8-K: Old Second Bancorp Reports Q3 Net Income of $9.9M, Driven by Acquisition

Old Second Bancorp, Inc. announced third quarter 2025 net income of $9.9 million, or $0.18 per diluted share, significantly impacted by the acquisition of Bancorp Financial, Inc.

Summary

• Net income for Q3 2025 was $9.9 million, or $0.18 per diluted share, a decrease from $21.8 million ($0.48 per diluted share) in Q2 2025 and $23.0 million ($0.50 per diluted share) in Q3 2024.
• Adjusted net income (non-GAAP) for Q3 2025 was $28.4 million, or $0.53 per diluted share, up from $22.8 million ($0.50 per diluted share) in Q2 2025 and $24.0 million ($0.52 per diluted share) in Q3 2024.
• The acquisition of Bancorp Financial, Inc. and Evergreen Bank Group closed effective July 1, 2025, significantly impacting Q3 2025 results.
• Pre-tax adjusting items for Q3 2025 included a $13.2 million day two provision for credit losses from the acquisition, $389,000 in MSRs mark-to-market losses, $430,000 in death benefits realized on BOLI, and $11.5 million in transaction-related expenses.
• Net interest and dividend income increased by $18.5 million (28.9%) to $82.8 million in Q3 2025 compared to Q2 2025, and by $22.2 million (36.6%) compared to Q3 2024.
• Provision for credit losses increased to $19.7 million in Q3 2025, up from $2.5 million in Q2 2025 and $2.0 million in Q3 2024, primarily due to the Bancorp Financial acquisition's day two purchase accounting and loan growth/charge-offs.
• Noninterest expense rose by $19.7 million (45.5%) to $63.2 million in Q3 2025 compared to Q2 2025, largely due to acquisition-related costs, including $8.4 million in change in control, retention, and severance payouts.
• Total loans increased by $1.27 billion to $5.27 billion at September 30, 2025, primarily driven by $1.19 billion of loans acquired from Bancorp Financial.
• Organic loan growth, excluding the acquisition, was $72.3 million (1.8%) in Q3 2025.
• Total deposits increased by $961.8 million (20.0%) to $5.76 billion at September 30, 2025, due to deposits assumed from Bancorp Financial.
• Nonperforming loans increased to $48.0 million (0.9% of total loans) at September 30, 2025, from $32.2 million (0.8%) at June 30, 2025, driven by two legacy relationships and powersport loans.
• Net charge-offs were $5.1 million in Q3 2025, primarily within the powersport portfolio, compared to $785,000 in Q2 2025 and net recoveries of $155,000 in Q3 2024.
• The Board of Directors declared a cash dividend of $0.07 per share, payable on November 10, 2025, to stockholders of record as of October 31, 2025, representing a 17% increase.
• The Company issued 7.9 million common shares as part of the Bancorp Financial acquisition, providing $140.5 million of capital.
• Repurchased 326,854 shares at $18.00 per share for a total reduction to capital of $5.9 million during Q3 2025.

Sentiment

Score: 6

Explanation: While GAAP net income and asset quality metrics show a negative trend, largely due to acquisition-related accounting and initial integration costs, the adjusted metrics, strong net interest margin, and management's positive outlook on the acquisition's long-term value and earnings accretion provide a more optimistic view. The dividend increase also signals confidence. The immediate GAAP results are worse, but the underlying strategic moves and adjusted performance suggest a moderately positive long-term outlook.

Positives

• Adjusted net income increased to $28.4 million, or $0.53 per diluted share, demonstrating strong core business results post-acquisition.
• Net interest and dividend income significantly increased by 28.9% quarter-over-quarter and 36.6% year-over-year, primarily due to the Bancorp Financial acquisition.
• Net interest margin (TE) improved to 5.05% in Q3 2025, up 20 basis points from the prior linked quarter and 41 basis points year-over-year, exceeding initial expectations.
• Strong loan growth of $1.27 billion, with $72.3 million (1.8%) in organic loan growth excluding the acquisition.
• Total deposits increased by $961.8 million (20.0%), enhancing funding base.
• The company's balance sheet is described as strong, liquid, and well-reserved, with a common equity tier 1 ratio of 12.44% and a loan to deposit ratio of 91%.
• Management is encouraged by trends and momentum in new and existing businesses, including strong loan growth, encouraging pipelines, and excellent core profitability.
• Systems integration of Bancorp Financial was completed without significant disruption, and the combination is expected to deliver exceptional value.
• Initial estimates on earnings accretion from the Bancorp Financial acquisition appear conservative, with asset yields exceeding expectations and progress on operational efficiencies.
• The acquisition substantially improves the company's interest rate sensitivity position and already strong profitability.
• The Board of Directors increased the common dividend by 17% to $0.07 per share, reflecting confidence in the bank's performance and financial strength.
• Unrealized mark-to-market loss on securities decreased to $47.7 million from $54.7 million in Q2 2025 and $56.2 million in Q3 2024.

