Q1 2026 Old Second Bancorp Inc Earnings Call

April 23, 2026

Speaker #1: Good morning, everyone, and thank you for joining us today for Old Second Bancorp Inc's first quarter 2026 earnings call. On the call today are Jim Ecker, the company's chairman, president, and CEO; Brad Adams, the company's COO and CFO; Darren Campbell, the company's head of national specialty lending; and Gary Collins, the vice chairman of our board.

Operator: Good morning everyone, and thank you for joining us today for Old Second Bancorp Inc.'s Q1 2026 earnings call. On the call today are Jim Eckert, the company's chairman, president and CEO, Brad 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.

Operator: Good morning everyone, and thank you for joining us today for Old Second Bancorp Inc.'s Q1 2026 Earnings Call. On the call today are Jim Eckert, the company's Chairman, President and CEO, Brad 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.

Speaker #1: 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.

Speaker #1: 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.

Speaker #1: 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 homepage under the Investor Relations tab.

Operator: 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 homepage under the investor relations tab. Now I will turn it over to Jim Eckert.

Speaker #1: Now I will turn it over to Jim Ecker.

James Eccher: Hey, good morning and thank you for joining us. I have several prepared opening remarks. We'll give you my overview of the quarter and then turn it over to Brad for additional color. I will then 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 $25.6 million, or $0.48 per diluted share in Q1, and return on assets was 1.51%. Q1 2026 return on average tangible common equity was 14.2%, and the tax-equivalent efficiency ratio was 52.4%. Excluding all adjustments, 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 Q1 was $26 million or $0.49 per diluted share.

Jim Eccher: Hey, good morning and thank you for joining us. I have several prepared opening remarks. We'll give you my overview of the quarter and then turn it over to Brad for additional color. I will then 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 $25.6 million, or $0.48 per diluted share in Q1, and return on assets was 1.51%. Q1 2026 return on average tangible common equity was 14.2%, and the tax-equivalent efficiency ratio was 52.4%. Excluding all adjustments, 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 Q1 was $26 million or $0.49 per diluted share.

Speaker #2: Hey, good morning, and thank you for joining us. I have several prepared opening remarks. We'll give you my overview of the quarter and then turn it over to Brad for additional color.

Speaker #2: I will then 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 $25.6 million, or 48 cents per diluted share, in the first quarter.

Speaker #2: And return on assets was 1.51%. First quarter 2026 return on average tangible common equity is 14.2%, and the tax equivalent of efficiency ratio was 52.4%.

Speaker #2: Excluding all adjustments, which include MSR valuation adjustments and costs related to the 2025 acquisition of Bancorp Financial and a totally owned subsidiary Evergreen Bank Group, net income for the first quarter was 26 million, or 49 cents per diluted share.

Speaker #2: First quarter 2026 earnings were impacted by 9.8 million of net loan charge-offs. Which primarily included a commercial real estate investor charge-off of 3.9 million that was an office property located in downtown Chicago.

James Eccher: Q1 2026 earnings were impacted by $9.8 million of net loan charge-offs, which primarily included a commercial real estate investor charge-off of $3.9 million. That was an office property located in downtown Chicago. The property experienced some vacancy and an updated valuation that was approximately 50% lower than prior estimates. The property does now cash flow adequately at the new carrying value after a restructuring. A commercial and industrial charge-off of $1.3 million in the warehousing and distribution space that has seen its cash flow position deteriorate over the last year. Lastly, net charge-offs related to the Powersports business totaled $3.9 million, a relatively higher than normal level due to some seasonality and continuing consumer lending softness consistent with what's being seen in the broader economy. Tangible book value per share increased to $14.35 as of 31 March 2026, from $14.12 as of 31 December 2025.

Jim Eccher: Q1 2026 earnings were impacted by $9.8 million of net loan charge-offs, which primarily included a commercial real estate investor charge-off of $3.9 million. That was an office property located in downtown Chicago. The property experienced some vacancy and an updated valuation that was approximately 50% lower than prior estimates. The property does now cash flow adequately at the new carrying value after a restructuring. A commercial and industrial charge-off of $1.3 million in the warehousing and distribution space that has seen its cash flow position deteriorate over the last year. Lastly, net charge-offs related to the Powersports business totaled $3.9 million, a relatively higher than normal level due to some seasonality and continuing consumer lending softness consistent with what's being seen in the broader economy. Tangible book value per share increased to $14.35 as of 31 March 2026, from $14.12 as of 31 December 2025.

Speaker #2: Property experienced some vacancy and an updated valuation that was approximately 50% lower than prior estimates. The property does now cash flow adequately at the new carrying value after a restructuring.

Speaker #2: A commercial and industrial charge-off of 1.3 million and the warehousing and distribution space that has seen its cash flow position deteriorate over the last year.

Speaker #2: And lastly, net charge-offs related to the PowerSport business totaled 3.9 million, a relatively higher than normal level due to some seasonality and continuing consumer lending softness consistent with what's being seen in the broader economy.

Speaker #2: Tangible book value per share increased to 14.35 as of March 31, 2026, from 14.12 as of December 31, 2025. The tangible equity ratio increased 5 basis points from last quarter from 11.02% to 11.07% and a 73 basis points higher than the like period one year ago.

James Eccher: The tangible equity ratio increased 5 basis points from last quarter, from 11.02% to 11.07%, and is 73 basis points higher than the like period one year ago. Common Equity Tier 1 was 13.13% in Q1, increasing from 12.99% last quarter, but decreased 34 basis points from a year ago. Our financial performance continued to reflect an exceptionally strong net interest margin at 5.14% for Q1. That's a 5 basis point improvement from last quarter and 26 basis point increase over the prior linked quarter on a tax-equivalent basis. Pre-provision net revenues decreased in Q1 from the prior quarter, primarily due to day count, lower loan balances, and a decline in rates overall. Cost of deposits was 105 basis points for Q1, compared to 115 basis points for the prior linked quarter and 83 basis points for Q1 2025.

Jim Eccher: The tangible equity ratio increased 5 basis points from last quarter, from 11.02% to 11.07%, and is 73 basis points higher than the like period one year ago. Common Equity Tier 1 was 13.13% in Q1, increasing from 12.99% last quarter, but decreased 34 basis points from a year ago. Our financial performance continued to reflect an exceptionally strong net interest margin at 5.14% for Q1. That's a 5 basis point improvement from last quarter and 26 basis point increase over the prior linked quarter on a tax-equivalent basis. Pre-provision net revenues decreased in Q1 from the prior quarter, primarily due to day count, lower loan balances, and a decline in rates overall. Cost of deposits was 105 basis points for Q1, compared to 115 basis points for the prior linked quarter and 83 basis points for Q1 2025.

Speaker #2: Common equity tier one was 13.13% in the first quarter, increasing from 12.99% last quarter, but decreased 34 basis points from a year ago. Our financial performance continued to reflect an exceptionally strong net interest margin at 5.14% for the first quarter at a 5 basis point improvement from last quarter and 26 basis point increase over the prior like quarter on a tax equivalent basis.

Speaker #2: Pre-provision net revenues decreased in the first quarter from the prior quarter, primarily due to day count, lower loan balances, and a decline in rates overall.

