Old Second Bancorp, Inc. (OSBC) Q2 2025 Earnings Call Transcript
Access earnings results, analyst expectations, report, slides, earnings call, and transcript.
Overview
The earnings call presents a generally positive outlook with strong financial performance, optimistic guidance, and a successful merger with Evergreen Bank Group. Despite some concerns about noninterest expenses and management's vague responses in the Q&A, the overall sentiment is boosted by record loan growth, strong deposit growth, and effective merger integration. The positive response to the Evergreen deal, alongside favorable asset mix and margin contributions, suggests a positive stock price movement in the short term.
Key Financial Performance
Net Income $21.8 million or $0.48 per diluted share in Q2 2025. Return on assets was 1.53%. Return on average tangible common equity was 15.29%. Impacted by $531,000 in MSR mark-to-market losses and $810,000 in merger-related expenses.
Tangible Equity Ratio Increased by 49 basis points from last quarter (10.34% to 10.83%) and by 144 basis points year-over-year.
Common Equity Tier 1 13.77% in Q2 2025, up from 13.47% last quarter.
Net Interest Margin Improved 22 basis points year-over-year on a tax equivalent basis but decreased 3 basis points compared to last quarter. Total cost of deposits was 84 basis points, up from 82 basis points last year.
Loan-to-Deposit Ratio 83.3% as of June 30, compared to 81.2% last quarter and 87.9% last year.
Total Loans Increased by $58.4 million from last quarter, driven by growth in construction and lease portfolios.
Allowance for Credit Losses on Loans Increased to $43 million (1.08% of total loans) from $41.6 million (1.05% of total loans) last quarter.
Noninterest Income Wealth management fees increased $324,000 (11.7%) and service charges on deposits increased $280,000 (11.2%) year-over-year. Mortgage banking income decreased year-over-year due to volatility in mortgage servicing rights valuations.
Noninterest Expense Increased $1.1 million from last quarter and $5.5 million year-over-year, primarily due to higher salaries, employee benefits, and costs related to acquired branches.
Net Interest Income Increased by $1.3 million (2.1%) from last quarter to $64 million, and by $4.5 million (8%) year-over-year.
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Operating Highlights
Evergreen Bank acquisition: The company completed the acquisition of Evergreen Bank on July 1, 2025. The integration is underway, with a focus on optimizing the balance sheet and reducing reliance on wholesale funding within the legacy Evergreen Bank.
Loan growth: Total loans increased by $58.4 million from the previous quarter, driven by growth in construction and lease portfolios.
Deposit growth: Average deposits increased by $51 million or 1.1% quarter-over-quarter, attributed to seasonal factors.
Net interest income: Net interest income increased by $1.3 million (2.1%) quarter-over-quarter and $4.5 million (8%) year-over-year, reflecting strong margin performance.
Efficiency ratio: The tax equivalent efficiency ratio improved to 54.54% from 55.48% in the previous quarter, indicating strong expense discipline.
Noninterest income: Wealth management fees increased by 11.7%, and service charges on deposits rose by 11.2% compared to the prior year.
Capital management: The company repurchased approximately 327,000 shares in a privately negotiated transaction, leveraging its strong capital position.
Merger-related expenses: The company incurred $810,000 in merger-related expenses primarily related to the Bancorp Financial merger.
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Risk or Challenges
Merger-related expenses: The company incurred $810,000 in merger-related expenses primarily related to the Bancorp Financial merger, which could impact profitability in the short term.
Loan-to-deposit ratio: The loan-to-deposit ratio increased to 83.3%, which, while stable, could pose liquidity management challenges if it continues to rise.
Asset quality: There was a $1.2 million gross charge-off in the second quarter, primarily associated with a single C&I credit, indicating potential credit risk.
Allowance for credit losses: The allowance for credit losses increased to $43 million, reflecting potential concerns about future loan performance.
Noninterest expense: Noninterest expenses increased year-over-year by $5.5 million, driven by higher salaries, employee benefits, and other operational costs, which could pressure margins.
Mortgage servicing rights volatility: Mortgage banking income was impacted by volatility in mortgage servicing rights mark-to-market valuations, which could affect noninterest income stability.
Economic conditions: The company acknowledged the potential impact of global tariff volatility and economic uncertainties, which could affect future financial performance.
Integration of Evergreen Bank: The integration of Evergreen Bank involves risks related to cost savings realization, operational alignment, and potential acquisition-related expenses in the next quarter.
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Guidance & Outlook
Integration of Evergreen Bank: The company is focused on the effective integration of Evergreen Bank, optimizing the balance sheet for its impacts, and achieving cost savings targets. Earnings expectations related to the transaction are slightly biased higher.
Capital Position: Old Second expects to maintain a strong and flexible capital position despite the Evergreen Bank acquisition. The tangible common equity (TCE) ratio has improved significantly over the past year, and the company anticipates continued capital building.
Net Interest Margin (NIM): The company is optimistic about maintaining exceptionally strong net interest margin levels for the remainder of 2025 and into 2026, despite uncertainties in rate cuts or recession scenarios.
Expense Growth: Core expense growth, excluding acquisitions, is expected to remain around 4%.
Market Conditions and Rate Outlook: The company does not foresee rate cuts unless a recession occurs. Current rate conditions are expected to remain balanced.
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Shareholder Return Plan
Share Repurchase: Subsequent to the end of the quarter, Old Second Bancorp repurchased approximately 327,000 shares in a privately negotiated transaction at a modest discount to market.
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Key Q&A
Q:What is the timing of the Evergreen conversion and the expected expense run rate?
A:The conversion is expected to occur in the early to mid-fourth quarter. By the time the fourth quarter is reported in December, the operating expenses should be closer to the final run rate, and the first quarter should be relatively clean.
