Old Second Bancorp Q4 2025 Earnings Call - 5% NIM Drives Strong Returns Despite Rising Power Sports Charge-Offs

Moderator, Old Second Bancorp: Good morning, everyone, and thank you for joining us today for Old Second Bancorp Inc.’s fourth quarter 2025 earnings call. On the call today are Jim Eccher, 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 and 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 Eccher.

Jim Eccher, Chairman, President, and CEO, Old Second Bancorp: Good morning, and thank you for joining us, and thanks for your patience as we worked through some technical difficulties here. I have several prepared opening remarks. I’ll give you my overview of the quarter, then turn it over to Brad for additional details. We will then conclude with summary comments and thoughts about the future before we open it up to Q&A. From a GAAP perspective, net income was $28.8 million, or $0.54 per diluted share in the fourth quarter, and ROA was 1.64%. Fourth quarter 2025 return on average tangible common equity was 16.15%, and the tax equivalent efficiency ratio was 53.98%.

Fourth quarter earnings were impacted by a couple of material adjusting items, the first being a $428,000 pre-tax loss on mortgage servicing rights and a $2.5 million in pre-tax acquisition-related expenses driven by $1.5 million of computer and data processing related to the core systems conversion, as well as systems related to acquired operations. Excluding those two items, net income in the fourth quarter was $30.8 million, or $0.58 per diluted share. Tangible book value per share increased 61 basis points to $14.12. The tangible equity ratio increased 61 basis points from last quarter, from 10.41% to 11.02%, and is 98 basis points higher than the like period one year ago. Common Equity Tier 1 was 12.99% in the fourth quarter, increasing from 12.44% last quarter and increasing 17 basis points from one year ago.

Our financials continue to reflect an exceptionally strong net interest margin at 5.09% for the fourth quarter, which is a four basis points improvement from last quarter and 41 basis points increase over the prior year-ago quarter on a tax equivalent basis. Pre-provision net revenues decreased from both interest-earning deposits and securities balance declines, coupled with a decline in rates. The total cost of deposits was 115 basis points for the fourth quarter, compared to 133 basis points for the prior linked quarter and 89 basis points from the fourth quarter of 2024. For the fourth quarter of 2025, compared to last quarter, tax equivalent income on average earning assets decreased $1.8 million, while interest expense on average interest-bearing liabilities decreased $2 million. Loan-to-deposit ratio now sits at 93.9% as of year-end, compared to 91.4% last quarter and 83.5% as of 12/31/2024.

The fourth quarter of 2025 experienced a slight decrease in total loans of $12.4 million from last quarter. Tax equivalent loan yields declined 11 basis points during the fourth quarter of 2025 compared to the link quarter, but reflected a 48 basis point increase for the quarter year-over-year. The decrease in yield comparison to the prior quarter is primarily a function of Fed rate cuts working through the portfolio. Asset quality trends were relatively unchanged. Non-performing loans increased $4.8 million, and classified assets increased by $10 million. In general, our collateral position is very good on Q4 downgraded credits. We recorded a $6 million of net loan charge-offs in the fourth quarter of 2025, with the majority, or 75% of those, stemming from the power sports portfolio and commercial real estate owner-occupied.

With regards to power sports, I would say that losses given default are running a bit higher than we expected. However, yields in that portfolio are much higher than expected, and the contribution margin is both above expectations and improving. Due to the nature of power sports business, gross charge-offs are anticipated to run at a higher rate than Old Second has historically experienced, especially in a higher interest rate environment. This is the nature of what is a very good business. Investors should know that the contribution margin is now at a multi-year high in this business, and we’re very bullish on our 2026 performance. The allowance for credit losses on loans was $72.3 million as of December 31, 2025, or 1.38% of total loans, from $75 million at September 30, 2025, which was 1.43% of total loans.