Speaker #2: Cost of deposits was 105 basis points for the first quarter compared to 115 basis points for the prior link quarter and 83 basis points for the first quarter of 2025.

Speaker #2: For the first quarter of 2026 compared to last quarter, tax equivalent income on average earning assets decreased 4 million, while interest expense on average interest-bearing liabilities decreased 2.1 million.

James Eccher: For Q1 2026 compared to last quarter, tax equivalent income on average earning assets decreased $4 million, while interest expense on average interest-bearing liabilities decreased $2.1 million. The loan-to-deposit ratio is 93.2% as of 31 March 2026, compared to about 94% last quarter and 81.2% as of 31 March 2025. Q1 2026 experienced a decrease in total loans of $66.9 million from last quarter. Tax equivalent loan yields declined five basis points during Q1 2026 compared to the linked quarter, but reflected a 48 basis points increase from the quarter year-over-year. The decrease in yield in comparison to the prior quarter is primarily a function of Fed rate cuts working through the portfolio. Asset quality trends softened during the quarter. Non-performing loans increased $22.7 million, but classified assets declined by $2.8 million.

Jim Eccher: For Q1 2026 compared to last quarter, tax equivalent income on average earning assets decreased $4 million, while interest expense on average interest-bearing liabilities decreased $2.1 million. The loan-to-deposit ratio is 93.2% as of 31 March 2026, compared to about 94% last quarter and 81.2% as of 31 March 2025. Q1 2026 experienced a decrease in total loans of $66.9 million from last quarter. Tax equivalent loan yields declined five basis points during Q1 2026 compared to the linked quarter, but reflected a 48 basis points increase from the quarter year-over-year. The decrease in yield in comparison to the prior quarter is primarily a function of Fed rate cuts working through the portfolio. Asset quality trends softened during the quarter. Non-performing loans increased $22.7 million, but classified assets declined by $2.8 million.

Speaker #2: The loan-to-deposit ratio is 93.2% as of March 31, 2026, compared to about 94% last quarter and 81.2% as of March 31, 2025.

Speaker #2: The first quarter of 2026 experienced a decrease in total loans of 66.9 million from last quarter; tax equivalent loan yields declined 5 basis points during the first quarter of 2026 compared to the link quarter but reflected a 48 basis point increase from the quarter year over year.

Speaker #2: The decrease in yield in comparison to the prior quarter is primarily a function of Fed rate cuts working through the portfolio. Asset quality trends softened during the quarter; non-performing loans increased 22.7 million, but classified assets declined by 2.8 million.

Speaker #2: In general, our collateral position is very good on quarter one downgraded credits. We recorded $9.8 million in net loan charge-offs in the first quarter, with the majority stemming from the PowerSports portfolio and one relationship each in commercial real estate investor and commercial.

James Eccher: In general, our collateral position is very good on Q1 downgraded credits. We recorded $9.8 million in net loan charge-offs in Q1, with the majority stemming from the Powersports portfolio and one relationship each in commercial real estate, investor, and commercial. The allowance for credit losses on loans was $72.1 million as of 31 March, or 1.39% of total loans, from $72.3 million at year-end, which was 1.38% of total loans. Unemployment and GDP forecast used in future loss rate assumptions remained fairly static from last quarter, with no material changes in the unemployment assumptions on the upper end of the range based on recent Fed data projections. The impact of the global tariff volatility and the war in Iran continues to be considered within our modeling.

Jim Eccher: In general, our collateral position is very good on Q1 downgraded credits. We recorded $9.8 million in net loan charge-offs in Q1, with the majority stemming from the Powersports portfolio and one relationship each in commercial real estate, investor, and commercial. The allowance for credit losses on loans was $72.1 million as of 31 March, or 1.39% of total loans, from $72.3 million at year-end, which was 1.38% of total loans. Unemployment and GDP forecast used in future loss rate assumptions remained fairly static from last quarter, with no material changes in the unemployment assumptions on the upper end of the range based on recent Fed data projections. The impact of the global tariff volatility and the war in Iran continues to be considered within our modeling.

Speaker #2: The allowance for credit losses on loans was 72.1 million. As of March 31, or 1.39% of total loans, from 72.3 million at year-end, which was 1.38% of total loans.

Speaker #2: Unemployment and GDP forecast used in future loss rate assumptions remained fairly static from last quarter, with no material changes in the unemployment assumptions on the upper end of the range based on recent Fed data projections.

Speaker #2: The impact of the global tariff volatility and the war in Iran continues to be considered within our modeling. Provision levels quarter over link quarter increased by 6.5 million to 9.5 million, and were largely driven by the PowerSports portfolio net loan charge-offs as well as the two larger credits that we mentioned earlier.

James Eccher: Provision levels quarter over linked quarter increased by $6.5 million to $9.5 million and were largely driven by the Powersports portfolio net loan charge-offs as well as the two larger credits that we mentioned earlier. Non-interest income reflected a $476,000 increase in Q1 compared to the prior linked quarter and $2.4 million increase from the prior year linked quarter. Mortgage banking income increased $225,000 compared to the linked quarter. It increased $574,000 compared to the linked prior year period, primarily due to volatility of mortgage servicing rights mark-to-market valuations. Excluding the impact of mortgage servicing rights mark-to-market adjustments, mortgage banking income decreased $51,000 over the prior linked quarter, but increased $156,000 from the prior year linked period.

Jim Eccher: Provision levels quarter over linked quarter increased by $6.5 million to $9.5 million and were largely driven by the Powersports portfolio net loan charge-offs as well as the two larger credits that we mentioned earlier. Non-interest income reflected a $476,000 increase in Q1 compared to the prior linked quarter and $2.4 million increase from the prior year linked quarter. Mortgage banking income increased $225,000 compared to the linked quarter. It increased $574,000 compared to the linked prior year period, primarily due to volatility of mortgage servicing rights mark-to-market valuations. Excluding the impact of mortgage servicing rights mark-to-market adjustments, mortgage banking income decreased $51,000 over the prior linked quarter, but increased $156,000 from the prior year linked period.

Speaker #2: Non-interest income reflected a 476,000 increase in the first quarter compared to the prior link quarter and 2.4 million increase from the prior year-like quarter.

Speaker #2: Mortgage banking income increased 225,000 compared to the link quarter and increased 574,000 compared to the like prior year period, , primarily due to volatility of mortgage servicing rates marked to market valuations.

Speaker #2: Excluding the impact of mortgage servicing rates marked-to-market adjustments, mortgage banking income decreased $51,000 over the prior linked quarter but increased $156,000 from the prior year-like period.

Speaker #2: Other income increased 358,000 in the first quarter compared to the prior link quarter and 714,000 compared to the prior year-like quarter. Driven largely by PowerSport loan service fees and dealer chargebacks.

