10-K: Old Second Bancorp Navigates Acquisitions, Reports Mixed 2025 Results

Old Second Bancorp, Inc. reported a decrease in GAAP net income for 2025, primarily due to acquisition-related costs, despite significant loan and deposit growth from the Bancorp Financial merger.

Summary

• Net income available to common stockholders decreased to $80.3 million ($1.62 diluted EPS) in 2025, down from $85.3 million ($1.87 diluted EPS) in 2024 and $91.7 million ($2.02 diluted EPS) in 2023.
• Adjusted net income (non-GAAP) increased to $102.6 million in 2025, compared to $86.4 million in 2024, excluding acquisition-related costs and other one-time items.
• Total assets grew by $1.25 billion (22.2%) to $6.90 billion at December 31, 2025, primarily driven by the Bancorp Financial acquisition.
• Total loans increased by $1.27 billion (31.9%) to $5.25 billion in 2025, including $1.20 billion from the Bancorp Financial acquisition and $76.1 million in net organic growth.
• Total deposits increased by $827.3 million (17.3%) to $5.60 billion at year-end 2025, largely due to the Bancorp Financial acquisition.
• Net interest and dividend income increased by $51.3 million (21.2%) to $293.0 million in 2025, driven by higher interest rates and the acquired loan portfolio.
• The provision for credit losses increased significantly to $27.6 million in 2025, up from $12.8 million in 2024, mainly due to a $13.2 million 'Day Two' non-PCD provision from the Bancorp Financial acquisition and increased charge-offs in the powersport loan segment.
• Nonperforming loans increased by 74.4% to $52.8 million at December 31, 2025, representing 1.0% of total loans, up from 0.8% in 2024.
• Wealth management income increased by $1.8 million (15.9%) to $13.2 million in 2025.
• Total noninterest expense increased by $44.3 million (27.7%) in 2025, primarily due to $8.4 million in change-in-control, retention, and severance payouts from the Bancorp Financial acquisition, as well as increased computer and data processing expenses related to systems conversion.
• The company maintained capital ratios exceeding regulatory minimums, with a Common Equity Tier 1 capital ratio of 12.99% and a Total Risk-Based Capital ratio of 15.46% at December 31, 2025.

Sentiment

Score: 5

Explanation: StockSavvy.ai views this filing as neutral to slightly negative. While strategic acquisitions have driven significant asset and loan growth, and adjusted net income shows underlying strength, the decline in GAAP net income and EPS, coupled with a substantial increase in provision for credit losses and noninterest expenses due to acquisition integration, indicates short-term headwinds. The increase in nonperforming loans also warrants close monitoring.

Positives

• Adjusted net income increased to $102.6 million in 2025, demonstrating underlying operational strength despite acquisition costs.
• Significant growth in total assets ($1.25 billion increase) and total loans ($1.27 billion increase) in 2025, primarily from the Bancorp Financial acquisition.
• Net interest and dividend income increased by $51.3 million (21.2%) in 2025, benefiting from higher interest rates and acquired portfolios.
• Wealth management income grew by 15.9% to $13.2 million, indicating strong performance in advisory, personal trust, and estate fees.
• Service charges on deposits increased by 10.3%, reflecting additional income from acquired deposits.
• Card-related income increased by 5.0%, boosted by the Bancorp Financial acquisition.
• Nonperforming assets as a percentage of total assets decreased slightly to 0.81% in 2025 from 0.92% in 2024, despite a dollar increase in nonperforming loans.
• The company maintains a strong liquidity profile with diverse funding sources, an outsized securities portfolio, and a stable core deposit base.
• Capital ratios remain strong, exceeding all 'well-capitalized' thresholds, with a CET1 ratio of 12.99% and a Total Risk-Based Capital ratio of 15.46% at year-end 2025.
• The company successfully completed the systems conversion for the Bancorp Financial acquisition in October 2025.

