Old Second Bancorp Q1 2026 Earnings Call Transcript

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Provided by Quartr
April 23, 2026

Key Takeaways

  • Positive Sentiment: Company delivered strong core profitability with GAAP net income of $25.6M ($0.48/sh), an exceptional tax‑equivalent NIM of 5.14%, and return on tangible common equity of 14.2%.
  • Negative Sentiment: Asset quality softened as the quarter included $9.8M of net loan charge-offs (notably Powersports and a downtown Chicago office CRE), non‑performing loans rose $22.7M, though the ACL remained roughly stable at $72.1M (1.39% of loans).
  • Positive Sentiment: Capital and shareholder returns remain healthy — tangible book value rose to $14.35, CET1 was 13.13% (up q/q), and the bank repurchased 1.2M shares for $23.1M and expects to continue buybacks and refile authorization when appropriate.
  • Neutral Sentiment: Balance‑sheet dynamics showed loans down ~$67M q/q with a loan‑to‑deposit ratio of 93.2%; management targets mid‑single‑digit loan growth for the year, modest expense growth (~3–4%), and expects NIM to trend back toward ~5% later in the year.
  • Neutral Sentiment: Powersports business drove outsized losses this quarter but also delivered high contribution margins (net contribution margin ~8.3%); underwriting has been modestly tightened and FICO on originations improved, so management expects seasonally lower losses ahead.
AI Generated. May Contain Errors.
Earnings Conference Call
Old Second Bancorp Q1 2026
00:00 / 00:00

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Operator

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 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 S. 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. The company does not undertake any duty to update such forward-looking statements.

Operator

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 James L. Eccher.

James L. Eccher
James L. Eccher
Chairman, President, and CEO at Old Second Bancorp

Hey, good morning and thank you for joining us. I have several prepared opening remarks. We'll give you my overview of the quarter and then turn it over to Bradley for additional color. I 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 or $0.48 per diluted share in the first quarter, and return on assets was 1.51%. First quarter 2024 return on average tangible common equity is 14.2%, and the tax equivalent efficiency ratio was 52.4%.

James L. Eccher
James L. Eccher
Chairman, President, and CEO at Old Second Bancorp

Excluding all adjustments, which include MSR valuation adjustments and costs related to the 2025 acquisition of Bancorp Financial and the wholly owned subsidiary, Evergreen Bank Group, net income for the first quarter was $26 million or $0.49 per diluted share. First quarter 2026 earnings were impacted by $9.8 million of net loan charge-offs, which primarily 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 estimates. The property does now cash flow adequately at the new carrying value after a restructuring. A commercial and industrial charge-off of $1.3 million in the warehousing and distribution space that has seen its cash flow position deteriorate over the last year.

James L. Eccher
James L. Eccher
Chairman, President, and CEO at Old Second Bancorp

Lastly, net charge-offs related to the Powersports business totaled $3.9 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 March 31st, 2026 from $14.12 as of December 31st, 2025. The tangible equity ratio increased five 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 decreased 34 basis points from a year ago.

James L. Eccher
James L. Eccher
Chairman, President, and CEO at Old Second Bancorp

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 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 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.

James L. Eccher
James L. Eccher
Chairman, President, and CEO at Old Second Bancorp

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 31st, 2025. 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 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. Non-performing loans increased $22.7 million, but classified assets declined by $2.8 million. In general, our collateral position is very good on quarter one downgraded credits.

James L. Eccher
James L. Eccher
Chairman, President, and CEO at Old Second Bancorp

We recorded $9.8 million 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 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 future loss rate assumptions remained 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 and the war in Iran continues to be considered within our modeling.

James L. Eccher
James L. Eccher
Chairman, President, and CEO at Old Second Bancorp

Provision levels quarter over linked 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. Noninterest income reflected a $476,000 increase in the first quarter compared to the prior linked quarter, and a $2.4 million increase from the prior year like quarter. Mortgage banking income increased $225,000 compared to the linked quarter. It increased $574,000 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 $51,000 over the prior linked quarter but increased $156,000 from the prior year like period.

