Old Second (OSBC) Q4 2025 Earnings Transcript

Old Second Bancorp reported Q4 net income of $28.8 million, or $0.54 per share, and adjusted EPS of $0.58, while tangible book value rose to $14.12 and tax-equivalent NIM improved 4 bps sequentially to 5.09%. Management said expenses fell $10.2 million, the loan-to-deposit ratio rose to 93.9%, and buybacks are expected to begin soon. Credit was mixed with $6 million of net charge-offs, mostly from Powersports, but the bank guided to roughly 3% expense growth and mid-single-digit loan growth for 2026.

Analysis

OSBC is transitioning from a post-deal cleanup story into a cleaner operating leverage story: the bank is now generating enough spread income that modest balance-sheet attrition and still-elevated credit costs can coexist with strong returns. The key second-order effect is that deposit mix repair is creating an earnings tailwind exactly when rate cuts are compressing peers who are still liability-sensitive; that makes OSBC look better on relative NII durability than the headline loan decline suggests.

The market may be underestimating how much of the current credit noise is a feature, not a bug, of the higher-yield Powersports book. Management is effectively telling you that the portfolio is designed to run with higher gross charge-offs but superior contribution margin, which means the right lens is not charge-off rate alone but incremental ROA per dollar of capital. If that framing holds, the stock deserves a higher multiple than a legacy Midwest bank because the earnings stream is becoming more fee-like and less rate-beta dependent.

The main risk is timing: the bank is still carrying residual wholesale-funding excess and participations runoff, so a 1Q NIM dip plus any further classified-asset drift could create a short-lived quality scare. But the longer-duration catalyst is capital return; once buybacks start, the combination of mid-single-digit loan growth, ~3% expense growth, and >5% margin should mechanically lift EPS and tangible book accretion over the next 2-3 quarters. The contrarian point is that the stronger the deposit cleanup, the more the market can justify paying for the franchise as a normalized earnings asset rather than as an acquisition stub.

Key Decisions for Investors

• Long OSBC outright into the next 1-3 quarters; use pullbacks on any 1Q margin dip as entry points. Risk/reward is attractive if NIM stays above 5% and buybacks begin, with downside limited by capital strength and visible EPS support.
• Pair trade: long OSBC vs short a regional bank ETF or a funding-sensitive peer with weaker deposit beta. OSBC should outperform on NII resilience in a falling-rate tape and on capital-return optionality over the next 6 months.
• Sell downside protection on OSBC only after buyback authorization is announced; the implied-volatility pop from capital-return confirmation should be monetizable if credit headlines remain contained.
• If you want a tighter catalyst trade, buy OSBC on any post-earnings drift lower and target a 3-6 month rerating toward a higher P/TBV multiple as the market prices in normalized capital deployment.
• Avoid chasing strength in the next few weeks unless classified assets stabilize; the cleanest setup is after the market digests the residual credit noise and before buybacks/loan growth reaccelerate.