Old Second Bancorp (OSBC)

Midwest regional bank Old Second Bancorp (NASDAQ:OSBC) beat Wall Street’s revenue expectations in Q3 CY2025, with sales up 34.6% year on year to $96.22 million. Its non-GAAP profit of $0.53 per share was 4.6% above analysts’ consensus estimates.

Company Overview

Dating back to 1871 as one of the Chicago area's longest-standing financial institutions, Old Second Bancorp (NASDAQ:OSBC) is an Illinois-based community bank offering deposit services, commercial and consumer loans, wealth management, and mortgage products through its 53 branch locations.

Regional banks, financial institutions operating within specific geographic areas, serve as intermediaries between local depositors and borrowers. They benefit from rising interest rates that improve net interest margins (the difference between loan yields and deposit costs), digital transformation reducing operational expenses, and local economic growth driving loan demand. However, these banks face headwinds from fintech competition, deposit outflows to higher-yielding alternatives, credit deterioration (increasing loan defaults) during economic slowdowns, and regulatory compliance costs. Recent concerns about regional bank stability following high-profile failures and significant commercial real estate exposure present additional challenges.

Old Second Bancorp's competitors include other regional banks operating in the Chicago metropolitan area and surrounding regions, such as First Midwest Bancorp (NASDAQ: FMBI), Wintrust Financial (NASDAQ: WTFC), MB Financial (NASDAQ: MBFI), and larger national banks like JPMorgan Chase (NYSE: JPM) and Bank of America (NYSE: BAC) that have significant presence in the market.

Two primary revenue streams drive bank earnings. While net interest income, which is earned by charging higher rates on loans than paid on deposits, forms the foundation, fee-based services across banking, credit, wealth management, and trading operations provide additional income. Luckily, Old Second Bancorp’s revenue grew at an exceptional 19.5% compounded annual growth rate over the last five years. Its growth beat the average banking company and shows its offerings resonate with customers, a helpful starting point for our analysis.

We at StockStory place the most emphasis on long-term growth, but within financials, a half-decade historical view may miss recent interest rate changes, market returns, and industry trends. Old Second Bancorp’s recent performance shows its demand has slowed significantly as its annualized revenue growth of 4.7% over the last two years was well below its five-year trend. Note: Quarters not shown were determined to be outliers, impacted by outsized investment gains/losses that are not indicative of the recurring fundamentals of the business.

This quarter, Old Second Bancorp reported wonderful year-on-year revenue growth of 34.6%, and its $96.22 million of revenue exceeded Wall Street’s estimates by 3.6%.

Net interest income made up 81.3% of the company’s total revenue during the last five years, meaning Old Second Bancorp barely relies on non-interest income to drive its overall growth.

Markets consistently prioritize net interest income growth over fee-based revenue, recognizing its superior quality and recurring nature compared to the more unpredictable non-interest income streams.

The underlying profitability of top-line growth determines the actual bottom-line impact. Banking institutions measure this dynamic using the efficiency ratio, which is calculated by dividing non-interest expenses like personnel, facilities, technology, and marketing by total revenue.

Markets emphasize efficiency ratio trends over static measurements, recognizing that revenue compositions drive different expense bases. Lower efficiency ratios signal superior performance by indicating that banks are controlling costs effectively relative to their income.

Over the last five years, Old Second Bancorp’s efficiency ratio has swelled by 5 percentage points, going from 65.8% to 54%. Said differently, the company’s expenses have grown at a slower rate than revenue, which typically signals prudent management.

Old Second Bancorp’s efficiency ratio came in at 52.1% this quarter, beating analysts’ expectations by 507.3 basis points (100 basis points = 1 percentage point). This result was in line with the same quarter last year.

For the next 12 months, Wall Street expects Old Second Bancorp to maintain its trailing one-year ratio with a projection of 54.8%.

Revenue trends explain a company’s historical growth, but the long-term change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

Old Second Bancorp’s EPS grew at a remarkable 13% compounded annual growth rate over the last five years. However, this performance was lower than its 19.5% annualized revenue growth, telling us the company became less profitable on a per-share basis as it expanded.

Like with revenue, we analyze EPS over a more recent period because it can provide insight into an emerging theme or development for the business.

