Old Second Bancorp, Inc. (OSBC) Q3 2026 earnings review
Old Second's lending margin rises, but deposit outflows tighten funding
Old Second Bancorp, an Illinois community bank, expanded its lending margin again while clearing problem loans through heavy write-offs. Tax-equivalent net interest margin—the spread between loan yields and funding costs—rose to 5.27%, beating the bank's own plan for a fifth straight quarter and keeping per-share profit excluding one-offs at $0.55. Chief executive Jim Eccher said the bank has "turned the corner on credit" as classified problem loans dropped 44%, leading the board to buy back 3% of the stock and raise the dividend.
| Tax-equivalent net interest margin | 5.27% +4 bps from last quarter (+22 bps from a year ago) |
|---|---|
| Profit per share, excluding one-offs | $0.55 unchanged from last quarter (+4% from a year ago) |
| Classified problem loans | $74.2M -44% from last quarter |
| Q4 common dividend plan | Raised 14% to $0.08 per share |
⚖️ Verdict: ⚪ Neutral
The standing story is unchanged because the cleanup in problem loan balances came largely from writing them off rather than collecting cash, while deposit outflows tightened funding. By our math, over half of the $17 million drop in nonaccrual loans came from $9.5 million of loan write-offs, and loans 30 to 89 days past due nearly doubled. Meanwhile, a $117 million deposit drop pushed the loan-to-deposit ratio past 98% and forced the bank to lean harder on short-term debt.
The question now is whether credit losses and funding costs will finally calm down in the fourth quarter. Either the latest commercial write-offs finish the cleanup while loan yields stay high, or the jump in early delinquencies and 98% loan-to-deposit ratio squeeze next year's profits. Fourth-quarter net charge-offs and deposit balances will tell.
🐂 Bull Case
Net Interest Margin Keeps Beating the Bank's Plan
Old Second's primary profit engine is its net interest margin (NIM), the gap between what the bank earns on loans and what it pays on deposits. On last quarter's call, finance chief Bradley Adams forecast that this tax-equivalent margin would slip from 5.23% to about 5.18% in the third quarter.
Instead, the Illinois lender expanded its margin by 4 basis points to 5.27%, up 22 basis points from a year ago. Loan yields rose 3 basis points to 6.94%, which more than covered a 2 basis point rise in funding costs. That lifted net interest income by $720,000 from last quarter to $84.0 million.
This matters because the bank has now beaten its own margin outlook for five straight quarters by an average of 9 basis points, by our math. Higher loan yields continue to offset deposit pricing pressure, keeping return on average tangible common equity (ROATCE, a measure of profit on physical shareholder capital) at 15.77%.
What to watch: the fourth-quarter tax-equivalent net interest margin against the 5.15% level Adams previously estimated. Another reading above 5.25% would show that core loan pricing is outlasting the expected drop in high-yielding consumer loans.
Buybacks and Dividend Hike Return Capital Fast
Old Second has shifted its excess capital from bank acquisitions toward direct shareholder payouts. This quarter, the company bought back 1.53 million common shares for $39.5 million, retiring roughly 3% of its outstanding stock in three months. Over the past year, weighted-average diluted shares fell 4.4% to 51.1 million.
Alongside the buyback, the board raised the fourth-quarter cash dividend by 14% to $0.08 per share. Because the share count dropped, per-share profit excluding one-offs held steady at $0.55 from last quarter even though net income excluding one-offs dipped slightly from $28.7 million to $28.5 million.
What to watch: remaining share repurchases over the next three quarters under the 2.5 million share plan authorized through June 2027. Completing the rest of that plan while keeping the common equity tier 1 ratio above 13% would lift per-share earnings even if loan balances stay flat.
🐻 Bear Case
Problem Loans Dropped, Though Write-Offs Stayed High
"Loan losses remained higher than we wanted this quarter due to one previously identified commercial relationship, but the trends are extremely encouraging with nonperforming and classified loans declining by 30% and 44%, respectively," chief executive Jim Eccher said. Eccher added that executives "believe we have turned the corner on credit" as criticized loans fell from 3.05% of the book to 1.88%.
- Nonaccrual loan write-offs: $6.2 million in full charge-offs and $3.3 million in partial charge-offs
- Powersport net charge-offs: $3.1 million, up from $2.8 million last quarter
- Implied total net charge-offs: about $12.9 million, or 99 basis points of average loans annualized, by our math
- Early-stage delinquencies (loans 30 to 89 days past due): $43.6 million, up 94% from $22.5 million last quarter
The drop in problem balances is real, including $9.1 million of customer paydowns on nonaccrual loans. However, writing off $9.5 million of bad commercial loans accounted for more than half of the $17.2 million nonaccrual decline. In addition, early-stage past-due loans nearly doubled, and the loan loss reserve shrank from 1.34% of loans to 1.23%.
What to watch: fourth-quarter net charge-offs and the 30-to-89-day past-due line when the next results arrive. If early delinquencies roll into nonaccrual status, credit provisions will have to rise again to rebuild the reserve.
Deposit Outflows Push Loan-to-Deposit Ratio Past 98%
Banks fund their lending most cheaply with customer deposits, especially checking accounts that pay no interest. In the third quarter, Old Second's total deposits shrank by $117.1 million, or 2.2%, to $5.33 billion. Over the past 12 months, deposits have fallen 7.5%, or $432.7 million, by our math.