James Eccher: Other income increased $358,000 in Q1 compared to the prior linked quarter and $714,000 compared to the prior year linked quarter, driven largely by Powersports loan service fees and dealer chargebacks. Total non-interest expense for Q1 2026 declined $2.7 million from the prior linked quarter as Q1 experienced $349,000 in acquisition costs compared to $2.3 million in the fourth quarter last year. Our efficiency ratio continues to be excellent as the tax-equivalent efficiency ratio adjusted to exclude core deposit intangible amortization, OREO costs, and the adjustments to net income, as noted earlier, was 51.7% for Q1 compared to 51.28% for Q4 2025. On the credit front, we're obviously disappointed in the level of charge-offs in the quarter, but otherwise trends at Old Second remain excellent.

Jim Eccher: Other income increased $358,000 in Q1 compared to the prior linked quarter and $714,000 compared to the prior year linked quarter, driven largely by Powersports loan service fees and dealer chargebacks. Total non-interest expense for Q1 2026 declined $2.7 million from the prior linked quarter as Q1 experienced $349,000 in acquisition costs compared to $2.3 million in the fourth quarter last year. Our efficiency ratio continues to be excellent as the tax-equivalent efficiency ratio adjusted to exclude core deposit intangible amortization, OREO costs, and the adjustments to net income, as noted earlier, was 51.7% for Q1 compared to 51.28% for Q4 2025. On the credit front, we're obviously disappointed in the level of charge-offs in the quarter, but otherwise trends at Old Second remain excellent.

Speaker #2: Total non-interest expense for the first quarter of 2026 declined $2.7 million from the prior linked quarter, as the first quarter experienced $349,000 in acquisition costs compared to $2.3 million in the fourth quarter last year.

Speaker #2: Our efficiency ratio continues to be excellent as the tax equivalent efficiency ratio adjusted to exclude core deposit and tangible amortization Oreo cost and the adjustments to net income as noted earlier was 51.7% for the first quarter compared to 51.28% for the fourth quarter of 2025.

Speaker #2: On the credit front, we're obviously disappointed in the level of charge-offs in the quarter, but otherwise, trends at Old Second remain excellent. Commercial real estate office continues to be under pressure broadly, with valuations coming in at steep discounts to prior levels and rents declining broadly.

James Eccher: Commercial real estate office continues to be under pressure broadly, with valuations coming in at steep discounts to prior levels and rents declining broadly. The good news is that we don't have very much of it on a relative basis and don't see circumstances in other credits similar to this credit that declined in value this quarter. I would say that the last office credit we are generally worried about is a participation loan that came with us via acquisition in 2021 that we unfortunately acquired an additional piece with the Evergreen transaction. I would like to call your attention to page 6 of our loan portfolio disclosures for more color on our office portfolio. With respect to the aforementioned C&I relationship, we are working through that one and there's underlying cash flow and value in that business.

Jim Eccher: Commercial real estate office continues to be under pressure broadly, with valuations coming in at steep discounts to prior levels and rents declining broadly. The good news is that we don't have very much of it on a relative basis and don't see circumstances in other credits similar to this credit that declined in value this quarter. I would say that the last office credit we are generally worried about is a participation loan that came with us via acquisition in 2021 that we unfortunately acquired an additional piece with the Evergreen transaction. I would like to call your attention to page 6 of our loan portfolio disclosures for more color on our office portfolio. With respect to the aforementioned C&I relationship, we are working through that one and there's underlying cash flow and value in that business.

Speaker #2: The good news is that we don't have very much of it on a relative basis and don't see circumstances in other credits similar to this credit that declined in value this quarter.

Speaker #2: I would say that the last office credit we are generally worried about is a participation loan that came with us via acquisition in 2021, that we unfortunately acquired an additional piece of with the Evergreen transaction.

Speaker #2: I would like to call your attention to page 6 of our loan portfolio disclosures. For more color on our office portfolio. With respect to the aforementioned CNI relationship, we are working through that one and there's underlying cash flow and value in that business.

Speaker #2: More broadly, our focus continues to be on the optimization of the balance sheet to perform and withstand the variability of the current and future interest rates.

James Eccher: More broadly, our focus continues to be on the optimization of the balance sheet to perform and withstand the variability of current and future interest rates, as well as diligent oversight of commercial credits and assessment of potential collateral shortfalls. We continue to reduce reliance on wholesale funding as we allow the legacy Evergreen Bank brokered CDs to run off and reprice higher cost deposits in the falling interest rate environment. With that, I'll turn it over to Brad for more color.

Jim Eccher: More broadly, our focus continues to be on the optimization of the balance sheet to perform and withstand the variability of current and future interest rates, as well as diligent oversight of commercial credits and assessment of potential collateral shortfalls. We continue to reduce reliance on wholesale funding as we allow the legacy Evergreen Bank brokered CDs to run off and reprice higher cost deposits in the falling interest rate environment. With that, I'll turn it over to Brad for more color.

Speaker #2: As well as diligent oversight of commercial credits and assessment of potential collateral shortfalls. We continue to reduce reliance on wholesale funding as we allow the legacy Evergreen Bank brokered CDs to run off and reprice higher cost deposits in the falling interest rate environment.

Speaker #2: With that, I'll turn it over to Brad for more color.

Speaker #1: Thank you, Jim. As Jim mentioned, revenue trends were generally excellent with only a modest decline in net interest income relative to last quarter. That's pretty unusual.

Bradley Adams: Thank you, Jim. As Jim mentioned, revenue trends were generally excellent with only a modest decline in net interest income relative to last quarter. That's pretty unusual. Relative to the prior year quarter, net interest income increased by $18 million or 29%. Tax-equivalent loan yields decreased by only five basis points, but securities yields increased four basis points in Q1 relative to last quarter. Overall total yield on interest-earning assets declined three basis points, and the cost of interest-bearing deposits decreased 15 basis points. Total interest-bearing liabilities decreased by 12 basis points. The end result was a five basis point increase in the tax-equivalent NIM to 5.14 relative to 5.09 last quarter. Obviously, we believe this continues to be exceptional margin performance. Tax-equivalent NIM for Q1 2026 increased 26 basis points compared to 4.88 last year.

Speaker #1: Relative to the prior year quarter, net interest income increased by 18 million or 29%. Tax equivalent loan yields decreased by only 5 basis points but securities yields increased 4 basis points in the first quarter.

Speaker #1: Relative to last quarter, overall total yield on interest-earning assets declined 3 basis points, and the cost of interest-bearing deposits decreased 15 basis points. Total interest-bearing liabilities decreased by 12 basis points.

Speaker #1: The end result was a 5 basis point increase in the tax equivalent NIM to 5.14 relative to 5.09 last quarter, obviously we believe this continues to be exceptional margin performance.

Speaker #1: Tax equivalent NIM for the first quarter of 2026 increased 26 basis points compared to 488 last year. Average loans decreased by 70 million or 1.3% quarter over link quarter and average deposits decreased by 162 million.

Bradley Adams: Average loans decreased by $70 million, or 1.3% quarter-over-linked quarter, and average deposits decreased by $162 million. Deposit runoff is largely concentrated in high beta, effectively wholesale deposit captions as planned. Loan origination activity in Q1 was seasonally slower, but the pipeline remained strong. Certainly, the market environment, including ongoing pricing challenges due to tariffs and the uncertainty with war, results in reluctance on borrowers and to invest in capital projects. Our lending teams are working with their customers to ensure we can meet their needs and offer loans at a good price when the demand is there. From a stock repurchase perspective, we acquired 1.2 million shares at an average price of $19.63, resulting in a reduction in equity and a growth in treasury stock of $23.1 million for Q1 2026. That enhanced EPS by about $0.01 for the quarter.

