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 picture of a bank with solid underlying profitability but facing bumpier credit conditions. Management highlighted a robust net interest margin, strong returns on capital, tight expense control, and active share buybacks, yet acknowledged softer asset quality, higher charge‑offs, and a heavier provision burden that constrained what could have been an even stronger quarter.
Solid Earnings Power and Returns
Old Second reported GAAP net income of $25.6 million, or $0.48 per diluted share, with adjusted earnings of $26.0 million, or $0.49 per share, for the first quarter of 2026. Those results translated into a mid‑teens return on average tangible common equity of 14.2% and a return on assets of 1.51%, underscoring durable earnings power.
Net Interest Margin Remains a Standout
The bank’s tax‑equivalent net interest margin reached 5.14% in the quarter, rising 5 basis points sequentially and 26 basis points year over year. Management credited disciplined margin management for the gain, noting this performance came despite some compression in loan yields as competition and rate dynamics pressured pricing.
Capital Strength and Book Value Growth
Tangible book value per share increased to $14.35 from $14.12 sequentially, reflecting retained earnings and balance sheet discipline. The tangible equity ratio improved to 11.07%, up 5 basis points quarter over quarter and 73 basis points year over year, while the CET1 ratio climbed to 13.13% compared with 12.99% in the prior quarter.
Expenses Kept in Check
Total noninterest expense declined by $2.7 million versus the previous quarter, reinforcing the bank’s focus on efficiency. The tax‑equivalent adjusted efficiency ratio came in at 51.7%, roughly in line with last year’s level, and management signaled only modest full‑year expense growth of about 3% to 4% from here.
Share Buybacks Support EPS
Old Second remained active on capital returns, repurchasing 1.2 million shares at an average price of $19.63 during the quarter. The roughly $23.1 million in buybacks lifted quarterly earnings per share by about $0.01, and management indicated it expects to stay engaged in repurchases and may seek fresh authorization once the current program is fully utilized.
Revenue Base Shows Resilience
Net interest income posted only a modest sequential decline while jumping $18 million, or 29%, from a year earlier, highlighting the benefits of margin expansion. Noninterest income also improved, rising $476,000 quarter over quarter and $2.4 million year over year, aided by mortgage banking and mark‑to‑market movements on mortgage servicing rights.
Funding Costs and Balance Sheet Flexibility
The cost of deposits fell to 1.05% from 1.15% in the prior quarter and 0.83% a year ago, as the bank repriced higher‑cost funds and improved mix. The loan‑to‑deposit ratio stood at 93.2%, slightly lower than the prior quarter but up from 81.2% a year earlier, as management reduced reliance on wholesale and brokered funding while preserving balance sheet flexibility.
Powersports Business Still Profitable
Despite higher credit losses, the powersports portfolio delivered a net contribution margin of 8.3% after charge‑offs. Originator FICO scores improved to 743 from 735 a year earlier, and management said it has modestly tightened underwriting while maintaining a product mix that continues to generate attractive profitability.
Credit Costs Weigh on Results
Net loan charge‑offs totaled $9.8 million in the quarter, materially impacting earnings and driving a larger provision. The losses were concentrated in a $3.9 million commercial real estate investor office exposure, $3.9 million from powersports loans, and $1.3 million in commercial and industrial credits.
Asset Quality Shows Signs of Strain
Nonperforming loans rose to $22.7 million, signaling some softening in credit performance even as classified assets declined by $2.8 million. Management noted an uptick in substandard accruing loans and special mention credits, suggesting more credits are being closely monitored even if they are not yet nonperforming.
Office CRE Hit Highlights Market Pressure
A single downtown Chicago office property drove a notable $3.9 million charge‑off after a new appraisal cut its valuation by roughly half from prior levels. Executives pointed to broad downward pressure on office values and rents, using this case as an example of the stresses facing parts of the commercial real estate market.
Provision for Credit Losses Rises Sharply
Provision expense for credit losses jumped by $6.5 million from the prior quarter to reach $9.5 million. The increase mainly reflected the need to cover the elevated powersports losses and two larger commercial credits, reinforcing management’s cautious stance on reserving amid pockets of credit volatility.
Loan and Deposit Balances Edge Lower
Total loans declined by $66.9 million quarter over quarter, with average loans down $70 million, or 1.3%, as the bank navigated credit risk and demand. Average deposits fell by $162 million, with runoff concentrated in higher‑beta and wholesale categories, creating a near‑term headwind to balance sheet growth but improving funding quality.
CET1 Down Slightly Versus Prior Year
While CET1 capital improved sequentially to 13.13%, it was 34 basis points lower than a year earlier. Management linked the year‑over‑year dip to the combined impact of capital returns through buybacks and the noise from credit volatility, though it emphasized that regulatory capital remains comfortably above required minimums.
Guidance Emphasizes Strong Margins and Controlled Growth
Looking ahead, Old Second expects its robust margin to remain healthy in the near term, with NIM gradually drifting toward about 5% later in the year. Management is targeting low‑ to mid‑single‑digit loan growth, modest expense growth of 3% to 4%, continued share repurchases, and seasonally lower but still somewhat elevated powersports losses, all while maintaining ample capital, solid liquidity, and mid‑teens returns on tangible equity.
Old Second’s earnings call showcased a bank balancing strong profitability, efficient operations, and shareholder‑friendly capital returns against emerging credit headwinds, especially in powersports and office real estate. For investors, the takeaway is that core earnings power and capital strength appear intact, but near‑term results will hinge on how quickly credit costs normalize and loan growth re‑accelerates.