管理層發言
Good morning, everyone, and thank you for joining us today for Old Second Bancorp, Inc. Second Quarter 2026 Earnings Call. On the call today are James L. Eccher, the company's Chairman, President and CEO; Bradley S. Adams, the company's COO and CFO; Darin 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 in 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 home page and under the Investor Relations tab. Now I will turn it over to James L. Eccher.
Okay. Good morning, and thank you for joining us. As customary, I have several prepared opening remarks, will give my overview of the quarter, and then turn it over to Brad for additional details. I will conclude with certain summary comments and thoughts about the future before we open it up to Q&A. From a GAAP perspective, net income was $28.2 million or $0.54 per diluted share in the second quarter, and return on assets was 1.65%. Second quarter 2026 return on average tangible common equity was 15.58%, and the tax-equivalent efficiency ratio was 51.72%. Excluding all adjusting items, which include MSR valuation adjustments and costs related to the 2025 acquisition of Bancorp Financial and its wholly owned subsidiary, Evergreen Bank Group, net income for the quarter was $28.7 million or $0.55 per diluted share. Second quarter earnings were impacted by $9.2 million of net loan charge-offs, which primarily included two credits that we discussed at length on last quarter's earnings call: a commercial and industrial charge-off of $3 million in the warehousing and distribution business that has seen its cash flow position erode over the last year; and a commercial real estate investor charge-off of $2.8 million that was an office property located in a western suburb of Chicago. This was an acquired credit. It was restructured into an A/B note in 2023 due to challenges facing the office market. At the time of the restructure, the B note was fully secured by the value of the underlying collateral but has recently experienced a decline in value. Based on an updated valuation, the B note's collectability is now in doubt and was charged off. The B note was previously fully allocated for in prior quarters and a portion of the note was accounted for in purchase accounting adjustments as a result of the acquisition of Evergreen Bank Group. The property continues to produce cash flow adequately to support the A note at this time. Net charge-offs related to the Power Sports business totaled $2.8 million, which is a $1.1 million reduction from the prior quarter as seasonality related to this loan portfolio usually results in higher usage of ATVs and UTVs that are collateral for these loans during the spring and summer months. I would note that the contribution margin in this business has continued to trend higher and remains robust. Tangible book value per share increased to $14.77 at the end of the quarter from $14.35 last quarter. The tangible equity ratio increased 12 basis points from last quarter from 11.07% to 11.19%, and is 36 basis points higher than the like period one year ago. Common Equity Tier 1 was 13.28% in the second quarter of 2026, increasing from 13.13% last quarter but decreased 49 basis points from one year ago. This decline is primarily due to stock repurchases of approximately $40.2 million during 2026. Our financials reflect an exceptionally strong net interest margin of 5.23% for the second quarter. That is a nine basis point improvement from last quarter and a 38 basis point increase over the prior year like quarter on a tax-equivalent basis. Pre-provision net revenues increased in the second quarter from the prior quarter primarily due to day count, higher average balances, and lower average time deposit balances. Total cost of deposits was 100 basis points for the second quarter compared to 105 basis points for the prior linked quarter and 84 basis points for the second quarter of 2025. For the second quarter of 2026 compared to last quarter, tax-equivalent income on average earning assets increased $2.8 million while interest expense on average bearing liabilities increased $658 thousand. Loan-to-deposit ratio stands at 96.4% as of June 30 compared to 93.2% last quarter and 83.3% as of 06/30/2025. Total loans increased $60.6 million during the second quarter, partially reversing seasonal declines in the previous quarter. Tax-equivalent loan yields increased 12 basis points during the second quarter of 2026 compared to the linked quarter and reflected a 63 basis point increase for the quarter year over year. The increase in yield in comparison to the prior quarter is driven by higher short-term rates and repricing of lower-yielding loans that were originated in 2021 and 2022. Turning to credit asset quality, trends improved during the quarter despite the elevated charge-offs. Nonperforming loans decreased $19 million and classified assets declined $16.5 million. In general, our collateral position remains stable on classified assets. We recorded $9.2 million of net charge-offs in the second quarter; the majority stemmed from the Power Sports portfolio and one relationship each in commercial real estate investor and commercial. Overall, we are pleased with the credit trends as NPAs declined 25% in the quarter. The allowance for credit losses on loans was $70.4 million as of June 30 or 1.34% of loans, from $72.1 million at March 31, 2026, which was 1.39% of loans. Unemployment and GDP forecasts used in the future loss rate assumption 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 global tariff volatility and the war in Ukraine continues to be considered within our modeling. Provision levels quarter-over-linked quarter decreased by $2.5 million to $7.5 million and were partially driven by significant movements when compared to the forecast period resulting in a negative qualitative adjustment. Additionally, some larger charge-offs taken during the quarter had been provided for or allocated in prior quarters. Broadly, we are encouraged by the positive credit trends with the reduction in nonperforming assets and classified assets quarter-over-linked