Old Second Bancorp ratings affirmed as KBRA lifts outlook to positive

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Old Second ratings outlook positive

Highlights

KBRA affirmed Old Second Bancorp's ratings (senior debt at BBB, sub debt at BBB-, short-term at K3) and lifted the long-term outlook to Positive from Stable.
KBRA cites Old Second's wider net interest margin post-Bancorp Financial acquisition, improved core funding, and expected cost savings from Evergreen deposit disposal as key drivers.
At Q2 2026, Old Second's CET1 ratio stood at 13.3%, reserves covered 1.34% of loans, and further upgrades depend on sustained profitability, robust capital, and normalized credit issues.

Earnings and funding support outlook change

As reported by Kroll Bond Rating Agency, KBRA affirmed Old Second Bancorp's senior unsecured debt rating at BBB, subordinated debt rating at BBB-, and short-term debt rating at K3, while revising the outlook on all long-term ratings to Positive from Stable. For its main subsidiary, Old Second National Bank, KBRA also affirmed deposit and senior unsecured debt ratings at BBB+, subordinated debt at BBB, and short-term deposit and debt ratings at K2.

KBRA says the outlook change reflects expectations for continued earnings outperformance, helped by a wider and more durable net interest margin after the Bancorp Financial acquisition in the third quarter of 2025. The agency says Old Second's core funding profile, strengthened through a series of acquisitions and balance sheet management moves, positions the company well in a higher-rate environment.

It also expects further earnings support from the disposal of Evergreen's higher-cost non-core deposits and from remaining cost savings tied to the transaction. KBRA adds that noninterest income, typically accounting for 15% to 20% of total revenue, provides an additional earnings buffer alongside the bank's strong margin profile.

Credit, capital and upgrade path

KBRA says the addition of Evergreen's powersport lending book structurally raises net charge-offs compared with legacy Old Second, but it views returns in that portfolio as strong on a risk-adjusted basis. Although losses are trending slightly above initial expectations amid a weaker consumer backdrop, the portfolio's annual percentage rate of more than 10% at the second quarter of 2026 is seen as providing enough margin to absorb credit costs.

The agency says Old Second has largely addressed earlier credit issues tied to acquired loans and investor commercial real estate pressures, especially in office exposure, while healthcare trends continue to improve. It also notes reduced participation and syndication exposure over recent years, positive movement in criticized and classified loans, and reserves equal to 1.34% of total loans at the second quarter of 2026.

Capitalization remains sound, with a CET1 ratio of 13.3% and a tangible common equity ratio of 11.2% at the second quarter of 2026, according to KBRA. The agency says a rating upgrade is likely over the medium term if Old Second maintains its stronger earnings profile, appropriate capital levels and core deposit funding base while credit losses normalize; a downgrade is not anticipated, but could occur if asset quality or other financial metrics deteriorate materially.

Our earlier update on KBRA’s rating action for KKR Return-Enhanced Investment Grade Notes (REIGN) explained why the agency affirmed the notes at BBB+ while shifting the outlook to Stable as liquidity pressures began to ease. It highlighted that principal is fully collateralized by zero-coupon U.S. Treasuries, while ongoing interest payments rely on distributions from the vehicle’s liquid and private asset pools, making the trajectory of liquidity and cash flows central to the credit view.

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