James L. Eccher
James L. Eccher
Chairman, President, and CEO at Old Second Bancorp

Other income increased $358,000 in the first quarter compared to the prior linked quarter and $714,000 compared to the prior year-ago quarter, driven largely by Powersports loan service fees and dealer chargebacks. Total non-interest expense for the first quarter of 2026 declined $2.7 million from the prior linked quarter as the first quarter experienced $349,000 in acquisition costs compared to $2.3 million 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 the fourth quarter of 2025. On the credit front, we're obviously disappointed in the level of charge-offs in the quarter, but otherwise trends at Old Second remain excellent.

James L. Eccher
James L. Eccher
Chairman, President, and CEO at Old Second Bancorp

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 of it on a relative basis and don't 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 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 and there's underlying cash flow and value in that business.

James L. Eccher
James L. Eccher
Chairman, President, and CEO at Old Second Bancorp

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 following interest rate environment. With that, I'll turn it over to Bradley for more color.

Bradley S. Adams
Bradley S. Adams
COO and CFO at Old Second Bancorp

Thank you, James. As James 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%. 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 NIM to 5.14% relative to 5.09% last quarter. Obviously, we believe this continues to be exceptional margin performance. Tax-equivalent NIM for the first quarter of 2024 increased 26 basis points compared to 4.88% last year.

Bradley S. Adams
Bradley S. Adams
COO and CFO at Old Second Bancorp

Average loans decreased by $70 million or 1.3% quarter-over-quarter and average deposits decreased by $162 million. Deposit runoff is largely concentrated in high-beta, effectively wholesale deposit categories 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 $19.63, 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 $0.01 for the quarter.

Bradley S. Adams
Bradley S. Adams
COO and CFO at Old Second Bancorp

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 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'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.

Bradley S. Adams
Bradley S. Adams
COO and CFO at Old Second Bancorp

As I mentioned, stock buyback will continue to be an attractive alternative for us as our capital continues to grow. That's it from my end. With that, I'll turn the call back over to James.

James L. Eccher
James L. Eccher
Chairman, President, and CEO at Old Second Bancorp

Okay. Thanks, Bradley. 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 expectations, 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. That concludes our prepared comments this morning, so I'll turn it 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 star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two 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 D.A. Davidson.

Jeff Rulis
Jeff Rulis
Managing Director, Senior Research Analyst at D.A. Davidson

Thanks. Good morning.

James L. Eccher
James L. Eccher
Chairman, President, and CEO at Old Second Bancorp

Hey, Jeff.

Bradley S. Adams
Bradley S. Adams
COO and CFO at Old Second Bancorp

Hey, Jeff.

Jeff Rulis
Jeff Rulis
Managing Director, Senior Research Analyst at D.A. Davidson

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. It kind of been bouncing around the 40 basis points, and you've 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
James L. Eccher
Chairman, President, and CEO at Old Second Bancorp

Yeah, good question, Jeff. I think the first thing is it, as it relates to Powersports, the absolute level of charge-offs is going to be a little bit higher. I'd call your attention to page nine of our loan disclosure deck. You can see, and Darin can speak to this certainly, but the actual absolute losses were certainly higher this quarter, but the contribution margins were at an all-time high. So that's the trade-off here. We had an 8.3% really 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've got a little over 3.5% of the loan book in office today. 68% loan to value based on updated appraisals. Only $3 million is classified.

James L. Eccher
James L. Eccher
Chairman, President, and CEO at Old Second Bancorp

Now, there's one other credit that's not classified that we're keeping a close eye on, and we may see some pull-forward losses, but it's too early to tell at this point. Roundabout way of saying we think losses will trend lower in coming quarters, but just keep in mind that Powersports losses will be a little more elevated than what we normally report.

Jeff Rulis
Jeff Rulis
Managing Director, Senior Research Analyst at D.A. Davidson

Yep.

James L. Eccher
James L. Eccher
Chairman, President, and CEO at Old Second Bancorp

Below the.

Jeff Rulis
Jeff Rulis
Managing Director, Senior Research Analyst at D.A. Davidson

Appreciate it.

