OSBC Q3 2026 earnings call transcript, October 22, 2026

Good morning, everyone. Thank you for joining us today for Old Second Bank Corp Inc.'s third quarter 2026 earnings call. On the call today are Mr. Jim Ecker, the company's Chairman, President and Chief Executive Officer, Mr. Brad Adams, the company's Chief Operating Officer and Chief Financial Officer, and Mr. Darren Campbell, the company's Head of National Specialty Lending. 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 also 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 the earnings release, which is available on our website at allseconds.com, on the homepage and under the Investor Relations tab. Now, I would like to turn the call over to Mr. Jim Ecker. Okay, good morning, and thank you for joining us. As customary, I have several prepared opening remarks. I'll give you my overview of the quarter and then turn it over to Brad for additional details.

I will then conclude with certain summary comments and thoughts about the future before we open it up to questions. From a GAAP perspective, net income was $28.9 million, or $0.56 per diluted share in the third quarter. Return on assets was 1.69%. Third quarter, 2026, return on average tangible common equity was 15.77%, and the efficiency ratio was 52.34%. Excluded. All adjusting items, which for the quarter was limited to MSR valuation adjustments, net income for the third quarter was $28.5 million, or $0.55 per diluted share. Third quarter, 2026 earnings were impacted by $12.7 million of net loan charge-offs, which consisted of commercial and industrial loan net charge-offs, $9.2 million, primarily related to one relationships, one relationship. We have discussed on prior calls, $6 million of that $9.2 million was previously reserved for. This credit is a warehousing and distribution business that has seen its cash flow position deteriorate over the last few years. We feel this credit is now largely behind us. The remaining portion of the charge-off is related to the power support business, which totaled $3.1 million. We have a tangible book. The book value per share decreased slightly to $14.75 as of September 30th from $14.77 as of June 30th. And the tangible equity to tangible asset ratio decreased 19 basis points from last quarter from 11.19% to 11%. The modest declines in these metrics are primarily due to stock repurchases of approximately $39.5 million and a change in the value of the securities portfolio.

Our financials reflect an exceptionally strong net interest margin at 5.27% for the third quarter 2026. That's a four basis point improvement from last quarter and 22 basis point increase over the prior year on a tax equivalent basis. Pre-provision net revenues increased in the third quarter 2026 from the prior quarter, primarily due to day count, slightly higher average loan balances, and lower average savings in time. deposit balances. Total cost of deposits was 102 basis points for the third quarter compared to 100 basis points for the prior link quarter and 133 basis points for the third quarter 2025. For the third quarter 2026 compared to last quarter, tax equivalent income on average earning assets increased and interest expense on average interest bearing liabilities increased nominally. Loan to deposit ratio is now 98.3% as the end of the third quarter compared to 96.4% last quarter and 91.4% as of September 30th, 2025. Total loans declined nominally about $7.8 million during the third quarter. Tax equivalent loan yields increased three basis points during the quarter compared to the link quarter but reflected a one basis point decrease for the quarter year over year. The increase in yield in comparison of the prior quarter is driven by higher short term. rates and repricing of lower yielding loans. We expect this to continue in the near term. Turning to credit, asset quality trends improved significantly during the quarter excluding the elevated charge offs resulting from the single credit we just discussed. Classified loans decreased 57.8 million and non-performing loans decreased 16.8 million. Criticized loans, an early indicator of stress, declined by 61%

1.3 million or 38% during the quarter. As a percentage of loans, classified loans have not been this low since before COVID. Needless to say we are extremely pleased with the credit trajectory and its implication for future quarters. The allowance for credit losses on loans was 64.2 million as of September 30th or 1.23% of total loans from 70.4 million at the end of the second quarter which was one point. 3.4% of loans. Unemployment and GDP forecast to use in 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 projections. Non-interest income declined $191,000 in the third quarter of 2026 compared to the prior late quarter and nominally from the prior year late quarter. Wealth management continues to reflect strong performance. growth quarter over late quarter and prior year late quarters. Mortgage banking income increased $436,000 compared to late quarter and increased $762,000 compared to the like period, like prior year period, primarily due to the changes in mortgage servicing rights mark to market valuations. MSR mark to market valuations increased $775,000 quarter over late quarter and $1,000,000 over the prior year period. Total non-interest expense for the third quarter of 2026 increased $370,000 from the prior link order, driven by higher regular salaries, higher officer incentive, and employee insurance costs within salaries and employee benefits, and an increase in occupancy, furniture and equipment due to continued capital projects and growth in real estate taxes. These increases were partially offset by a decrease in other expense from several one-off expenses in the prior quarter.

