OLD SECOND BANCORP INC (OSBC)

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations

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Overview

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The following discussion provides additional information regarding our operations for the three months ended March 31, 2026, compared to the three months ended March 31, 2025, and our financial condition at March 31, 2026, compared to December 31, 2025. This discussion should be read in conjunction with our consolidated financial statements as well as the financial and statistical data appearing elsewhere in this report and our Form 10-K for the year ended December 31, 2025. The results of operations for the three months ended March 31, 2026 are not necessarily indicative of future results. Dollar amounts presented in the following tables are in thousands, except per share data, and March 31, 2026 and 2025 amounts are unaudited. Certain items in prior periods have been reclassified to conform to the current presentation.

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In this report, unless the context suggests otherwise, references to the “Company,” “we,” “us,” and “our” mean the combined business of Old Second Bancorp, Inc. and its subsidiary bank, Old Second National Bank (the “Bank”).

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We have made, and will continue to make, various forward-looking statements with respect to financial and business matters. Comments regarding our business that are not historical facts are considered forward-looking statements that involve inherent risks and uncertainties. Actual results may differ materially from those contained in these forward-looking statements. For additional information regarding our cautionary disclosures, see the “Cautionary Note Regarding Forward-Looking Statements” on page 3 of this report.

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Business Overview

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The Company is a bank holding company headquartered in Aurora, Illinois. Through our wholly-owned subsidiary bank, Old Second National Bank, a national banking organization also headquartered in Aurora, Illinois (the “Bank”), we offer a wide range of financial services through our 55 banking centers located in Cook, DeKalb, DuPage, Kane, Kendall, LaSalle and Will counties in Illinois. These banking centers offer access to a full range of traditional retail and commercial banking services including treasury management operations as well as fiduciary and wealth management services. We focus our business on establishing and maintaining relationships with our clients while maintaining a commitment to provide for the financial services needs of the communities in which we operate. We emphasize relationships with individual customers as well as small to medium-sized businesses throughout our market area. We also have extensive wealth management services, which include a registered investment advisory platform in addition to trust administration and trust services related to personal and corporate trusts and employee benefit plan administration services.

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On July 1, 2025, we completed our previously announced acquisition of Bancorp Financial, Inc. (“Bancorp Financial”), pursuant to the agreement and plan of merger dated February 24, 2025. At the effective time of the acquisition, Bancorp Financial merged with and into the Company, with the Company continuing as the surviving corporation. Immediately following the merger, Evergreen Bank Group (“Evergreen”), an Illinois-chartered banking corporation and wholly-owned subsidiary of Bancorp Financial, merged with and into Old Second National Bank, with the Bank continuing as the surviving bank. Under the terms of the merger agreement, each share of Bancorp Financial common stock outstanding immediately prior to the effective time was converted into the right to receive 2.5814 shares of Old Second common stock and $15.93 in cash, without interest, with cash paid in lieu of any fractional shares.

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As of July 1, 2025, Bancorp Financial had approximately $1.43 billion of total assets, $1.20 billion of total loans, and $1.23 billion of total deposits. The consideration paid totaled $189.4 million and consisted of 7.9 million shares of Old Second common stock and $48.9 million in cash. The systems conversion was successfully completed in October 2025.

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Our results of operations depend generally on net interest income, which is the difference between interest income from interest-earning assets and interest expense on interest-bearing liabilities. Net interest income is affected by regulatory, economic and competitive factors that influence interest rates, loan demand and deposit flows. In addition, we are subject to interest rate risk to the degree that our interest-earning assets mature or reprice at different times, or at different speeds, than our interest-bearing liabilities. Our results of operations are also affected by noninterest income, such as service charges, wealth management fees, loan fees, gains from the sale of newly originated loans, gains or losses on investments and certain other noninterest related items. Our principal operating expenses, aside from interest expense, consist of compensation and employee benefits, occupancy costs, professional fees, data processing expenses and provision for credit losses.

