8-K: Old Second Bancorp Posts Strong Q4 2025 Earnings

Old Second Bancorp, Inc. reported a significant increase in net income for the fourth quarter of 2025, driven by lower acquisition costs and strong core earnings growth.

Summary

• Net income for the fourth quarter of 2025 was $28.8 million, or $0.54 per diluted share, a substantial increase from $9.9 million ($0.18 diluted EPS) in Q3 2025 and $19.1 million ($0.42 diluted EPS) in Q4 2024.
• Adjusted net income, a non-GAAP measure, reached $30.8 million, or $0.58 per diluted share, for Q4 2025, up from $28.4 million ($0.53 diluted EPS) in Q3 2025 and $20.0 million ($0.44 diluted EPS) in Q4 2024.
• The increase in net income was primarily driven by a $16.7 million decrease in provision for credit losses, a $2.0 million decrease in interest expense, and a $10.2 million decrease in noninterest expense, mainly due to lower acquisition-related costs from the Bancorp Financial acquisition.
• These positive impacts were partially offset by a $1.8 million decrease in interest and dividend income, a $955,000 decrease in noninterest income, and a $7.3 million increase in provision for income taxes.
• Net interest and dividend income was $83.1 million for Q4 2025, reflecting a 0.3% increase from Q3 2025 and a 34.9% increase from Q4 2024.
• A net provision for credit losses of $3.0 million was recorded in Q4 2025, significantly lower than the $19.7 million in Q3 2025, which included a $13.2 million day two provision from the Bancorp Financial acquisition.
• Nonperforming loans totaled $52.8 million (1.0% of total loans) at December 31, 2025, an increase from $48.0 million (0.9%) at September 30, 2025, and $30.3 million (0.8%) at December 31, 2024.
• Total loans were $5.25 billion at December 31, 2025, a decrease of $12.4 million from September 30, 2025, but a significant increase of $1.27 billion compared to December 31, 2024, primarily due to the $1.19 billion of loans acquired from Bancorp Financial.
• Total deposits decreased by $164.2 million, or 2.9%, to $5.60 billion at December 31, 2025, mainly due to the runoff of higher-rate brokered deposits and other exception-priced time deposits acquired from Bancorp Financial.
• The Board of Directors declared a cash dividend of $0.07 per share of common stock on January 20, 2026, payable on February 9, 2026, to stockholders of record as of January 30, 2026.

Sentiment

Score: 8

Explanation: The company reported significantly improved net income and strong adjusted earnings, driven by reduced acquisition costs and a resilient net interest margin. Key profitability metrics and capital ratios are robust, and management expresses optimism for future growth. While nonperforming loans and net charge-offs increased, and deposits saw a slight decline, the overall financial performance and outlook are very positive.

Positives

• Net income and adjusted net income showed significant quarter-over-quarter and year-over-year growth, indicating strong financial performance.
• Core earnings exhibited very strong growth, with profitability metrics like return on average assets (1.75%) and return on average tangible equity (17.23%) (excluding acquisition costs) noted as among the best in the industry.
• The tax equivalent net interest margin remained resilient and impressive at 5.09%.
• The adjusted efficiency ratio improved to a very healthy 51.28%, reflecting effective cost management.
• The tangible common equity capital ratio increased to 11.02% from 10.04% at the end of the prior year, demonstrating strong capital building.
• Tangible book value per share increased by 14% in 2025, despite the dilution associated with a meaningful acquisition.
• Unrealized mark-to-market losses on securities decreased to $43.1 million at December 31, 2025, from $68.6 million at December 31, 2024, due to market interest rate fluctuations and portfolio composition changes.
• Interest expense decreased by $2.0 million quarter-over-quarter, driven by a decrease in interest paid on deposits.
• Noninterest expense decreased by $10.2 million quarter-over-quarter, mainly due to the timing of acquisition-related costs.
• Organic loan growth, excluding the Bancorp Financial acquisition, totaled $76.1 million, or 1.9%, compared to December 31, 2024, primarily in commercial, leases, and commercial real estate.

Negatives

• Nonperforming loans increased to $52.8 million (1.0% of total loans) at December 31, 2025, from $30.3 million (0.8%) at December 31, 2024.
• Nonaccrual loans increased by $13.8 million in Q4 2025 due to inflows of $18.3 million, primarily related to two commercial real estate relationships totaling $14.9 million.
• Total loans decreased by $12.4 million quarter-over-quarter, influenced by seasonal reductions within the powersport portfolio.
• Total deposits decreased by $164.2 million, or 2.9%, quarter-over-quarter, driven by the runoff of higher-rate brokered deposits and other exception-priced time deposits.
• Provision for income taxes increased by $7.3 million quarter-over-quarter, as certain acquisition costs related to the Bancorp Financial transaction were not fully deductible.
• Noninterest income decreased by $955,000 quarter-over-quarter, primarily due to a $341,000 decrease in the cash surrender value of BOLI and no death benefit realized in Q4 2025.
• Net charge-offs increased to $6.0 million in Q4 2025, primarily within the powersport portfolio, compared to $5.1 million in Q3 2025 and $4.9 million in Q4 2024.
• Classified loans increased by $15.8 million quarter-over-quarter and $58.1 million year-over-year, driven by downgrades of nine commercial relationships, two commercial real estate investor relationships, and one construction relationship.

