Old Second Bancorp Inc Q1 FY2026 Earnings Call

Good morning, everyone, and thank you for joining us today for Old Second Bancorp, Inc.'s first quarter 2026 earnings call. On the call today are Jim Ecker, the company's chairman, president, and CEO, Brad Adams, the company's COO and CFO, Darren 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 Seconds 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 homepage under the Investor Relations tab. Now I will turn it over to Jim Ecker.

Hey, good morning, and thank you for joining us. I have several prepared opening remarks, and then turn it over to Brad. I 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, 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 a totally-owned subsidiary Evergreen Bank Group, net income for the first quarter was $26 million, or $0.49 for delusion. First quarter 2026 earnings were impacted by $9.8 million of net loan charge-offs. It really included a commercial real estate investor charge-off of $3.9 million. That was an office property located in downtown Chicago. The property experienced some vacancy and an updated valuation that was approximately 50% lower than prior. The property does now cash flow adequately at the new carrying value after $3.3 million in the warehousing and distribution space that has seen its cash flow position deteriorate. And lastly, net charge-offs related to $9 million, a relatively higher than normal level due to some seasonality and continuing consumer lending softness consistent with what's being seen in the broader economy. Tangible book value per share increased to $14.35 as of first 2026 from $14.12 as of December 31, 2025. The tangible equity ratio increased five basis points 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 decreased 34 basis points. Our financial performance continued to reflect an exceptionally strong net interest margin at 5.14% for the first quarter. That's a five basis point improvement from last quarter, and 26 basis point increase over the prior equivalent basis. Pre-provision net revenues decreased in the first quarter due to date count, lower loan balances, and a decline in rates overall. This was 105 basis points for the first quarter compared to 115 basis points, 83 basis points for the first quarter of 2025. For the first quarter of 2026 compared to last quarter, tax equivalent income on average earning assets decreased $4 million, while interest expense on average interest-bearing liabilities decreased $2.1 million. The loan to deposit ratio is 93.2% as of March 31st, 2026 compared to about 94% last quarter and 81.2% as of March 31, 2020. The first quarter of 2026 experienced a decrease in total loans of $66.9 million from last quarter. Tax equivalent Loan yields declined five basis points during the first quarter of 2026 compared to the link 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. Non-performing loans increased $22.7 million, but classified assets declined by $2.8 million. In general, our collateral position won downgraded credits. We recorded 9.8 million in net loan charge-offs in the first quarter relationship each in commercial real estate investor. The allowance for credit losses on loans was 72.1 million as of March 31st, or 1.39% of total loans, from 72.3 million at year-end, which was 1.38% of total loans. Unemployment and GDP forecast used in 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 the global tariff volatility in the war in Iran continues to be considered within our modeling. Provision levels quarter over link quarter increased by 6.5 million to 9.5 million and were largely driven by the power sports portfolio net loan charge offs as well as the two larger credits that we mentioned earlier. Non-interest income reflected a $476,000 increase in the first quarter compared to the prior link quarter and $2.4 million increase. Banking income increased $225,000 compared to the link quarter and increased $500 to the like. Excluding the impact of mortgage servicing rates, mark-to-market adjustments, mortgage banking income decreased $51,000 over the prior link quarter, but increased $156,000 from the prior year-like period. Increased $358,000 in the first link quarter. It's $714,000 compared to the prior year-like quarter, driven largely by PowerSport loan service fees and dealer chargebacks. $2.7 million from the prior link quarter, as the first quarter experienced $349,000 in acquisition costs, compared to $2.3 million in the fourth quarter. Our efficiency ratio continues to be excellent, as the tax equivalent efficiency ratio adjusted to exclude core deposit and tangible amortization, oriole cost, and the adjustments to net income as noted earlier was 51.7% for the first quarter compared to 51.28% for the fourth quarter of 2025. We're obviously disappointed in the level of charge-offs in the quarter, but otherwise, transit will second 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 don't have very much, don't see circumstances in other credits similar to this credit that decline in value. I would say that the last office credit we were generally worried about is a participation loan that came with us via acquisition in 2021 that we unfortunately acquired an additional piece with the Evergreen. I would like to call your attention to page six of our loan portfolio disclosures. I mentioned C&I relationship. We are working through that one, and there's underlying cash. 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 shortfall. Reduce reliance on wholesale funding as we allow the legacy Evergreen Bank brokered CDs to run off and reprice higher cost.