Unemployment and GDP forecast views 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 projections. The impact of the global tariff volatility continues to be considered within our modeling. Provision levels, quarter-over-quarter, exclusive of day-two purchase accounting impacts, decreased $3 million and were largely driven by the power sports portfolio net charge-off levels with other losses associated with previously allocated provisions. Non-interest income reflected a slight decrease in the fourth quarter compared to the prior quarter, but continued to perform well compared to the prior year-ago quarter. Non-interest income in the third quarter of 2025 reflected a $430,000 death benefits on a bully policy, which was not experienced in the fourth quarter of 2025.

Mortgage banking income was flat compared to the linked quarter and declined $668,000 compared to the prior-year period, primarily due to the volatility of mortgage servicing rights marked-to-market valuations. Excluding the impact of mortgage servicing right marked-to-market adjustments, mortgage banking income increased nominally quarter-over-linked quarter and from the prior-year period. Other income decreased nominally in the fourth quarter of 2025 compared to the prior linked quarter, but increased $550,000 compared to the prior-year quarter, driven largely by power sports service fees. Non-interest income increased $544,000 compared to the prior-year quarter, as wealth management fees increased $238,000, or 7.2%, and service charges on deposits increased $198,000, or 7.5%. Total non-interest expenses for the fourth quarter of 2025 declined $10.2 million from the prior linked quarter. Fourth quarter experienced a decrease of $9.3 million in acquisition-related cost.

Our efficiency ratio continues to be excellent, and the tax equivalent efficiency ratio adjusted to exclude core deposit intangibles, amortization, or real costs, and the adjustments to net income as noted earlier was 51.28% for the fourth quarter compared to 52.1% for the third quarter of 2025. So our focus continues to be on the optimization of the balance sheet to perform and withstand the variability of the current and future interest rates. 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 for Brad for additional color.

Brad Adams, COO and CFO, Old Second Bancorp: Thanks, Jim. I don’t have a ton to talk about today. I would say that we’re pretty darn excited to close the year like this. Running at a north of a 5% margin and ROA handsomely above 1.5 and our ROCCE above 17.5 on an operating basis is pretty exceptional performance that we’re proud of. EPS some 30% over last year. Integration fully done. Integration at the end of last year as well. That’s a lot of work, and to close the year like that, this is especially gratifying. This quarter’s not a lot of complexity to it. Most of the stuff that we talked about last quarter is still true, so I’ll be relatively brief. Net interest income increased nominally this quarter relative to last quarter, both around the $83 million level. Loan yields decreased about 11 basis points and securities yields decreased a bit more, 14 basis points.

Total yield on interest earning assets decreased 8 basis points over the linked quarter. Cost of interest-bearing deposits decreased more at 24 basis points and total interest-bearing liabilities decreased 15 basis points. The end result was a 4 basis point improvement in the tax equivalent NEM, which is obviously pretty awesome. Tax equivalent NEM for the fourth quarter of 2025 increased 41 basis points from 468 for the period last year. Average loans increased $60 million, or 1.2 percent over the linked quarter, with average deposits declining to the $200 million level we expected. Deposit runoff is largely concentrated in high beta effectively wholesale deposit captions as planned. Loan origination activity in the fourth quarter, you may not know, was actually very good and activity remains robust.

Certainly, the market environment, marginal spreads is far more favorable than it was in the first half of the year and certainly at this time last year. Payoffs, especially in the participation book, have resulted in relatively flat balance sheet growth in the fourth quarter. This is interesting. Balances in the CRE loan participations acquired with West Suburban declined by $53 million in the fourth quarter of this year, the largest one-quarter runoff that we have seen to date in that portfolio. This was a significant headwind to growing the balance sheet this quarter. Organic activity remains exceptionally strong. Other than that, everything I said last quarter remains true to the best of my knowledge. Balance sheet is exceptionally well positioned and margin trends feel stable. We may tick down modestly in the first quarter, but I expect to still be above five.