Speaker #1: Deposit runoff has largely concentrated in high beta effectively wholesale deposit captions as planned. Loan origination activity in the first quarter was seasonally slower, but the pipeline remained strong.

Speaker #1: Certainly, the market environment, including ongoing pricing challenges due to tariffs and the uncertainty with war, results in reluctance on borrowers to invest in capital projects.

Speaker #1: Our lending teams are working with their customers to ensure we can meet their needs and offer loans at a good price when the demand is there.

Speaker #1: From a stock repurchase perspective, we acquired 1.2 million shares at an average price of $1,963, resulting in a reduction in equity and a growth in treasury stock of $23.1 million for the first quarter of 2026.

Speaker #1: That enhanced EPS by about 1 cent for the quarter. We're a little more than halfway through the existing buyback authorization we expect to continue to remain active.

Bradley Adams: We're a little more than halfway through the existing buyback authorization. We expect to continue to remain active. Obviously, capital still managed to grow in the quarter despite the size of this capital return, and that's due to the exceptional earnings power that's inherent in this balance sheet right now. It's pretty remarkable that we can have a couple stumbles in credit and still produce this level of earnings with an ROTCE still in the mid-teens. Margin trends still feel very good and stable in the near term. I do think later in the year, we'll start to trend back towards 5%. Loan growth for the remainder of the year is still being targeted in the mid-single digit level. Expense growth will continue to be modest in the quarters ahead, as you can see.

Speaker #1: Obviously, capital is still managed to grow in the quarter despite the size of this capital return, and that's due to the exceptional earnings power that's inherent in this balance sheet right now.

Speaker #1: It's pretty remarkable that we can have a couple of stumbles in credit and still produce this level of earnings. With an ROTCE still in the mid-teens.

Speaker #1: Margin trends still feel very good and stable in the near term. I do think later in the year we'll start to trend back towards 5%.

Speaker #1: Loan growth for the remainder of the year is still being targeted in the mid-single digit level. Expense growth will continue to be modest in the quarters ahead.

Speaker #1: As you can see, as I mentioned, stock buyback will continue to be an attractive alternative for us as our capital continues to grow. That's it from my end.

Bradley Adams: As I mentioned, stock buyback will continue to be an attractive alternative for us as our capital continues to grow. That's it from my end. With that, I'll turn the call back over to Jim.

Speaker #1: So with that, I'll turn the call back over to Jim.

Speaker #2: Okay. Thanks, Brad. In closing, obviously a mixed quarter. Especially as it relates to the two aforementioned credits. But the rest of the bank is performing exceptionally well, far ahead of expectations.

James Eccher: Okay, thanks, Brad. In closing, obviously a mixed quarter, especially as it relates to the two aforementioned credits, but the rest of the bank is performing exceptionally well, far ahead of expectations, and the earnings power is extremely strong. We remain optimistic about loan growth in the coming quarters and the potential for more strategic growth opportunities as well. That concludes our prepared comments this morning, so I'll turn it over to the moderator and open it up to Q&A.

Jim Eccher: Okay, thanks, Brad. In closing, obviously a mixed quarter, especially as it relates to the two aforementioned credits, but the rest of the bank is performing exceptionally well, far ahead of expectations, and the earnings power is extremely strong. We remain optimistic about loan growth in the coming quarters and the potential for more strategic growth opportunities as well. That concludes our prepared comments this morning, so I'll turn it over to the moderator and open it up to Q&A.

Speaker #2: And the earnings power is extremely strong. We remain optimistic about loan growth in the coming quarters and the potential for more strategic growth opportunities as well.

Speaker #2: That concludes our prepared comments this morning. So I'll turn it over to the moderator and open it up to Q&A.

Speaker #3: Certainly. At this time, we will be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad.

Operator: Certainly. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two 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. Your first question for today is from Jeff Rulis with D.A. Davidson.

Speaker #3: A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue.

Speaker #3: For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we pull for questions.

Speaker #3: Your first question for today is from Jeff Rulis with DA Davidson.

Speaker #4: Thanks. Good morning.

Jeff Rulis: Thanks. Good morning.

Speaker #2: Hey, Jeff.

James Eccher: Hey, Jeff.

Jim Eccher: Hey, Jeff.

Speaker #5: Hey, Jeff.

James Eccher: Hey, Jeff.

Jim Eccher: Hey, Jeff.

Speaker #4: Just a question on maybe the net charge-off expectations just to kind of realign with maybe where we are for the balance of the year.

Jeff Rulis: Just a question on maybe the net charge-off expectations just to kind of realign with maybe where we are for the balance of the year. It kind of been bouncing around the 40 basis points and you've talked about that with the Powersports book. Given this quarter's elevated level, is there any pull forward on some of those losses or should we revert back to that prior guide on net charge-offs?

Speaker #4: It's kind of been bouncing points and you've talked about that with the Power Sports book. Given this quarter's elevated level, is there any pull forward on some of those losses or do we should we revert back to kind of that prior guide on net charge-offs?

Speaker #2: Yeah, good question, Jeff. I mean, I think the first thing, as it relates to Power Sports, the absolute level of charge-offs is going to be a little bit higher.

James Eccher: Yeah, good question, Jeff. I think that the first thing is, as it relates to Powersports, the absolute level of charge-offs is going to be a little bit higher. I'd call your attention to page 9 of our loan disclosure deck. You can see, and Darin can speak to this certainly, but the actual absolute losses were certainly higher this quarter, but the contribution margins were at an all-time high. That's the trade-off here with 8.3% really net contribution margin after charge-offs. We think loss content will probably trend lower in the coming quarters due to normal seasonality. As it relates to commercial office, page six, I mentioned before, we've got a little over 3.5% of the loan book in office today. 68% loan to value based on updated appraisals. Only $3 million is classified.

Jim Eccher: Yeah, good question, Jeff. I think that the first thing is, as it relates to Powersports, the absolute level of charge-offs is going to be a little bit higher. I'd call your attention to page 9 of our loan disclosure deck. You can see, and Darin can speak to this certainly, but the actual absolute losses were certainly higher this quarter, but the contribution margins were at an all-time high. That's the trade-off here with 8.3% really net contribution margin after charge-offs. We think loss content will probably trend lower in the coming quarters due to normal seasonality. As it relates to commercial office, page six, I mentioned before, we've got a little over 3.5% of the loan book in office today. 68% loan to value based on updated appraisals. Only $3 million is classified.

Speaker #2: I'd call your attention to page nine of our loan disclosure deck. You can see and Darren can speak to this certainly, but the actual absolute losses were certainly higher this quarter, but the contribution margins were at an all-time high.

Speaker #2: So that's the trade-off here. We had an 8.3% really net contribution margin after charge-offs. That will probably we think lost content will probably trend lower in the coming quarters due to normal seasonality.

