Old Second Bancorp Q3 Earnings Call Highlights

Key Points

• Third-quarter net income was $28.9 million, or $0.56 per diluted share, supported by a higher net interest margin and improved credit classifications, though results were partly offset by elevated charge-offs.
• Net loan charge-offs totaled $12.7 million, largely tied to one commercial borrower, but classified, nonperforming and criticized loans all declined. Management said the isolated credit issue is largely behind the company.
• The tax-equivalent net interest margin rose to 5.27%, and management expects low-single-digit loan growth in the fourth quarter while remaining active in share repurchases and targeting annual buybacks of roughly 5% of outstanding shares.

Old Second Bancorp NASDAQ: OSBC reported third-quarter 2026 net income of $28.9 million, or $0.56 per diluted share, as a higher net interest margin and improving credit classifications were partly offset by elevated loan charge-offs tied primarily to one commercial relationship.

On an adjusted basis, excluding mortgage servicing rights valuation adjustments, the company earned $28.5 million, or $0.55 per diluted share. Return on assets was 1.69%, while return on average tangible common equity was 15.77%. The company reported a 52.34% efficiency ratio for the quarter.

“Despite the isolated charge-off, it was a pretty solid quarter for the company,” Chairman, President and Chief Executive Officer Jim Eccher said. He added that the bank’s improving credit metrics and performance across the rest of its operations left management optimistic about the outlook.

Charge-Offs Concentrated in Previously Discussed Credit

Third-quarter results included $12.7 million of net loan charge-offs. Commercial and industrial charge-offs totaled $9.2 million, with $6 million of that amount previously reserved. The bulk of the C&I losses related to a warehousing and distribution borrower whose cash flow deteriorated over the past year.

Eccher said the company believes that credit is “largely behind us,” noting that the borrower is under contract to be sold at a lower price. The remaining $3.1 million of charge-offs came from the company’s powersport portfolio, a level comparable with the preceding quarter.

Management pointed to broad improvement in other credit indicators. Classified loans declined to $57.8 million, nonperforming loans fell to $16.8 million, and criticized loans decreased by $61.3 million, or 38%, during the quarter. Eccher said classified loans as a percentage of total loans had not been this low since before the COVID-19 pandemic.

The allowance for credit losses on loans declined to $64.2 million, or 1.23% of total loans, at Sept. 30, from $70.4 million, or 1.34% of loans, at the end of the second quarter. Chief Operating Officer and Chief Financial Officer Brad Adams said the reserve reduction largely reflected the decline in classified loans, though he does not expect a substantial additional reduction because the company expects to replenish reserves for recurring powersport charge-offs.

Margin Expansion Continues

Net interest income rose to $84 million in the third quarter from $83.3 million in the prior quarter and increased $1.3 million from a year earlier. The tax-equivalent net interest margin expanded 4 basis points sequentially to 5.27%, up 22 basis points from the prior-year quarter.

Loan yields rose 3 basis points during the quarter, while the total yield on earning assets increased 6 basis points to 6.40%. The cost of interest-bearing deposits increased 2 basis points, and total cost of deposits was 1.02%, compared with 1.00% in the second quarter and 1.33% a year earlier.

Average loans increased by $5.5 million, while average deposits fell by $78 million. Adams attributed the deposit decline largely to seasonal factors, remaining runoff in higher-beta deposits, and wholesale deposits obtained through prior acquisitions.

Management said loan originations were stronger than reported balances suggested, but higher prepayments and the deliberate reduction of the syndicated loan portfolio offset production. Loan prepayments through the first nine months of 2026 had already reached the full-year 2025 total, according to Adams.

Old Second expects low-single-digit loan growth in the fourth quarter. Adams said the company could give back roughly 5 basis points of margin as loan growth requires more marginal funding and deposit competition increases, but added that he expects the bank to remain above a 5.20% margin in the near-to-intermediate term.

About 45% of the loan portfolio is expected to reprice over the next three to four quarters, Eccher said, along with roughly 25% of the securities portfolio. Adams said about half of the loan portfolio is variable rate and generally reprices with a 30-day lag.

Loan Pipelines, Specialty Lending and Deposits

Total loans declined by approximately $7.8 million during the quarter, while the loan-to-deposit ratio rose to 98.3% from 96.4% in the prior quarter. Eccher said outsized payoffs and a $53 million reduction in the syndicated loan portfolio constrained reported loan growth.

The company has reduced its syndicated loan balances by more than 60% from the end of 2021, when the portfolio peaked at $550 million. Adams said the company will continue participating in some syndicated credits but no longer views the business as a primary strategic focus.

Management said commercial loan pipelines were broad-based, with activity in small business, middle market, C&I, healthcare, investment commercial real estate, sponsored lending and investment leasing. Eccher said the fourth-quarter pipeline was shaping up as one of the company’s strongest in a long time and could support a strong start to 2027.

In national specialty lending, Head of National Specialty Lending Darin Campbell said application volumes were modestly higher than a year earlier, while underwriting standards had led the company to decline more applications due to higher consumer debt burdens. He said originations remained similar to the prior year and collector car lending was up significantly.

Campbell also said Old Second recently launched a multiyear endorsed agreement with Ducati USA. He said the arrangement had generated positive dealer feedback and initial application flow, with management expecting it to support fourth-quarter originations and provide a more substantial boost in 2027.

Adams said he expects deposits to grow in the fourth quarter and believes most post-acquisition deposit attrition is now behind the company.

Capital Returns and Expense Outlook

Old Second repurchased 1.5 million shares during the third quarter for approximately $39.2 million. Through the first nine months of 2026, the company repurchased 3.4 million shares at an average price of $22.74, representing a $74.7 million reduction in equity.

The repurchases contributed to a modest decline in tangible book value per share to $14.75 from $14.77 in the prior quarter and reduced the tangible equity-to-tangible assets ratio to 11.0% from 11.19%.

Adams said the company expects to remain active in buybacks, citing its capital position and earnings outlook. He said investors could reasonably expect Old Second to repurchase about 5% of its shares annually while retaining the capacity for smaller, “fill-in” acquisitions.

The company increased its common dividend by 14% in the fourth quarter of 2026. Management said it continues to evaluate acquisition opportunities, although Adams characterized the Chicago-area market as active but not more robust than it was a year ago.

Noninterest expense increased $370,000 from the second quarter, driven by compensation, incentive, employee insurance, occupancy and equipment costs. Adams said management expects expense growth of roughly 3% to 4% annually, despite pressure from projected increases in health care costs.

About Old Second Bancorp (NASDAQ:OSBC)

Old Second Bancorp, Inc is a bank holding company headquartered in Aurora, Illinois. Through its principal subsidiary, Old Second National Bank, the company provides banking and financial services to individuals, families, businesses and governmental entities.

Its offerings include checking and savings accounts, certificates of deposit, residential and commercial real estate lending, commercial and industrial loans, consumer loans, treasury management and cash-management services. The bank also provides wealth management, trust and investment-related services through its financial services operations.

Founded in 1871, Old Second has a long history of serving communities in northern Illinois, including the Fox Valley and Chicago metropolitan area.

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