Loan growth being targeted in the mid-single digit level for next year. Expense growth will be modest. Pre-inflationary trends in employee benefits and salaries are going to be moderated by the realization of the cost savings associated with Evergreen. Buyback is on the table, but we haven’t done anything this quarter. It’s becoming inevitable. I don’t have anything to add about the tax rate other than it was really high this quarter. Please don’t ask me about that. There isn’t a lot of complicated stuff to go over beyond that, so I’ll turn the call back over to Jim.

Jim Eccher, Chairman, President, and CEO, Old Second Bancorp: Okay, thanks, Brad. In closing, we’re very proud of the year we just concluded, and we believe the level of performance is reflective of the strength of the bank we are building. We’re optimistic about next year or this year and all the opportunities that are in front of Old Second. I would like to thank our team for their hard work and execution in 2025, including integrations and systems conversions and upgrades that have made us a much better Old Second. I could not be more excited about the things we can accomplish next year. That concludes our prepared comments this morning, so I’ll turn it over to the moderator and we can open it up to questions.

Moderator, Old Second Bancorp: Thank you. At this time, we will be conducting a question-and-answer session. If you would like to ask a question, please press star one 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. Once again, that is star one to ask a question. One moment, please, while we pull for questions. Your first question for today is from Jeff Rulis with D.A. Davidson.

Jeff Rulis, Analyst, D.A. Davidson: Thanks. Good morning. On the expense side, I just wanted to see if those cost savings, Brad, I couldn’t tell. Are those fully captured or is there a tail end at 2026 that leads to that muted expense growth from your perspective?

Brad Adams, COO and CFO, Old Second Bancorp: There’s a tail end at 26. Employee benefits are expected to be up solidly in the double digits next year just with inflationary trends that we’re seeing in health insurance. We’ve done a lot of things to restructure to keep those costs contained, but we’ve got a couple of branch closings that are scheduled and some other expense initiatives. All in all, it’s going to look like we’re just kind of doing a good job. Not as good as flat, but not as bad as it would be just on a pure apples-to-apples basis. So it kind of feels like a 3% type level as we get those final cost saves run through.

Jeff Rulis, Analyst, D.A. Davidson: Gotcha. Thanks. And then on the credit front, Jim, I guess the charge-off from the power sports, and you really outlined that clearly very profitable on the margin front. Just wanted to see on the net charge-off pace. I think we talked about kind of 30 basis point level, a little higher. Is anything that front-end loaded or could we expect kind of 30-40 going forward? And then secondly, on the credit side, is that 30 to 89-day bucket a little bit of an increase? Anything to note on that balance? Thanks.

Jim Eccher, Chairman, President, and CEO, Old Second Bancorp: Yeah, yeah. Yeah, good question. I think we need to be accustomed to a little bit higher net charge-off rate due to Power sports. That’s just the nature of that business. I think if you look at the $6 million in charge-off, $4.5 million was Power sports related, so only $1.5 million in the legacy book, which is more in line with our historical trends. But given that we’re in a higher interest rate environment, we expect Power sports to have maybe elevated charge-offs in the next couple of quarters. And I think we have to look at that hand in hand with the contribution margin, which I mentioned was at a multi-year high. So obviously, that’s flowing through the margin and profitability. As it relates to 30-89, we had a couple of larger loans that were just past maturity.

We had a couple of loans that obviously migrated into non-accrual that we’re working through. One has a very low loan to value. The other is a mixed-use property in Chicago that has been very slow to lease up, and it’s going to take another couple of quarters to work through that one.

Jeff Rulis, Analyst, D.A. Davidson: Okay. Thank you.

Jim Eccher, Chairman, President, and CEO, Old Second Bancorp: Thank you.

Moderator, Old Second Bancorp: Your next question for today is from Nathan Race with Piper Sandler.

Darren Campbell, Head of National Specialty Lending, Old Second Bancorp: Hey, Nate.

Hi. Hi, this is Adam Kroll. I’m for Nathan Race. Good morning, and thanks for taking my questions.

Good morning.

So, maybe just a question for Brad on the margin. I was curious if you could kind of frame out expectations for the first quarter with the full quarter impact of the December rate cut and just your overall positioning if we were to get another cut or two in the middle part of the year and just where you think the NEM can settle out over the longer term?