Speaker #2: As it relates to commercial office, page six, I mentioned before, we've got a little over 3.5% of the loan book in office today.

Speaker #2: 68% loan to value based on updated appraisals. Only 3 million is classified. Now, there's one other credit that's not classified that we're keeping a close eye on that we may see some pull forward losses, but it's too early to tell at this point.

James Eccher: Now, there's one other credit that's not classified that we're keeping a close eye on, and we may see some pull-forward losses, but it's too early to tell at this point. Roundabout way of saying we think losses will trend lower in coming quarters, but just keep in mind that Powersports losses will be a little more elevated than what we normally report.

Jim Eccher: Now, there's one other credit that's not classified that we're keeping a close eye on, and we may see some pull-forward losses, but it's too early to tell at this point. Roundabout way of saying we think losses will trend lower in coming quarters, but just keep in mind that Powersports losses will be a little more elevated than what we normally report.

Speaker #2: So, roundabout way of saying we think losses will trend lower in the coming quarters, but just keep in mind that Power Sport losses will be a little more elevated than what we normally report.

Jeff Rulis: Yeah.

Speaker #4: Yeah.

Speaker #2: Along with the contribution.

James Eccher: Along with the company.

Jim Eccher: Along with the company.

Jeff Rulis: Appreciate it.

Speaker #4: Appreciate it, Jim.

Speaker #2: Yeah.

James Eccher: Yeah.

Jim Eccher: Yeah.

Jeff Rulis: Appreciate it, Jim. Yeah, I guess I'd take the positive side of the next question on the margin. I guess the first part is, I've heard your comments, Brad, on expectations for the margin, but is there any residual, maybe positive impact on the sub-debt payoff? Is that inclusive of your expectations? The second piece of that is just, are you assuming a kind of a static rate environment? Thanks.

Speaker #4: Appreciate it, Jim. And yeah, I guess I'd take the positive side of the next question on the margin I guess the first part is and heard your comments, Brad, on expectations for the margin, but is there any residual maybe positive impact on the sub debt payoff?

Speaker #4: Is that inclusive of your expectations and the second piece of that is just are you assuming a kind of a static rate environment? Thanks.

Speaker #5: Well, what I tell you at this point, and obviously notice is required to pay it off further, but what we have done for the go-forward is we paid down a portion of the sub debt that resulted in the basically gross dollar amount of interest expense remaining the same.

James Eccher: Well, what I'd tell you at this point, and obviously notice is required to pay it off further, but what we have done, going forward, is we paid down a portion of the sub-debt that resulted in basically the gross dollar amount of interest expense remaining the same. Obviously, we have ample flexibility to pay it down further. We could refinance depending on what we view our capital needs as. Capital needs are not urgent at this point, obviously, as you can see by looking at our balance sheet. I don't think the name of the game is any different than what we've said for the last two years, Jeff. That is we've got lots of flexibility. Balance sheet's ridiculously strong.

Jim Eccher: Well, what I'd tell you at this point, and obviously notice is required to pay it off further, but what we have done, going forward, is we paid down a portion of the sub-debt that resulted in basically the gross dollar amount of interest expense remaining the same. Obviously, we have ample flexibility to pay it down further. We could refinance depending on what we view our capital needs as. Capital needs are not urgent at this point, obviously, as you can see by looking at our balance sheet. I don't think the name of the game is any different than what we've said for the last two years, Jeff. That is we've got lots of flexibility. Balance sheet's ridiculously strong.

Speaker #5: Obviously, we have ample flexibility to pay it down further, or we could refinance depending on what we view our capital needs as. Capital needs are not urgent at this point, obviously, as you can see by looking at our balance sheet.

Speaker #5: But I don't think the name of the game is any different than what we've said for the last two years, Jeff, is that we've got lots of flexibility.

Speaker #5: Balance sheet's ridiculously strong. To be able to see the kind of delta that we've seen in rates along the curve and deliver this kind of margin stability has been something I'm very proud of.

James Eccher: To be able to see the kind of delta that we've seen in rates along the curve and deliver this kind of margin stability has been something I'm very proud of. I don't see a lot of volatility going in. I think we'll see more competition on consumer loan yields as it relates to Powersports. I think we'll see, in the near term, some of that mitigated by the movement back up in rates with some of the macro uncertainty, what that's done to overnight index swap rates and so on and so forth. All in all, this is about as upbeat and positive as I can sound on interest rates, and I realize I still sound monotone and boring, but it's about as upbeat as I can be.

Jim Eccher: To be able to see the kind of delta that we've seen in rates along the curve and deliver this kind of margin stability has been something I'm very proud of. I don't see a lot of volatility going in. I think we'll see more competition on consumer loan yields as it relates to Powersports. I think we'll see, in the near term, some of that mitigated by the movement back up in rates with some of the macro uncertainty, what that's done to overnight index swap rates and so on and so forth. All in all, this is about as upbeat and positive as I can sound on interest rates, and I realize I still sound monotone and boring, but it's about as upbeat as I can be.

Speaker #5: And I don't see a lot of volatility going in. I think we'll see more competition on consumer loan yields as it relates to power sports.

Speaker #5: I think we'll see in the near term, some of that mitigated by the movement back up in rates with some of the macro uncertainty.

Speaker #5: What that's done to overnight index swap rates, and so on and so forth. But all in all, this is about as upbeat and positive as I can sound on interest rates, and I realize I still sound monotone and boring.

Speaker #5: But it's about as upbeat as I can be.

Speaker #4: Appreciate it. Thanks.

Jeff Rulis: Appreciate it. Thanks.

Speaker #5: Yep.

James Eccher: Yep.

Jim Eccher: Yep.

Speaker #3: Your next question is from Brandon Rudd with Stevens Inc.

Operator: Your next question is from Brandon Rudd with Stephens Inc.

Brandon Rudd: Hi. Morning, guys.

Brandon Rud: Hi. Morning, guys.

Speaker #6: Hi. Morning, guys. I guess the first one I think for the color on the charge-offs, could we drill into the increase in the non-performing loans?

James Eccher: Morning.

Jim Eccher: Morning.

Brandon Rudd: I guess the first one, I'll take color on the charge-offs. Can we drill into the increase in the non-performing loans? I think the press release mentions a few larger relationships. If you could provide a bit more color there.

Brandon Rud: I guess the first one, I'll take color on the charge-offs. Can we drill into the increase in the non-performing loans? I think the press release mentions a few larger relationships. If you could provide a bit more color there.

Speaker #6: I think the press release mentions a few larger relationships. If you could provide a bit more color there.

Speaker #2: Yeah. So actually classifieds were lower. We did have an uptick in some seven or substandard accruing loans. The largest was that aforementioned CNI credit that is cash flow dependent.

James Eccher: Yeah. Actually classifieds were lower. We did have an uptick in some seven or substandard accruing loans. The largest was that aforementioned C&I credit that is cash flow dependent. They've been hit pretty hard with supply chain disruption and tariff issues. That's really the largest one. We did have a little bit of an uptick in the special mention, 2 or 3 credits, one of which we talked about was that office one that we repositioned. Again, classifieds in total were down about $3 million.

