Old Second Bancorp's (NASDAQ:OSBC) Q3 CY2025 Outperformance and Its Implications for Value Investors

Old Second Bancorp (NASDAQ:OSBC) delivered a mixed performance in Q3 2025, with net income declining to $9.9 million, or $0.18 per diluted share, compared to $21.8 million in Q2 2025. However, the company's net interest margin (NIM) expanded to 5.05%, a 20 basis point increase from the prior quarter, and tangible book value per share (TBVPS) rose to $13.51, reflecting resilience amid integration costs from its acquisition of Bancorp Financial and Evergreen Bank Group. For value investors, the critical question is whether these metrics-particularly NIM and TBVPS growth-are sustainable in a post-rate normalization environment.

NIM Expansion: A Mixed Bag of Strength and Challenges

The 5.05% NIM in Q3 2025 marked a 41 basis point year-over-year improvement, driven by higher loan yields from Evergreen's powersports segment, which averaged 9.48% in Q4 2024. This segment's strong performance offset rising deposit costs, a key concern as rate normalization looms. Analysts note that while the acquisition initially pressured operational efficiency, noninterest expenses surged by 45.5% quarter-over-quarter to $63.2 million-the company's tax-equivalent efficiency ratio of 64.46% suggests underlying cost discipline.

Management anticipates stable NIMs in 2025, citing a disciplined approach to loan growth and deposit pricing. CFO Brad Adams emphasized that the Evergreen acquisition, while dilutive in the short term, is expected to shorten the earned-back period and enhance long-term profitability through cross-selling opportunities. However, the recent $19.7 million provision for credit losses-a sharp increase from $2.5 million in Q2 2025-highlights risks in asset quality, particularly in the Powersports segment.

TBVPS Growth: Resilience Amid Integration Costs

Despite the acquisition's dilutive impact, TBVPS growth remained robust, climbing to $13.51 in Q3 2025 from $13.44 in Q2. The tangible equity ratio declined modestly to 10.41%, a 42 basis point drop, but remains 27 basis points higher than the same period in 2024. This resilience underscores the strategic value of the acquisition, which added an asset generation business and diversified Old Second's loan portfolio. Consumer lending now accounts for 21% of total loans, a segment historically characterized by favorable risk-adjusted yields.

Analysts project TBVPS sustainability will hinge on Old Second's ability to manage integration costs and maintain capital returns. The company's $0.07 per share dividend, declared in October 2025, and potential share buybacks signal a commitment to shareholder value. KBRA analysts note that the acquisition's capital dilution is "relatively tame," with tangible equity expected to stabilize as cost synergies materialize by 2026.

Rate Normalization: A Tailwind or Headwind?

The post-rate normalization environment presents both opportunities and risks. While falling short-term rates could pressure NIMs, Old Second's high-yielding loan portfolio-particularly in powersports and consumer credit-offers a buffer. Management expects to leverage its expanded deposit base to fund organic loan growth at low single-digit rates. Additionally, the company's focus on deposit-focused M&A and digital banking expansion positions it to capitalize on rate-driven customer migrations. Management expects to leverage its expanded deposit base to fund organic loan growth at low single-digit rates.

However, rate normalization could exacerbate credit risks. The Q3 2025 provision for credit losses and increased classified assets highlight vulnerabilities in asset quality. Analysts caution that while risk-adjusted yields in consumer lending historically outperform other segments, tighter credit standards may be necessary to mitigate losses.

Implications for Value Investors

For value investors, Old Second's Q3 performance underscores a delicate balance between short-term integration challenges and long-term growth potential. The company's NIM expansion and TBVPS resilience, coupled with a "Buy" consensus rating from analysts, suggest a compelling risk-reward profile. However, the path to sustainable outperformance depends on:
1. Execution of cost synergies from the Evergreen acquisition, particularly the 30% reduction in noninterest expenses by 2026.
2. Stability in credit quality, with management's ability to manage Powersports-related risks critical to maintaining profitability.
3. Strategic capital allocation, including disciplined M&A and share repurchases, to enhance TBVPS growth.

In a post-rate normalization environment, Old Second's ability to leverage its expanded asset base while maintaining operational efficiency will be pivotal. For now, the company's adjusted net income of $28.4 million, or $0.53 per diluted share, in Q3 2025-excluding acquisition costs-demonstrates the core strength that underpins its long-term appeal.