Old Second Bancorp, Inc. (OSBC) Q4 2025 Earnings Call Transcript
Access earnings results, analyst expectations, report, slides, earnings call, and transcript.
Overview
The earnings call indicates strong financial performance with positive catalysts like the Evergreen acquisition, dividend growth, and cost savings. Despite slight concerns over increased charge-offs in the Powersports segment and unclear guidance on margins, the company's robust loan and deposit growth, capital management plans, and reduced noninterest expenses provide a positive outlook. The management's confidence in future performance, as reflected in dividend hikes and share repurchase plans, further supports a positive sentiment.
Key Financial Performance
Net Income (GAAP) $28.8 million or $0.54 per diluted share in Q4 2025, impacted by a $428,000 pretax loss on mortgage servicing rights and $2.5 million in pretax acquisition-related expenses. Excluding these, net income was $30.8 million or $0.58 per diluted share.
Return on Average Tangible Common Equity (ROATCE) 16.15% in Q4 2025, reflecting strong performance.
Tax Equivalent Efficiency Ratio 53.98% in Q4 2025, showing operational efficiency.
Tangible Book Value Per Share Increased 61 basis points to $14.12, reflecting a 98 basis point increase year-over-year.
Tangible Equity Ratio Increased from 10.41% to 11.02% quarter-over-quarter, and 98 basis points higher year-over-year.
Common Equity Tier 1 12.99% in Q4 2025, up from 12.44% last quarter and 17 basis points higher year-over-year.
Net Interest Margin (NIM) 5.09% in Q4 2025, a 4 basis point improvement from last quarter and a 41 basis point increase year-over-year.
Total Cost of Deposits 115 basis points in Q4 2025, compared to 133 basis points last quarter and 89 basis points in Q4 2024.
Loan-to-Deposit Ratio 93.9% as of year-end 2025, up from 91.4% last quarter and 83.5% as of 12/31/2024.
Total Loans Decreased by $12.4 million from last quarter, with tax equivalent loan yields declining 11 basis points quarter-over-quarter but increasing 48 basis points year-over-year.
Nonperforming Loans Increased by $4.8 million in Q4 2025, with classified assets increasing by $10 million.
Net Loan Charge-Offs $6 million in Q4 2025, primarily from the Powersport portfolio and commercial real estate owner-occupied.
Allowance for Credit Losses on Loans $72.3 million as of 12/31/2025, down from $75 million as of 9/30/2025.
Noninterest Income Slightly decreased quarter-over-quarter but increased $544,000 year-over-year, driven by wealth management fees (+7.2%) and service charges on deposits (+7.5%).
Noninterest Expenses Declined by $10.2 million quarter-over-quarter, with a $9.3 million decrease in acquisition-related costs.
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Operating Highlights
Powersport Portfolio: Despite higher-than-expected losses given default, the portfolio yields are much higher than expected, and the contribution margin is above expectations and improving. The contribution margin is now at a multiyear high, and the company is optimistic about its 2026 performance.
Loan Origination Activity: Loan origination activity in the fourth quarter was very strong, with robust market activity. Marginal spreads are more favorable compared to earlier in the year.
Net Interest Margin (NIM): The tax equivalent NIM for Q4 2025 was 5.09%, a 4 basis point improvement from the previous quarter and a 41 basis point increase year-over-year.
Efficiency Ratio: The tax equivalent efficiency ratio adjusted for certain items was 51.28% in Q4 2025, compared to 52.1% in Q3 2025, reflecting operational efficiency improvements.
Cost of Deposits: The total cost of deposits decreased to 115 basis points in Q4 2025 from 133 basis points in the prior quarter.
Balance Sheet Optimization: The company continues to reduce reliance on wholesale funding by allowing legacy brokered CDs to run off and repricing higher-cost deposits in a falling interest rate environment.
Integration and Systems Upgrades: The integration of acquisitions and systems upgrades were completed in 2025, making the company more efficient and better positioned for future growth.
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Risk or Challenges
Mortgage Servicing Rights Loss: The company experienced a $428,000 pretax loss on mortgage servicing rights, which could impact profitability.