quarter. The office portfolio continues to be under pressure broadly with valuations coming in at steep discounts to prior levels and rents declining broadly. The good news is we do not have anything classified in that vertical; on a relative basis, it only represents about 3% of the portfolio. Noninterest income increased $631 thousand or 5% in the quarter compared to the prior linked quarter and increased $2.4 million or 21.7% from the prior year linked quarter. Wealth Management had a strong quarter: income was up $245 thousand quarter-over-linked quarter and increased $525 thousand compared to the prior year linked quarter. Mortgage banking income increased $97 thousand compared to the linked quarter and increased $543 thousand compared to the like period a year ago, primarily due to changes in mortgage servicing rights mark-to-market valuations. MSR valuation was flat quarter-over-linked quarter. However, excluding the impact of mortgage servicing rights mark-to-market adjustments, mortgage banking income increased $164 thousand over the prior year like period. Other income declined $176 thousand in the second quarter compared to the prior linked quarter and increased $551 thousand compared to the prior year like quarter driven largely by Power Sports loan service fees, dealer chargebacks, and lease syndication fees. Total noninterest expense for the second quarter increased $1 million from the prior linked quarter driven by higher officer incentive and employee insurance costs within salaries and employee benefits, elevated OREO expenses as the first quarter of 2026 realized net gains on property sales, as well as GAAP insurance refunds related to legacy Evergreen activity with another expense. Altogether, our efficiency ratio continues to be excellent. The tax-equivalent efficiency ratio adjusted to exclude core deposit intangible amortization, OREO cost, and the adjustments to net income as noted earlier was 50.8% for the second quarter compared to 51.7% for the first quarter. Overall, the bank continues to perform at an exceptionally high level. Operating leverage is strong, the margin is stable, and fee income businesses are performing well. We are doing a good job of adding additional talent throughout the organization. Credit is on an improving trend and I am hopeful that we will soon be able to demonstrate the full earnings power of Old Second. I will now turn it over to Bradley for additional color.
Thanks, Jim. I will be brief. There is not a lot controversial from my corner of the world, or confusing for that matter. Net interest income increased to $83.3 million for the quarter relative to last quarter's $81.1 million, and increased by $19 million or almost 30% from the year-ago like quarter. The interesting thing about this quarter is tax-equivalent loan yields increased by 12 basis points and securities yields increased by six basis points. That is the fundamental driver of what I would call a margin surprise—an increase of nine basis points relative to our expectations of giving back a few. That largely stemmed from interest rate increases along the curve, particularly in SOFR and overnight index swap rates, that began after instability in the Middle East kicked up and the price of oil went up. None of which could have been expected. It worked out well. The margin is very strong at this point: 5.23% relative to 5.14% last quarter and 38 basis points up year over year. We did have some loan growth this quarter on an average basis; it was only $14 million. Deposit runoff was a little higher than expected. Deposit funding cost came down, which I did not expect. I would say that both loan and deposit market competition is very robust right now. We are seeing that both in terms of pricing and structure on the loan side, and we are seeing deposit competition pretty significantly above the Fed funds curve and the treasury curve at this point. So things are pretty aggressive out there. Loan origination activity in the second quarter reflected a seasonal increase of $60 million and the pipeline remained strong. The market environment, including pricing challenges due to tariffs and the uncertainty of the war in Ukraine, results in some reluctance on borrowers to invest in capital projects. So we are still kind of in a wait-and-see mode on that front. Overall, I still feel pretty good about loan growth on a full-year basis. I do not see much reason to step down what we talked about before—maybe a little more of a bias toward the low single-digit level. From a stock repurchase perspective, we acquired 732 thousand shares during the second quarter at an average price of $21.08. The result is a reduction to equity and growth in the treasury stock of $15.4 million. This enhanced EPS in the quarter by about a penny. Year-to-date repurchases under the stock repurchase program totaled 1.9 million shares at an average price of $20.31. We had exhausted the previously approved stock repurchase program, which was 5% at the time pre-Evergreen, and the Board of Directors has approved a new plan to repurchase approximately 2.5 million shares through June 30, 2027. I would expect that we will continue to be active and aggressive in the repurchase of shares given our extremely strong capital position that far outstretches our projected capital needs over the next 12 to 24 months. Margin trends still feel very good and very stable in the near term. If you pin me down, my best guess would be we would be at kind of a 5.18% range in the third quarter and maybe 5.15% in the fourth. That is my best guess, though I fully recognize my track record is not perfect. We had expected to give back a few basis points, but that did not happen, largely because rates along the curve went up quite a bit as I said. Those trends remain stable here, and if high-cost deposit attrition slows, I would expect a few basis points of contraction to occur, but it may not. Loan growth for 2026 still targets low to mid single digits as I said. Expense growth will continue to be modest in the quarters ahead. That is it from my end. I will turn the call back over to Jim.
