Old Second Bancorp Q4 Earnings Call Highlights

Key Points

• Q4 results: GAAP net income was $28.8 million ($0.54/share), or $30.8 million ($0.58) excluding adjustments, with ROA of 1.64%, return on tangible common equity of 16.15% and a tax‑equivalent net interest margin of 5.09%.
• Margin and funding strategy: NIM remained above 5% as deposit costs fell to 1.15% (from 1.33%), and management plans a multi-stage shift back to its preferred funding mix by replacing about $300–$400 million of deposits to reduce reliance on wholesale funding.
• Credit and outlook: Q4 net charge-offs were $6 million (roughly 75% from the power sports and owner‑occupied CRE portfolios); management expects elevated near‑term power sports losses but stronger margins and is targeting mid‑single‑digit loan growth in 2026 despite continued runoff in West Suburban CRE participations.

Old Second Bancorp NASDAQ: OSBC reported fourth-quarter 2025 GAAP net income of $28.8 million, or $0.54 per diluted share, as management highlighted strong profitability, an expanding tangible capital base, and a net interest margin that remained above 5% despite rate cuts moving through the loan portfolio.

Quarterly results and notable adjustments

Chairman, President and CEO Jim Eccher said fourth-quarter return on assets was 1.64%, while return on average tangible common equity was 16.15%. The company’s tax-equivalent efficiency ratio was 53.98%.

Earnings for the quarter included two “material adjusting items,” according to Eccher: a $428,000 pre-tax loss on mortgage servicing rights and $2.5 million of pre-tax acquisition-related expenses. The acquisition-related costs were driven by $1.5 million of computer and data processing expenses tied to core systems conversion and systems related to acquired operations. Excluding those items, the company reported net income of $30.8 million, or $0.58 per diluted share.

Chief Operating Officer and Chief Financial Officer Brad Adams said performance to close out the year was “pretty exceptional,” pointing to a net interest margin above 5%, ROA above 1.5%, and operating ROCCE “above 17.5.” Adams also noted earnings per share were “some 30% over last year,” and said integration work was completed.

Net interest margin and balance sheet positioning

Old Second’s tax-equivalent net interest margin was 5.09% in the fourth quarter, up four basis points from the prior quarter and up 41 basis points from the year-ago period, management said. Eccher attributed margin performance in part to a decline in deposit costs and the company’s ongoing effort to reduce reliance on wholesale funding as higher-cost deposits reprice in a falling-rate environment.

Deposit costs moved lower sequentially. Eccher said total cost of deposits was 115 basis points in the fourth quarter, compared with 133 basis points in the third quarter. Adams added the cost of interest-bearing deposits declined 24 basis points from the linked quarter, helping offset lower asset yields as Federal Reserve rate cuts worked through the portfolio. Loan yields declined 11 basis points from the prior quarter, while securities yields fell 14 basis points, Adams said.

Management’s near-term margin outlook remained constructive. Adams said he expected the margin could “tick down modestly in the first quarter,” but that he still expected it to remain above 5%. He also indicated the balance sheet is positioned to benefit from falling rates due to elevated levels of wholesale-like funding compared with Old Second’s typical profile, though he emphasized that is not the long-term goal.

On funding strategy, Adams said completing the return to an Old Second-style funding mix is a “multi-stage process” and that the company likely needs to replace $300 million to $400 million in deposits with its preferred type of funding to complete that transition.

Loan growth, runoff, and 2026 targets

At year-end, Old Second’s loan-to-deposit ratio was 93.9%, up from 91.4% in the prior quarter and 83.5% at December 31, 2024, Eccher said. Total loans decreased $12.4 million from the prior quarter, though Adams noted average loans increased $60 million, or 1.2%, from the linked quarter. Average deposits declined by about $200 million, as expected, with runoff “largely concentrated in high beta effectively wholesale deposit captions as planned,” Adams said.

Management emphasized that underlying origination activity remained strong. Adams said loan origination activity in the fourth quarter was “actually very good” and that market spreads were “far more favorable” than earlier in the year. Eccher said the company’s end-of-year pipeline was the highest in roughly six to seven quarters, which he said supported optimism for the first half of 2026.

