Old Second Bancorp, Inc. (OSBC) Earnings

Management highlights

• Overall Financial Performance - GAAP return on assets was 1.65%, return on average tangible common equity was 15.58%, and tax equivalent net interest margin hit 5.23%, a 9bps improvement from Q1 2026 and 38bps increase year-over-year. - Total loans grew $60.6 million in the quarter, reversing seasonal declines from Q1; loan-to-deposit ratio reached 96.4% as of June 30, 2026, up from 93.2% last quarter and 83.3% year-ago. - Capital ratios remain strong: Common Equity Tier 1 ratio was 13.28%, down 49bps year-over-year due to 2026 stock repurchases totaling $40.2 million year-to-date. • Credit Quality - Net loan charge-offs totaled $9.2 million, driven by a $3 million C&I charge-off (warehousing and distribution), a $2.8 million commercial real estate office charge-off (acquired legacy credit), and $2.8 million in PowerSport charge-offs (a $1.1 million decrease from Q1). - Non-performing loans decreased $19 million and classified assets declined $16.5 million, with a 30% reduction in special mention loans quarter-over-quarter; NPAs fell 25% in the quarter. - The allowance for credit losses totaled $70.4 million (1.34% of total loans) as of quarter-end, down from $72.1 million (1.39%) in Q1; provision for credit losses decreased $2.5 million quarter-over-quarter to $7.5 million. • Strategic & Operational Updates - The Board of Directors approved a new share repurchase program authorizing buyback of 2.5 million shares through June 30, 2027, after exhausting the prior authorization. - Integration of the 2025 acquisition of Bancorp Financial/Evergreen Bank Group is largely complete, with only minimal remaining closure costs after a recent branch shutdown. - The firm is actively adding talent across the organization and continuing ongoing technology and capital improvement projects, with these investments already incorporated into current and projected expense run rates.

Guidance

• Loan growth for full-year 2026 is maintained at a low to mid-single digit target, with a slight bias toward the lower end of the range. • Net interest margin is expected to see a modest contraction of a few basis points in the second half of 2026, with management projecting 5.18% in Q3 2026 and 5.15% in Q4 2026, though actual results have beaten management's prior downward projections for multiple consecutive quarters. • Full-year 2026 expense growth is expected to remain modest. • Fee income is projected to deliver low single-digit growth in the second half of 2026. • Management expects PowerSport contribution margin to remain at current historic highs through 2026, with a small projected decline in 2027 as the portfolio turns over after recent modest rate cuts. • Management expects to fully execute the new 2.5 million share repurchase authorization over the next 12 months, given the firm's excess capital position. • Long-term, management expects net interest margin to remain at elevated levels for the foreseeable future, anchored by a higher interest rate environment that has departed from the prior zero-interest-rate policy era.

Segment performance

The transcript does not break out financial performance for separate product segments with reported absolute figures and revenue contribution percentages. Core business lines referenced in results include commercial banking, commercial real estate lending, PowerSport national specialty lending, wealth management, and mortgage banking. Key overall results are as follows: GAAP net income of $28.2 million ($0.54 diluted per share), adjusted net income (excluding MSR valuation adjustments and 2025 acquisition costs) of $28.7 million ($0.55 diluted per share). Tangible book value per share increased to $14.77 from $14.35 last quarter. Net interest income was $83.3 million, up $2.2 million quarter-over-quarter and $19 million year-over-year. Non-interest income increased 5% quarter-over-quarter and 21.7% year-over-year, with wealth management income up $245k quarter-over-quarter and $525k year-over-year, and mortgage banking income up $97k quarter-over-quarter and $543k year-over-year. Total non-interest expense increased $1 million quarter-over-quarter, driven by higher incentive and employee insurance costs.

Risks & headwinds

• Broad commercial office real estate valuations are declining sharply and rents are falling industry-wide; Old Second's office exposure is limited to ~3% of its total loan portfolio with no currently classified assets in the vertical, but further valuation declines could create future credit risks. • Loan and deposit market competition is currently very robust, with aggressive pricing pressure on both sides; deposit competition is particularly strong above the Fed funds and Treasury curves. • Geopolitical uncertainty from the war in Iran and global terror volatility has created borrower reluctance to commit to large capital projects, limiting near-term C&I loan origination momentum. • Unexpected shifts in market interest rates could lead to larger than projected changes in net interest margin. • Uncertainty around future macroeconomic conditions, including unemployment and GDP shifts, could impact future credit loss experience.

Analyst Q&A

• Q: After cleaning up large previously flagged problem credits this quarter, what is the projected path for net charge-offs going forward?

  A: Management noted that the 30% reduction in special mention loans (a leading indicator of future credit issues) and declining charge-offs in the PowerSport portfolio are positive signals. No new unflagged problem credits have emerged in the last two quarters, and the bank is only working through a small number of previously identified credits. Management expects to return to very clean credit quarters soon, with charge-offs likely to fall to a 35-45 basis point annualized range.

• Q: What is the bank's approach to share repurchases and M&A under its new capital authorization, and how sensitive is buyback activity to share price?

  A: Management confirmed the bank has excess capital far exceeding projected needs for organic growth and any reasonable M&A pipeline, so share repurchases are a tax-efficient way to return capital to shareholders. Buyback activity will not be sensitive to share price, and management expects to fully execute the new 2.5 million share authorization over 12 months. For M&A, the firm has a bias toward smaller transactions that add franchise value, particularly deposit-driven deals, and is optimistic about completing a deal in the near term with no interest in large bet-the-company transactions.

• Q: What is the outlook for credit metrics and non-performing asset reductions over the next few quarters?

  A: Management expects continued improvement in credit metrics, including further reductions in charge-off levels and classified/non-performing assets, with several larger problem credits expected to be fully resolved in the near term. The 30% quarter-over-quarter drop in special mention loans (to $27 million from $40 million) is a strong leading indicator of positive future credit migration, and no new material problem credits have emerged in recent quarters.

• Q: What is the long-term directional outlook for net interest margin heading into 2027?

  A: Management stated that if interest rates fall along the curve as inflation cools, the bank would likely give back a small amount of margin. However, management believes the era of near-zero interest rate policy is over, and as long as rates remain at current elevated levels, Old Second will maintain a structurally very high margin thanks to the quality of its deposit base, so margins will remain elevated for a long time.