Acquisition-Related Expenses: $2.5 million in pretax acquisition-related expenses, including $1.5 million for computer and data processing related to core systems conversion, which could strain financial resources.
Nonperforming Loans: Nonperforming loans increased by $4.8 million, indicating potential credit quality issues.
Classified Assets: Classified assets increased by $10 million, reflecting potential risks in asset quality.
Net Loan Charge-Offs: $6 million in net loan charge-offs, primarily from the Powersport portfolio and commercial real estate owner-occupied loans, indicating higher credit risk.
Powersport Portfolio Losses: Losses given default in the Powersport portfolio are higher than expected, especially in a higher interest rate environment, posing a risk to profitability.
Loan-to-Deposit Ratio: Loan-to-deposit ratio increased to 93.9%, which may indicate liquidity management challenges.
Decline in Loan Yields: Tax equivalent loan yields declined by 11 basis points during the quarter, reflecting potential pressure on interest income.
Global Tariff Volatility: The impact of global tariff volatility continues to be a factor in future loss rate assumptions, posing economic uncertainty.
Deposit Runoff: Average deposits declined by $200 million, which could impact funding stability.
CRE Loan Participation Runoff: CRE loan participations declined by $53 million, creating a headwind to balance sheet growth.
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Guidance & Outlook
2026 Performance Expectations: The company is very bullish on its 2026 performance, particularly in the Powersport business, where contribution margins are at a multiyear high.
Loan Growth: Loan growth is targeted in the mid-single-digit level for 2026.
Expense Growth: Expense growth is expected to be modest, with pre-inflationary trends in employee benefits and salaries being moderated by cost savings from the Evergreen integration.
Net Interest Margin (NIM): The company expects the net interest margin to remain stable, potentially ticking down modestly in Q1 2026 but still staying above 5%.
Buyback Program: A buyback program is on the table, though no actions were taken in the current quarter.
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Shareholder Return Plan
Buyback: Buyback is on the table that we haven't done anything this quarter. It's becoming inevitable.
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Key Q&A
Q:Are the cost savings fully captured, or is there a tailwind to 2026 that leads to muted expense growth?
A:Bradley Adams stated that there is a tailwind to 2026. Employee benefits are expected to rise solidly in double digits next year due to inflationary trends in health insurance. The company has restructured to contain costs, including branch closings and other expense initiatives. Overall, expenses are expected to grow at around 3% as final cost savings are realized.
Q:What is the expected net charge-off pace for Powersports, and is there anything notable about the 30- to 89-day bucket?
A:James Eccher explained that the net charge-off rate for Powersports is expected to be higher due to the nature of the business. Of the $6 million in charge-offs, $4.5 million was related to Powersports, with $1.5 million in the legacy book. Elevated charge-offs are expected in the next couple of quarters. Regarding the 30- to 89-day bucket, there were a couple of larger loans past maturity and some loans migrated into nonaccrual, including a mixed-use property in Chicago that will take a few quarters to resolve.
Q:What are the expectations for the margin in the first quarter and the impact of rate cuts?
A:Bradley Adams expects the margin to be around 5% for the full year 2027 but did not comment on 2027 specifically. He mentioned that purchase accounting accretion for the quarter was a few hundred thousand dollars, down substantially from the previous quarter. The purchase accounting impact on the Powersports portfolio is expected to be negative for the next two years, but the go-forward business is better.
Q:How much of the exception-priced deposits remain, and are there opportunities to reduce deposit costs?
A:Bradley Adams stated that $300 million to $400 million in deposits need to be replaced to complete the funding profile transition. The current balance sheet benefits from falling rates due to wholesale funding, which is a short-term benefit but not a long-term goal.
Q:What are the expectations for growth in the Powersports vertical?
A:The expectation is for slightly less than mid-single-digit growth in the Powersports vertical.
Q:What is the profile of a typical Powersport borrower, and is there seasonality in charge-offs?
A:Darin Campbell explained that the average FICO score for Powersports borrowers is 730, with the majority in the Tier 1 bucket (average FICO score of 776). Seasonality exists, with higher delinquencies and losses in the first and fourth quarters, particularly at year-end.
Q:What are the plans for capital management and share repurchases?
