Old Second Bancorp, Inc. (OSBC) Q3 2025 Earnings Call Transcript
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Overview
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.
Key Financial Performance
Net Income (GAAP) $9.9 million or $0.18 per diluted share in Q3 2025. Return on assets was 0.56%. Return on average tangible common equity was 6.16%. Tax equivalent efficiency ratio was 64.46%. The decrease was due to acquisition-related costs and provisions.
Adjusted Net Income $28.4 million or $0.53 per diluted share in Q3 2025. Adjustments included acquisition-related costs, day 2 provision on non-PCD loans, and MSR mark-to-market losses.
Net Interest Margin (NIM) 5.05% in Q3 2025, a 20 basis point improvement from last quarter and 41 basis points year-over-year. Improvement due to loan growth and acquisition impacts.
Total Loans Increased by $1.27 billion from last quarter, primarily due to $1.19 billion of loans acquired with Bancorp Financial. Loan yields increased by 67 basis points quarter-over-quarter and 47 basis points year-over-year.
Allowance for Credit Losses (ACL) Increased to $75 million or 1.43% of total loans as of September 30, 2025, from $43 million or 1.08% of total loans as of June 30, 2025. Increase due to day 1 and day 2 allowances recorded on acquired loans.
Noninterest Income Increased by $2.1 million year-over-year in Q3 2025. Wealth management fees increased by $728,000 (26.1%), and service charges on deposits increased by $274,000 (10%).
Noninterest Expense Increased by $19.7 million from the prior quarter, $11.8 million of which was related to acquisition costs. Additional salary and benefits expense of $8.4 million due to Evergreen employees.
Loan-to-Deposit Ratio 91.4% as of September 30, 2025, compared to 83.3% last quarter and 89.4% as of September 30, 2024. Increase due to loan growth and acquisition impacts.
Net Interest Income Increased by $18.5 million (29%) to $83 million in Q3 2025 compared to $64 million last quarter. Up 37% year-over-year due to portfolio composition changes and acquisition impacts.
Tangible Book Value Per Share $13.51 as of Q3 2025. Tangible equity ratio declined by 42 basis points from last quarter but increased by 27 basis points year-over-year.
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Operating Highlights
New product offerings: The company is optimistic about new product offerings post the Evergreen Bank acquisition.
Market expansion: The acquisition of Bancorp Financial and its subsidiary Evergreen Bank Group has expanded the company's market presence.
Operational efficiencies: The integration of Evergreen Bank is progressing effectively, with systems conversions completed ahead of schedule. Cost savings related to the acquisition are expected to be achieved ahead of schedule.
Financial performance: Net interest margin improved to 5.05%, a 20 basis point increase from the previous quarter. Return on tangible common equity is approaching 17%, and tangible book value per share increased to $13.51.
Strategic acquisition: The acquisition of Evergreen Bank is expected to be more accretive and less dilutive than initially anticipated. The company is focusing on optimizing the balance sheet and reducing reliance on wholesale funding.
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Risk or Challenges
Acquisition-related costs: The acquisition of Bancorp Financial and Evergreen Bank Group resulted in significant acquisition-related costs of $11.8 million pretax, impacting net income and financial performance.
Loan portfolio risks: The solar loan portfolio acquired has a very low contractual coupon, and the Powersport portfolio is experiencing higher-than-expected losses given default, particularly in a high-interest rate environment.
Transportation and warehousing industry challenges: Certain industries, notably transportation and warehousing, have softened, leading to increased provision levels and credit rating downgrades within the C&I portfolio.
Classified assets increase: Classified assets increased by $38.4 million, indicating a potential rise in credit risk.
Higher cost of deposits: The total cost of deposits increased to 133 basis points, up from 84 basis points in the prior quarter, which could pressure net interest margins.
Economic environment and global tariff volatility: The impact of global tariff volatility and economic uncertainties are factored into future loss rate assumptions, posing risks to financial stability.
Noninterest expense growth: Noninterest expenses increased significantly due to acquisition costs and higher operating costs, including salary and benefits expenses, which could impact profitability.
Allowance for credit losses: The allowance for credit losses on loans increased to $75 million, reflecting higher risk in the loan portfolio, particularly from the acquired loans.
Integration risks: The integration of Evergreen Bank and optimization of its balance sheet pose operational and strategic execution risks.
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Guidance & Outlook
Future Financial Performance: The company expects a shortened earn-back period for the Evergreen acquisition, significantly less than the initially estimated three years. The acquisition is anticipated to be far more accretive than initially expected, with positive catalysts to push earnings substantially above the $2 run rate over the last couple of quarters.
Net Interest Margin (NIM): The net interest margin is expected to remain strong, currently at 5.05%, with continued exceptional performance anticipated.
Loan and Deposit Growth: Organic loan growth of $72 million was recorded in the third quarter, and the company expects continued growth opportunities. Average loans increased by 32% over the linked quarter, and average deposits increased by 22%.
Cost Savings and Integration: Cost savings related to the Evergreen acquisition are expected to be achieved ahead of schedule, with the integration and systems conversion already completed.
Noninterest Expense: Core expense growth is expected to remain around 4% through 2026, exclusive of the impact of the Evergreen acquisition. Cost increases are primarily attributed to workforce and facilities expansion.
Dividend Growth: The company announced a 17% increase in its common dividend, reflecting confidence in future performance.
Economic Preparedness: The company is well-reserved for its new business mix and prepared for any economic environment, with allowances for credit losses adjusted to reflect the new consumer mix and economic conditions.
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Shareholder Return Plan
Dividend Increase: The company announced a 17% increase in the quarterly dividend, raising it to $0.07 per share. This reflects confidence in the company's performance and future outlook.