Our efficiency ratio continues to be excellent as a tax equivalent efficiency ratio adjusted to exclude core deposit intangibles, ORIO cost, and the adjustments to net income as noted earlier is 52.06% for the third quarter compared to 50.8% for the second quarter. Overall, the company continues to perform at an exceptionally high level. Operating leverage is strong, and fee businesses are performing well. The improvement in key credit metrics, including reductions in classifieds and criticized during the third quarter, will allow us to finish the year over the next quarter in a much better position to demonstrate the full earnings power of old second. I'll now turn it over to Brad. Thanks, Jim. Net interest income increased to $84 million relative to the last quarter at $83.3 million. It also increased $1.3 million from last year.

Loan yields increased three basis points, while securities yields declined five basis points in the third quarter. Total yield on earning assets increased six basis points over the last quarter to 640 basis points. Cost of interest-bearing deposits increased modestly at two basis points, and total cost of interest-bearing liabilities increased one basis point to $174.00. The end result was a four basis point increase in the tax equivalent of them to $527.00. The end result was a four basis point. $523.00 last quarter. Obviously, we believe this continues to be exceptional margin performance. Average loans increased $5.5 million, or only 0.1%, over the length quarter, and average deposits, however, decreased by $78.00 million, or 1.4%. Deposit runoff is largely seasonal this quarter, with some residual runoff and high beta effectively wholesale deposit captions. Loan origination activity in the third quarter was much better. Better than it appears in line with budget, but was offset by significant pay down and payoff activity. Loan prepayments through the first three quarters have already reached full year 2025 levels. Certainly the market environment, including ongoing interest rate volatility, and due to high energy prices, broad-based inflation has resulted in outsized payoffs, it appears to us. Our lending teams are continuing to work very hard. Lines for the fourth quarter are building, which should also bode well for the first quarter of 2027 as well. From a stock repurchase perspective, we acquired 1.5 million shares during the third quarter, resulting in a reduction to equity and a growth in Treasury stock of 39.2 million. Year-to-date repurchases, a total of 3.4 million shares at an average price of $22.74. That's a $74.7 million reduction in equity.

This has a negative impact on the net interest margin, obviously, but a positive impact on earnings per share. We do expect to continue being active in the repurchase of shares, given our extremely strong capital position and current and expected earnings trends. In addition, based on the strength of the balance sheet and resilient income statements trends, Old Second elected to increase the common dividend in the fourth quarter of 2026 by 14% as we continue to deliver growth commensurate. with the bank's performance. Overall, margin trends still feel very good. Obviously, rates along the curve went up quite a bit with recent instability in the Middle East and previous expectations for rate cuts over reverse course under rate hikes. If those trends remain stable from here and high cost deposit attrition slows, I would expect to maintain exceptional margin performance. I do believe at this point, however, that we are likely to give back five basis points or so with our current loan growth expectations. And the rapid rise we have seen in deposit competition recently. Loan growth in the fourth quarter of 26 is being targeted in a low single-digit level. Expense growth will continue to be modest in the quarters ahead. That's it from my view, and I'll turn the call back over to Jim.

Thanks, Brad. In closing, we feel despite the isolated charge-up was a pretty solid quarter for the company, we're optimistic due to the improvement in credit metrics this quarter, and the rest of the bank is performing ahead of our expectations. We remain positive about loan growth opportunities and the potential for more strategic growth opportunities as well. That concludes our prepared comments this morning, so I will turn it over to the moderator and open it up for questions.

Thank you. At this time, we will be conducting our 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 key. And you may press star 2 if you would like to remove your question from the key. 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. Thank you.

The loan book today as we have in several years. Okay, great. That's helpful. And Brad, a little surprised to hear your comments around, you know, giving back five bips of margin in the fourth quarter, just given how low beta your deposit franchise has historically been. You know, I appreciate deposit pricing competitions increasing these days, but, you know, just given how much repricing you have and assets tied to short-term rates. I'm curious if you can kind of just unpack some of that a bit, just in terms of what your beta expectations are for the fourth quarter. And, again, if you could remind us kind of what you have repricing on the left side of the balance sheet tied to the short-term rates.

So, there's a couple things going on. What I would say from the expectation of giving back a few basis points, the drivers of it, the one is how many shares we've repurchased. Obviously, we're giving back a few basis points. a fair amount of free funding in order to do that. That has a negative implication. The other thing is the loan-to-deposit ratio is pretty much nearing the ceiling at this point. For the first time in a while, we are participating at the marginal funding rate relative to our loan growth expectations. I think that's probably the biggest driver in what I'm talking about. There are, as you point out, things on the other side that are to the good. At any given time, 50% of our book is variable. Generally, it reprices with a 30-day lag, and then we move relative to SOFR, but SOFR is ahead of what the Fed's been doing, and that rate's been high for a while. We've been seeing that benefit for quite some time. That being said, we do ask them. Jim was positively giddy the other day talking about this 3.5% commercial real estate loan that repriced in the sixes. We are seeing some of that, and that's obviously a big benefit. Yeah, I would say 45. 25% of our loan book is going to reprice in the next three to four quarters, and 25% of our securities portfolio is going to reprice at the same time. So there will be some tailwind there. The net net of all that is we're going to hang out pretty high at these levels, but guessing within plus or minus five basis points, clearly I've been pretty bad at it over the last year or so, but I've been bad on the right side of it. So maybe I'm hedging a bit, maybe I'm right.

