Old Second (OSBC) Q1 2026 earnings review
Exceptional Margins Mask Asset Quality Deterioration
Old Second Bancorp delivered solid core operating performance in 26Q1, driven by an exceptional Net Interest Margin (NIM) of 5.14%. However, the bottom line tells a Reversing story: Net Income fell 11% sequentially to $25.6 million. The culprit was a sharp deterioration in asset quality, primarily stemming from powersport charge-offs and two large commercial/CRE relationships. This forced the provision for credit losses to triple sequentially to $9.5 million. While management touts a well-positioned balance sheet and executed aggressive stock repurchases ($23.1 million), the contraction in both loan and deposit balances alongside spiking nonperforming assets warrants close monitoring.
🐂 Bull Case
NIM expanded another 5 basis points to 5.14%. Management successfully drove the cost of deposits down 10 basis points, outpacing a 5 basis point decline in loan yields.
The bank repurchased 1.2 million shares ($23.1 million) in Q1 and paid down $30 million of 2031 subordinated debt in April, optimizing the capital structure and reducing future interest expense.
🐻 Bear Case
Nonperforming loans (NPLs) surged 43% sequentially to $75.5 million. The provision for credit losses spiked to $9.5 million, highlighting vulnerability in both the acquired powersport book and legacy commercial real estate.
Both sides of the balance sheet are shrinking. Total loans declined $66.9 million and deposits dropped $31.1 million, reflecting macro headwinds and the runoff of higher-rate acquired funding.
⚖️ Verdict: ⚪
Neutral. The bank's core earnings engine and expense discipline are phenomenal, yielding top-tier margins. However, the sudden spike in NPLs and shrinking loan book offset the operational wins. The stock is a 'hold' until the credit picture stabilizes.
Key Themes
Exceptional Net Interest Margin Durability
Stable and Accelerating. In a challenging rate environment, Old Second pushed its tax-equivalent NIM up 5 bps sequentially to 5.14%. This was achieved by aggressively managing funding costs: the cost of savings accounts fell 10 bps, money markets fell 11 bps, and time deposits fell 16 bps. This liability-side optimization successfully insulated the bank from a 5 bps drop in average loan yields.
Commercial and CRE Credit Deterioration
Reversing. Management explicitly claims they are 'adequately reserved,' yet this positive narrative is contradicted by a sudden 43% sequential spike in nonperforming loans (from $52.8M to $75.5M). The deterioration was heavily concentrated in one downtown Chicago office credit and one cash-flow-dependent commercial relationship. Criticized loans also grew, rising to 3.64% of total loans.
Powersport Portfolio Pressures
Decelerating. The powersport lending platform, integrated via the July 2025 Bancorp Financial acquisition, saw balances shrink from $696.9M in 25Q4 to $674.1M in 26Q1. This segment continues to be a primary driver of net charge-offs. While the high yield on this portfolio supports the NIM, the elevated loss rate poses an ongoing drag on the provision line.
Disciplined Expense Control
Stable. Noninterest expense decreased $2.7 million (5.15%) sequentially to $50.2 million. This was driven by a $1.3 million reduction in salaries and employee benefits, and a $1.4 million drop in computer/data processing as prior-quarter acquisition core conversion expenses rolled off. The adjusted efficiency ratio improved to an excellent 51.70%.
Macro Headwinds: Balance Sheet Contraction
Decelerating. Reflecting broader macro uncertainties, both sides of the balance sheet shrank. Total loans fell $66.9 million across CRE, construction, and powersport segments. Concurrently, deposits declined $31.1 million, driven by seasonal savings declines and the intentional runoff of higher-rate brokered deposits assumed from the Bancorp Financial acquisition.
Proactive Capital Management
Accelerating. Armed with strong organic capital generation, management aggressively returned capital to shareholders. During Q1, the bank repurchased 1.17 million shares at an average price of $19.63 (totaling $23.1 million). Furthermore, on April 15, 2026, the bank paid down $30 million of its outstanding subordinated debt due in 2031, which will immediately benefit future interest expense.
Other KPIs
Improved 158 basis points sequentially from 53.98%. This demonstrates management's success in shedding the integration costs of the Evergreen/Bancorp Financial acquisition and actively managing core operational overhead.
Decelerating from 16.15% in 25Q4. While still a very healthy absolute number for a regional bank, the sequential drop reflects the weight of the elevated provision for credit losses overshadowing the strong core net interest income.
Guidance
Stable. The Board maintained the dividend at $0.07 per share, matching the payout from 25Q4. This suggests confidence in the bank's underlying capital generation despite the sequential dip in net income.
Executed post-quarter on April 15, 2026. This retires half of the $60 million outstanding sub-debt due in 2031, signaling an acceleration in balance sheet optimization and a forward-looking reduction in interest expense.
Key Questions
Powersport Loss Trajectory
With the powersport portfolio shrinking sequentially and charge-offs remaining a primary driver of the provision, where do you see the peak loss rate for this specific segment, and are tightening underwriting standards impacting volume?
Downtown Chicago CRE Exposure
You cited 'one downtown Chicago office credit' as a driver for the NPL increase. What is the remaining exposure to central business district office space, and what specific LTV/DSCR metrics are you seeing on the remaining book?
Deposit Pricing Floor
Cost of deposits fell an impressive 10 bps this quarter. Given the runoff of the higher-rate Bancorp exception deposits, how much further can deposit costs fall before hitting an absolute floor in the current macro environment?