8-K: Old Second Bancorp Reports Strong Q2 2025 Earnings, Driven by Margin Performance and Strategic Merger

Old Second Bancorp, Inc. announced net income of $21.8 million, or $0.48 per diluted share, for the second quarter of 2025, reflecting growth from the prior quarter and highlighting strong margin performance and the recent Bancorp Financial merger.

Summary

• Net income for the second quarter of 2025 was $21.8 million, or $0.48 per diluted share, an increase from $19.8 million ($0.43 per diluted share) in Q1 2025, and comparable to $21.9 million ($0.48 per diluted share) in Q2 2024.
• Adjusted net income, a non-GAAP measure, was $22.8 million, or $0.50 per diluted share, for Q2 2025, up from $20.6 million ($0.45 per diluted share) in Q1 2025 and $21.2 million ($0.46 per diluted share) in Q2 2024.
• Net interest and dividend income reached $64.2 million in Q2 2025, increasing by $1.3 million (2.1%) from Q1 2025 and $4.5 million (7.6%) from Q2 2024.
• The tax-equivalent net interest margin was 4.85% for Q2 2025, a slight decrease of 3 basis points from 4.88% in Q1 2025, but an increase of 22 basis points from 4.63% in Q2 2024.
• Noninterest expense was $43.4 million in Q2 2025, a decrease of $1.1 million (2.4%) from Q1 2025, but an increase of $5.5 million (14.6%) from Q2 2024.
• A net provision for credit losses of $2.5 million was recorded in Q2 2025, compared to $2.4 million in Q1 2025 and $3.8 million in Q2 2024.
• Nonperforming loans totaled $32.2 million (0.8% of total loans) at June 30, 2025, down from $34.8 million (0.9%) at March 31, 2025, and $46.9 million (1.2%) at June 30, 2024.
• Total loans stood at $4.00 billion at June 30, 2025, an increase of $58.4 million from March 31, 2025, and $22.1 million from June 30, 2024.
• Total deposits were $4.80 billion at June 30, 2025, a decrease of $54.4 million (1.1%) compared to $4.85 billion at March 31, 2025.
• The merger with Bancorp Financial, Inc. closed on July 1, 2025, subsequent to the end of the quarter.

Sentiment

Score: 8

Explanation: The company reported strong financial results with significant quarter-over-quarter improvements in net income and adjusted net income, robust net interest margin, and excellent asset quality metrics. Capital ratios are strong, and the recent acquisition positions the company for future growth. While there was a slight year-over-year dip in net income and noninterest income, and an increase in noninterest expense, the overall performance and strategic moves are highly positive.

Positives

• Net income increased by $2.0 million quarter-over-quarter, demonstrating strong sequential growth.
• Adjusted net income showed consistent growth, increasing by $2.2 million quarter-over-quarter and $1.6 million year-over-year, indicating improved underlying operational performance.
• Net interest and dividend income increased by 7.6% year-over-year, driven by higher security yields and reduced borrowing costs.
• The tax-equivalent net interest margin of 4.85% remains strong and increased by 22 basis points year-over-year, reflecting effective asset-liability management.
• Asset quality improved significantly, with nonperforming loans decreasing by 31.2% year-over-year to $32.2 million (0.8% of total loans).
• Tangible book value per share continues to compound at a double-digit rate, reaching $13.44 at June 30, 2025.
• Capital ratios are robust, with the Common Equity Tier 1 capital ratio at 13.77%, well above regulatory minimums.
• The efficiency ratio improved to 55.99% from 56.46% in the prior linked quarter, indicating disciplined operating efficiency.
• The acquisition of Bancorp Financial, Inc. (closed July 1, 2025) is expected to add meaningful consumer lending capabilities and enhance balance sheet flexibility and profitability.
• Other real estate owned (OREO) expense decreased significantly by $1.8 million quarter-over-quarter due to property sales and lower operating costs.
• Short-term FHLB advances decreased substantially year-over-year, leading to a $3.3 million reduction in interest expense on other short-term borrowings.

Negatives

• Net income for Q2 2025 decreased slightly by $69,000 compared to Q2 2024.
• Noninterest income decreased by $229,000 (2.1%) year-over-year, primarily due to the absence of an $893,000 death benefit realized on BOLI in Q2 2024 and a $293,000 decrease in MSRs mark-to-market valuations.
• Noninterest expense increased significantly by $5.5 million (14.6%) year-over-year, driven by higher salaries and employee benefits, computer and data processing, and acquisition-related costs.
• Total deposits decreased by $54.4 million (1.1%) quarter-over-quarter, primarily due to decreases in savings, NOW, demand, and time deposits.
• The company held an unrealized mark-to-market loss on securities of $54.7 million as of June 30, 2025.
• Classified loans increased by $12.6 million quarter-over-quarter, primarily due to one large commercial real estate owner-occupied downgrade.
• Other real estate owned (OREO) increased by 125.4% quarter-over-quarter to $6.486 million, partly due to a $5.0 million loan transfer to OREO.

