Old Second Bancorp, Inc. (OSBC) Earnings

Management highlights

• Jim Ecker started by discussing GAAP net income, return on assets, return on average tangible common equity, and efficiency ratio. • Mentioned first quarter earnings impacted by net loan charge-offs, including details on commercial real estate, commercial and industrial, and power sport charge-offs. • Talked about tangible book value, tangible equity ratio, common equity tier one. • Highlighted strong net interest margin, pre-provision net revenues decrease, cost of deposits, tax equivalent income and expense changes, loan-to-deposit ratio, loan changes, tax equivalent loan yields, asset quality trends, allowance for credit losses, provision levels, non-interest income, non-interest expense, and efficiency ratio. • Jim and Brad provided further color on revenue trends, margin performance, loan origination activity, stock repurchase, loan growth target, expense growth, and future outlook.

Guidance

• Loan growth for the remainder of the year is targeted in the mid-single-digit level. • Expect to continue stock buyback as capital continues to grow. • Remain optimistic about loan growth in coming quarters and potential for strategic growth opportunities.

Segment performance

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 adjustments, net income was $26 million, or $0.49 for diluted share. First quarter 2026 earnings were impacted by $9.8 million of net loan charge-offs. Tangible book value per share increased to $14.35. The tangible equity ratio increased. Common equity tier one was 13.13%. Net interest margin was 5.14% for the first quarter. Pre-provision net revenues decreased. Cost of deposits was 105 basis points. Tax equivalent income on average earning assets decreased $4 million, while interest expense on average interest-bearing liabilities decreased $2.1 million. Loan-to-deposit ratio is 93.2%. Total loans decreased $66.9 million. Tax equivalent loan yields declined five basis points but increased 48 basis points year over year. Non-performing loans increased 22.7 million, but classified assets declined by 2.8 million. Allowance for credit losses on loans was $72.1 million as of March 31st, 1.39% of total loans. Provision levels increased by $6.5 million to $9.5 million. Non-interest income increased $476,000. Total non-interest expense declined $2.7 million. Efficiency ratio was 51.7%.

Risks & headwinds

• Impact of the global tariff volatility in the war in Iran continues to be considered within modeling.

Analyst Q&A

• Q: 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?

  A: 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.

• Q: 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.

  A: 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.

• Q: 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?

  A: 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.

• Q: 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.

  A: 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.

• Q: Just maybe a little bit more color on core expenses where we go from here for the year.

  A: 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.