last quarter. Where are new origination yields relative to roll-off yields, and what is that incremental pickup?
James L. Eccher: If I look at it quarter-over-quarter, the weighted average yield that we put on as far as new business has averaged between 6.6% and 6.75% over the last couple of quarters. That is actually down, obviously, 50 to 75 basis points from prior quarters.
Analyst: Okay. Sure. Thank you very much. Thanks, Brad.
Operator: Your next question for today is from Nathan James Race with Piper Sandler.
Analyst: Hey, guys. Good morning. Thanks for taking the question. Bigger-picture question: the earnings power and the high-quality and top-quartile earnings that you guys have been putting up over the last several quarters seem to be masked by the ongoing credit inconsistencies and noise there. Jim, is there anything else you can offer to assure investors that you are getting toward the tail end of some of that credit noise in the legacy portfolio?
James L. Eccher: Yes. I guess all I would say is nonperformers overall—if you look at two years ago to the end of last year—we are almost half, right? Obviously, this is a little bit of a disappointing print, having them go up again this quarter. I would just say credit progress and improvement is not always linear. This office credit has been hanging out there for some time. We think we are through most of that book. And then the C&I relationship kind of came to a head over the last six months. All I can say is we understand our NPAs are higher than we would like, and we are working very hard to reduce those.
Analyst: Okay, that is helpful. And maybe, Brad, just given the buyback pace this quarter, is there appetite near term—given you are expecting some moderation in charge-offs going forward, and the margin is pretty well positioned for the current rate environment with the Fed on hold—to keep up the pace of buybacks and limit excess capital inflows going forward?
Bradley S. Adams: I do not see any reason why buybacks cannot continue at these levels, subject to the remaining amount on the authorization. If you would ask me today what my intentions are, it would be to refile another authorization in short order once this is filled. We have more than enough capital to do anything strategic that I could envision coming our way and still continue to return capital to shareholders.
Analyst: Got it. And I apologize—I jumped on late—but, Jim, any thoughts on what you are seeing from a pipeline perspective and how you are thinking about loan growth over the balance of this year?
James L. Eccher: Yes, the first quarter is obviously soft in commercial, and it is soft with powersport. Pipelines are building. We still are anticipating low-to-mid single-digit growth through the balance of the year. Nothing has changed on that front.
Analyst: And from a pricing competition perspective, are you seeing anything irrational out there on the commercial lending side of things in Chicagoland these days, or how are new spreads holding up on the commercial portfolio?
James L. Eccher: I would say commercial real estate is fiercely competitive right now. We are still getting acceptable spreads in our C&I group and leasing. Brad mentioned we think powersport yields will come down a little bit due to competition. But we are still bullish our margin is going to be hanging in there around 5%.
Analyst: Okay. Great. I appreciate all the color. Thanks, guys.
James L. Eccher: Thank you.
Operator: Once again, if you would like to ask a question, please press 1. Your next question is from David Conrad with KBW.
Analyst: Hey, good morning. Just a follow-up question on loan growth from here. I was hoping you can break that down a little bit between commercial and powersports. I imagine powersports is just kind of the trough seasonal level for the year. So maybe those two asset classes—give a little bit of expectations for the year.
James L. Eccher: Yes. Maybe I will let Darin talk about powersports. As it relates to commercial, we think it will be pretty broad-based. I think we will see growth in commercial real estate, C&I, sponsored, leasing. We are not seeing any one sector with higher expectations than the other. As it relates to powersport, maybe, Darin, you can comment on that.
Darin Campbell: Yes. I think I am the same as where I was at end of the year. In the overall group—and with that, I include the collector car lending that we do as well nationally—we will have single-digit growth. I am self-projecting for the remainder of the year. And then charge-offs in powersports were a little bit over 2% this quarter.
Analyst: But to your point, the excess spread, the contribution margin, was actually one of the highest you have had in recent quarters. Just wondering if you are doing anything to tweak the credit on that aspect as you are looking at originations going forward in terms of underwriting.
Darin Campbell: We have tightened a little bit on the underwriting, but not a material change, because we focus on the net contribution margin, which is the overall profitability of the business. A lot of it is driven by product mix. We have a good mix of originations—endorsed OEM products and non-endorsed products—and we charge higher on the non-endorsed products than we do for our endorsed products. For example, endorsed would be Indian, Triumph, KTM. If you are not endorsed—maybe it is Harley, BMW, Yamaha, Suzuki—those types of products, we charge a point higher for those products. So part of the little higher charge-off rate is related to the product mix coming in over the last couple of years, which is driving the overall profitability. It does not charge off at a point higher, but we charge a point higher. So it is driving a little bit higher charge-off rate, but it is also driving a better profitable portfolio. I see it staying around this level, maybe slightly less. A couple of changes that we made: our overall mix of paper that we did in the first quarter—if you include everything that we did nationally in the business—2025 compared to 2026, our FICO score went from 735 up to 743 on the full mix of business that we did, comparing quarter over quarter. All of that will start playing into the mix as this portfolio continues to turn over. That number should start coming down a little bit, but I would not say materially going down because we like the mix of business that is going into the portfolio from a profitability standpoint.
Analyst: Got it. Perfect. And then last one for me, Brad. Expenses were much lower than at least what I expected this quarter. Maybe a little more color on core expenses—where we go from here for the year.
Bradley S. Adams: Fourth quarter is always tough because you see bonus levels can have more variability in the fourth quarter based on where everything comes out. Acquisition costs were also in there. I would point you broadly to the overall expense guide, which is we are trying to grow in that 3% to 4% range for the year. That feels right. So I would just expect it to follow that range from here. I would say, given how well the businesses are performing, I would expect to see an overall bonus level as a component of salary and benefits to be relatively consistent with what we saw last year, minus the one-time stuff, of course. Again, I feel like we have done a good job controlling it, and 3% to 4% in this kind of inflationary world, given the type of double-digit increases that we have in employee benefits, is pretty good performance for us. I am pleased with that.
Analyst: Got it. Okay. Thank you. Appreciate it.
Operator: We have reached the end of the question and answer session, and I will now turn the call over to James L. Eccher for closing remarks.
James L. Eccher: Okay. Thank you, everyone, for joining us this morning. We appreciate your interest in the company, and we look forward to speaking with you again next quarter. Thank you.
Operator: This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.