Negatives

• GAAP net income decreased to $80.3 million in 2025 from $85.3 million in 2024, primarily due to acquisition-related costs.
• Diluted earnings per share decreased to $1.62 in 2025 from $1.87 in 2024.
• Provision for credit losses increased significantly to $27.6 million in 2025, largely due to the Bancorp Financial acquisition's 'Day Two' provision and higher charge-offs in the powersport loan segment.
• Nonperforming loans increased by 74.4% to $52.8 million at December 31, 2025, driven by larger relationships with downgraded mixed-use commercial real estate.
• Total noninterest expense increased by $44.3 million (27.7%) in 2025, primarily due to acquisition-related costs, including $8.4 million in change-in-control, retention, and severance payouts.
• Mortgage banking earnings decreased by $701,000 in 2025, primarily due to increased mark-to-market losses on mortgage servicing rights.
• The company experienced a $422,000 decrease in the cash surrender value of BOLI due to changes in market interest rates on COLI investments.
• The efficiency ratio (GAAP) worsened to 57.91% in 2025 from 54.36% in 2024, indicating higher costs to generate revenue.

Risks

• Business may be adversely affected by negative economic conditions, including declines in economic growth, real estate values, and high unemployment, particularly in the concentrated Illinois market.
• Inflationary pressures and rising interest rates could increase deposit and funding costs, decrease loan demand, reduce deposit balances, and negatively impact asset values and borrower repayment ability.
• The trust and wealth management business is susceptible to changes in economic and financial market conditions, potentially leading to reduced fees or client litigation for investment performance.
• Increasing scrutiny and evolving expectations regarding environmental, social, and governance (ESG) practices may impose additional costs or expose the company to new risks, including reputational harm.
• Climate change-related physical risks (e.g., extreme weather) and transition risks (e.g., regulatory changes, evolving market preferences) could adversely impact business operations, asset values, and borrower creditworthiness.
• Failure to effectively manage credit risk, including maintaining disciplined underwriting standards, could lead to increased loan defaults, foreclosures, and higher provisions for credit losses.
• The allowance for credit losses (ACL) and fair value adjustments for acquired loans may be insufficient to absorb potential losses, especially given economic uncertainty and regulatory scrutiny.
• The loan portfolio's concentration in commercial and residential real estate loans, including construction loans, exposes the company to risks specific to real estate values and markets.
• Rapidly rising interest rates could compress net interest margins, impact the value of investment securities, and increase funding costs.
• Nonperforming assets require significant time to resolve and adversely affect net income and financial condition.
• Damage to the company's reputation, whether from employee actions, legal/regulatory non-compliance, or other issues, could undermine client confidence and business relationships.
• Operating in a highly competitive industry and market area, including competition from larger financial institutions and FinTech companies, could lead to competitive disadvantages, lower margins, and reduced profitability.
• Dependence on executive officers and other key employees, and the ability to attract and retain talent, is critical; unexpected loss of services could harm business.
• Inability to offer competitive long-term incentive compensation (equity awards) could hinder talent attraction and retention, increasing compensation costs.
• Reliance on outside third parties for processing and data handling increases exposure to operational disruptions, data breaches, and cybersecurity risks.
• Increased losses from fraud due to sophisticated techniques and organized criminal activity, requiring ongoing investments in detection and prevention systems.
• Failure to keep pace with rapid technological change, including the adoption of Artificial Intelligence (AI), could adversely affect business and competitive positioning.
• New lines of business, products, or services may subject the company to additional risks, including substantial investment without guaranteed success.
• Future acquisitions may be delayed, impeded, or prohibited due to regulatory issues, including those related to anti-money laundering, fair lending, and CRA compliance.
• Difficulties in combining operations of acquired or merged businesses (e.g., Bancorp Financial) could prevent the achievement of expected benefits, lead to customer/personnel loss, or incur unforeseen liabilities.
• Monetary policies and regulations of the Federal Reserve, including changes in interest rates and reserve requirements, could adversely affect business, financial condition, and results of operations.
• Deposit insurance premiums could substantially increase in the future, reducing profitability, especially if there are more bank failures.
• Adverse developments in the financial services industry, such as recent bank failures or liquidity concerns, could negatively impact the company through reputational risk, deposit outflows, increased costs, and credit risk.
• Risk of noncompliance with the Bank Secrecy Act and other anti-money laundering statutes and regulations, leading to significant civil money penalties and regulatory actions.
• The highly regulated environment, including extensive federal and state banking regulations, imposes costly compliance burdens and affects various aspects of operations.
• Changes in tax laws, regulations, and interpretations, or challenges to income tax provisions, could adversely affect the effective tax rate and financial results.
• Expanded retail business and nationwide consumer lending activities subject the company to various state consumer protection laws and tax codes, with potential for fines, penalties, and litigation for non-compliance.
• Potential claims and litigation pertaining to fiduciary responsibility, especially in wealth management services, could result in significant financial liability and reputational harm.
• The company is a defendant in various litigation and other actions, with potential for adverse rulings, settlements, or regulatory actions.
• Business needs and future growth may require additional capital, which may not be available on acceptable terms or could be dilutive to existing shareholders.
• Unexpected inability to obtain needed liquidity could materially adversely affect business and financial condition.
• Inability to maintain a strong core deposit base or access other low-cost funding sources could limit asset growth and increase funding costs.