Brad Adams, COO and CFO, Old Second Bancorp: I’d be very surprised if we’re not around the 5% level for the full year 2027. 2027, sorry. I was typing in my time machine there. 2027, I have no comment on at this point.

Yeah. And I was just curious if you had the purchase accounting accretion number for the quarter?

The few hundred thousand. I’ve talked about that before. It’s down substantially from last quarter. The thing that I would really like people to focus on is that the amount of purchase accounting that we have in our numbers this year in aggregate is less than the amount of purchase accounting that we’re getting off the solar loan book. I mean, it’s nothing. I think there was $150,000. It’s not something that I really think is material to anyone’s understanding of Old Second at this point. It was down substantially last quarter. But the thing to keep in mind here is that the purchase accounting impact on the power sports portfolio is negative for the next two years. So the go-forward business is better than what you’re trying to isolate as the unrepeatable portion in the current periods. It’s actually a tailwind going forward relative to a headwind.

Got it. No, that’s super helpful. And then maybe just moving to deposits. You’ve called out letting exception-priced deposits run off from the acquisition. So I guess I’m curious how much is remaining of those deposits and if you’re seeing opportunities to reduce deposit costs on your legacy non-maturity deposits?

We talked about this last quarter. The thing to remember is that fixing and returning to an Old Second funding profile is a multi-stage process. Some of it we did prior to bringing on the Evergreen balance sheet and some of it we’ll do after. We probably need to replace $300 million-$400 million in deposits with our type of funding in order to complete the process. In terms of the amount of wholesale funding, effective wholesale funding that’s on the balance sheet right now, that’s part of the reason why the margin is so darn resilient at this point because we do have substantially more funding that benefits from falling rates than we typically otherwise would have. So it’s not necessarily a bad thing to focus on, at least at this stage.

It’s not what I want over the long term, but right now it’s actually a benefit. I would say just the number to keep in mind is that I would like to look $300 million-$400 million different on the liability side.

Got it. And then maybe just last one from me, digging into the mid-single digit loan growth. Guy, I was curious what your expectations are for growth in the Power sports vertical specifically.

Slightly less than that would be my expectation.

Got it. Thanks for taking my questions.

All right. Thank you.

Moderator, Old Second Bancorp: Once again, if you would like to ask a question, please press star one. Your next question for today is from Terry McEvoy with Stephens.

Hi. Good morning, guys. How are you?

Darren Campbell, Head of National Specialty Lending, Old Second Bancorp: Hey, Terry.

Jim Eccher, Chairman, President, and CEO, Old Second Bancorp: Hey, Terry.

Maybe could you just remind us of the profile of a typical power sports borrower? And I ask, I’m just curious, where do they line up in this K-shaped economy? And has there typically been some seasonality in terms of the charge-offs within that portfolio?

Sure. Terry, hey, Darren, if you’re there and on, you want to take that one?

Darren Campbell, Head of National Specialty Lending, Old Second Bancorp: Yeah, I can do that. Hey, Terry, how are you doing?

Jim Eccher, Chairman, President, and CEO, Old Second Bancorp: Good.

Darren Campbell, Head of National Specialty Lending, Old Second Bancorp: Yeah, Terry, the average cycle score for our portfolio in the power sports and 730 with the biggest percentage of that in your tier one bucket, which has an average cycle score of 776. But from seasonality perspective, Terry, our busy season starts March 1st through it’s really the second and the third quarter from an origination perspective where you have most of your business. And from a risk perspective, from either delinquency or losses, we have more of that in the other two quarters, especially at year-end. Like I say, when you compete with Santa Claus at year-end, the numbers elevate a little bit and then stabilize out again as you get into the second quarter. But I’ve been Terry, I’ve been doing it for 30 years, and it’s been pretty consistent trends for 30 straight years in this portfolio.