James L. Eccher
James L. Eccher
Chairman, President, and CEO at Old Second Bancorp

Yeah.

Jeff Rulis
Jeff Rulis
Managing Director, Senior Research Analyst at D.A. Davidson

Appreciate it, James. Yeah, I guess I'd take the positive side of the next question on the margin. I guess the first part is I heard your comments, Bradley, on expectations for the margin, but is there any residual, maybe positive impact on the sub-debt payoff? Is that inclusive of your expectations? The second piece of that is just, are you assuming a kind of a static rate environment? Thanks.

Bradley S. Adams
Bradley S. Adams
COO and CFO at Old Second Bancorp

Well, what I'd tell you at this point, and obviously notice is required to pay it off further, but what we have done going forward is we paid down a portion of the sub-debt that basically resulted in the gross dollar amount of interest expense remaining the same. Obviously, we have ample flexibility to pay it down further. 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. 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.

Bradley S. Adams
Bradley S. Adams
COO and CFO at Old Second Bancorp

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. 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 Powersports. I think we'll see, in the 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.

Bradley S. Adams
Bradley S. Adams
COO and CFO at Old Second Bancorp

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.

Jeff Rulis
Jeff Rulis
Managing Director, Senior Research Analyst at D.A. Davidson

Appreciate it. Thanks.

Bradley S. Adams
Bradley S. Adams
COO and CFO at Old Second Bancorp

Yep.

Operator

Your next question is from Brandon Rud with Stephens Inc.

Brandon Rud
Brandon Rud
Equity Research Analyst at Stephens Inc

Hi. Morning, guys.

Brandon Rud
Brandon Rud
Equity Research Analyst at Stephens Inc

I guess the first one, thanks for the color on the charge-offs. Could we drill into the increase in the non-performing loans? I think the press release mentions a few larger relationships. If you could provide a bit more color there.

James L. Eccher
James L. Eccher
Chairman, President, and CEO at Old Second Bancorp

Yeah. Actually, classifieds were lower. We did have an uptick in some seven substandard accruing loans. The largest was that aforementioned C&I credit that is cash flow dependent. They've been hit pretty hard with supply chain disruption and tariff issues. That's really the largest one. We did have a little bit of an uptick in the special mention, two or three credits, one of which we talked about was that office one that we repositioned. Again, classifieds in total were down about $3 million.

Brandon Rud
Brandon Rud
Equity Research Analyst at Stephens Inc

Sure. Okay. Thank you. Then maybe if I put some pieces together here, 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. Looking ahead, should we assume the ACL ratio kind of holds flat at this, call it 140-ish level going forward? Or-

James L. Eccher
James L. Eccher
Chairman, President, and CEO at Old Second Bancorp

Yeah. Plus or minus.

Brandon Rud
Brandon Rud
Equity Research Analyst at Stephens Inc

As the classifieds work through the system, do they come down?

James L. Eccher
James L. Eccher
Chairman, President, and CEO at Old Second Bancorp

Plus or minus, that's a reasonable expectation, Brandon.

Brandon Rud
Brandon Rud
Equity Research Analyst at Stephens Inc

Okay. Thank you. One last one, just 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?

James L. Eccher
James L. Eccher
Chairman, President, and CEO at Old Second Bancorp

Yeah. That's a good point. I mean, that portfolio largely came over with the West Suburban acquisition, peaked at right around $500 million. We've done a real good job of reducing that portfolio. We've essentially more than halved it over the last couple of years. Yeah, there's probably some room here. We'd like to continue to wind that down. Certainly, it's created a headwind to growth the last few quarters. That's not a main line of business for us. We don't view that as franchise-enhancing type of business. I think you can expect us to continue to wind that down. There's a certain level we'll probably keep, but we'd like to continue to wind this down even further.

Brandon Rud
Brandon Rud
Equity Research Analyst at Stephens Inc

Got you. 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. Do you have where new origination yields are relative to roll-off yields and what that incremental pickup is?