Future Outlook

The company anticipates continued economic uncertainty in 2026 due to persistent inflation, higher interest rates, and geopolitical conflicts, despite forecasts for moderate global growth. The Federal Reserve's data-dependent monetary policy, with implied rate cuts in 2026, may impact net interest margin. The company expects to continue paying quarterly dividends, subject to financial performance, capital needs, and regulatory restrictions. The Basel III Endgame rules, if finalized as proposed, are not expected to apply to the company due to its asset size. The company plans to continue its strategic growth through organic means and opportunistic acquisitions, while actively monitoring and managing credit and interest rate risks.

Management Comments

• Management believes the inflation rate will moderate at the current level, an acceptable level by the FRB.
• Management believes it has implemented effective asset and liability management strategies to reduce the potential effects of changes in interest rates on our results of operations.
• Management closely monitors and stress tests concentrations within its commercial real estate portfolio so that we remain well diversified.
• Management continues to emphasize loan portfolio quality, and credit remediation continued in 2025.
• Management believes it has established an adequate estimated allowance for expected credit losses over the estimated life of our loan portfolio.
• Management reviews its process quarterly using an extensive and detailed loan review process, makes changes as needed, and reports those results at meetings of our Board of Directors and Audit Committee.
• Management monitors our asset diversification and anticipates that the percentage of real estate lending in relation to the overall portfolio will decrease in the future.
• Management believes that the ultimate liabilities, if any, resulting from legal actions will not have a material adverse effect on the financial position of the Bank or on the consolidated financial position of the Company based on all known information at this time.
• The Chief Executive Officer and Chief Financial Officer concluded that as of December 31, 2025, the Company's disclosure controls and procedures are effective.

Industry Context

StockSavvy.ai notes that Old Second Bancorp's strategic focus on acquisitions, particularly the Bancorp Financial merger, aligns with a broader trend in the regional banking sector seeking scale and diversification in a competitive and evolving landscape. The significant increase in noninterest expenses due to acquisition-related costs is a common challenge during integration phases, impacting short-term GAAP profitability. The growth in powersport lending reflects a move into specialized consumer finance, a segment many regional banks explore for higher yields. The company's proactive management of commercial real estate concentrations and its asset-sensitive balance sheet position it to potentially benefit from a sustained higher interest rate environment, or navigate rate cuts, contrasting with some peers who may face greater margin compression. The extensive discussion of regulatory changes, including CRA, Basel III Endgame, and AI risks, highlights the increasing compliance burden and technological demands across the financial services industry, which disproportionately affects smaller institutions without robust internal resources.

Comparison to Industry Standards

• The company's Common Equity Tier 1 capital ratio of 12.99% and Total Risk-Based Capital ratio of 15.46% at December 31, 2025, significantly exceed the 'well-capitalized' thresholds of 6.50% and 10.00% respectively, indicating a strong capital position relative to regulatory standards.
• The net interest margin (GAAP) of 4.96% in 2025, up from 4.61% in 2024, suggests effective interest rate management or favorable market conditions compared to some regional banks that have experienced margin compression.
• The increase in nonperforming loans to 1.0% of total loans in 2025, while higher than 0.8% in 2024, remains within a manageable range for a community bank, though specific comparisons to peer averages would provide more granular insight.
• The efficiency ratio (GAAP) of 57.91% in 2025, up from 54.36% in 2024, indicates a deterioration in operational efficiency, likely due to acquisition integration costs. This is higher than the target efficiency ratios of many top-performing regional banks, which often aim for below 55% or even 50%.
• The growth in wealth management income by 15.9% is a positive indicator, suggesting strong performance in a fee-based business line, which is a strategic focus for many banks seeking to diversify revenue away from traditional interest income volatility.