We are significantly impacted by prevailing economic conditions, including federal monetary and fiscal policies, and federal regulations of financial institutions. Deposit balances are influenced by numerous factors such as competing investments, the level of income and the personal rate of savings within our market areas. Factors influencing lending activities include the demand for housing and the interest rate pricing competition from other lending institutions.

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As of March 31, 2026, all of our capital ratios were in excess of all regulatory requirements. While we believe that we have sufficient capital to withstand an extended economic recession, our reported and regulatory capital ratios could be adversely impacted by credit losses.

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Financial Overview

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Net income for the first quarter of 2026 was $25.6 million, or $0.48 per diluted share, compared to $28.8 million, or $0.54 per diluted share, for the fourth quarter of 2025, and $19.8 million, or $0.43 per diluted share, for the first quarter of 2025. Net income increased compared to the prior year like quarter, primarily due to the Bancorp Financial acquisition and the resulting growth in net interest income. Variances included an increase of $24.8 million in interest and dividend income and a $2.4 million increase in noninterest income, partially offset by a $6.5 million increase in interest expense, a $7.1 million increase in provision for credit losses, a $5.7 million increase in noninterest expense, and a $2.1 million increase in provision for income taxes. Net income in the first quarter of 2026 was negatively impacted by provision for credit losses of $9.5 million, compared to $3.0 million and $2.4 million recorded in the fourth quarter of 2025 and first quarter of 2025, respectively. Adjusted net income, a non-GAAP financial measure that excludes mortgage servicing rights mark to market gains or losses, net securities gains or losses, and acquisition related costs, net of gains on branch sales, as applicable, was $26.0 million for the first quarter of 2026, compared to $30.8 million for the fourth quarter of 2025, and $20.6 million for the first quarter of 2025.

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See the discussion entitled “Non-GAAP Financial Measures” on page 45, as well as the table below, which provides a reconciliation of this non-GAAP measure to the most comparable GAAP equivalents:

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The following provides an overview of some of the factors impacting our financial performance for the three-month period ended March 31, 2026, compared to the like period ended March 31, 2025:

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[["","\u25cf","Noninterest income was $12.6 million for the first quarter of 2026, compared to $10.2 million for the first quarter of 2025, which is an increase of $2.4 million, or 23.8%. Contributing to the higher noninterest income was a $714,000 increase in other income as a result of powersport and other consumer fee income. Also contributing to the growth in noninterest income during the quarter, compared

[Excerpt truncated for page length; source filing is linked above.]

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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The following discussion provides additional information regarding our operations for the twelve-month periods ended December 31, 2025, 2024 and 2023, and financial condition at December 31, 2025 and 2024 and should be read in conjunction with our consolidated financial statements and the related notes.  Historical results of operations and the percentage relationships among any amounts included, and any trends that may appear, may not indicate trends in operations or results of operations for any future periods.

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We have made, and will continue to make, various forward-looking statements with respect to financial and business matters.  Comments regarding our business that are not historical facts are considered forward-looking statements that involve inherent risks and uncertainties.  Actual results may differ materially from those contained in these forward-looking statements.  For additional information regarding our cautionary disclosures, see the “Cautionary Note Regarding Forward-Looking Statements” at the beginning of this annual report.

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Business Overview

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We provide a wide range of financial services through our 55 banking locations located in Cook, DeKalb, DuPage, Kane, Kendall, LaSalle and Will counties in Illinois.  These banking centers offer access to a full range of traditional retail and commercial banking services including treasury management operations as well as fiduciary and wealth management services.  We focus our business on establishing and maintaining relationships with our clients while maintaining a commitment to providing for the financial services needs of the communities in which we operate through our retail branch network.  We emphasize relationships with individual customers as well as small to medium-sized businesses throughout our market area.  Our market area includes a mix of commercial and industrial, real estate, and consumer related lending opportunities, and provides a stable, loyal core deposit base.  We also offer extensive wealth management services, which include a registered investment advisory platform in addition to trust administration and trust services related to personal and corporate trusts, including employee benefit plan administration services.