James L. Eccher
James L. Eccher
Chairman, President, and CEO at Old Second Bancorp

Yeah. If I look at it quarter-over-quarter, the weighted average yield that we've put on as far as new business is average between 6.6% and 6.75% over the last couple of quarters.

Brandon Rud
Brandon Rud
Equity Research Analyst at Stephens Inc

Got you.

James L. Eccher
James L. Eccher
Chairman, President, and CEO at Old Second Bancorp

That's actually down, obviously, 50-75 basis points from prior quarters.

Brandon Rud
Brandon Rud
Equity Research Analyst at Stephens Inc

Sure. Okay. Thank you very much.

James L. Eccher
James L. Eccher
Chairman, President, and CEO at Old Second Bancorp

Thanks, Brandon.

Operator

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

Nathan Race
Nathan Race
Managing Director and Senior Research Analyst at Piper Sandler

Hey, guys. Good morning. Thanks for taking the questions.

James L. Eccher
James L. Eccher
Chairman, President, and CEO at Old Second Bancorp

Morning, Nathan.

Nathan Race
Nathan Race
Managing Director and Senior Research Analyst at Piper Sandler

Bigger picture question. The earnings power and 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. James, is there anything else you can offer just to assure investors that you were getting towards the tail end of some of this credit noise in the legacy portfolio?

James L. Eccher
James L. Eccher
Chairman, President, and CEO at Old Second Bancorp

Yeah, I guess that our non-performers overall, if you look at two years ago to the end of last year, we're almost halved, right? Obviously, this is a little bit of a disappointing print, having them go up again this quarter. I'd just say credit progress improvement isn't always linear. This office credit's been hanging out there for some time. We think we're through most of that book. 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'd like. We're working very hard to reduce those.

Nathan Race
Nathan Race
Managing Director and Senior Research Analyst at Piper Sandler

Okay. That's helpful. Maybe Bradley, just given the buyback pace this quarter, is the appetite near-term, just given you're expecting some moderation in charge-offs going forward and 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?

Bradley S. Adams
Bradley S. Adams
COO and CFO at Old Second Bancorp

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 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.

Nathan Race
Nathan Race
Managing Director and Senior Research Analyst at Piper Sandler

Okay, got it. I apologize, I jumped on late. James, maybe any thoughts on just what you're seeing from a pipeline perspective and just how you're thinking about loan growth over the balance of this year?

James L. Eccher
James L. Eccher
Chairman, President, and CEO at Old Second Bancorp

Yeah. I think first quarter is obviously soft in commercial and it's soft at Powersports. Pipelines are building. We still are anticipating low- to single-digit growth through the balance of the year. Nothing's changed on that front.

Nathan Race
Nathan Race
Managing Director and Senior Research Analyst at Piper Sandler

Okay. Just from a pricing competition perspective, are you seeing anything kind of irrational out there on the commercial lending side of things in Chicagoland these days? Or just generally, how are new spreads holding up on the commercial portfolio?

James L. Eccher
James L. Eccher
Chairman, President, and CEO at Old Second Bancorp

Yeah, I would say commercial real estate is fiercely competitive right now. We're still getting acceptable spreads in our C&I group and leasing. As Bradley mentioned, we think Powersports yields will come down a little bit due to competition. We're still bullish that our margin's going to be hanging in there around 5%.

Nathan Race
Nathan Race
Managing Director and Senior Research Analyst at Piper Sandler

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

Bradley S. Adams
Bradley S. Adams
COO and CFO at Old Second Bancorp

Thank you.

Operator

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

David Konrad
David Konrad
Managing Director of Equity Research at KBW

Hey, good morning. Just a follow-up question on the loan growth from here. I was just hoping you could kind of break that down a little bit between commercial and Powersports. I'd imagine Powersports, this is kind of the trough seasonal level for the year. Maybe those two asset classes give a little bit of expectations for the year.

Bradley S. Adams
Bradley S. Adams
COO and CFO at Old Second Bancorp

I maybe I'll let Darin talk about Powersports. As it relates to commercial, we think it'll be pretty broad-based. I think we'll see growth in commercial real estate, C&I sponsored leasing. We're not seeing any one sector with higher expectations than the other. As it relates to Powersports, maybe Darin, you can comment on that.

