Old Second Bancorp, Inc.

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 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. 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. give you my overview of the quarter and then turn it over to Brad 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, 2026, return on average tangible common equity is 14.2%. and the tax equivalent efficiency ratio was 52.4%. Excluding all adjustments, which include MSR evaluation 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, or $0.49 for 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. And lastly, net charge-offs related to the power sport 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 1412 as of December 31, 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 one was 13.13%, in the first quarter, increasing from 12.99% last quarter, but decreased 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'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 link 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. The loan-to-deposit ratio is 93.2% as of March 31, 2026, compared to about 94% last quarter and 81.2% as of March 31, 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 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 is very good on quarter one downgraded credits. 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 use 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 PowerSports 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 from the prior year light quarter. Mortgage banking income increased $225,000 compared to the link quarter. It increased $574,000 compared to the light prior year period, primarily due to volatility of mortgage servicing rates, mark-to-market valuations. 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. Other income increased $358,000 in the first quarter compared to the prior linked quarter at $714,000 compared to the prior year-like quarter, driven largely by PowerSport 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, or real 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. On the credit front, we're obviously are disappointed in the level of charge-offs in the quarter, but otherwise, trends at Old 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 of it on a relative basis and don't see circumstances in other credits similar to this credit that decline in value this quarter. 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 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 CNI relationship, we are working through that one and there's underlying 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'll turn it over to Brad for more color.

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%. 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 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 and 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 million. 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 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. 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, 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 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.

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 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 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 elevated level, is there any pull forward on some of those losses, or should we revert back to kind of that prior guide on on that charge-off?

Yeah, good question, Jeff. I mean, I think the first thing, as it relates to power sports, the absolute level of charge-offs is going to be a little bit higher. I'd call your attention to page 9 of our loan disclosure deck. You can see, and Darren 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 lost 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. 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. So roundabout way of saying we think losses will trend lower in coming quarters, but just keep in mind that power support losses will be a little more elevated than what we normally report. Appreciate it, Jim.

Yeah. 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 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 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. 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 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 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.,

Hi.

Morning, Brad.

I guess the first one, I think for the color 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. If you could provide a bit more color there.

Yeah, so actually classifieds were lower. We did have an uptick in some seven, you know, substandard accruing loans. The largest was that aforementioned CNI 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 special mention, two or three credits, one of which we talked about was that office one that we repositioned. But again, classified in total, we're down about $3 million.

Okay, thank you. And then maybe if I kind of put some pieces together here, the provision is 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 reserve level kind of, sorry, the ACL ratio kind of holds flat at this, call it 140-ish level going forward, or as those classifieds work through the system, do they come down?

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

Okay, thank you. 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 and 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 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, but certainly it's created a headwind to growth the last few quarters, but that's not a main line of business for us. We don't view that as franchise enhancing type of business, so I think you can expect 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.

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 businesses, averaged between 6.6 and 6.75 over the last couple quarters. And that's actually down, obviously, 50 to 75 basis points from prior quarters.

Sure. Okay. Thank you very much.

Thanks, Brandon.

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

Hey, guys. Good morning. Thanks for taking the questions. Good morning, Nate. 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, our non-performers overall, you know, if you look at two years ago to the end of last year, you know, 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, you know, credit progress – Improvement isn't always linear, so you know these. This office credits been hanging out there for for some time. We think we're through most of that book. And then the C&I relationship kind of has. Came to a head over the last six months. All I can say is, you know. We understand our NPA's are higher than we'd like and we're working very hard to reduce those.

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 margins 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, you know, 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 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.

Okay, 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 think about loan growth over the balance of this year?

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

Okay. 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. We're still getting acceptable sales. In our CNI group and leasing, as Brad mentioned, we think power sport yields will come down a little bit due to competition, but we're still bullish. Our margin is going to be hanging in there around 5%.

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

Thank you.

Once again, if you would like to ask a question, please press star 1. Your next question is from David Conrad with KBW.

Hey, good morning. Just a follow-up question on the loan growth from here. I'm just hoping you can kind of break that down a little bit between commercial and power sports. I imagine power sports, this is 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 PowerSport. As it relates to commercial, we think it'll be pretty broad-based. I think we'll see drill to commercial real estate, CNI-sponsored leasing. We're not seeing any one sector with higher expectations than the other. As it relates to PowerSport, maybe Darren, you can comment on that.

Yeah, so I'm the same as where I've been in the year. We'll have, 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.

And then, you know, charge-offs in PowerSport are a little bit over 2% this quarter. But to your point, Ken, the excess spread, the contribution 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.

You know, we have a little bit tighter on the underwriting, but not a material change, because we do focus on that net contribution margin, which is the overall profitability 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 OEM products and non-endorsed products. And we charge higher on the non-endorsed products than we do for our endorsed products. An 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. So part of the little higher charge-off rate is related to the product mix coming in over the last couple years, which is driving the overall profitability. So it doesn't charge off at a point higher, but we charge a point higher. So it's driving a little bit higher charge-off rate, but it's also driving a better profitable portfolio. And so I see it 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 So if you include everything that we did nationally in the business, first quarter of 25 compared to the first quarter of 26, or actually our FICO score went from 735 up to 743 on the full mix of business that we did comparing quarter over quarter. So all that will start playing into the mix as this portfolio continues to turn over. And so that number should start coming down a little bit. But I wouldn't say materially going down because we like the mix of business that's going into the portfolio from a profitability standpoint.

Got it. Perfect. And last one for me, Brad. 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.

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 saw last year. So that all minus the one-time stuff, of course. 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 and employee benefits is pretty good performance for us. I'm pleased with that.

Okay. Thank you. Appreciate it.

We have reached the end of the question and answer session, and I will now turn the 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.