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Our primary deposit products are checking, NOW, money market, savings, and certificate of deposit accounts, and our primary lending products are commercial mortgages, leases, construction lending, commercial loans, residential mortgages, powersport, and other consumer loans.  Many of our loans are secured by various forms of collateral including real estate, business assets, and consumer property although borrower cash flow is the primary source of repayment at the time of loan origination.

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On July 1, 2025, we completed our previously announced acquisition of Bancorp Financial, Inc. (“Bancorp Financial”), pursuant to the agreement and plan of merger dated February 24, 2025. At the effective time of the acquisition, Bancorp Financial merged with and into the Company, with the Company continuing as the surviving corporation. Immediately following the merger, Evergreen Bank Group (“Evergreen”), an Illinois-chartered banking corporation and wholly owned subsidiary of Bancorp Financial, merged with and into Old Second National Bank, with the Bank continuing as the surviving bank. Under the terms of the merger agreement, each share of Bancorp Financial common stock outstanding immediately prior to the effective time was converted into the right to receive 2.5814 shares of Old Second common stock and $15.93 in cash, without interest, with cash paid in lieu of any fractional shares.

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As of July 1, 2025,  Bancorp Financial had approximately $1.43 billion of total assets, $1.20 billion of total loans, and $1.23 billion of total deposits. The consideration paid totaled $189.4 million and consisted of 7.9 million shares of Old Second common stock and $48.9 million of cash. The systems conversion was successfully completed in October 2025.

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On December 6, 2024, we closed on our branch purchase and assumption agreement with First Merchants Bank (“FRME”).  As a result of this transaction, we assumed approximately $268.0 million in deposits related to the branch locations and purchased approximately $7.1 million in branch-related loans along with the purchase of other branch-related assets.  The transaction resulted in increasing our presence in the south suburban Chicago area, as five branches were acquired with a retail and commercial client mix of loans and deposits. Historical periods before December 6, 2024, reflect results of our legacy operations. Subsequent to closing, results reflect all post-transaction activity.

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Summary Financial Data

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Old Second Bancorp, Inc. and Subsidiaries

Financial Highlights

(Dollars in thousands, except per share data)

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Old Second Bancorp, Inc. and Subsidiaries

Quarterly Financial Information

(Dollars in thousands, except per share data)

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2025 Financial Overview

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In 2025, we recorded net income of $80.3 million, or $1.62 per fully diluted share, compared to $85.3 million, or $1.87 per fully diluted share, in 2024, and $91.7 million, or $2.02 per fully diluted share, in 2023.  Our basic earnings per share for the periods presented were $1.64 in 2025, $1.90 in 2024 and $2.05 in 2023.

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Our 2025 net income, as compared to the prior year, decreased primarily as a result of additional costs incurred with the Bancorp Financial acquisition. Adjusted net income, a non-GAAP financial measure that excludes acquisition-related costs, Day Two provision for credit losses, MSR mark to market (gains)/losses, net securities (gains)/losses, death benefits realized on BOLI, litigation expense, and net gains on branch sales was $102.6 million in 2025. See the discussion entitled “Non-GAAP Financial Measures” on page 48 and the table below, which provides a reconciliation of this non-GAAP measure and related items, to the most comparable GAAP equivalents.

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Adjusted net income provides a comparative analysis of our performance excluding those one-time matters, such as transaction-related costs for our acquisition of Bancorp Financial and our purchase of five FRME branches, Day Two provision for credit losses from our acquisition of Bancorp Financial, net securities (gains)/losses, death benefits realized on BOLI, litigation expense related to a claim regarding prior years’ overdraft fee compliance, and net gains or net losses stemming from branch sales completed to eliminate duplicative geographic locations due to past acquisitions.