Okay. Thanks, Brad. In closing, we are cautiously optimistic due to the improvements in credit metrics this quarter. I think we are particularly encouraged by a 30% reduction in our special mention loans. The rest of the bank is performing far ahead of our expectations. We remain optimistic about loan growth, as Bradley mentioned, and the potential for more strategic growth opportunity as well. That concludes our prepared comments this morning, so I will turn it over to the moderator and we can open it up to Q&A.
分析師問答
Certainly. At this time, we will be conducting a question-and-answer session. If you would like to ask a question, please press 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press 2 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. One moment, please, while we poll for questions.
Hey, guys. Good morning. Thanks for taking the questions.
Good morning, Nate.
Obviously, some nice cleanup in terms of classified and nonperformers in the quarter, and it sounds like you largely resolved some lingering credits on that office commercial real estate loan and the C&I loan in the quarter. As you look out over the next several quarters, what do you think is a reasonable projection in terms of where charge-offs can shake out for Old Second with, hopefully, more benign nonperformer inflows and so forth in the future?
I think the takeaway for us is that the quarter not only showed a meaningful reduction in classified NPAs, but also a 30% reduction in special mention, which is generally a leading indicator for future problems and gives us optimism. Power Sports also had a nice reduction in charge-offs. We will see some additional charge-offs in that vertical, but we are observing a normalization in the seasonal trends and in charge-offs. We are still working through a couple of credits, but we have not seen anything new really pop up in the last couple quarters that had not been previously identified. We are really close to having a very clean quarter on the credit front, which should drive exceptional performance.
Okay, that's helpful. Then maybe Bradley, just thoughts on how the margin could trend in the back half of the year. I know it will depend on market rates similar to what we saw in the second quarter, but any thoughts on weighted average rates on loan production these days and where deposits and overall cost trends might go?
Start with a caveat that there are many ways I can be wrong if something changes. If I had to guess, I would say around a 5.18% range in the third quarter and maybe 5.15% in the fourth. I fully recognize my track record is imperfect. The things really driving it for us are the speed of attrition of what effectively mimics wholesale on the deposit side and our ability to backfill that with different types of deposits. Loan yields feel relatively stable; we've been in essentially the same rate environment for almost 18 to 24 months on the asset side, except for the last three months. The tailwind of margin expansion from Power Sports is in the later innings—Year 1 of rates moving back lower is pretty great for that business, Year 2 less so, and Year 3 worse. We did see another strong increase in the contribution margin from Power Sports this quarter; the business continues to be exceptional. The biggest delta on margin right now is the speed of attrition on effectively wholesale deposits and our success in backfilling. Liability management is critical these days.
Understood. And then one last one on capital management: can we expect the pace of buybacks to step up relative to the second quarter? It looked like they came down a little versus Q1. Also, within that capital management context, what's the appetite and prospects on the acquisition front these days?
Well-priced M&A that adds franchise value is something we always consider. The market is still favorable for that. Regarding stock buyback activity, we have been buying as much as we can and I expect that to continue. We are still growing capital even while buying back shares, but I think it's reasonable to expect that we will fully execute this authorization over the next 12 months.
Okay. Great. I appreciate all the color. Thanks, guys.
Thanks, Nate.
Your next question is from Brandon Rudd with Stephens Inc.
Good morning.
Good morning, Brandon.
Following up on Bradley's comments about backfilling higher-rate attrition on the deposit side with core deposits: what blended interest-bearing deposit rate is needed now to generate core deposit growth? Another way to ask it is, what is the blended interest-bearing deposit rate for that new growth?
I get the gist of the question: to maintain the margin, if we ran out $200 million of effectively wholesale funding right now, it would be margin accretive to replace it with wholesale funding. That is the nature of deposit competition marginally right now. So the exact rate needed to generate deposit growth is less important than how much wholesale funding you are willing to stomach. We are largely retail core-deposit funded; adding wholesale funding increases asset sensitivity, which we are willing to accept. There are various levers we can pull, including paying off outstanding subordinate debt. The net of which is that margin feels pretty stable. I don't want to claim margin can go up from here, but it is gives and takes.
Got it. And on the expense side, the efficiency ratio is in the low fifties and expenses are mid to high 90s as a percent of assets. Are there any near-term investments coming that may change those metrics materially?
Not materially. We have capital projects underway across the board to make us an even better bank, and we do not shy away from them. Those are in the run rate and in future projections, but nothing that would materially change those metrics in the near term.
Okay, perfect. Maybe one last one: regarding the commercial real estate charge-offs and the C&I loan you mentioned earlier, is that still on the balance sheet or has it been removed? Can you walk through that a bit more?