Negatives

• GAAP net income decreased significantly to $9.9 million in Q3 2025 from $21.8 million in Q2 2025 and $23.0 million in Q3 2024.
• Provision for credit losses increased substantially to $19.7 million in Q3 2025, primarily due to day two valuations from the Bancorp Financial acquisition and current period charge-offs.
• Noninterest expense increased by $19.7 million (45.5%) quarter-over-quarter, largely due to acquisition-related costs, including $8.4 million in change in control, retention, and severance payouts.
• Nonperforming loans increased by $15.7 million to $48.0 million (0.9% of total loans) in Q3 2025, driven by two legacy relationships and powersport loans.
• Net charge-offs increased to $5.1 million in Q3 2025, primarily within the powersport portfolio, compared to $785,000 in Q2 2025 and net recoveries in Q3 2024.
• Classified loans increased by $36.6 million from Q2 2025, driven by downgrades of commercial and commercial real estate relationships and acquired Bancorp Financial loans.
• The efficiency ratio (GAAP) worsened to 64.46% in Q3 2025 from 55.99% in Q2 2025, indicating higher operational costs relative to revenue.

Risks

• The strength of the United States economy in general and the local economies in which operations are conducted may be different than expected.
• Rates of delinquencies and amounts of charge-offs, the level of allowance for credit loss, 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 has 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 the business.
• 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 customer supply chains or disruption in transportation, and disruptions caused from widespread cybersecurity incidents.

Future Outlook

Management is very encouraged about the trends and momentum in both new and existing businesses, including strong loan growth, encouraging pipelines, and excellent core profitability. They believe the combination with Bancorp Financial will deliver exceptional value, with initial earnings accretion estimates appearing conservative as asset yields exceed expectations and operational efficiencies progress. The company is well prepared for any economic environment and has the resources and momentum to focus on growth and additional strategic opportunities.

Management Comments

• "On July 1, 2025, we acquired Bancorp Financial, Inc., a $1.4 billion bank holding company headquartered in Oak Brook, Illinois and its subsidiary bank, Evergreen Bank Group. We are extremely excited to welcome Evergreen Bank customers and employees to the Old Second team and pleased to deliver solid core business results in the first quarter inclusive of the acquisition."
• "We are very encouraged about the trends and momentum in both our new and existing businesses including strong loan growth, encouraging pipelines and excellent core profitability."
• "The systems integration of the two companies was completed without significant disruption and we continue to believe the combination will deliver exceptional value in the years ahead."
• "Our initial estimates on earnings accretion at the announcement of the transaction appear conservative as asset yields are exceeding our expectations and our teams are continuing to make progress on operational efficiencies."
• "We believe that the combination is exceptionally rare, for its size, in that book value dilution was relatively minimal and the deal itself substantially improves both our interest rate sensitivity position and already strong profitability."
• "Third quarter return on average assets and return on average tangible common equity, adjusted to exclude acquisition related purchase accounting and deal costs, were 1.61% and 16.69%, respectively, the tax equivalent net interest margin was impressive at 5.05% and the efficiency ratio was a very healthy 52.10%."
• "Based on the strength of the balance sheet and resilient income statement trends, Old Second elected in this fourth quarter to increase the common dividend by 17%, as we continue to regularly deliver dividend growth commensurate with the banks performance."
• "We believe Old Second is well prepared for any economic environment and has the resources and momentum to focus on growth and additional strategic opportunities as they present themselves."
• "We are excited for the future and proud of our progress in building a better Old Second for our customers, communities and stockholders."

