Old Second Bancorp: 3 Key Takeaways for Investors

On its third-quarter 2026 earnings call, Old Second Bancorp (OSBC) reported net income of $28.9 million. The bank also absorbed $12.7 million in net loan charge-offs, primarily from one commercial customer. However, management highlighted three key takeaways that signal improving fundamentals.

First, asset quality improved significantly. Criticized loans—those flagged for potential repayment risks—fell by 38% to $61.3 million. As a percentage of total loans, classified loans are now at their lowest level since before COVID-19. CEO James Eccher noted that the reduction in problem loans will allow the bank to finish the year in a much better position.

Second, capital allocation remains shareholder-friendly. Old Second repurchased 1.5 million shares during the quarter and raised its dividend by 14%. CFO Bradley Adams stated that investors can reasonably expect the bank to reduce its share count by about 5% annually while still preserving capital for strategic M&A.

Third, upcoming loan and asset repricing should provide margin support. Adams revealed that 45% of the loan book and 25% of the securities portfolio will reprice over the next three to four quarters, adjusting upward to current interest rates. This natural tailwind should help offset near-term margin pressure from intense deposit competition.

The sharp decline in criticized loans is a critical development for Old Second. Problem loans tie up capital and require provisions that eat into profits. With criticized loans now at pre-pandemic lows, the bank can release reserves and deploy capital more productively, boosting future earnings. This also reduces the risk of nasty surprises that often plague small banks.

The aggressive share buyback program and dividend increase signal management's confidence in the bank's financial health and commitment to returning capital to shareholders. A 5% annual reduction in share count, combined with a 14% dividend hike, can significantly enhance earnings per share and total shareholder return over time. This is especially attractive in a sector where many peers are conserving capital.

The upcoming repricing of loans and securities is a powerful earnings tailwind. As older, lower-yielding assets mature and are replaced with higher-yielding ones, net interest margin should expand. Management expects this to offset deposit cost pressures. If deposit competition stabilizes, Old Second could see exceptional margin performance, driving stronger profitability.

However, the bank still faces near-term margin pressure from high deposit competition. The $12.7 million charge-off from a single commercial customer is a reminder that credit risk remains. Investors should monitor deposit trends and the pace of repricing to gauge whether the margin expansion materializes as expected.