However, payoffs created headwinds to loan growth, particularly in a portfolio acquired with West Suburban. Adams said balances in CRE loan participations acquired with West Suburban declined by $53 million in the fourth quarter, calling it the largest one-quarter runoff the company has seen in that portfolio. In response to an analyst question, management provided more detail on the runoff:

• At the end of 2021 (when West Suburban closed), commitments in that book were about $772 million.
• As of the end of 2025, the balance was about $285 million.
• Management expects roughly one-third of the remaining balance will continue to run off, with the remainder likely retained.

For 2026, Adams said Old Second is targeting loan growth in the “mid-single digit” range, while expense growth is expected to be modest. When asked specifically about growth expectations for the power sports vertical, Adams said he expects growth there to be “slightly less” than mid-single digits.

Credit quality trends and power sports performance

Asset quality trends were “relatively unchanged,” Eccher said, though non-performing loans increased $4.8 million and classified assets increased $10 million during the quarter. Old Second recorded $6 million of net loan charge-offs in the fourth quarter, with roughly 75% stemming from the power sports portfolio and owner-occupied commercial real estate.

Eccher said losses given default in power sports were running somewhat higher than expected, but he emphasized that yields and contribution margin in the portfolio were higher than expected and improving. He added that gross charge-offs in power sports are anticipated to be higher than Old Second’s historical experience, particularly in a higher-rate environment, and said the contribution margin in the business was at a multi-year high. Eccher also said the company was “very bullish” on its 2026 power sports performance.

In response to a question about net charge-off expectations, Eccher said the company expects elevated power sports charge-offs in the next couple of quarters due to the higher interest-rate environment, while noting that $4.5 million of the $6 million in charge-offs was power sports-related and about $1.5 million related to the legacy book.

Head of national specialty lending Darren Campbell described the power sports borrower profile and portfolio seasonality. Campbell said the average cycle score in the power sports portfolio is 730, with the largest portion in the tier-one bucket, which has an average cycle score of 776. He said the origination “busy season” runs from March 1 into the second and third quarters, while delinquency and losses tend to be higher in the other two quarters, “especially at year-end.”

On early-stage delinquency, Eccher attributed an increase in the 30-89 day bucket to a couple of larger loans that were past maturity and to credits that migrated into non-accrual. He cited one credit with a very low loan-to-value and another involving a mixed-use property in Chicago that has been slow to lease up, which he said could take another couple of quarters to work through.

Expenses, capital, and buyback commentary

Non-interest income decreased slightly from the prior quarter but was higher than the year-ago quarter, management said, with year-over-year increases in wealth management fees and service charges on deposits. Mortgage banking income was flat sequentially but lower than the prior-year period, which management attributed primarily to volatility in mortgage servicing rights mark-to-market valuations.

On expenses, total non-interest expense declined $10.2 million from the prior quarter, including a $9.3 million decrease in acquisition-related costs. Eccher said the adjusted tax-equivalent efficiency ratio (excluding core deposit intangible amortization and certain adjustments) was 51.28% for the quarter, compared to 52.1% in the third quarter.

Adams said Old Second expects expense growth around 3% in 2026 as inflationary pressure in employee benefits and salaries is moderated by realized cost savings related to Evergreen, and he noted that employee benefits are expected to rise “solidly in the double digits” due to health insurance inflation. He also referenced planned branch closings and other expense initiatives.

On capital, tangible book value per share increased to $14.12 and the tangible equity ratio rose to 11.02% at year-end. Common Equity Tier 1 capital was 12.99%, up from 12.44% in the prior quarter.

Adams said a share repurchase is “on the table” and later described it as “becoming inevitable,” adding that he expects a buyback could begin “in relatively short order” and said he is “not price sensitive at this point.” On M&A, Adams said the market “feels good” with “no shortage of discussions,” but emphasized that timing and the right fit matter and that Old Second will not pursue a deal unless it makes the bank better. Management said near-term priorities are focused on fully integrating Evergreen and driving organic balance sheet growth and optimization.

About Old Second Bancorp NASDAQ: OSBC

Old Second Bancorp, Inc is a bank holding company based in Aurora, Illinois, serving businesses and consumers through its primary subsidiary, Old Second National Bank. The company provides a broad range of commercial and retail banking services across the suburban Chicago marketplace, supported by a branch network and online platforms designed to meet the financial needs of local communities.

In its commercial banking division, Old Second offers lending solutions that include lines of credit, term loans, equipment financing and commercial real estate financing.

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