KBRA Affirms Ratings for Old Second Bancorp, Inc.; Revises Outlook to Positive

KBRA affirms the senior unsecured debt rating of BBB, the subordinated debt rating of BBB-, and the short-term debt rating of K3 for Aurora, Illinois-based Old Second Bancorp, Inc. (NASDAQ: OSBC) ("Old Second" or "the company"). Additionally, KBRA affirms the deposit and senior unsecured debt ratings of BBB+, the subordinated debt rating of BBB, and the short-term deposit and debt ratings of K2 for its main subsidiary, Old Second National Bank. The Outlook for all long-term ratings is revised to Positive from Stable.

Key Credit Considerations

The revision to Positive Outlook from Stable Outlook reflects the expectation for continued earnings outperformance, supported by a wider and more durable NIM following the acquisition of Bancorp Financial, Inc., parent company of Evergreen Bank Group (“Evergreen”) in 3Q25, underpinned by OSBC’s best-in-class core funding profile which has been reinforced over time by execution on a series of opportunistic acquisitions. These actions reflect a disciplined and long-term approach to balance sheet management, which has positioned the company advantageously in the higher-rate environment and supported favorable returns despite some credit challenges in recent years. Looking ahead, incremental refinement in the funding profile driven by the continued disposal of Evergreen’s higher-cost non-core deposits, along with realization of remaining cost savings, present near-term earnings tailwinds. A relatively durable NIM (that we expect would compare favorably to peers even in the event of rate cuts) should support OSBC’s ROA around the current level. Old Second additionally benefits from healthy noninterest revenue streams, typically representing 15%-20% of total revenues, a level of contribution which is particularly notable in light of the company’s peer-leading NIM.

While the addition of Evergreen's powersport lending portfolio structurally increases NCOs relative to legacy Old Second, we note strong risk-adjusted returns in that book. Losses have trended slightly higher than initially expected on a weaker consumer backdrop, but the portfolio APR (10%+ at 2Q26) supports a significant contribution margin and provides cushion for absorption of credit losses. Elsewhere, OSBC has largely addressed credit challenges related to acquired loans and broader ICRE headwinds, particularly in the office segment, and healthcare continues to show steady improvement. Moreover, the loan book has been derisked on significant reduction in acquired participation/syndication exposure over the last several years. While OSBC has experienced chunkier charge-offs in recent quarters related to two commercial loan relationships, we believe these to be idiosyncratic and note positive trends in criticized, classified, and special mention loans. We additionally take comfort in loss absorption capacity supported by reserves of 1.34% of total loans at 2Q26.

Capitalization remains sound, with a CET1 ratio and TCE ratio of 13.3% and 11.2% at 2Q26, respectively. The company rebuilt capital rapidly following the Evergreen transaction, which was less dilutive than initially expected, and the earnings profile, along with a modest dividend payout ratio, support robust capital generation capacity. Balance sheet leverage has increased on the planned runoff of Evergreen’s higher-cost price sensitive deposits, but we expect the loan-to-deposit ratio to remain within the historical operating range as OSBC continues to backfill the funding base with low-cost, retail deposits.

Rating Sensitivities

The Positive Outlook reflects KBRA’s view that a rating upgrade is likely over the medium term, based on the expectation that OSBC maintains its improved earnings profile, appropriate capitalization, and core deposit-driven funding base, while credit losses normalize with no meaningful broadening of stress across the portfolio. A downgrade is not anticipated; however, negative rating action could occur if there is sustained deterioration in asset quality, sustained declines in regulatory capital ratios to below-peer levels, or meaningful deterioration in other key financial metrics.

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