Q:What were the loan-to-deposit balances brought over at the acquisition date for Evergreen?
A:The loan-to-deposit ratio was just north of 90%, with actual levels around $1.3 billion.
Q:Can you provide more details about the owner-occupied CRE classified in Oregon?
A:The issue stems from a large healthcare transaction in Oregon. The facility faced restrictions from the state, which impacted its leasing ability. These restrictions have been lifted, and cash flow is expected to improve. The loan has a 70% loan-to-value ratio, and no loss is anticipated.
Q:What is the sentiment among commercial clients regarding business growth and loan pipeline?
A:Commercial clients are weathering uncertainty well, but appetite for capital expenditures has been muted, reflected in low line utilization. There is growth in leasing and commercial real estate, but loan demand in the sponsored finance group has been weak. Evergreen Bank is expected to generate strong assets in the second and third quarters. Overall, low to mid-single-digit growth is possible for 2025.
Q:How is the Evergreen deal performing compared to initial expectations?
A:Evergreen is performing well ahead of expectations. It is already achieving the profit level projected for the next year as a stand-alone entity. The asset mix is favorable, and the margin contribution is better than anticipated.
Q:What is the outlook for charge-offs with the inclusion of Evergreen's lending specialties?
A:Charge-offs in the powersports lending portfolio could range between 1% and 1.5%, but this is offset by an average coupon of around 9%. Overall, charge-offs are expected to be around 30 basis points going forward.
Q:How will the margin respond to a potential 25 basis point Fed rate cut?
A:The margin is less sensitive to rate cuts than expected, with a potential 4 basis point impact for a 25 basis point cut. However, balance sheet movements, such as selling the securities portfolio and reducing wholesale funding, have a more significant impact on the margin.
Q:What is the cost of funds for Evergreen, and how is it expected to change?
A:Evergreen's cost of funds is around 4%. By the end of the next quarter, reliance on market rate funds is expected to decrease by $100 million to $200 million, reducing the overall cost of funds by 30 to 70 basis points.
Q:Will the company pursue another acquisition before integrating Evergreen?
A:The preference is to wait until Evergreen is integrated before pursuing another acquisition. However, the company remains opportunistic and open to opportunities.
Q:What is the company's approach to share buybacks?
A:The company repurchased 327,000 shares in a private sale at $18 per share and remains open to further buybacks.
Q:What is the outlook for the margin in a flat rate environment?
A:The margin is expected to be stable and durable, slightly higher with Evergreen's contribution. The long-term margin floor is estimated to be around 4.25%.
Q:What is the expected ROA after the Evergreen integration?
A:The ROA is expected to be above 1.50%.
Q:What is the outlook for loan growth?
A:Loan growth is expected to be stronger in the second and third quarters, with stabilization in the fourth and first quarters.
Q:Review of Unclear Management Responses
A:Management avoided giving a direct answer regarding the potential for a 25 basis point Fed rate cut, using vague language and humor to deflect the question. Additionally, the response about the margin outlook for the third quarter included a wide margin of error and lacked precision due to ongoing fair value work.
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Earnings Word Cloud
The most frequently occurring keywords in this quarter's earning call
Adams COO
Adams Executive
Allen Rulis
Asset quality
Associates
Bank acquisition
COO CFO
Co Research
Eccher
Evergreen Bank
Inc Research
Noninterest expense
Research Division
Tax
banking income
bulk
core deposit
deposit intangible
estimate
item
material change
merger
mortgage servicing
point decrease
point loan
projection
recession
right market
servicing right
transaction
value mark
OSBC Transcript
Old Second Bancorp, Inc. (OSBC) Q4 2025 Earnings Call Transcript
Positive1-22
The earnings call indicates strong financial performance with positive catalysts like the Evergreen acquisition, dividend growth, and cost savings. Despite slight concerns over increased charge-offs in the Powersports segment and unclear guidance on margins, the company's robust loan and deposit growth, capital management plans, and reduced noninterest expenses provide a positive outlook. The management's confidence in future performance, as reflected in dividend hikes and share repurchase plans, further supports a positive sentiment.
Old Second Bancorp, Inc. (OSBC) Q3 2025 Earnings Call Transcript
Positive10-23
The earnings call summary and Q&A reveal a stable financial position, effective cost management, and robust growth expectations. The integration of Evergreen Bank is expected to enhance profitability, and the company maintains a strong capital position. While there are concerns about expense growth and margin stability, the overall outlook is optimistic, with potential for increased profitability and growth. The lack of clear guidance on some issues is a minor negative, but the positive aspects outweigh this, suggesting a positive stock price movement in the short term.
Old Second Bancorp, Inc. (OSBC) Q2 2025 Earnings Call Transcript
Positive7-24
The earnings call presents a generally positive outlook with strong financial performance, optimistic guidance, and a successful merger with Evergreen Bank Group. Despite some concerns about noninterest expenses and management's vague responses in the Q&A, the overall sentiment is boosted by record loan growth, strong deposit growth, and effective merger integration. The positive response to the Evergreen deal, alongside favorable asset mix and margin contributions, suggests a positive stock price movement in the short term.
Old Second Bancorp, Inc. (OSBC) Q1 2025 Earnings Call Transcript
Unknown4-24
The earnings call presents a mixed picture. Financial performance shows positive aspects like increased net income and reduced non-performing assets, but there are concerns about expenses and interest rate risks. The Q&A session reveals cautious management sentiment and unclear guidance on growth and margins. While the buyback program could be positive, the overall sentiment is tempered by economic uncertainties and potential margin declines. Given these factors, a neutral stock price movement is likely, with no clear catalyst for significant upward or downward movement.
OSBC Report
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