A:Bradley Adams mentioned that share repurchases are inevitable and expected to begin shortly. The company has generated significant capital and does not see a need to grow it much further. M&A discussions are ongoing, but the focus is on finding the right deal at the right time.
Q:What is the status of the syndication book and its impact on loan growth?
A:James Eccher stated that the syndication book has been reduced by almost 80% over five years, with $285 million remaining. About one-third of this is expected to run off, with the remainder being retained. The fourth quarter was the best production quarter of the year, and the pipeline is at its highest in 6-7 quarters, supporting mid-single-digit loan growth.
Q:What are the trends in criticized and classified loans, and how are special mention loans performing?
A:James Eccher noted some degradation in the C&I book due to weaker company performance, but collateral positions remain strong. Special mention loans decreased by $15 million in the quarter, indicating positive early-stage indicators.
Q:What are the expectations for expense growth in 2025 and 2026?
A:Bradley Adams confirmed that expenses are expected to grow by 3% year-over-year in 2025 and 2026.
Q:What is the outlook for M&A activity?
A:James Eccher and Bradley Adams stated that the priority is integrating Evergreen and focusing on organic growth. M&A will be opportunistic, with no immediate plans for acquisitions.
Q:Review of Unclear Management Responses
A:Management avoided providing a direct answer regarding the margin outlook for 2027, stating they had no comment on that year. Additionally, Bradley Adams was vague about the optimal target for M&A, stating only that any deal would make the bank better without providing specifics.
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Earnings Word Cloud
The most frequently occurring keywords in this quarter's earning call
Balance sheet
Balances CRE
Bank broker
CDs cost
CFO ton
COO CFO
CRE loan
Chairman patience
Deposit runoff
Evergreen
Expense trend
Fed rate
Integration end
Investors contribution
Loan digit
Loan origination
NIM Tax
NIM basis
OREO adjustment
Powersport charge
Powersport portfolio
activity
banking income
charge offs
contribution margin
cost deposit
decrease
fee
income period
interest deposit
mortgage servicing
nature
point period
service
servicing right
stuff
system
OSBC Transcript
Old Second Bancorp, Inc. (OSBC) Q4 2025 Earnings Call Transcript
Positive1-22
The earnings call indicates strong financial performance with positive catalysts like the Evergreen acquisition, dividend growth, and cost savings. Despite slight concerns over increased charge-offs in the Powersports segment and unclear guidance on margins, the company's robust loan and deposit growth, capital management plans, and reduced noninterest expenses provide a positive outlook. The management's confidence in future performance, as reflected in dividend hikes and share repurchase plans, further supports a positive sentiment.
Old Second Bancorp, Inc. (OSBC) Q3 2025 Earnings Call Transcript
Positive10-23
The earnings call summary and Q&A reveal a stable financial position, effective cost management, and robust growth expectations. The integration of Evergreen Bank is expected to enhance profitability, and the company maintains a strong capital position. While there are concerns about expense growth and margin stability, the overall outlook is optimistic, with potential for increased profitability and growth. The lack of clear guidance on some issues is a minor negative, but the positive aspects outweigh this, suggesting a positive stock price movement in the short term.
Old Second Bancorp, Inc. (OSBC) Q2 2025 Earnings Call Transcript
Positive7-24
The earnings call presents a generally positive outlook with strong financial performance, optimistic guidance, and a successful merger with Evergreen Bank Group. Despite some concerns about noninterest expenses and management's vague responses in the Q&A, the overall sentiment is boosted by record loan growth, strong deposit growth, and effective merger integration. The positive response to the Evergreen deal, alongside favorable asset mix and margin contributions, suggests a positive stock price movement in the short term.
Old Second Bancorp, Inc. (OSBC) Q1 2025 Earnings Call Transcript
Unknown4-24
The earnings call presents a mixed picture. Financial performance shows positive aspects like increased net income and reduced non-performing assets, but there are concerns about expenses and interest rate risks. The Q&A session reveals cautious management sentiment and unclear guidance on growth and margins. While the buyback program could be positive, the overall sentiment is tempered by economic uncertainties and potential margin declines. Given these factors, a neutral stock price movement is likely, with no clear catalyst for significant upward or downward movement.
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