Jim Eccher: Yeah. Actually classifieds were lower. We did have an uptick in some seven or substandard accruing loans. The largest was that aforementioned C&I credit that is cash flow dependent. They've been hit pretty hard with supply chain disruption and tariff issues. That's really the largest one. We did have a little bit of an uptick in the special mention, 2 or 3 credits, one of which we talked about was that office one that we repositioned. Again, classifieds in total were down about $3 million.

Speaker #2: They've been hit pretty hard. And with supply chain disruption and tariff issues, that's really the largest one. We did have a little bit of an uptick in special mention two or three credits, one of which we talked about was that office one that we repositioned.

Speaker #2: But again, classifieds in total were down about 3 million.

Speaker #6: Sure. Okay. Thank you. And then maybe if I kind of put some pieces together here, the provision a bit higher than expected. I'm assuming that's to cover the charge-offs in this quarter, but the reserve ratio kind of held flat.

Brandon Rudd: Sure. Okay. Thank you. Maybe just to kind of put some pieces together here, the provision a bit higher than expected. I'm assuming that's to cover the charge-offs in this quarter, but the reserve ratio kind of held flat. Looking ahead, should we assume the ACL ratio kind of holds flat at this, call it 140-ish level going forward? Or-

Brandon Rud: Sure. Okay. Thank you. Maybe just to kind of put some pieces together here, the provision a bit higher than expected. I'm assuming that's to cover the charge-offs in this quarter, but the reserve ratio kind of held flat. Looking ahead, should we assume the ACL ratio kind of holds flat at this, call it 140-ish level going forward? Or-

Speaker #6: Looking ahead, should we assume the reserve level kind of sorry, the ACL ratio kind of holds flat at this call it 1/40-ish level going forward, or?

James Eccher: Yeah. Plus or minus

Jim Eccher: Yeah. Plus or minus

Brandon Rudd: As the classifieds work through the system, do they come down?

Brandon Rud: As the classifieds work through the system, do they come down?

Speaker #6: As it classifies work to the system, they come down?

Speaker #2: Plus or minus, that's a reasonable expectation, Brandon.

James Eccher: ±, that's a reasonable expectation, Brandon.

Jim Eccher: ±, that's a reasonable expectation, Brandon.

Speaker #6: Okay. Thank you. And then one last, I'm just kind of taking a step back. I think there's a new exhibit on slide four at the bottom showing the decline in participation in syndication exposure over time.

Brandon Rudd: Okay. Thank you. One last one, just kind of taking a step back. I think there's a new exhibit on slide 4 at the bottom, showing the decline in participation in syndication exposure over time. Is there a level that you'd like to get that down to, just over time?

Brandon Rud: Okay. Thank you. One last one, just kind of taking a step back. I think there's a new exhibit on slide 4 at the bottom, showing the decline in participation in syndication exposure over time. Is there a level that you'd like to get that down to, just over time?

Speaker #6: Is there a level that you'd like to get that down to, just over time?

Speaker #2: Yeah. That's a good point. I mean, that portfolio largely came over with the West Suburban acquisition peaked at right around 500 million. We've done a real good job of reducing that portfolio.

James Eccher: Yeah. That's a good point. I mean, that portfolio largely came over with the West Suburban acquisition, peaked at right around $500 million. We've done a real good job of reducing that portfolio. We've essentially more than halved it over the last couple of years. Yeah, there's probably some room here. We'd like to continue to wind that down. Certainly, it's created a headwind to growth the last few quarters. That's not a main line of business for us. We don't view that as franchise-enhancing type of business. I think you can expect us to continue to wind that down. There's a certain level we'll probably keep, but we'd like to continue to wind this down even further.

Jim Eccher: Yeah. That's a good point. I mean, that portfolio largely came over with the West Suburban acquisition, peaked at right around $500 million. We've done a real good job of reducing that portfolio. We've essentially more than halved it over the last couple of years. Yeah, there's probably some room here. We'd like to continue to wind that down. Certainly, it's created a headwind to growth the last few quarters. That's not a main line of business for us. We don't view that as franchise-enhancing type of business. I think you can expect us to continue to wind that down. There's a certain level we'll probably keep, but we'd like to continue to wind this down even further.

Speaker #2: We've essentially more than halved it over the last couple of years. Yeah, there's probably some room here we'd like to continue to wind that down.

Speaker #2: But certainly, it's created a headwind to growth the last few quarters. But that's not a main line of business for us. We don't view that as a franchise-enhancing type of business.

Speaker #2: So I think you can expect us to continue to wind that down. There's a certain level we'll probably keep it. We'd like to continue to wind this down even further.

Speaker #6: Gotcha. Okay, thank you. And maybe just one last one on loan yields. I think, broadly, we've kind of heard the spreads were a bit compressed last quarter.

Brandon Rudd: Gotcha. Okay. Thank you. Maybe just one last one on loan yields. I think broadly we've kind of heard that spreads were a bit compressed last quarter. Do you have where new origination yields are relative to roll-off yields and what that incremental pickup is?

Brandon Rud: Gotcha. Okay. Thank you. Maybe just one last one on loan yields. I think broadly we've kind of heard that spreads were a bit compressed last quarter. Do you have where new origination yields are relative to roll-off yields and what that incremental pickup is?

Speaker #6: So, do you have where new origination yields are relative to roll-off yields, and what that incremental pickup is?

Speaker #2: Yeah. If I look at a quarter over quarter, we've been the weighted average yield that we've put on as far as new business is averaged between 6.6 and 6 and 3/4.

James Eccher: Yeah. If I look at it quarter-over-quarter, the weighted average yield that we've put on as far as new business is average between 6.6% and 6.75% over the last couple of quarters. That's-

Jim Eccher: Yeah. If I look at it quarter-over-quarter, the weighted average yield that we've put on as far as new business is average between 6.6% and 6.75% over the last couple of quarters. That's-

Speaker #2: Over the last couple of quarters. And that's obviously that's actually down, obviously, 50 to 75 basis points from prior quarters.

Brandon Rudd: Gotcha

Brandon Rud: Gotcha

Brandon Rudd: that's actually down, obviously, 50 to 75 basis points from prior quarters.

Brandon Rud: that's actually down, obviously, 50 to 75 basis points from prior quarters.

Speaker #6: Sure. Sure. Okay. Thank you very much.

Brandon Rudd: Sure. Okay. Thank you very much.

Brandon Rud: Sure. Okay. Thank you very much.

Speaker #2: Thanks, Brandon.

James Eccher: Thanks, Brandon.

Jim Eccher: Thanks, Brandon.

Speaker #3: Your next question for today is from Nathan Race with Piper Sandler.

Operator: Your next question for today is from Nathan Race with Piper Sandler.

Speaker #4: Hey, guys. Good morning. Thanks for taking the question.

Nathan Race: Hey, guys. Good morning. Thanks for taking the question.

Bradley Adams: Morning, Nate.

Speaker #2: Morning, Nathan. Morning, Nate.

Bradley Adams: Morning, Nate.

Speaker #4: Bigger picture question. The earnings power and the high quality and kind of top quartile earnings that you guys have been putting up over the last several quarters seems to be being masked by just the ongoing credit inconsistencies and noise there.

