Old Second Bancorp’s Q1 2025 Results: Margin Strength Amid Strategic Gambles

Old Second Bancorp (NASDAQ: OSBC) reported first-quarter 2025 net income of $19.8 million, or $0.43 per diluted share, marking a modest sequential improvement but a year-over-year decline as the bank navigates rising expenses, evolving loan demand, and ambitious merger plans. The results underscore a financial institution balancing near-term challenges with long-term growth opportunities.

Key Financial Highlights

Net income rose $700,000 sequentially from Q4 2024 ($19.1 million) but fell $1.5 million from Q1 2024 ($21.3 million). Adjusted net income (excluding merger-related costs and mortgage servicing rights adjustments) reached $20.6 million, up $600,000 from Q4 but down $637,000 year-over-year.

The standout performance came from the net interest margin (NIM), which expanded to 4.88%, a 20-basis-point increase from Q4 2024 and a full 30 basis points higher than Q1 2024. This reflected disciplined deposit pricing and lower funding costs, with net interest income rising $1.3 million to $62.9 million.

However, noninterest income stumbled, falling $1.4 million (12%) quarter-over-quarter to $10.2 million, driven by declines in mortgage banking revenue and fee-based services. Noninterest expenses, meanwhile, rose $183,000 sequentially to $44.5 million, though this masked a 16.4% year-over-year jump as merger costs and salary increases took their toll.

Balance Sheet and Asset Quality

Total assets grew 1.4% to $5.73 billion, fueled by a $245 million year-over-year deposit surge to $4.85 billion. Loans, however, fell $41 million sequentially to $3.94 billion, as the bank reduced exposure to commercial and real estate portfolios.

Asset quality improved: nonperforming loans (NPLs) totaled $34.8 million (0.9% of total loans), up slightly from Q4 2024 (0.8%) but down sharply from 1.6% in Q1 2024. Management attributed the sequential rise to two large commercial loans but emphasized the improvement was driven by recoveries and charge-offs.

Strategic Moves: Mergers and Risks

Old Second is aggressively expanding through acquisitions. In February 2025, it announced a pending merger with Bancorp Financial, Inc., which includes the $1.5 billion Evergreen Bank Group. This deal aims to boost consumer lending and diversify revenue streams but carries risks: integration costs and regulatory approvals could strain resources.

The bank also finalized a December 2024 branch purchase from First Merchants Bank, adding $454,000 in Q1 expenses. CEO Jim Eccher framed these moves as necessary to capitalize on “regional growth opportunities,” but investors will watch closely for execution risks.

Capital Strength and Dividend

Capital ratios remain robust: the Common Equity Tier 1 (CET1) ratio rose to 13.47%, up from 12.82% in Q4 and 12.02% in Q1 2024. Tangible book value per share grew to $12.88, a 15.6% annual increase, reflecting strong capital generation.

The board maintained its quarterly dividend at $0.06 per share, a modest payout that prioritizes capital retention over shareholder returns.

Challenges Ahead

• Loan Portfolio Dynamics: The $41 million sequential loan decline raises questions about demand in a slowing economy. Management cited “strategic sales” of commercial real estate loans, but prolonged softness could pressure margins.
• Expense Growth: Noninterest expenses rose 16.4% year-over-year, with salaries and merger costs contributing to the rise. The efficiency ratio (56.5%) improved sequentially but remains elevated compared to peers.
• Noninterest Income Volatility: The 12% drop in noninterest income highlights reliance on fee-based services, which are vulnerable to market cycles.

Investment Takeaways

Old Second’s Q1 results paint a mixed picture: margin strength and capital discipline are positives, but loan headwinds and expense pressures temper optimism. The merger with Evergreen Bank offers growth potential but hinges on seamless integration and regulatory approval.

Key Data Points:
- NIM at 4.88% remains a bright spot, outperforming many regional banks.
- Tangible book value up 15.6% year-over-year signals strong capital management.
- Efficiency ratio at 56.5% compares unfavorably to peers like Wintrust Financial (WTFC) at 51%.

Conclusion

Old Second Bancorp’s Q1 results reflect a bank navigating a crossroads: its margin resilience and balance sheet strength position it to capitalize on strategic acquisitions, but execution risks and macroeconomic headwinds loom large. Investors should weigh the potential upside from mergers against the near-term pressures on loan growth and expenses. With a forward P/B ratio of 1.2x (vs. 1.5x for regional peers), the stock offers value—if management can deliver on its growth bets.

For now, Old Second remains a speculative play on regional banking consolidation, best suited for investors willing to bet on disciplined execution and a rebound in loan demand. The next quarter will test whether the merger benefits offset the current challenges.