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Key Q&A
Q:Could you expand on the potential runoff of exception price deposits and whether they will be replaced with legacy Old Second types of deposits?
A:Bradley Adams mentioned that there are a couple of hundred million dollars in pure market-priced funding, and replacing these with Old Second type funding is challenging organically. The company is interested in acquiring additional deposits and expects a 6- to 18-month timeline to return to previous funding levels. James Eccher added that core deposit funding at Evergreen expanded in the first quarter, excluding brokered and high-yield money market runoff.
Q:What is the focus for future originations in Powersports?
A:Darin Campbell stated that the focus is on originating all tiers, but historically, 75% or more of originations have been in the top 2 tiers. The company plans to maintain this policy and may tighten at the lower end if economic conditions change.
Q:What is the nature and seasonality of Powersport fees?
A:Darin Campbell explained that Powersport fees, such as payment and late fees, are consistent across all four quarters. However, originations are highest in the second and third quarters, with some runoff in the first and fourth quarters.
Q:What are the expectations for legacy Old Second growth and cost savings from the acquisition?
A:Bradley Adams indicated that the growth expectation is stable, with a core run rate around $52 million in the third quarter. Cost savings from the acquisition are expected to balance out, making the impact a wash.
Q:What are the margin expectations considering the higher-yielding book at Evergreen and potential Fed cuts?
A:Bradley Adams stated that the margin is influenced by the speed of NIM and overnight index swap rates. He believes the bottom margin for Old Second at a 3% Fed funds rate will not go below 4.50%. James Eccher added that the Powersport portfolio's robust coupons will help in a declining rate environment.
Q:What is the charge-off trajectory and outlook for nonperforming loans?
A:Bradley Adams mentioned that nonperformers have decreased significantly in the last three weeks and are well-collateralized. Losses in the Powersports segment were slightly higher than modeled but are manageable. The 30 basis points charge-off rate feels appropriate for the near, intermediate, and long term.
Q:Was the 4% expense growth in 2026 inclusive of Evergreen?
A:Bradley Adams clarified that the 4% expense growth does not include Evergreen. Cost savings from Evergreen are expected to offset inflationary impacts, resulting in no significant trend in expenses.
Q:What is the outlook for core commercial loan pipeline and hiring prospects?
A:James Eccher stated that the pipeline is robust, at a two-year high, and the company expects low single-digit growth in 2025. They are open to hiring additional talent, particularly in the C&I sector.
Q:What is the status of the sponsor finance team and its pipeline?
A:James Eccher mentioned that the sponsor finance team had a soft first half of the year but expects significant growth in the fourth quarter. The team consistently generates $150 million to $200 million in originations annually.
Q:Are there any quick resolutions for acquired problem loans?
A:James Eccher noted that $10 million in resolved remediation occurred after the quarter, providing a tailwind for the fourth quarter. Most additions to classified loans are well-collateralized, with some backed by SBA 504 deals.
Q:What are the thoughts on additional M&A opportunities?
A:Bradley Adams stated that the company is ready for additional M&A from a balance sheet perspective. The focus is on deposit-heavy acquisitions, although Evergreen was an exception as an asset generation business.
Q:What are the expectations for deposit beta and margin stability?
A:Bradley Adams expects some CD runoff and an increase in overnight borrowing rates, which will help with margin sensitivity. He anticipates the margin to remain stable, with minimal movement expected.
Q:What is the outlook for the wealth management business?
A:James Eccher highlighted a strong quarter with over a 25% increase in fees. The team has brought in new assets under management, and the business is expected to grow steadily.
Q:What is the sustainable loan growth outlook post-acquisition?
A:Bradley Adams expects low to mid-single-digit growth heading into 2026, with meaningful growth anticipated in the fourth quarter due to robust pipelines in various sectors.
Q:What are the priorities between buybacks and M&A?
A:Bradley Adams stated that the buyback is open and on the table, but the priority depends on the M&A opportunities available. He noted that few deals are as well-priced as the company's stock.
Q:What is the outlook for reserves and charge-offs?
A:James Eccher mentioned that reserves will likely remain around the 140 basis points level due to the Powersport segment's charge-off policies. Bradley Adams added that reserves might decrease over time as loss rates normalize.
Q:What are the biggest drivers of the margin?
A:Bradley Adams identified SOFR as the primary driver of the margin. He expects minimal movement in the margin, with a flat outlook in the current interest rate environment.
Q:What is the profitability outlook post-acquisition?
A:Bradley Adams suggested that profitability could exceed previous expectations, potentially reaching higher levels than the 150 ROA initially anticipated.
Q:Review of Unclear Management Responses
A:Management avoided providing a direct answer to the question about margin expectations in light of potential Fed cuts. Bradley Adams mentioned the complexity of predicting margins due to factors like SOFR and overnight index swap rates, but he did not provide a clear forecast. Additionally, the response to the question about additional M&A opportunities was vague, with Bradley Adams emphasizing readiness but not specifying any concrete plans or targets.
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Earnings Word Cloud
The most frequently occurring keywords in this quarter's earning call
ACL
BOLI
Bancorp Financial
Evergreen Bank
Evergreen acquisition
Evergreen deal
Powersport portfolio
Provision level
Tax loan
accounting accretion
acquisition increase
addition Evergreen
adjustment
banking income
benefit expense
charge offs
consumer
conversion
core deposit
day
death benefit
deposit amortization
impact
industry
item income
legacy Evergreen
mortgage
nature
opportunity
point Cost
point tax
pretax share
purchase accounting
rating
run rate
transportation
wrongness
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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