Great. Thanks for being on the call. And then as a follow-up, Brad, just capital management. I think you said share repurchase inevitable. I look back, the stock’s up 20% from three months ago, so the stock’s higher. Is that just a comment on where your capital levels are, or should I read into maybe the M&A market and what you see happening in 2026?

Brad Adams, COO and CFO, Old Second Bancorp: No, the M&A market feels good. There’s no shortage of discussions happening. The question is, what’s the right deal for Old Second at the right time, and how much capital do we need to do that? Clearly, I got it wrong in that we were basically running a big fat Christmas plus savings account in order to acquire the capital for an acquisition, and we needed a fraction of what we had saved up. So it’s just a function of what we need versus what we have. Obviously, we generated a ton of capital, and I’m not uncomfortable where we are. I just don’t really see a need to grow it much from here is the thing.

Makes sense. Thanks for taking my questions. Appreciate it.

Thank you, Terry.

Jim Eccher, Chairman, President, and CEO, Old Second Bancorp: Thanks, Terry.

Moderator, Old Second Bancorp: Your next question is from Brian Martin with Janney.

Brad Adams, COO and CFO, Old Second Bancorp: Hey, Brian.

Moderator, Old Second Bancorp: Good morning, guys.

Jim Eccher, Chairman, President, and CEO, Old Second Bancorp: Morning, Brad.

Moderator, Old Second Bancorp: Hey. Can you talk a little bit, Brad, about or Jim, you talked about the production being exceptional this quarter versus kind of the payoffs and then the piece from the West Suburban that was running off. Just maybe how much ran off on that West Suburban and then how much is left there that maybe a headwind going forward, but then just trying to get your take on this kind of mid-single digit loan growth, but kind of the production being better than it’s been in a long time?

Jim Eccher, Chairman, President, and CEO, Old Second Bancorp: Yeah, right. The fourth quarter, actually, surprisingly, was their best production quarter of the year, and normally, that’s a softer quarter along with the first quarter, but it was exceptionally strong along multiple verticals. The challenges, Brad pointed out, we had some pretty big paydowns. Some of it was welcome in the syndication portfolio, but we also had early payoffs in multifamily and commercial real estate, a lot of it stemming from property sales. Where I think we get encouraged is the pipeline today, or as of the end of the year, is the highest it’s been in probably six to seven quarters, so that gives us a lot of optimism that we’re going to have a pretty good first half of the year in 2026, and I think mid-single digit growth is certainly achievable this year.

Moderator, Old Second Bancorp: Gotcha. And how big is that? Where is that syndication book today? How far is that down and maybe how much more to go there? Is that a headwind going forward?

Jim Eccher, Chairman, President, and CEO, Old Second Bancorp: At the end of 2021, which is when we closed on West Suburban, we had about $772 million in commitments. We’ve had that as of the end of 2025. From a balance perspective, we got about $285 million left. I would anticipate a third of that will continue to run off, and we’ll probably keep the remainder.

Brad Adams, COO and CFO, Old Second Bancorp: I would tell you that those numbers that Jim’s referencing are inclusive of some additions related to Evergreen. What you’re really talking about over a five-year period is almost an 80% reduction in that loan book.

Moderator, Old Second Bancorp: Yeah. Gotcha. Okay. And Brad, I think you mentioned the stability in the margin just maybe being down potentially a bit in 1Q. I guess what’s the modest headwind here in 1Q? And just in terms of the balance sheet, the runoff that you expect, it sounds like there’s still $200 million of exception-based brokered CDs that, like you say, is benefiting now, but that’s going to continue to run off. That’s what’s left to go in terms of what?

Brad Adams, COO and CFO, Old Second Bancorp: I’m just being really pessimistic, man, because the reality is that the biggest headwind to the margin is probably going to mean me deciding to buy Treasuries, especially if people keep making noises about invading countries that are largely ICE. So the more we see moves like that, I would be comfortable adding assets that largely don’t offer, obviously, a 5% spread. So it’s just a function of that. I also just don’t want to go on here and say that, "Hey, the margin is going to go up from 5.09." I’m not going to say that. So I’m the biggest headwind, Brian, me personally.