Industry Context

This announcement reflects a continued trend of consolidation within the regional banking sector, as Old Second Bancorp strategically expands its market presence and loan portfolio through the acquisition of Bancorp Financial. The focus on integrating acquired assets and achieving operational efficiencies is common in post-merger environments. The increase in net interest margin and asset yields, despite rising interest expenses, indicates effective asset-liability management in a dynamic interest rate environment. The rise in nonperforming loans and charge-offs, particularly in newer segments like powersports, highlights the inherent credit risks associated with portfolio expansion and potentially less seasoned loan books, a challenge many banks face when diversifying or growing rapidly. The dividend increase signals management's confidence in sustained profitability and capital strength, a positive indicator for investors in a competitive banking landscape.

Comparison to Industry Standards

• The adjusted return on average assets (ROAA) of 1.61% and adjusted return on average tangible common equity (ROATCE) of 16.69% are strong, particularly for a regional bank, and compare favorably to many peers in the industry, often targeting ROAA above 1.0% and ROATCE in the low to mid-teens.
• A net interest margin (TE) of 5.05% is highly competitive and generally above the average for many U.S. regional banks, which often range from 3.0% to 4.5%, indicating strong pricing power and effective asset yield management.
• The adjusted efficiency ratio of 52.10% is considered very healthy and indicates good cost control relative to revenue, comparing favorably to an industry average that often hovers around 55-60% for well-managed banks.
• A common equity tier 1 capital ratio of 12.44% is robust and well above the regulatory minimums (7.00% plus buffer), positioning the company strongly against capital requirements and providing flexibility for future growth or economic downturns.
• The loan to deposit ratio of 91% is within a healthy range for banks, indicating effective deployment of deposits into loans while maintaining liquidity, typically falling between 80-100% for many institutions.
• The increase in nonperforming loans to 0.9% of total loans and net charge-offs of $5.1 million, particularly in the powersport segment, warrants close monitoring. While still manageable, this trend could diverge from peers with more conservative lending profiles or less exposure to newer, higher-risk consumer segments.

Stakeholder Impact

• **Shareholders:** Experience a decrease in GAAP diluted EPS but an increase in adjusted diluted EPS. The 17% dividend increase is positive. The acquisition is expected to deliver exceptional value and improve interest rate sensitivity and profitability, potentially leading to long-term shareholder value creation. However, increased provision for credit losses and nonperforming loans could be a concern.
• **Employees:** Employees of Bancorp Financial and Evergreen Bank Group have been welcomed to Old Second, with systems integration completed without significant disruption. There were change in control, retention, and severance payouts related to the acquisition, indicating some personnel adjustments.
• **Customers:** Evergreen Bank customers are welcomed to Old Second, with the acquisition expanding consumer lending and adding a powersport loan segment, potentially offering new products and services. Systems integration was smooth, minimizing disruption.
• **Creditors:** The company's strong capital ratios (Common Equity Tier 1 of 12.44%) and robust balance sheet indicate a solid financial position, which is favorable for creditors. However, increased nonperforming loans and charge-offs in certain segments warrant monitoring.

Next Steps

• Continue remediation work on classified credits with the goal of cash flow improvements and increased tenancy.
• Monitor market activity to control the cost of funds and allow previous exception-priced deposits to runoff naturally.
• Focus on growth and additional strategic opportunities as they present themselves.
• Host a conference call on October 23, 2025, to discuss Q3 2025 financial results.
• Pay a cash dividend of $0.07 per share on November 10, 2025, to stockholders of record as of October 31, 2025.

Key Dates

Recommendation

While the GAAP net income for Q3 2025 shows a significant decline and asset quality metrics like nonperforming loans and net charge-offs have worsened, these are largely attributable to the immediate accounting impacts and integration costs of the Bancorp Financial acquisition. The adjusted net income and net interest margin demonstrate strong underlying core performance and the strategic benefits of the acquisition. Management's confidence, reflected in the 17% dividend increase and positive outlook on future earnings accretion, suggests long-term value. However, the increase in credit loss provisions and nonperforming assets, particularly in the new powersport segment, introduces a degree of uncertainty. A 'hold' recommendation is appropriate as investors should monitor the successful integration, realization of synergies, and stabilization of asset quality in the coming quarters before making a more definitive 'buy' decision, despite the promising adjusted figures.

Keywords

Banking, Financial Services, Regional Bank, Community Bank, Acquisition, Merger, Bancorp Financial, Evergreen Bank Group, Net Income, Earnings, Loan Growth, Deposits, Net Interest Margin, Credit Quality, Nonperforming Loans, Charge-offs, Dividend, Capital Ratios, SEC Filing, OSBC