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's pretty unusual. Relative to the prior year quarter, net interest income increased by 18 million or 29 percent. Tax equivalent loan yields decreased by only five basis points, but securities yields increased four basis points in the first quarter relative to last quarter. Overall total yield on interest earning assets declined three basis points, and the cost of interest bearing deposits decreased 15 basis points. Total interest bearing liabilities decreased by 12 basis points. The end result was a five basis point increase in the tax equivalent then to 5.14 relative to 5.09 last quarter. Obviously, we believe this continues to be exceptional margin performance. Tax equivalent then for the first quarter of 2026 increased 26 basis points compared to 488 last year. Average loans decreased by 70 million, or 1.3%, quarter over link quarter, and average deposits decreased by 162 million. 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' end 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 1963, 63, resulting in a reduction in equity and a growth in Treasury stock of $23.1 million for the first quarter of 2026. That enhanced EPS by about one cent for the quarter. We're 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's due to the exceptional earnings power that's inherent in this balance sheet right now. It's pretty remarkable that we can have a couple of stumbles in credit and still produce this level of earnings with an ROTC 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'll 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's it for my end. So with that, I'll turn the call back over to Jim.

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 We are optimistic about loan growth in the coming quarters and the potential for more strategic growth opportunities as well.

Certainly. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 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 Jeff Rulis with DA Davidson.

Thanks. Good morning. Just a question on maybe the net charge-off expectations just to kind of realign with maybe where we are for the balance of the year. You've kind of been bouncing around the 40 basis points, and you've talked about that with the Power Sports book. Given this quarter's, you know, elevated level, is there any pull forward on some of those losses, or should we revert back to kind of that prior guide on net charge-offs?

Good question, Jeff. I mean, I think the first thing is, you know, as it relates to Power Sports, you know, the absolute level of charge-offs is going to be a little bit higher. You know, I'd call your attention to page 9 of our loan disclosure deck. You can see, and Darren can speak to this, certainly. Salute losses were certainly higher this quarter, but the contribution margins were...that's the trade-off here. We had an 8.3% really net contribution margin after trend lower in the coming quarters due to normal seasonality. You know, as it relates to commercial office, Page 6, I mentioned before, we've got a little over 3.5% of loan book in office today. Only 3 million is classified. Now, there's one other credit that's not classified that we're keeping a close eye on that we may see some pull forward losses, but it's too early to tell at this point. We think losses will trend lower in coming quarters, but just keep in mind that power support losses will

I appreciate it, Jim. And, yeah, I guess I'd take the positive side of the next question on the margin. I guess the first part is, and 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 just, you know, are you assuming kind of a static rate environment?

Thanks. Well, what I 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 basically gross dollar amount of interest expense remaining the same. Obviously, 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 don't think the name of the game is any different than what we've said for the last two years, Jeff, is that we've got lots of flexibility. Balance sheet's ridiculously strong. To be able to see the kind of delta that we've seen in rates along the curve and deliver this kind of margin stability has been something I'm very proud of. and I don't see a lot of volatility going in. I think we'll see more competition on consumer loan yields as it relates to power sports. I think we'll see in the near, near term some of that mitigated by the movement back up in rates with some of the macro uncertainty, what that's 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's about as upbeat as I can be.

Appreciate it. Thanks. Yep. Your next question is from Brandon Rudd with Stevens, Inc.

Morning, Brandon. I guess the first one, I'm thankful to call her on the charge-offs. Can we drill into the increase in the non-performing loans? I think the press release mentions a few larger relationships um if you could provide a bit more color there yeah so actually classifieds

were were lower we did have an uptick in in some cells the largest was that one of which

okay thank you and then um maybe if i kind of put some pieces together here the the provision a bit higher than expected i'm assuming that's to cover the charge-offs in this quarter but the reserve ratio kind of held flat um looking ahead should we assume the reserve level kind of uh sorry the the acl ratio kind of holds flat at this call it 140 ish level going forward or as this classifies work to the system they come down plus a minus that's a reasonable expectation thank you um and then one last one just kind of taking a step back i think there's a new exhibit on slide four at the bottom showing the decline in participation in syndication exposure over time. Is there a level that you'd like to get that down to just over time?