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Net interest and dividend income increased $51.3 million, or 21.2% for 2025 compared to 2024, due primarily to increased interest and dividend income stemming from our acquisition of Bancorp Financial as well as decreased borrowing costs on the lower average balances on FHLBC advances. Partially offsetting the increase in interest and dividend income from the prior year was an increase in interest expense due to higher deposit costs from the additional deposits assumed with the acquisition of Bancorp Financial. Average loans, including loans held-for-sale, increased $622.3 million, or 15.6%, in 2025 compared to 2024 due to the loan portfolio included in the acquisition of Bancorp Financial. Total interest and dividend income growth in 2025, compared to 2024, resulted in a 32 basis point increase in average rates earned on interest earning assets.  Average interest bearing deposits increased $768.2 million, or 27.3%, for 2025 compared to 2024, and average deposit rates increased 22 basis points over the same period.  The increase in deposit rates was primarily due to exception priced deposits incurred in the Bancorp Financial acquisition, which we are allowing to run off over time.  Average noninterest bearing deposits increased by $1.5 million, or 0.1%, from 2024 to 2025.

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We continued to reposition our balance sheet in 2025 to ensure adequate liquidity, reduce asset quality risk, and to manage interest rate risk on our cost of funds.  In 2025, our available-for-sale securities portfolio decreased $71.2 million, compared to year-end 2024, due primarily to $279.6 million of paydowns, maturities, and calls and $7.5 million of strategic sales.  These decreases in 2025 were partially offset by security purchases of $191.6 million. The change in activity in 2025, compared to year end 2024, excludes the sale of Bancorp Financial’s $117.6 million available-for-sale securities portfolio shortly after the acquisition closed. The unrealized mark to market adjustment on securities was a $43.1 million unrealized loss as of December 31, 2025, compared to a $68.6 million unrealized loss at December 31, 2024, due primarily to changes in market interest rates and the portfolio holdings mix year over year.  Average interest bearing liabilities increased $545.1 million, to $3.75 billion in 2025 from $3.21 billion in 2024.  Total average borrowings decreased $223.2 million to $171.5 million compared to $394.7 million in 2024. The decrease in average borrowings was primarily due to a $224.1 million decrease in other short-term borrowings due to a reduction in overnight FHLBC advances throughout 2025.

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Management also continued to emphasize credit quality and maintained our capital ratios with continued strong liquidity.  In 2025, we had loan growth of $1.27 billion, or 31.9%, over 2024 primarily due to the acquired loan portfolio of Bancorp Financial.  Nonperforming assets relative to total assets decreased slightly in 2025 and 2024, with nonperforming assets of $55.6 million, or 0.81%, of total assets for 2025, compared to $52.4 million, or 0.92% of total assets for 2024, and $73.9 million, or 1.29% of total assets, for 2023.  The total dollar increase in 2025, compared to 2024, was primarily due to an increase in nonaccrual loans of $19.1 million and an increase in loans past due 90 days and accruing of $3.4 million, partially offset by a $20.2 million decrease in OREO. We continue to take steps to control operating expenses and increase noninterest income.

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As we focused on reducing noninterest expenses, exclusive of acquisition-related activity, we were also able to maintain our profitable wealth management business, and continue profitability, though to a lesser extent, with the mortgage banking business as originations and sales are negatively impacted by elevated interest rates.

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For information comparing our financial condition and results of operations for the year ended December 31, 2024, to year ended December 31, 2023, see “Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 6, 2025.

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Critical Accounting Estimates

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Our consolidated financial statements are prepared based on the application of accounting policies in accordance with GAAP and follow general practices within the banking industry.  These policies require the reliance on estimates, assumptions and judgments, which may prove inaccurate or are subject to variations.  Changes in underlying factors, estimates, assumptions or judgments could have a material impact on our future financial condition and results of operations.

