Old Second ((OSBC)) has held its Q1 earnings call. Read on for the main highlights of the call.
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Old Second’s latest earnings call painted a cautiously optimistic picture for investors. Management highlighted robust profitability, a standout 5.14% net interest margin, and disciplined cost control that together support mid‑teens returns on tangible equity. Yet the tone was tempered by rising credit costs and specific problem loans, which management framed as manageable and largely idiosyncratic.
Solid Earnings Power Underpins Returns
Old Second reported Q1 2026 GAAP net income of $25.6 million, or $0.48 per diluted share, with adjusted net income of $26.0 million, or $0.49 per share. Those results translate into a healthy 14.2% return on average tangible common equity and a 1.51% return on assets, underscoring the bank’s strong earnings engine.
Net Interest Margin Remains a Standout
The bank’s tax‑equivalent net interest margin came in at 5.14% for the quarter, up 5 basis points sequentially and 26 basis points from a year ago. Management achieved this despite some compression in loan yields, signaling effective balance sheet positioning and pricing discipline in a still‑competitive rate environment.
Capital Strength and Tangible Book Growth
Tangible book value per share increased to $14.35 from $14.12 in the prior quarter, reflecting retained earnings power despite higher credit costs. The tangible equity ratio improved to 11.07%, and the CET1 capital ratio edged up to 13.13% from 12.99% sequentially, giving the bank ample flexibility for growth and capital returns.
Expense Discipline Supports Efficiency
Noninterest expense declined by $2.7 million versus the previous quarter, helping keep profitability intact despite credit headwinds. The tax‑equivalent adjusted efficiency ratio held at a strong 51.7%, and management signaled only modest full‑year expense growth of about 3% to 4%, reinforcing its cost‑control narrative.
Share Buybacks Enhance Capital Returns
Old Second continued to lean into share repurchases, buying back 1.2 million shares at an average price of $19.63, for roughly $23.1 million in Q1. The buyback added about $0.01 to quarterly EPS, and management indicated it intends to remain active and may refresh the authorization once the current program is fully utilized.
Revenue Resilience and Mortgage Tailwinds
Net interest income dipped only modestly from Q4 but was up a strong $18 million, or 29%, year over year. Noninterest income also improved, rising $476,000 sequentially and $2.4 million from a year ago, with mortgage banking income getting a lift from servicing rights mark‑to‑market movements.
Funding Costs and Balance Sheet Flexibility
The cost of deposits improved to 1.05% from 1.15% in the prior quarter, and from 0.83% a year earlier, easing some funding pressure. The loan‑to‑deposit ratio stood at 93.2%, down slightly quarter over quarter, as management reduced reliance on wholesale and brokered funding and repriced higher‑cost deposits.
Powersports Business Still Profitable Despite Credit Tightening
The powersports portfolio delivered an 8.3% net contribution margin after charge‑offs, remaining solidly profitable despite elevated losses. Management tightened underwriting standards, with the originator FICO score improving to 743 from 735 a year ago, while maintaining a product mix it views as attractive on a risk‑adjusted basis.
Higher Net Charge‑Offs Weigh on Results
Net loan charge‑offs rose to $9.8 million in Q1, pressuring earnings and driving a higher provision. Key contributors included a $3.9 million charge‑off on a commercial real estate office loan, $3.9 million from powersports, and $1.3 million from commercial and industrial lending.
Asset Quality Metrics Show Some Strain
Nonperforming loans increased to $22.7 million during the quarter, reflecting emerging stress in portions of the portfolio. While classified assets fell by $2.8 million, there was a noticeable uptick in substandard accruing loans and special mention credits, signaling a more challenging credit backdrop.
Office CRE Valuation Hit Highlights Risk
One downtown Chicago office property saw a sharp valuation reset, forcing a $3.9 million charge‑off after an updated appraisal came in roughly 50% below prior estimates. Management pointed to broad pressure on office valuations and rents, aligning the loss with wider sector‑level headwinds rather than a systemic issue for the bank.
Provision Expense Rises with Credit Pressure
Provision for credit losses climbed by $6.5 million sequentially to $9.5 million, largely to cover powersports losses and two larger commercial credits. The higher provisioning reflects a more cautious stance amid softening credit metrics and ensures reserves keep pace with realized and expected losses.
Loan and Deposit Volumes Contract
Total loans declined by $66.9 million quarter over quarter, with average loans down $70 million, or 1.3%, as the bank emphasized discipline over growth. Average deposits fell by $162 million, with runoff concentrated in higher‑beta and wholesale categories, creating a near‑term drag on balance‑sheet expansion.
Capital Ratios Reflect Push‑Pull of Returns and Risk
While CET1 improved sequentially to 13.13%, it was 34 basis points lower than a year ago, showing the interplay of buybacks, earnings, and credit volatility. Management nonetheless stressed that capital levels remain comfortably above regulatory minimums and adequate to support moderate growth and ongoing shareholder returns.
Guidance Points to Strong Margins and Cautious Growth
Looking ahead, management expects the net interest margin to stay robust near current levels, gradually trending toward about 5% later this year, with loan growth in the low‑ to mid‑single‑digit range. Expense growth should remain modest at 3% to 4%, share repurchases will continue, and while powersports losses are likely to stay somewhat elevated, management anticipates seasonal improvement in overall credit costs.
Old Second’s earnings call ultimately balanced confidence in its core profitability and capital strength against a frank acknowledgment of credit headwinds. For investors, the story is one of a bank leveraging a strong margin and tight expense control to absorb higher loan losses while still returning capital, with the key watchpoints now centered on credit normalization and execution on measured growth plans.