The company noted that "higher-rate brokered deposits and other exception-priced time deposits assumed from Bancorp Financial, Inc. rolled off" during the quarter, cutting time deposits by $43.3 million. However, noninterest-bearing demand accounts also fell by $75.0 million from June to $1.67 billion, and the total cost of deposits rose 2 basis points to 1.02%.
Because deposits fell while loans stayed near $5.24 billion, the loan-to-deposit ratio climbed from 96.3% last quarter to 98.3% by our math. To plug the funding gap, the bank raised its short-term borrowings by $20.0 million to $395.0 million, where it pays an average rate of 3.88%.
What to watch: noninterest-bearing deposit balances and short-term borrowings in the fourth quarter. Continued checking outflows would force the bank to rely even more on 3.88% wholesale debt to fund any new lending.
Powersport Loans Grew, While Segment Profits Stay Unreported
Powersport loans—consumer financing for motorcycles, boats, and recreational vehicles added in last year's Bancorp Financial deal—are the bank's highest-yielding assets, but executives have warned that their profit margins are near a cyclical peak. Management previously credited this book for lifting the bank's overall margin while noting that its rate tailwind is fading.
In the third quarter, powersport balances rose 0.8% from June to $689.2 million, or 13.2% of total loans, though the book is still down 3.7% from a year ago by our math. At the same time, powersport net charge-offs rose to $3.1 million from $2.8 million last quarter, representing an annualized loss rate of about 1.80% by our math.
The earnings release does not report standalone revenue, expenses, or net contribution margin for the powersport business. Without that table, investors can see the $3.1 million of quarterly credit losses and $1.7 million of consumer credit expenses, but cannot verify whether the portfolio's net return is holding above 8.5%.
What to watch: commentary on the conference call regarding the powersport contribution margin and fourth-quarter loss expectations. Because powersport defaults typically rise in the winter months, a jump in fourth-quarter losses would test the book's profitability.
👓 Other Themes
Acquisition Lap Removes Headline Growth Rates
Old Second closed its purchase of Bancorp Financial on July 1, 2025, adding $1.19 billion of loans in last year's third quarter. Because this quarter laps that closing date, year-over-year comparisons now measure only underlying sales from businesses owned a year ago. Combined net interest and fee revenue rose 1.3% from a year ago to $97.1 million, compared with 32.9% growth last quarter, while total loans edged down 0.5%.
Higher Market Rates Shifted Fees and Bond Values
Changes in market interest rates during the third quarter moved several non-lending lines in opposite directions. Higher rates reduced mortgage prepayment expectations, creating a $623,000 valuation gain on mortgage servicing rights after a $152,000 loss last quarter. However, rate shifts cut the cash value increase of bank-owned life insurance by $673,000 and added $11.5 million of unrealized losses to the bond portfolio, trimming shareholder equity.
💲 Other KPIs
Fell by $7.8 million, or 0.1%, from last quarter and 0.5% from a year ago. Commercial loans dropped $46.2 million and investor commercial real estate fell $27.3 million from June, offsetting small gains in leases and home equity lines. Loans are now down $14.1 million since December, putting the 1% to 5% full-year growth target in doubt.
Rose 1.26 percentage points from 50.80% last quarter, while the standard efficiency ratio—noninterest expense as a share of revenue—increased 0.62 percentage points to 52.34%. Salaries and benefits rose $743,000 to $30.8 million, or 31.8% of net revenue (up 0.6 percentage points from Q2), alongside $377,000 in higher marketing and consulting fees for a brand campaign.
Dipped $0.02 from $14.77 last quarter, though still up 9.2% from $13.51 a year ago. Tangible book value measures the bank's physical net worth per share excluding goodwill. Strong quarterly earnings were offset by the $39.5 million share buyback and an $11.5 million increase in unrealized bond and swap losses, moving the tangible equity ratio from 11.19% to 11.00%.
🔮 Guidance
Raised. The board increased the quarterly cash payout by $0.01 per share, or 14.3%, payable November 9, 2026, after holding it at $0.07 for four quarters. Management linked the increase to strong balance sheet and income trends. It is the second annual dividend hike in two years, following a 17% raise in October 2025.
❓ Key Questions
Why did 30-to-89-day past-due loans nearly double this quarter?
Loans 30 to 89 days past due jumped from $22.5 million in June to $43.6 million in September. Investors need to know whether this reflects a single commercial borrower in renewal or broader stress across the consumer and real estate books.
Is the unresolved commercial relationship now completely off the books?
Old Second recorded $6.2 million of full charge-offs and $3.3 million of partial charge-offs on nonaccrual loans, tied mainly to "two commercial loans on a single relationship". Management did not state how much remaining balance on that relationship still sits in nonaccrual loans.
What was the powersport portfolio's net contribution margin in Q3?
Executives stated on prior calls that the powersport unit earned a contribution margin above 8.5%, but the release omits standalone revenue and expense figures for the vertical. With powersport charge-offs up to $3.1 million, the current net margin is not readable.
How high will management let the loan-to-deposit ratio climb?
Total deposits fell another $117.1 million, pushing the loan-to-deposit ratio to 98.3% and short-term borrowings to $395.0 million. Management has not set a ceiling on wholesale borrowings or said how much of the acquired brokered deposit book remains to run off.