Moderator, Old Second Bancorp: Gotcha. Gotcha. Okay. And Jim, I was just going to the criticized or classified for a minute. I guess classifieds are up a little bit.

Jim Eccher, Chairman, President, and CEO, Old Second Bancorp: Yep.

Moderator, Old Second Bancorp: I guess, and I guess how do you see those trends going forward? And do you have, how are the special mention trends? I don’t know that you mentioned that, but if you quantify those, were those up or down in the quarter?

Jim Eccher, Chairman, President, and CEO, Old Second Bancorp: Yeah. Well, classifieds, certainly, we had a lot of migration in and migration out. I think where we’re seeing a little bit of degradation at portfolios is in the C&I book, and companies just showing weaker performance. By and large, collateral positions are pretty good. We’re not seeing a whole lot of loss given default at this point, but it’s going to take some time to work through this. I think the positive news from our perspective is the net change in special mention or watch loans was down materially. We had, I think, only a couple loans migrate in, and we had over $15 million in reduction in that bucket. So those are early-stage indicators for us, so that should help us moving forward.

Moderator, Old Second Bancorp: Gotcha. So the special mention, we’re down on a linked quarter basis? Or did I hear that wrong?

Jim Eccher, Chairman, President, and CEO, Old Second Bancorp: Yeah. Down $15 million in the quarter.

Moderator, Old Second Bancorp: Down $15 million. Okay. Perfect. And the last one or two for me, and I’ll jump off, was, Brad, you mentioned on the expenses, just to clarify that your comment, the 3%, you were talking about 3% growth year over year in expenses. So 2025 expenses to 2026 is 3%, or were you talking about something else there in terms of your comment?

Brad Adams, COO and CFO, Old Second Bancorp: No, that’s what I’m talking about.

Moderator, Old Second Bancorp: Yeah. Okay. And then just on the buyback, your general comments, or we expect it? Can you give any sense on how you’re thinking about the buyback, Brad? Or is it just you expect to begin that this quarter and based on pricing, that’ll be opportunistic?

Brad Adams, COO and CFO, Old Second Bancorp: I expect it will begin in relatively short order, yeah. I’m not price sensitive at this point.

Moderator, Old Second Bancorp: Gotcha. Okay. And the M&A environment, you said it’s good with lots of discussions. What is kind of the optimal target today look like for Old Second if you are looking at M&A? I know the last one was obviously asset-driven.

Brad Adams, COO and CFO, Old Second Bancorp: I’m not sure how much that I can be helpful on an answer there because I can tell you that I wouldn’t have described Evergreen if you’d asked me that 18 months ago. So I think the only thing that investors can be certain of is that we’re not going to do anything unless it makes us a better bank, and that’s what we’re focused on.

Jim Eccher, Chairman, President, and CEO, Old Second Bancorp: Yeah. Brad, I would say our priority this year is really fully integrating Evergreen, which we’re about there, but really focusing on organically growing the balance sheet and optimizing it. That would be priority one.

Moderator, Old Second Bancorp: Yeah. That’s what I was getting. And I felt like it was more if there was M&A, it was likely more on the deposit side rather than the asset class.

Jim Eccher, Chairman, President, and CEO, Old Second Bancorp: Yeah. We’ll be opportunistic, but it’s certainly not in the near term for us.

Moderator, Old Second Bancorp: Yeah. Okay. Understood. Thanks, guys.

Jim Eccher, Chairman, President, and CEO, Old Second Bancorp: Thank you.

Moderator, Old Second Bancorp: We have reached the end of the question and answer session, and I will now turn the call over to Jim Eccher for closing remarks.

Jim Eccher, Chairman, President, and CEO, Old Second Bancorp: Okay. Thanks, everyone, for joining us this morning. Again, apologize for the technical difficulties. We look forward to speaking with you again next quarter. Goodbye.

Moderator, Old Second Bancorp: This concludes today’s conference, and you may disconnect your lines at this time. Thank you for your.