Old Second Bancorp, Inc. Q4 FY2025 earnings call

• Jim Eccher discussed GAAP and non-GAAP net income, noting adjusting items like mortgage servicing rights loss and acquisition-related expenses. Tangible book value and equity ratios increased.
• The net interest margin was strong at 5.09%, with pre-provision net revenues affected by balance declines and rate changes. Cost of deposits improved.
• Loan-to-deposit ratio, loan yields, and asset quality trends were discussed, with Powersport portfolio having higher charge-offs but higher contribution margin.
• Brad Adams talked about net interest income, margin improvement, deposit runoff, loan origination activity, and noted cost savings and a buyback on the table.

For the fourth quarter of 2025, GAAP net income was $28.8 million or $0.54 per diluted share, with ROA at 1.64%. Return on average tangible common equity was 16.15% and the tax equivalent efficiency ratio was 53.98%. The net interest margin was 5.09%, a 4 basis point improvement from the prior quarter. Loan-to-deposit ratio was 93.9% at year-end. Nonperforming loans increased $4.8 million and classified assets increased by $10 million. Net loan charge-offs were $6 million, with 75% from the Powersport portfolio and commercial real estate owner occupied. Noninterest income had a slight decrease but wealth management fees and service charges on deposits increased. Noninterest expenses declined $10.2 million, and the tax equivalent efficiency ratio adjusted to exclude certain items was 51.28%.

• Management expects loan growth in the mid-single-digit level for 2026. Expense growth is expected to be modest. The tax equivalent NIM is anticipated to be around 5% in 2027. Share repurchase is expected to begin in the near term.

• Impact of global tariff volatility on loss rate modeling. Powersport business has higher anticipated charge-offs in a higher interest rate environment. Potential margin pressure from treasury purchases.

Q: On the expense side, could you comment on cost savings and expense growth in 2026?

A: There's a tailwind to 2026 with employee benefits expected to be up solidly in the double digits due to inflationary trends, but there are branch closings and other expense initiatives, resulting in around 3% growth.

Q: On the credit front, what's the expected net charge-off pace for Powersports?

A: A higher net charge-off rate is expected due to Powersports, but the contribution margin is at a multiyear high.

Q: What are the margin expectations for the first quarter and longer term?

A: May tick down modestly in the first quarter but expect to still be above 5% in the long term, anticipating around 5% for 2027.

Q: Can you talk about deposits, remaining exception price deposits, and deposit cost reduction?

A: Need to replace $300 million to $400 million in deposits with the bank's type of funding; wholesale funding is currently a benefit.

Q: What's the expectation for loan growth in the Powersports vertical?

A: Slightly less than the mid-single-digit loan growth target.

Q: Describe the Powersport borrower profile and seasonality in charge-offs?

A: Average FICO score in the portfolio is 730, origination is busy in Q2-Q3, and there's higher charge-offs at year-end.

Q: Talk about capital management, share repurchase, and M&A?

A: Share repurchase is inevitable, M&A discussions are ongoing, with priority on integrating Evergreen and organic growth.

Q: Discuss loan production, West Suburban runoff, and mid-single-digit growth?

A: Q4 had strong production, West Suburban portfolio had runoff, and the pipeline is high for 2026 growth.

Q: What are the trends in classified and special mention loans?

A: Classifieds are up, but special mention loans decreased by $15 million in the quarter.

Q: Comment on expense growth and buyback?

A: Expense growth is around 3%, and buyback is expected to begin soon.

Q: Talk about M&A target and priority?

A: Priority is integrating Evergreen, with M&A being opportunistic but not near term.