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.
• Adverse changes in asset quality in the loan portfolio, including the rate of delinquencies, amounts of charge-offs, level of allowance for credit loss, and rates of loan growth, 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 pending or future acquisitions, 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 may continue to affect deposit and funding costs, net income, prepayment penalty income, mortgage banking income, other future cash flows, or the market value of assets, including investment securities.
• Elevated inflation poses adverse risk to the overall economy and could indirectly pose challenges to clients and business.
• Adverse effects of events beyond control that may have a destabilizing effect on financial markets and the economy, such as 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 transportation, and disruptions caused from widespread cybersecurity incidents.

Future Outlook

The company is well positioned to capitalize upon future growth opportunities and weather any economic challenges. The recently closed merger with Bancorp Financial, Inc. is expected to add meaningful consumer lending capabilities, enhance the flexibility and profitability of the balance sheet, and create additional scale with new product and service offerings.

Management Comments

• Old Second reported another quarter of strong results in the second quarter of 2025, led by exceptional margin performance and disciplined operating efficiency.
• Second quarter return on average assets and return on average tangible common equity were 1.53% and 15.29%, respectively, the tax equivalent net interest margin was strong at 4.85% and the efficiency ratio was a very healthy 55.99%.
• Tangible book value per share continues to compound at a double-digit rate and the balance sheet remains strong and liquid with a common equity tier 1 ratio of 13.77%, a loan to deposit ratio of 83% and cash and marketable securities in excess of 23% of total assets.
• We are extremely proud of our financial performance so far this year, and believe we are both well positioned to capitalize upon future growth opportunities and weather any economic challenges that may present themselves.
• We believe the transaction will add meaningful consumer lending capabilities and enhance the flexibility and profitability of Old Second's balance sheet.
• The additional scale created by the merger and the new product and service offerings offer a tremendous opportunity to deliver great outcomes for our stockholders, customers, employees and communities.
• We are extremely excited to welcome Evergreen Bank customers and employees to the Old Second team.

Industry Context

The filing reflects a regional bank navigating a dynamic interest rate environment, evidenced by changes in net interest margin and strategic securities portfolio management. The acquisition of Bancorp Financial, Inc. and the prior FRME branch purchase indicate a strategy of inorganic growth and consolidation within the banking sector, aiming for increased scale and diversified offerings, which is a common trend among regional banks seeking competitive advantages. The focus on managing deposit costs and optimizing loan portfolio composition (growth in leases, commercial real estate-investor, and construction) aligns with broader industry efforts to enhance profitability and manage risk in varying economic conditions.

Comparison to Industry Standards

• Return on average assets (ROAA) of 1.53% is strong, generally exceeding the average for community banks, which often ranges from 1.0% to 1.2% in a stable environment.
• Return on average tangible common equity (ROATCE) of 15.29% is excellent, indicating efficient use of tangible equity and typically outperforming many peers in the regional banking sector.
• Net interest margin (tax-equivalent) of 4.85% is robust, suggesting effective asset-liability management and strong pricing power compared to many larger banks that might have lower margins due to different funding structures or competitive pressures.
• The efficiency ratio of 55.99% is considered healthy for a bank, indicating good cost control, especially when compared to an industry average that often hovers in the low to mid-60s.
• The Common Equity Tier 1 capital ratio of 13.77% is well above regulatory minimums and provides a strong buffer, indicating a very well-capitalized institution compared to most banking peers.
• Nonperforming loans to total loans at 0.8% is a very favorable asset quality metric, significantly lower than the average for many regional banks, which can range from 0.5% to over 1.5% depending on portfolio mix and economic conditions.

Stakeholder Impact

• Shareholders: Positive impact due to strong earnings, compounding tangible book value, declared cash dividend, and strategic acquisitions expected to enhance profitability and scale.
• Customers: Positive impact from the Bancorp Financial merger, which is expected to add meaningful consumer lending capabilities and new product/service offerings.
• Employees: Employees of Evergreen Bank Group are welcomed to the Old Second team, indicating integration and potential new opportunities.
• Communities: The merger is expected to deliver great outcomes for communities.

Next Steps

• Integration of Bancorp Financial, Inc. and its subsidiary Evergreen Bank Group following the merger close on July 1, 2025.
• Continued efforts to capitalize on future growth opportunities and manage economic challenges.
• Ongoing remediation work on classified loans with the goal of cash flow improvements and increased tenancy.
• Potential strategic purchases and sales of securities as opportunities arise.
• Payment of the declared cash dividend of $0.06 per share on August 4, 2025.

Key Dates

Recommendation

The filing demonstrates robust financial health, strong profitability metrics (ROAA, ROATCE, NIM), and excellent asset quality, with nonperforming loans significantly declining. The successful integration of the Bancorp Financial merger, which closed post-quarter, is expected to further enhance scale and profitability. The company's capital position is very strong, and tangible book value per share is growing at a double-digit rate. Despite some year-over-year expense increases related to acquisitions and a slight dip in non-interest income due to non-recurring items, the underlying operational performance and strategic growth initiatives make this a compelling investment.

Keywords

Banking, Financial Services, Regional Bank, Community Bank, Commercial Real Estate, Loans, Deposits, Net Interest Margin, Asset Quality, Mergers and Acquisitions, OSBC, Illinois