Darin Campbell
Darin Campbell
EVP, National Specialty Lending at Old Second Bancorp

I'm 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'll have single-digit growth. I'm still projecting for the remainder of the year.

David Konrad
David Konrad
Managing Director of Equity Research at KBW

Charge-offs in Powersports were a little bit over 2% this quarter. To your point, James, the excess spread, the kind of niche in margin was actually one of the highest you've had in recent quarters. I 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.

Darin Campbell
Darin Campbell
EVP, National Specialty Lending at Old Second Bancorp

We have a little tighter on the underwriting, but not a material change because we do focus on that net contribution margin, which the overall profitability.

David Konrad
David Konrad
Managing Director of Equity Research at KBW

Right

Darin Campbell
Darin Campbell
EVP, National Specialty Lending at Old Second Bancorp

... of the business. A lot of it is driven, which is important to note, it's a product mix. We have a good mix of originations that's endorsed OEM products and non-endorsed products. We charge higher on the non-endorsed products than we do for our endorsed products. For example, would be endorsed Indian, Triumph, KTM. If you're non-endorsed, maybe it's Harley, BMW, Yamaha, Suzuki, those type of products. We charge a point higher for those products. 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 doesn't charge off at a point higher, but we charge a point higher. It's driving a little bit higher the charge-off rate, but it's also driving a better profitable portfolio. I see it-

David Konrad
David Konrad
Managing Director of Equity Research at KBW

Got it.

Darin Campbell
Darin Campbell
EVP, National Specialty Lending at Old Second Bancorp

Staying around this level, maybe slightly less with a couple of changes that we made. Our overall mix of paper that we did first quarter if you include everything that we did nationally in the business, first quarter of 2025 compared to the first quarter of 2026. Actually our FICO score went from 735 up to 743 on the full mix of business that we did comparing quarter-over-quarter. All that'll start playing into the mix as this portfolio continues to turn over. That number should start coming down a little bit. I wouldn't say materially going down because we like the mix of business that's going into the portfolio from a profitability standpoint.

David Konrad
David Konrad
Managing Director of Equity Research at KBW

Got it, perfect. Last one from me, Bradley. Expenses were much lower than at least what I expected this quarter. Just maybe a little bit more color on core expenses where we go from here for the year.

Bradley S. Adams
Bradley S. Adams
COO and CFO at Old Second Bancorp

I think that fourth quarter is always tough because you see bonus levels can have more variability in the fourth quarter based on where everything comes out.

James L. Eccher
James L. Eccher
Chairman, President, and CEO at Old Second Bancorp

Acquisition costs.

Bradley S. Adams
Bradley S. Adams
COO and CFO at Old Second Bancorp

Acquisition costs were also in there. I think that I'd point you to broadly just the overall expense guide, which is we're trying to go in that kind of 3%-4% range for the year. That feels right. 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 the salary and benefits to be relatively consistent with what we saw last year. That all minus the one-time stuff, of course.

David Konrad
David Konrad
Managing Director of Equity Research at KBW

Right.

Bradley S. Adams
Bradley S. Adams
COO and CFO at Old Second Bancorp

Again, I feel like we've done a good job controlling it. 3%-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'm pleased with that.

David Konrad
David Konrad
Managing Director of Equity Research at KBW

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
James L. Eccher
Chairman, President, and CEO at Old Second Bancorp

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.

Operator

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

Executives
    • Bradley S. Adams
      Bradley S. Adams
      COO and CFO
    • Darin Campbell
      Darin Campbell
      EVP, National Specialty Lending
    • James L. Eccher
      James L. Eccher
      Chairman, President, and CEO
Analysts
    • Brandon Rud
      Equity Research Analyst at Stephens Inc
    • David Konrad
      Managing Director of Equity Research at KBW
    • Jeff Rulis
      Managing Director, Senior Research Analyst at D.A. Davidson
    • Nathan Race
      Managing Director and Senior Research Analyst at Piper Sandler
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