It is still on the balance sheet, Brandon. The company is in the process of transacting and we are being conservative with taking additional charges as to where we believe a sale price will eventually be. I expect that credit to be fully resolved within the next quarter.
Okay, thank you very much.
Your next question for today is from Jeff Rulis with D.A. Davidson.
Thanks. Good morning. Just a couple follow-ups on the margin. I wanted to confirm if any recovered interest on problem loan resolution or any one-timers added to the 5.23% margin. Also, what do you have for the June monthly average margin?
I do not have the June monthly average in front of me, but no, I am not aware of any one-timers that positively impacted the margin. It was largely stable throughout the quarter and started going up during the quarter.
Largely, as Bradley pointed out, three levers drove it: we had repricing of some 2021–2022 vintage commercial real estate loans that came up from maturity; we had some high-cost deposit costs priced lower; and we had securities roll off that were reinvested at higher yields.
Got it. On the fee income front, I would expect BOLI to normalize, but that wealth management number was encouraging. Do you have thoughts on overall fee income levels in the second half?
We have been low single-digit growers in fee income. Our wealth group continues to be successful in bringing in new assets under management and has benefited from the equity market uptick. We would expect low single-digit growth and with any pickup in mortgage banking we could reach mid-single digits.
And lastly, the Evergreen merger costs and related cost saves—are we pretty much through those items?
I believe so, yes.
We did close one branch last month, so there will be a small impact going forward, but we are largely through that integration activity.
Got it. Thank you.
Your next question is from David Konrad with Raymond James.
Hi, good morning. Bradley, I appreciate the commentary on share repurchases and it sounds like you will continue. How sensitive are you to the share price and valuation—at what point do repurchases not make sense from your perspective?
I am generally not sensitive to it. We have more capital than we need absent M&A opportunities and buying back the full authorization would still leave capital levels healthy. It is simply a lever to return capital to shareholders in a tax-efficient way. So buying back shares makes sense for us given our capital position.
Got it. And going back to loan growth, which looked great in the quarter—what stood out was commercial growth. Can you provide more detail there given the competition backdrop?
Growth this quarter came from several buckets: the middle market C&I group, our commercial real estate group, sponsored finance, and Power Sports had unexpected growth this quarter when we thought it might be relatively flat. Competition remains fierce, but we are encouraged by our pipeline.
Thanks. That is helpful.
Your next question is from Brian Martin with Janney.
Hey. Good morning, guys.
Hey, Brian.
On the credit front, it seems like there may be improvement coming. You mentioned a couple credits you are still working through. How do you think credit plays out over the next couple of quarters—do you expect a handful of meaningful resolutions or more granular improvements?
We printed about 70 basis points in charge-offs this quarter. I would like to get back into the 35 to 45 basis point range, although we will run a little higher with Power Sports. We saw a nice reduction in charge-offs quarter-over-quarter and we are optimistic we'll see improvement next quarter not only in charge-off levels but in overall migration, with further reductions in classified assets and NPAs.
Is there anything you can quantify on how much NPAs could be reduced in the coming quarters? Are there a couple meaningful items you are working on or is it more granular?
There are a couple larger items we are optimistic about resolving, but we are not seeing anything new pop up in recent quarters. As I mentioned, special mention was down 30% this quarter, which is a solid leading indicator of future migration trends.
What was the special mention amount and the dollar change? When you said 30% down from the previous quarter, what is the barometer there?
Special mention was down $12.5 million in the quarter, from about $40 million to $27 million.
Thanks. And on M&A size, is there a preference for smaller or larger deals if an opportunity arises?
The bias is toward smaller deals right now, but we do not rule anything out. The key question is whether a transaction makes the franchise more valuable. It is often a deposit-based question. While we are open to opportunities, we are not interested in dramatically changing the franchise; we want transactions that add value.
You mentioned contribution margin in the National Specialty Lending business was a historical high—can you comment on how you expect that to trend?
Yes, Brian. Contribution margin for National Specialty Lending is at a historical high and I expect that to continue through this year. We will see some reduction in 2027 as we changed rates a little lower in the middle of this year, so as the portfolio turns over you'll see a bit of that impact in 2027. It will be a modest reduction, not material for this year.
To add context, the APR on that portfolio right now is over 10% and the loss rate came down from over 2% to 1.80%. That results in contribution margin well over 8.5% on that business, which is extraordinary.
Thanks. One last question: directionally, as you go into next year, what are the puts and takes on the margin—how do you think about where it could be?
If rates and inflation dampen substantially you could see margin move, but my broader view is that the era of zero or near-zero anchored policy is over. If that view holds, this is a structurally high-margin institution given our funding quality. I am bullish that a relatively elevated margin can persist for a long time.
Okay. That is helpful. Thanks for taking the question.
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.
Okay. Thanks, everyone, for joining us this morning. We look forward to talking to you again in the third quarter. Goodbye.
This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.