Skip to content
    OSBC
    Earnings call· Jun 2026(Q2 FY26)

    OLD SECOND BANCORP INC OSBC

    Jul 23, 2026 Source

    Executive summary

    Old Second Bancorp Q2 FY26 — Strong Margin Expansion and Improving Credit Trends

    Old Second Bancorp delivered a strong second quarter, marked by significant net interest margin expansion and notable improvements in credit quality, particularly a 30% reduction in special mention loans. Despite elevated charge-offs from previously identified credits, management expressed optimism for future credit trends and continued strong operating leverage. The bank remains active in share repurchases, with a new authorization for 2.5 million shares, while also seeking strategic M&A opportunities.

    Highlights

    5

    • Net interest margin expanded to 5.23%, a 9 basis point improvement QoQ and 38 basis points YoY.

    • Adjusted net income was $28.7 million or $0.55 per diluted share.

    • Nonperforming loans decreased $19 million and classified assets declined $16.5 million.

    • Special mention loans, a leading indicator, reduced by 30% or $12.5 million to $27 million.

    • Tangible book value per share increased to $14.77 at quarter-end from $14.35 last quarter.

    Concerns

    3

    • Net loan charge-offs were elevated at $9.2 million, primarily from two specific credits ($3M C&I, $2.8M CRE office) and Powersports ($2.8M).

    • Deposit runoff was higher than expected, and deposit competition is robust.

    • Uncertainty with the war in Iran and tariffs results in some reluctance on borrowers to invest in capital projects.

    Guidance & targets

    5
    CategoryTargetConfidence
    Net interest margin
    5.18% range
    high materiality
    Medium
    Net interest margin
    5.15%
    high materiality
    Medium
    Loan growth
    low to mid-single digits
    medium materiality
    Medium
    Expense growth
    modest
    medium materiality
    High
    Share repurchase authorization execution
    fully execute this authorization
    high materiality
    High

    Segment performance

    1
    SegmentRevenueYoYQoQMargin
    Powersports Lending
    The Powersports business continued to show robust contribution margins and a reduction in charge-offs, with seasonal trends normalizing. The business is performing exceptionally well with high APRs and improving loss rates.
    Charge-offs: $2.8M (down $1.1M QoQ)Contribution margin: robust and trending higherAPR: over 10%Loss rate: 1.80% (down from >2%)
    		————

    Operational metrics

    24
    Net income (adjusted)
    $28.7M
    Q2 FY26

    Net income excluding specific adjusting items.

    Return on assets
    1.65%
    Q2 FY26

    GAAP return on assets.

    Tax equivalent efficiency ratio (adjusted)
    50.8%vs 51.7% Q1 FY26
    Q2 FY26

    Adjusted efficiency ratio showing improvement from prior quarter.

    Tangible book value per share
    $14.77up from $14.35 last quarter
    Q2 FY26

    Increase in tangible book value per share.

    Tangible equity ratio
    11.19%up 12 bps from 11.07% last quarter, up 36 bps YoY
    Q2 FY26

    Improvement in tangible equity ratio.

    Tax equivalent income on average earning assets
    $2.8Mincreased QoQ
    Q2 FY26

    Increase in income from earning assets.

    Interest expense on average-bearing liabilities
    $658,000increased QoQ
    Q2 FY26

    Increase in interest expense on liabilities.

    Loan-to-deposit ratio
    96.4%vs 93.2% last quarter and 83.3% YoY
    as of June 30

    Increase in loan-to-deposit ratio.

    Tax equivalent loan yield
    12 bpsincreased QoQ, 63 bps increase YoY
    Q2 FY26

    Increase in loan yield driven by higher short-term rates and repricing.

    Classified assets
    $16.5Mdeclined QoQ
    Q2 FY26

    Reduction in classified assets.

    Special mention loans
    $27Mdown $12.5M (30%) QoQ
    Q2 FY26

    Significant reduction in special mention loans, a leading indicator for credit quality.

    Wealth management income
    $245,000up QoQ, up $525,000 YoY
    Q2 FY26

    Strong performance in wealth management.

    Mortgage banking income
    $97,000increased QoQ, increased $543,000 YoY
    Q2 FY26

    Increase in mortgage banking income, primarily due to MSR valuation.

    Mortgage banking income (ex-MSR mark-to-market)
    $164,000increased YoY
    Q2 FY26

    Mortgage banking income excluding mark-to-market adjustments.

    Other income
    $176,000declined QoQ, increased $551,000 YoY
    Q2 FY26

    Other income trends.

    Securities yields
    6 bpsincreased QoQ
    Q2 FY26

    Increase in securities yields.

    EPS enhancement from buybacks
    $0.01
    Q2 FY26

    Impact of share repurchases on EPS.

    Year-to-date share repurchases
    1.9M
    YTD 2026

    Total shares repurchased year-to-date.

    Loan origination activity
    $60Mseasonal increase
    Q2 FY26

    Seasonal increase in loan originations.

    Average loan balances
    $14Mincreased QoQ
    Q2 FY26

    Increase in average loan balances.

    NPA decline
    25%declined QoQ
    Q2 FY26

    Nonperforming assets declined significantly.

    C&I loan charge-off
    $3M
    Q2 FY26

    Specific charge-off in the commercial and industrial portfolio.

    CRE office property charge-off
    $2.8M
    Q2 FY26

    Specific charge-off related to an acquired commercial real estate office property.

    Office portfolio exposure
    3%
    Q2 FY26

    The office portfolio represents a small portion of the total portfolio.