For Old Second Bancorp, its two-year annual EPS declines of 5.7% mark a reversal from its (seemingly) healthy five-year trend. These shorter-term results weren’t ideal, but given it was successful in other measures of financial health, we’re hopeful Old Second Bancorp can return to earnings growth in the future.

In Q3, Old Second Bancorp reported adjusted EPS of $0.53, up from $0.51 in the same quarter last year. This print beat analysts’ estimates by 4.6%. Over the next 12 months, Wall Street expects Old Second Bancorp’s full-year EPS of $1.92 to grow 11.2%.

Banks operate as balance sheet businesses, with profits generated through borrowing and lending activities. Valuations reflect this reality, emphasizing balance sheet strength and long-term book value compounding ability.

This is why we consider tangible book value per share (TBVPS) the most important metric to track for banks. TBVPS represents the real, liquid net worth per share of a bank, excluding intangible assets that have debatable value upon liquidation. Traditional metrics like EPS are helpful but face distortion from M&A activity and loan loss accounting rules.

Old Second Bancorp’s TBVPS grew at an impressive 7.6% annual clip over the last five years. TBVPS growth has also accelerated recently, growing by 17.9% annually over the last two years from $9.72 to $13.51 per share.

Over the next 12 months, Consensus estimates call for Old Second Bancorp’s TBVPS to grow by 14.8% to $15.51, decent growth rate.

Leverage is core to a financial firm’s business model (loans funded by deposits). To ensure economic stability and avoid a repeat of the 2008 GFC, regulators require certain levels of capital and liquidity, focusing on the Tier 1 capital ratio.

Tier 1 capital is the highest-quality capital that a firm holds, consisting primarily of common stock and retained earnings, but also physical gold. It serves as the primary cushion against losses and is the first line of defense in times of financial distress.

This capital is divided by risk-weighted assets to derive the Tier 1 capital ratio. Risk-weighted means that cash and US treasury securities are assigned little risk while unsecured consumer loans and equity investments get much higher risk weights, for example.

New regulation after the 2008 financial crisis requires that all firms must maintain a Tier 1 capital ratio greater than 4.5%. On top of this, there are additional buffers based on scale, risk profile, and other regulatory classifications, so that at the end of the day, firms generally must maintain a 7-10% ratio at minimum.

Over the last two years, Old Second Bancorp has averaged a Tier 1 capital ratio of 12.6%, which is considered safe and well capitalized in the event that macro or market conditions suddenly deteriorate.

Return on equity (ROE) reveals the profit generated per dollar of shareholder equity, which represents a key source of bank funding. Banks maintaining elevated ROE levels tend to accelerate wealth creation for shareholders via earnings retention, buybacks, and distributions.

Over the last five years, Old Second Bancorp has averaged an ROE of 12.7%, healthy for a company operating in a sector where the average shakes out around 7.5% and those putting up 15%+ are greatly admired. This shows Old Second Bancorp has a decent competitive moat.

We enjoyed seeing Old Second Bancorp beat analysts’ tangible book value per share expectations this quarter. We were also glad its revenue outperformed Wall Street’s estimates. Overall, we think this was a solid quarter with some key areas of upside. The stock remained flat at $19.47 immediately after reporting.

The latest quarterly earnings matters, sure, but we actually think longer-term fundamentals and valuation matter more. Investors should consider all these pieces before deciding whether or not to invest in Old Second Bancorp.

There are definitely a lot of things to like about Old Second Bancorp. First off, its revenue growth was exceptional over the last five years, and analysts believe it can continue growing at these levels. And while its anticipated efficiency ratio over the next year signals its day-to-day expenses will rise, its net interest income growth was exceptional over the last five years. On top of that, its estimated net interest income growth for the next 12 months is great.

Old Second Bancorp’s P/B ratio based on the next 12 months is 1.1x. Looking at the banking landscape right now, Old Second Bancorp trades at a pretty interesting price. If you trust the business and its direction, this is an ideal time to buy.

Wall Street analysts have a consensus one-year price target of $22.92 on the company (compared to the current share price of $19.47), implying they see 17.7% upside in buying Old Second Bancorp in the short term.