Nathan Race: Bigger picture question. The earnings power and the high quality and kind of top quartile earnings that you guys have been putting up over the last several quarters seems to be being masked by just the ongoing credit inconsistencies and noise there. Jim, is there anything else you can offer just to assure investors that you were getting towards the tail end of some of this credit noise in the legacy portfolio?

Speaker #4: Jim, is there anything else you can offer just to assure investors that you are getting toward the tail end of some of this credit noise in the legacy portfolio?

Speaker #2: Yeah. I guess all our non-performers overall, if you look at two years ago to the end of last year, were almost halved, right? Obviously, this is a little bit of a disappointing print, having them go up again.

James Eccher: Yeah, I guess that they are non-performers overall. If you look at two years ago to the end of last year, we're almost halved, right? Obviously, this is a little bit of a disappointing print, having them go up again this quarter. I'd just say, credit progress improvement isn't always linear. This office credit's been hanging out there for some time. We think we're through most of that book. Then the C&I relationship kind of came to a head over the last six months. All I can say is, we understand our NPAs are higher than we'd like, and we're working very hard to reduce those.

Jim Eccher: Yeah, I guess that they are non-performers overall. If you look at two years ago to the end of last year, we're almost halved, right? Obviously, this is a little bit of a disappointing print, having them go up again this quarter. I'd just say, credit progress improvement isn't always linear. This office credit's been hanging out there for some time. We think we're through most of that book. Then the C&I relationship kind of came to a head over the last six months. All I can say is, we understand our NPAs are higher than we'd like, and we're working very hard to reduce those.

Speaker #2: This quarter, I'd just say credit progress improvement isn't always linear. So these this office credit's been hanging out there for some time. We think we're through most of that book.

Speaker #2: And then the CNI relationship kind of came to a head over the last six months. All I can say is we understand our NPAs are higher than we'd like.

Speaker #2: And we're working very hard to reduce those.

Speaker #4: Okay, that's helpful. And maybe, Brad, just given the buyback pace this quarter, is the appetite near term—just given you're expecting some moderation in charge-offs going forward and the margins are pretty well positioned for the current rate environment with the Fed on hold?

Nathan Race: Okay. That's helpful. Maybe Brad, just given the buyback pace this quarter, is the appetite near term, just given you're expecting some moderation charge-offs going forward and the margin's pretty well positioned for the current rate environment with the Fed on hold. Just any thoughts on just kind of the pace of buybacks and the appetite just to limit excess capital inflows going forward?

Speaker #4: Just any thoughts on the pace of buybacks and the appetite to limit excess capital inflows going forward?

Speaker #5: I don't see any reason why buyback can't continue at these levels subsequent to the remaining amount on the authorization. If you would ask me today what my intentions are, it would be to refile another authorization in short order.

Bradley Adams: I don't see any reason why buyback can't continue at these levels subsequent to the remaining amount on the authorization. If you would ask me today what my intentions are, it would be to refile another authorization in short order, once this is filled. We have more than enough capital to do anything strategic that I could envision coming our way and still continue to return capital to shareholders.

Speaker #5: Once this is filled, we have more than enough capital to do we have more than enough capital to do anything strategic that I could envision coming our way.

Speaker #5: And still continue to return capital to shareholders.

Speaker #4: Okay. Got it. And I apologize. I jumped down late, but just, Jim, maybe any thoughts on just what you've seen from a pipeline perspective and just kind of how you're thinking about loan growth over the balance of this year?

Nathan Race: Okay. Got it. I apologize, I jumped on late. Just Jim, maybe any thoughts on just what you're seeing from a pipeline perspective and just kind of how you're thinking about loan growth over the balance of this year?

Speaker #2: Yeah. I think first quarter is obviously soft in commercial and soft with PowerSport. Pipelines are building. We still are anticipating load of single-digit growth through the balance of the year.

James Eccher: Yeah. I think Q1 is obviously soft in commercial and it's soft at Powersports. Pipelines are building. We still are anticipating low to single-digit growth through the balance of the year. Nothing's changed on that front.

Jim Eccher: Yeah. I think Q1 is obviously soft in commercial and it's soft at Powersports. Pipelines are building. We still are anticipating low to single-digit growth through the balance of the year. Nothing's changed on that front.

Speaker #2: Nothing's changed on that front.

Speaker #4: Okay. And just from a pricing competition perspective, are you seeing anything kind of irrational out there on the commercial lending side of things in Chicago land these days, or just generally how are kind of new spreads holding up on the commercial portfolio?

Nathan Race: Okay. Just from a pricing competition perspective, are you seeing anything kind of irrational out there on the commercial lending side of things in Chicagoland these days? Just generally, how are kind of new spreads holding up on the commercial portfolio?

Speaker #2: Yeah, I would say commercial real estate is fiercely competitive right now. We're still getting acceptable spreads in our CNI group and leasing. As Brad mentioned, we think PowerSport yields will come down a little bit due to competition.

James Eccher: Yeah, I would say commercial real estate is fiercely competitive right now. We're still getting acceptable spreads in our C&I group and leasing. As Brad mentioned, we think Powersports yields will come down a little bit due to competition, but we're still bullish our margin's going to be hanging in there around 5%.

Jim Eccher: Yeah, I would say commercial real estate is fiercely competitive right now. We're still getting acceptable spreads in our C&I group and leasing. As Brad mentioned, we think Powersports yields will come down a little bit due to competition, but we're still bullish our margin's going to be hanging in there around 5%.

Speaker #2: But we're still bullish. Our margin is going to be hanging in there around 5%.

Speaker #4: Okay. Great. I appreciate all the color. Thanks, guys.

Nathan Race: Okay, great. I appreciate all the color. Thanks, guys.

Speaker #2: Thank you.

James Eccher: Thank you.

Jim Eccher: Thank you.

Speaker #3: Once again, if you would like to ask a question, please press star one. Your next question is from David Conrad with KBW.

Operator: Once again, if you would like to ask a question, please press star one. Your next question is from David Konrad with KBW.

Speaker #7: Hey, good morning. Just a follow-up question on the loan growth from here. I was just hoping you can kind of break that down a little bit between commercial and PowerSport.

David Konrad: Hey, good morning. Just a follow-up question on the loan growth from here. I just was hoping you could kind of break that down a little bit between commercial and Powersports. I'd imagine Powersports, this is kind of the trough seasonal level for the year. Maybe those two asset classes give a little bit of expectations for the year.

Speaker #7: I imagine PowerSport, this is kind of the trough seasonal level for the year. So maybe those two asset classes give a little bit of expectations for the year.

Speaker #2: Yeah. Maybe I'll let Darren talk about PowerSport. As it relates to commercial, we think it'll be pretty broad-based. I think we'll see growth in commercial real estate CNI-sponsored leasing.

James Eccher: I maybe I'll let Darin talk about Powersports. As it relates to commercial, we think it'll be pretty broad-based. I think we'll see growth in commercial real estate, C&I sponsored leasing. We're not seeing any one sector with higher expectations than the other. As it relates to Powersports, maybe Darin, you can comment on that.