Risks

• The strength of the United States economy in general and the strength of the local economies in which operations are conducted may be different than expected.
• The rate of delinquencies and amounts of charge-offs, the level of allowance for credit loss, the rates of loan growth, or adverse changes in asset quality in the loan portfolio, which may result in increased credit risk-related losses and expenses.
• Changes in legislation, regulation, policies, or administrative practices, whether by judicial, governmental, or legislative action.
• Risks related to future acquisitions, if any, including execution and integration risks.
• Adverse conditions in the stock market, the public debt market, and other capital markets (including changes in interest rate conditions) could have a negative impact.
• Changes in interest rates, which have and may continue to affect deposit and funding costs, net income, prepayment penalty income, mortgage banking income, and other future cash flows, or the market value of assets, including investment securities.
• Elevated inflation which causes adverse risk to the overall economy, and could indirectly pose challenges to clients and to business.
• The adverse effects of events beyond control that may have a destabilizing effect on financial markets and the economy, such as government shutdowns, trade disputes, epidemics and pandemics, war or terrorist activities, essential utility outages, deterioration in the global economy, instability in the credit markets, disruptions in customers' supply chains or disruption in transportation, and disruptions caused from widespread cybersecurity incidents.

Future Outlook

Management is optimistic about opportunities for additional growth in 2026, citing improving marginal spreads in loan and deposit markets. The company believes it has exceptional balance sheet flexibility and strategic positioning to capitalize on future growth opportunities. They are excited about what can be accomplished within the next year, following successful integrations and system upgrades in 2025.

Management Comments

• "Old Second concluded a great year with an extremely strong fourth quarter."
• "Core earnings have exhibited very strong growth in recent periods and profitability remains among the best in the industry with return on average assets of 1.75% and return on average tangible equity of 17.23%, both excluding acquisition related purchase accounting and deal costs."
• "The tax equivalent net interest margin has remained resilient and impressive at 5.09% and the adjusted efficiency ratio was a very healthy 51.28%."
• "This strong bottom-line performance and a well-positioned balance sheet drove an increase in the tangible common equity capital ratio to 11.02% from 10.04% last year end and tangible book value per share increased by 14% in 2025 despite the dilution associated with a meaningful acquisition."
• "In summary, we are proud of the strength and sustainability of our performance, and with marginal spreads in loan and deposit markets improving, we are excited about the opportunities for additional growth in 2026."
• "We believe we have exceptional balance sheet flexibility and the strategic positioning to capitalize on growth opportunities that may come our way in the near future."
• "I would like to thank our team for their hard work and execution in 2025, including integrations and systems conversions and upgrades that have made us a much better Old Second. I could not be more excited about the things we can accomplish within the next year."

Industry Context

The filing highlights the impact of recent interest rate fluctuations, including Federal Reserve rate cuts in Q4 2025 and September 2025, on earning assets and deposit costs, a common challenge across the banking sector. The successful integration of the Bancorp Financial acquisition, which significantly expanded the loan portfolio (particularly in powersport lending) and deposits, demonstrates a strategic move to enhance market share and diversify revenue streams, aligning with ongoing M&A activity in regional banking. The company's focus on managing the cost of funds by allowing higher-rate, exception-priced deposits to run off is a standard practice for optimizing profitability in a dynamic interest rate environment.

Comparison to Industry Standards

• Profitability remains among the best in the industry with return on average assets of 1.75% and return on average tangible equity of 17.23%, both excluding acquisition related purchase accounting and deal costs.
• The tax equivalent net interest margin has remained resilient and impressive at 5.09%.
• The adjusted efficiency ratio was a very healthy 51.28%.
• Company and Bank capital ratios (Common equity tier 1, Tier 1 risk-based, Total risk-based, Tier 1 leverage) are well above minimum capital adequacy guidelines (7.00%, 8.50%, 10.50%, and 4.00% respectively) and prompt corrective action provisions (6.50%, 8.00%, 10.00%, and 5.00% respectively).

Stakeholder Impact

• Shareholders: Positive impact due to significantly increased net income, strong profitability ratios, a 14% increase in tangible book value per share, and a declared cash dividend of $0.07 per share.
• Employees: Positive impact from the Bancorp Financial acquisition leading to additional employees retained and increases in annual base salary rates, officers' incentives, and restricted stock expense.
• Customers: Potential impact from changes in loan and deposit rates, though the company aims to control the cost of funds.
• Creditors: Strong capital ratios and improved financial performance indicate a healthy financial position, enhancing creditworthiness.

Next Steps

• Continue to control the cost of funds by monitoring market activity and allowing remaining exception-priced deposits to run off naturally.
• Capitalize on growth opportunities in 2026, especially with improving marginal spreads in loan and deposit markets.
• Remediation work continues on classified credits, with the goal of cash flow improvements with increased tenancy within commercial real estate.
• Host a conference call on Thursday, January 22, 2026, at 10:00 a.m. Eastern Time (9:00 a.m. Central Time) to discuss Q4 2025 financial results.
• Payment of a cash dividend of $0.07 per share on February 9, 2026, to stockholders of record as of January 30, 2026.

Key Dates

Recommendation

The company delivered exceptionally strong fourth-quarter results, with net income and adjusted earnings significantly exceeding prior periods. Key profitability metrics such as ROAA, ROAE, and ROATCE are robust and among the best in the industry. The net interest margin remains impressive, and the efficiency ratio has improved substantially. While there's a slight uptick in nonperforming loans and a modest decline in deposits due to strategic runoff, the overall balance sheet is well-positioned, and capital ratios are strong. Management's optimistic outlook for 2026, coupled with a 14% increase in tangible book value per share despite acquisition-related dilution, suggests continued positive momentum. The declared dividend further enhances shareholder value. These factors indicate a compelling investment opportunity.

Keywords

Old Second Bancorp, OSBC, financial results, Q4 2025, earnings, net income, diluted EPS, adjusted net income, net interest margin, loan portfolio, deposits, nonperforming loans, asset quality, Bancorp Financial acquisition, bank, financial services, regional bank, Illinois, credit losses, capital ratios, dividends