Um, but I still think we're, we're solidly above a five 20 margin for the near and intermediate term.

Okay, great. And then you guys just kind of speak to just the buyback appetite, obviously, you know, really stepped up on the buybacks, um, you know, in three Q and over the course of this year, um, you know, to what extent do you guys want to continue down the path at a similar clip to what we've seen recently? And, um, within that context, curious, you know, how you want to. Balance buybacks with perhaps, you know, um, an acquisition, uh, at some point, perhaps sometime next year. I have plenty of capital to do both, Nate. I mean, as you can see, even this quarter, we didn't shrink capital and we bought back 3% of shares. Um, I think it's reasonable for investors to expect us to take out 5% of shares a year and still have the ability to execute on the type of M&A that we're looking for, which as we've talked about in the past is, is relatively small. than, you know, what we would have talked about a couple of years ago. It's kind of fill-in type stuff is, from our perspective, is where the value would be at this point.

Okay. That's really helpful. I'll step back. Thanks, guys. Yep. Thanks, Mike.

Thank you. Our next question is coming from Mark Shutley with KBW. Your line is live.

That's awful. Appreciate it. That's it from me.

Thank you. Our next question is coming from Jeff Rulis with DA Davidson. Your line is live.

As pleased as we can be. And normally four quarters, pretty soft, but pipelines are really pretty good right now. I appreciate that. And I guess the other side of that is, I think, Jim, you noted that nice to see the benefit of repricing in the book. You know, the flip side of that is any thoughts on repricing risk on the credit side as maybe higher rates? Customers face that, I guess, any color on, are you helping with borrowers in terms of that repricing risk, potentially? Yeah, I mean, keep in mind our loan book, you know, is very short duration. A significant part of it, you know, we stress tests, you know, constant.

You know, early stage indicators are low and no concerns at this point. Darren, you want to add anything on the consumer? Yeah, I think, yeah, Brian, just one other thing that's worth mentioning on the call, we're very excited to announce that we signed a multi-year endorsed agreement with Zucati USA. So we, something we've been working on for quite some time to get to the finish line. That partnership was announced and launched last week. The dealer feedback that we've... received from the dealer network has been tremendous. The application flow has already started to come in. So that's been exciting. And as we think about growth going forward, even in our fourth quarter, this will give us a little boost for the fourth quarter. But if you think about for 27, there'll be a substantial boost for us in originations next year. And Zucati is one of the, you know, the best motorcycle brands that's in the market. So...

So it's good on the production side, but again, on Jim, the credit and the repricing on the credit front, feel good about that given the short duration. Yeah, this is Brad. I think what you've seen from us in terms of the spike in classified and criticized over the past three years has been that very thing. Got it. But yeah, I think it's pretty safe to say we're through that. Okay. Fair enough. Thanks.

Thank you. Our next question is coming from Ken Kohut with Raymond James. Your line is live.

Thank you. Our next question is coming from Brandon Rudd with Stevens, Inc. Your line is live.

Okay. Got you. And then the last one was just on the syndication book. I know you mentioned it's been running off, Jim, obviously. Just where it stands today, and I guess that runoff is just going to continue. It's just a steady decline in that book. Is that how to think about that? So it's not going to really impact the... Yeah, I mean, you know, at our peak, we were $550 million in syndications. We've reduced that by over 60% since the end of 21, roughly $285 million. Will it go to zero? No. It's just not going to be a material part of our balance sheet. We just view that businesses. So we'll continue to do some of it. It's just not going to be a primary flow. Okay. And the payoffs will just, you know, I guess that's what I was getting at. The payoffs won't be a major factor in terms of, as we go forward here, like maybe it has been, as you wound it down. Yeah. It won't be as much of a headwind as it has been. You're correct. Yeah. Okay. That's all I had, guys. Thanks for the calls or the questions. Yep. Thanks, Brian. Thanks, Brian.

Thank you. Ladies and gentlemen, if you do have any final questions or comments, please... Okay. So now by pressing star one on your telephone keypad. Okay. As we have no further questions on the lines at this time, I would like to turn the call back over to Mr. Jim Ecker for any closing remarks. Okay. Thanks, everyone, for joining us this morning. We look forward to talking to you again next quarter. Goodbye. Thank you. Ladies and gentlemen, this does conclude today's call. You may disconnect. Lines at this time, and we thank you for your participation.