    Industry KPIs

    13
    MetricValueDetails
    Loans$60.6MUSD
    Deposits100 bpsbps
    Rotce ROE15.58%%
    Cet1 ratio13.28%%
    Capital returns732,000 sharesshares
    Fee income lines$631,000USD
    Allowance reserves$70.4MUSD
    Net interest income$83.3MUSD
    Net interest margin5.23%%
    Net charge offs npls$9.2MUSD
    Total operating expenses$1MUSD
    Provision for credit losses$7.5MUSD
    Efficiency ratio operating leverage51.72%%

    Deals & partnerships

    1
    Bancorp Financial and Evergreen Bank GroupAcquisition of Bancorp Financial and its wholly owned subsidiary, Evergreen Bank Group

    Costs related to the 2025 acquisition impacted second quarter earnings. The B note charge-off was partially accounted for in purchase accounting adjustments from this acquisition.

    Risks & headwinds

    5
    Elevated net loan charge-offsQ2 FY26

    $9.2 million in Q2 FY26

    Mitigation: Majority stemmed from previously discussed credits (C&I, CRE office, Powersports); management expects normalization and improvement in future quarters.

    Office property market pressure

    Valuations at steep discounts, rents declining broadly

    Mitigation: Company's office portfolio represents only about 3% of the total portfolio, with nothing currently classified in that vertical.

    Global tariff volatility and war in Iran

    Unquantified reluctance on borrowers to invest in capital projects

    Mitigation: Management is in a 'wait-and-see mode' regarding the impact on capital projects.

    Robust competition in loan and deposit marketsCurrent

    Unquantified impact on pricing and structure for loans, deposit competition 'pretty significantly above the Fed funds curve and the treasury curve'

    Mitigation: Management is actively managing deposit funding costs and seeking to backfill runoff with different types of deposits; willing to trade asset sensitivity for wholesale funding.

    Higher than expected deposit runoffQ2 FY26

    Unquantified, but noted as 'a little higher than expected'

    Mitigation: Deposit funding costs came down, and management is focused on backfilling growth with different types of deposits.

    What to watch in Q3 FY26

    5

    Net charge-off levels

    next quarter
    Current70 bps (Q2 FY26)
    Target35-45 bps (excluding Powersports)

    Why it matters

    Normalization of charge-offs is key to demonstrating full earnings power and improving overall credit quality.

    I mean we're -- we print about 70 basis points in charge-offs this quarter. I mean I'd like to say we're going to get back into that 35 to 45 basis points with -- we're going to run a little bit higher with Powersports, right? But we saw a nice reduction second quarter over first. We're working through a couple more credits, but we're optimistic we're going to see improvement again next quarter, not only in charge-off levels, but in overall migration, and we hope to see further reductions in classified and NPAs.

    Q&A highlights

    7

    What is a better projection for charge-offs in the coming quarters, given the cleanup of lingering credits and improved nonperforming inflows?

    Management is optimistic due to a 30% reduction in special mention loans, a leading indicator. Powersports charge-offs are normalizing, and while a couple of credits are still being worked through, nothing new has popped up, suggesting a very clean quarter on the credit front is near.

    “I mean I think the big takeaway for us this quarter is not only the meaningful reduction in criticized and classified NPAs, but to have a 30% reduction in special mention, which is generally a leading indicator for future problems. I think, gives us some optimism.”

    asked by Nathan Race · answered by James Eccher

    2 min read5 chapters

    Detailed Narrative

    01

    Credit Quality Improvement

    The company saw a significant improvement in asset quality trends during the quarter, with nonperforming loans decreasing by $19 million and classified assets declining by $16.5 million. Notably, special mention loans, which are generally a leading indicator for future problems, were reduced by 30% or $12.5 million to $27 million, signaling potential for further credit normalization. Management expressed optimism for future credit trends, expecting a very clean quarter on the credit front soon.

    02

    Net Interest Margin Expansion

    Old Second Bancorp achieved an exceptionally strong net interest margin of 5.23% for the second quarter, representing a 9 basis point increase from the prior quarter and a 38 basis point increase year-over-year on a tax equivalent basis. This expansion was primarily driven by higher short-term rates, the repricing of lower-yielding loans originated in 2021 and 2022, and lower average time deposit balances. Securities yields also increased by 6 basis points.

    03

    Capital Management and Share Repurchases

    The company repurchased 732,000 shares during the second quarter at an average price of $21.08, resulting in a $15.4 million reduction to equity and enhancing EPS by approximately $0.01. Year-to-date repurchases totaled 1.9 million shares. The Board of Directors approved a new plan to repurchase approximately 2.5 million shares through June 30, 2027, reflecting management's confidence in its strong capital position and commitment to returning capital to shareholders.

    04

    Loan Growth and Market Conditions

    Total loans increased by $60.6 million during the second quarter, partially reversing seasonal declines from the previous quarter, with average loan balances increasing by $14 million. Loan origination activity reflected a seasonal increase, and the pipeline remains strong. However, the market environment, including pricing challenges due to tariffs and uncertainty from the war in Iran, has led to some reluctance among borrowers to invest in capital projects, impacting overall loan growth.

    05

    Powersports Business Performance

    The National Specialty Lending Powersports business continued to demonstrate robust performance, with its contribution margin trending higher and remaining strong. Charge-offs related to Powersports totaled $2.8 million, a $1.1 million reduction from the prior quarter, as seasonal trends normalized. The portfolio currently boasts an APR over 10% and an improved loss rate of 1.80%, contributing to an extraordinary contribution margin well over 8.5%.

    AI-generated summary of the company’s earnings call. Not investment advice.