Yeah, that's a good point. I mean, that portfolio largely came over with the West Suburban acquisition. A certain level we'll probably keep, but we'd like to continue.

Okay. Thank you. Maybe just one last one on loan yields. I think broadly, we've kind of heard that spreads were a bit compressed last quarter. So, do you have where new origination yields are relative to roll-off yields and what that incremental pickup is?

Yeah. If I look at it quarter over quarter, we've been – the weighted average yield that we've put on as far as new business is between six and three.

Thank you very much.

Your next question for today is from Nathan Race with Piper Sandler.

Thanks for taking the questions. Bigger picture question, you know, the earnings power and, you know, the high quality and kind of top quartile earnings that you guys have been putting up over the last several quarters seems to be being masked by just the ongoing credit inconsistencies and noise there. Jim, is there anything else you can offer just to assure investors that we're getting towards the tail end of some of this credit noise in the legacy portfolio.

Yeah, I guess that, you know, if you look at, you know, these through most of that NPAs are.

Okay, that's helpful. And maybe Brad, you know, just given the buyback pace this quarter, you know, is the appetite, you know, near term just given, you know, you're expecting some moderation charge offs going forward and, you know, the margin's pretty well positioned for the current rate environment with the Fed on hold. Just any thoughts on just kind of the pace of buybacks and the appetite just to

limit excess capital inflows going forward? I don't see any reason why buyback can't continue at these levels subsequent 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 the 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.

Got it. And I apologize, I jumped down late, but Jim, maybe any thoughts on just what you see from a pipeline perspective and just kind of how you're thinking about loan growth over the balance of this year?

Yeah, I think first quarter is obviously soft in commercial and soft at power.

And just from a pricing competition perspective, are you seeing anything kind of rational out there on the commercial lending side of things in Chicago land these days or just generally how are kind of new spreads holding up on the commercial portfolio?

Yeah, I would say commercial real estate is fiercely competitive right now.

Okay, great. I appreciate all the color. Thanks, guys.

Once again, if you would like to ask a question, please press star one. Your next question is from David Conrad with KBW.

Hey, good morning. Just a follow-up question on the loan growth from here. I was just hoping you can kind of break that down a little bit between commercial and power sports. I imagine power sports 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.

Maybe I'll let Darren talk about PowerSports. As it relates to commercial, we think it'll be –

Yeah, so the year we'll have – and with that, I will nationally, we'll have single-digit growth.

And then, you know, charge-offs in PowerSports were a little bit over 2% this quarter. But to your point, Kim, the excess spread, the contribution margin was actually one of the highest you've had in recent quarters. But just wonder if you're doing anything to tweak the credit on that aspect as you're looking at originations going forward in terms of underwriting.

You know, we have a little bit on, a little tighter on the underwriting, but not a material change, because we do focus on that aspect of the business. And a lot of it's driven, which is important to note, it's a product mix. So we have a good mix of originations that's endorsed, and we charge higher on the non-endorsed products than we do for our endorsed products. The example would be KTM. If you're not endorsed, maybe it's Harley, BMW. It doesn't charge off at a point. I think staying around this level that we made, our overall mix of paper that we did first quarter. So if you include everything that we did nationally in the business, first quarter of 25 compared because we like the mix of business that's going into the portfolio.

And last one for me, Brad. Expenses were much lower than at least what I expected this quarter. or just maybe a little bit more color on core expenses where we go from here for the year?

So I think that's, you know, fourth quarter is always tough because you see bonus levels can have more variability in the fourth quarter based on where everything comes out. And acquisition costs were also in there. So I think that I point you to broadly just the overall expense guy, which is we're trying to go in that kind of 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 this salary and benefits to be relatively consistent with what we see. So that all minus the one type. Again, I feel like we've 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.

Okay. Thank you. Appreciate it.

We have reached the end of the question and answer session, and I will now turn a call over to Jim Ecker for closing remarks.

Okay. Thank you, everyone, for joining us this morning. Appreciate your interest in the company, and we look forward to speaking with you again next quarter. Thank you.

This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.