Management Changes

Corporate Governance

Legal Proceedings

• The company and its subsidiaries are involved in collection suits and other actions arising in the ordinary course of business against borrowers.
• The company is a defendant in legal actions arising from normal business activities.
• Management, after consultation with legal counsel, believes that ultimate liabilities from pending legal matters will not have a material adverse effect on the financial position of the Bank or the consolidated Company.

Related Party Transactions

• As of December 31, 2025 and 2024, there were no loans to principal officers, directors, and their affiliates.

Stakeholder Impact

• **Shareholders**: Experience diluted earnings per share decrease due to acquisition costs, but benefit from increased adjusted net income and a re-authorized stock repurchase program. Dividend payments are expected to continue.
• **Employees**: Impacted by acquisition-related change-in-control, retention, and severance payouts. The company continues to invest in employee development and retention programs, and stock-based compensation remains a key part of the compensation package.
• **Customers**: Benefit from expanded branch network and new product offerings (e.g., powersport lending) from acquisitions. Subject to evolving consumer protection regulations and the company's focus on service quality.
• **Regulators**: The company is subject to extensive and evolving federal and state regulations, including capital requirements, CRA, anti-money laundering, and cybersecurity. Regulatory scrutiny and potential changes in policy remain a significant factor.
• **Acquired Entities (Bancorp Financial, First Merchants Bank branches)**: Their assets, loans, and deposits have been integrated, leading to operational changes and system conversions. Employees from acquired entities are subject to retention and severance programs.

Next Steps

• Continue to evaluate any changes to CRA regulations and their impact to the Bank.
• Monitor and manage the loan portfolio to avoid unnecessarily high credit concentrations.
• Actively monitor and manage the balances of maturing and re-pricing assets and liabilities to reduce the adverse impact of changes in interest rates.
• Continue to make significant investments in enhancing cyber defense-in-depth capabilities and strengthening partnerships with government and law enforcement agencies.
• Seek stockholder approval to adopt or amend equity compensation plans in the future to maintain competitive compensation packages.
• Evaluate opportunities to acquire additional financial institutions or branches or to open new branches as part of strategic growth plans.
• The Board of Directors will make future determinations relating to the dividend policy based on earnings, financial condition, liquidity, capital requirements, and regulatory climate.
• Repurchases under the stock repurchase program may be initiated, discontinued, suspended, or restarted at any time, with Federal Reserve non-objection or approval required after December 31, 2026.
• The company will continue to assess potential modifications to the Corporate Transparency Act (CTA) framework in light of public interest considerations, litigation risk, and regulatory burden.

Key Dates

Recommendation

The company demonstrates strategic growth through acquisitions, significantly expanding its asset and loan base, and improving its net interest margin. However, the reported GAAP net income and EPS declined due to substantial acquisition-related costs and increased provision for credit losses, which are short-term headwinds. While the underlying adjusted net income shows operational strength, the increase in nonperforming loans and the worsening efficiency ratio warrant caution. The strong capital position and liquidity provide a buffer against economic uncertainties and regulatory changes. Given the mixed financial performance, with growth offset by integration costs and some asset quality deterioration, a 'hold' recommendation is appropriate for investors to observe the successful integration of acquisitions and the realization of anticipated synergies before making further investment decisions.

Keywords

Community Banking, Financial Services, SEC Filing, 10-K, Bank Holding Company, Acquisition, Bancorp Financial, Evergreen Bank Group, Loan Portfolio, Deposits, Net Interest Income, Credit Losses, Nonperforming Assets, Wealth Management, Regulatory Compliance, Capital Ratios, Interest Rate Risk, Cybersecurity, ESG, Artificial Intelligence, Stock Repurchase, Illinois Banking, Powersport Loans, Commercial Real Estate