Jim Eccher: I maybe I'll let Darin talk about Powersports. As it relates to commercial, we think it'll be pretty broad-based. I think we'll see growth in commercial real estate, C&I sponsored leasing. We're not seeing any one sector with higher expectations than the other. As it relates to Powersports, maybe Darin, you can comment on that.

Speaker #2: We're not seeing any one sector with higher expectations than the other. As it relates to PowerSport, that's maybe—Darren, you can comment on that.

Speaker #4: Yeah. So I'm the same as where I was at at the end of the year. We'll have in the overall group and with that, I include the collector car lending that we do as well nationally.

Darin Campbell: Yeah. I'm the same as where I was at end of the year. We'll have in the overall group, and with that, I include the collector car lending that we do as well nationally. We'll have single-digit growth, I'm still projecting for the remainder of the year.

Speaker #4: We'll have single-digit growth. I'm still projecting for the remainder of the year.

Speaker #7: And then charge-offs in PowerSports are a little bit over 2% this quarter. But to your point, Jim, the excess spread, the contribution margin was actually one of the highest we've had in recent quarters.

David Konrad: Then charge-offs in Powersports were a little bit over 2% this quarter. To your point, Jim, the excess spread, the kind of niche in margin was actually one of the highest you've had in recent quarters. Just wonder if you're doing anything to tweak the credit on that aspect as you're looking at originations going forward in terms of underwriting.

Speaker #7: But just wonder if you're doing anything to tweak the credit on that aspect as you're looking at originations going forward in terms of underwriting?

Speaker #2: We have a little bit on a little tighter on the underwriting, but not a material change. Because we do focus on that net contribution margin, which the overall profitability of the business.

Darin Campbell: We have a little tighter on the underwriting, but not a material change because we do focus on that net contribution margin, which the overall profitability.

Darin Campbell: Right

Darin Campbell: ... of the business. A lot of it's driven, which is important to note, it's a product mix. We have a good mix of originations that's endorsed OEM products and non-endorsed products. We charge higher on the non-endorsed products than we do for our endorsed products. For example, would be endorsed Indian, Triumph, KTM. If you're non-endorsed, maybe it's Harley, BMW, Yamaha, Suzuki, those type of products. We charge a point higher for those products. Part of the little higher charge-off rate is related to the product mix coming in over the last couple of years, which is driving the overall profitability. It doesn't charge off at a point higher, but we charge a point higher, so it's driving a little bit higher the charge-off rate, but it's also driving a better profitable portfolio. I see it-

Speaker #2: And a lot of it's driven, which is important to note, it's a product net. So we have a good mix of originations that's endorsed OEM products and non-endorsed products.

Speaker #2: And we charge higher on the non-endorsed products than we do for our endorsed products. For example, endorsed would be Indian, Triumph, KTM. If you're non-endorsed, maybe it's Harley, BMW.

Speaker #2: Yamaha, Suzuki, those types of products—we charge a point higher for those products. So, part of the little higher charge-off rate is related to the product mix coming in over the last couple of years, which is driving the overall profitability.

Speaker #2: So, charge it. It doesn't charge off at a point higher. But we charge a point higher, so it's driving a little bit higher charge-off rate, but it's also driving a better, profitable portfolio.

Speaker #2: And so I see it staying around this level, maybe slightly less with a couple of changes that we made. Our overall mix of paper that we did first quarter—so if you include everything that we did nationally in the business—first quarter of '25 compared to the first quarter of '26, actually our FICO score went from 735 up to 743 on the full mix of business that we did, comparing quarter over quarter.

Darin Campbell: Got it.

Darin Campbell: ... staying around this level, maybe slightly less with a couple of changes that we made. Our overall mix of paper that we did Q1, so if you include everything that we did nationally, in the business, Q1 2025 compared to Q1 2026. Actually our FICO score went from 735 up to 743 on the full mix of business that we did comparing quarter over quarter. All that'll start playing into the mix, as this portfolio continues to turn over. That number should start coming down a little bit. I wouldn't say materially going down because we like the mix of business that's going into the portfolio from a profitability standpoint.

Speaker #2: So all that'll start playing into the mix as this portfolio continues to turn over. And so that number should start coming down a little bit.

Speaker #2: But I wouldn't say materially going down because we like the mix of business that's going into the portfolio from a profitability standpoint.

Speaker #7: Got it. Perfect. And last one from me, Brad. Expenses were much lower than at least what I expected this quarter. Just maybe a little bit more color on core expenses where we go from here for the year.

David Konrad: Got it, perfect. Last one from me, Brad. Expenses were much lower than at least what I expected this quarter. Just maybe a little bit more color on core expenses, where we go from here for the year.

Speaker #2: So I think that's fourth quarter is always tough because you see bonus levels can have more variability in the fourth quarter based on where everything comes out.

Bradley Adams: I think that Q4's always tough because you see bonus levels can have more variability in Q4 based on where everything comes out.

Speaker #2: Acquisition costs. And acquisition costs were also in there. So I think that I point you too broadly—just the overall expense guy, which is, we're trying to go in that kind of 3% to 4% range for the year.

David Konrad: Acquisition costs.

Bradley Adams: Acquisition costs were also in there. I think that I'd point you to broadly just the overall expense guide, which is we're trying to go in that kind of 3% to 4% range for the year. That feels right. I would just expect it to follow that range from here. I would say, given how well the businesses are performing, I would expect to see an overall bonus level as a component of the salary and benefits to be relatively consistent with what we saw last year. That all, minus the one-time stuff, of course.

Speaker #2: That feels right. So I would just expect it to follow that range from here. I would say given how well the businesses are performing, I would expect to see an overall bonus level as a component of this salary and benefits to be relatively consistent with what we saw last year.

Speaker #2: So that all minus the one-time stuff, of course.

Speaker #7: Right.

David Konrad: Right.

Speaker #2: Again, I feel like we've done a good job controlling it. And three to four percent in this kind of inflationary world, given the type of double-digit increases that we have in employee benefits, is pretty good performance for us.

Bradley Adams: Again, I feel like we've done a good job controlling it, and 3% to 4% in this kind of inflationary world, given the type of double-digit increases that we have in employee benefits, is pretty good performance for us. I'm pleased with that.

Speaker #2: I'm pleased with that.

Speaker #7: Got it. Okay. Thank you. Appreciate it.

David Konrad: Got it. Okay. Thank you. Appreciate it.

Bradley Adams: Yeah.

Speaker #3: 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.

Operator: We have reached the end of the question and answer session, and I will now turn the call over to James Eccher for closing remarks.

Speaker #2: Okay. Thank you. Everyone, for joining us this morning. Appreciate your interest in the company. We look forward to speaking with you again next quarter.

James Eccher: Okay, thank you everyone for joining us this morning. Appreciate your interest in the company, and we look forward to speaking with you again next quarter. Thank you.

Jim Eccher: Okay, thank you everyone for joining us this morning. Appreciate your interest in the company, and we look forward to speaking with you again next quarter. Thank you.

Speaker #2: Thank you.

Operator: This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.

Q1 2026 Old Second Bancorp Inc Earnings Call

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