Old Second Bancorp (NASDAQ:OSBC) reported higher second-quarter earnings and an expanded net interest margin, while management said credit metrics improved despite elevated charge-offs tied largely to previously discussed problem loans.
The Aurora, Illinois-based bank holding company posted GAAP net income of $28.2 million, or $0.54 per diluted share, for the second quarter of 2026, Chairman, President and CEO James Eccher said on the company’s earnings call. Return on assets was 1.65%, while return on average tangible common equity was 15.58%. The company’s tax-equivalent efficiency ratio was 51.72%.
Margin Expands as Net Interest Income Rises
Chief Operating Officer and Chief Financial Officer Brad Adams said net interest income increased to $83.3 million from $81.1 million in the prior quarter and was up $19 million, or nearly 30%, from the year-earlier period.
The bank reported a tax-equivalent net interest margin of 5.23% for the second quarter, up 9 basis points from the linked quarter and 38 basis points from the prior-year quarter. Eccher said the increase reflected higher average balances, lower average time deposit balances, higher short-term rates and repricing of lower-yielding loans originated in 2021 and 2022.
Adams characterized the margin as “ridiculously good,” noting that tax-equivalent loan yields increased 12 basis points and securities yields rose 6 basis points during the quarter. He said the improvement was partly driven by increases in rates along the curve, particularly SOFR and overnight index swap rates, following geopolitical instability.
Total cost of deposits was 100 basis points in the second quarter, compared with 105 basis points in the first quarter and 84 basis points in the second quarter of 2025. Adams said competition for both loans and deposits remains “very robust,” with deposit competition running “pretty significantly above” the Fed funds and Treasury curves.
Looking ahead, Adams said margin trends still appeared stable in the near term, though he suggested the bank could give back a few basis points. In response to an analyst question, he estimated the margin could be around 5.18% in the third quarter and 5.15% in the fourth quarter, while cautioning that market conditions could change.
Loan Growth Returns After Seasonal Declines
Total loans increased $60.6 million during the quarter, partially reversing seasonal declines from the first quarter. The loan-to-deposit ratio rose to 96.4% as of June 30, compared with 93.2% at the end of the prior quarter and 83.3% a year earlier.
Adams said loan origination activity reflected a seasonal increase, and the pipeline remained strong. However, he said tariffs and uncertainty related to the war in Iran had caused some borrowers to remain cautious about capital projects. He maintained the company’s full-year loan growth target in the low- to mid-single-digit range, with “a little bit more of a bias” toward the low-single-digit level.
Eccher said second-quarter loan growth came from several areas, including middle-market commercial and industrial lending, commercial real estate, sponsored finance and the powersports portfolio. He said competition remains “fierce,” but management is encouraged by current pipelines.
Charge-Offs Elevated, But Credit Metrics Improve
Old Second recorded $9.2 million of net loan charge-offs in the second quarter. Eccher said the charge-offs primarily included two credits that management had discussed on the previous quarter’s call: a $3 million commercial and industrial charge-off related to a warehousing and distribution business, and a $2.8 million commercial real estate investor charge-off tied to an office property in a western suburb of Chicago.
The office property was an acquired credit that had been restructured into an A/B note in 2023 due to challenges in the office market. Eccher said the B note had previously been fully secured by collateral value but recently experienced a decline in value, leading management to conclude its collectibility was in doubt and charge it off. He added that the property continues to generate enough cash flow to support the A note at this time.
Net charge-offs related to the powersports business totaled $2.8 million, down $1.1 million from the prior quarter. Eccher said seasonal patterns typically result in higher usage of ATVs and UTVs during the spring and summer, improving collateral outcomes, and he noted that the business’s contribution margin remained strong.
Despite the charge-offs, management emphasized improvement in broader credit trends. Non-performing loans declined by $19 million, classified assets fell by $16.5 million and non-performing assets decreased 25% during the quarter, Eccher said. Special mention loans declined by $12.5 million, from about $40 million to $27 million, a reduction he called an encouraging leading indicator.
The allowance for credit losses on loans stood at $70.4 million, or 1.34% of loans, at June 30, compared with $72.1 million, or 1.39% of loans, at March 31. Eccher said unemployment and GDP assumptions used in the bank’s loss modeling were largely unchanged from the prior quarter, while tariff volatility and the war in Iran continued to be considered in the model.
On the outlook for credit, Eccher said the company is “really close to having a very clean quarter on the credit front,” though it is still working through a couple of credits. He said charge-offs could move back toward a 35- to 45-basis-point range, while acknowledging that the powersports portfolio may keep levels somewhat higher.
Fee Income, Expenses and Capital
Non-interest income increased $631,000, or 5%, from the prior quarter and rose $2.4 million, or 21.7%, from the year-earlier period. Eccher said wealth management had a strong quarter, with income up $245,000 from the linked quarter and $525,000 from the prior-year period. Mortgage banking income increased $97,000 sequentially and $543,000 from a year earlier, primarily due to mortgage servicing rights mark-to-market valuations.
Total non-interest expense increased $1 million from the prior quarter, driven by higher officer incentive and employee insurance costs, elevated OREO expenses and GAP insurance refunds related to legacy Evergreen activity. Adams said he did not see material expense pressures from upcoming investments, saying capital projects are already reflected in the run rate.
Tangible book value per share increased to $14.77 from $14.35 in the prior quarter. The tangible equity ratio rose to 11.19% from 11.07%, while Common Equity Tier 1 capital was 13.28%, up from 13.13% in the first quarter but down from a year earlier due mainly to stock repurchases.
Adams said Old Second repurchased 732,000 shares during the second quarter at an average price of $21.08, reducing equity by $15.4 million and adding about $0.01 to earnings per share. Year-to-date repurchases totaled 1.9 million shares at an average price of $20.31. After exhausting its prior authorization, the board approved a new plan to repurchase about 2.5 million shares through June 30, 2027.
Adams said management expects to remain “active and aggressive” with buybacks given the company’s capital position. He also said Old Second remains interested in well-priced mergers and acquisitions that add to franchise value, though management currently has a bias toward smaller transactions.
Eccher closed the call by saying the bank is “cautiously optimistic” because of improved credit metrics and remains optimistic about loan growth and potential strategic growth opportunities.
About Old Second Bancorp (NASDAQ:OSBC)
Old Second Bancorp, Inc is a bank holding company based in Aurora, Illinois, serving businesses and consumers through its primary subsidiary, Old Second National Bank. The company provides a broad range of commercial and retail banking services across the suburban Chicago marketplace, supported by a branch network and online platforms designed to meet the financial needs of local communities.
In its commercial banking division, Old Second offers lending solutions that include lines of credit, term loans, equipment financing and commercial real estate financing.