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Certain policies inherently have a greater reliance on the use of estimates, assumptions and judgments and, as such, have a greater possibility of producing results that could be materially different from originally reported.  We have identified the determination of the allowance for credit losses and fair value measurements to be the accounting areas that require the most subjective or complex judgments and, as such, could be most subject to revision as new or additional information becomes available or circumstances change, including overall changes in the economic climate and/or market interest rates.  Therefore, we consider these policies, discussed below, to be critical accounting estimates and discuss them directly with the Audit Committee of our board of directors.

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Significant accounting policies are presented in Note 1 of the financial statements included in this annual report.  These policies, along with the disclosures presented in the other financial statement notes and in this discussion, provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined.  Recent accounting pronouncements and standards that have impacted or could potentially affect us are also discussed in Note 1 of the consolidated financial statements.

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Allowance for credit losses for loans

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The allowance for credit losses (“ACL”) for loans represents management’s estimate of all expected credit losses over the expected contractual life of our loan portfolio.  Determining the appropriateness of the allowance is complex and requires judgment by management about the effect of matters that are inherently uncertain.  Subsequent evaluations of the then-existing loan portfolio, in light of the factors then prevailing, may result in significant changes in the allowance for credit losses in those future periods.

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The ACL involves critical accounting estimates because:

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Because our estimates of the ACL involve judgments and are influenced by factors outside of our control, there is uncertainty inherent in these estimates. Changes in such estimates could significantly impact our ACL and provision for credit losses. See Note 1 –Summary of Significant Accounting Policies in the accompanying notes to the consolidated financial statements included elsewhere in this annual report for a discussion of our ACL.

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As a result of management’s modeling, we increased our ACL on loans to $72.3 million as of December 31, 2025; in addition, we increased our ACL on unfunded commitments to $2.1 million as of December 31, 2025, included within other liabilities.  We recorded provision for credit losses of $27.6 million in 2025, comprised of $14.2 million of provision for credit loss expense on loans, a Day Two non-PCD provision expense of $13.2 million, and a $185,000 of provision expense on unfunded commitments.  Additionally, we recorded a Day One purchase accounting credit mark of $17.5 million to the ACL in relation to the acquisition of Bancorp Financial. In 2024, we recorded a provision for credit losses of $12.8 million, comprised of a $13.6 million provision for credit loss expense on loans, and a $834,000 release of provision for credit losses on unfunded commitments. In 2023, we recorded a provision for credit losses of $16.5 million, comprised of a $18.1 million provision for credit loss expense on loans, and a $1.6 million release of provision for credit losses on unfunded commitments.  In addition, a discussion of the factors driving changes in the amount of the ACL is included in the “Allowances for Credit Losses” section below.

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Fair Value Measurements

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The use of fair values is required in determining the carrying values of certain assets and liabilities, as well as for specific disclosures. Fair value is an estimate of the exchange price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction (i.e., not a forced transaction, such as a liquidation or distressed sale) between market participants at the measurement date and is based on the assumptions market participants would use when pricing an asset or liability.

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In determining the fair value of financial instruments, market prices of the same or similar instruments are used whenever such prices are available.  If observable market prices are unavailable or impracticable to obtain, we are required to make judgments about assumptions market participants would use in estimating the fair value of the financial instrument.  Fair value is estimated using modeling techniques and incorporates assumptions about interest rates, duration, prepayment speeds, risks inherent in a particular valuation technique and the risk of nonperformance. These assumptions are inherently subjective as they require material estimates, all of which may be susceptible to significant change.  See Note 16 “Fair Value Measurements” and Note 17 “Fair Values of Financial Instruments,” to the consolidated financial statements which include information about the extent to which fair value is used to measure assets and liabilities, and the valuation methodologies and key inputs used for further information regarding the valuation processes.

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Non-GAAP Financial Measures

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This annual report contains references to financial measures that are not defined in GAAP. Such non-GAAP financial measures include the presentation of adjusted net income, net interest income and net interest income to interest earning assets on a tax equivalent (“TE”) basis and our tangible common equity to tangible assets ratio.  Management believes that the presentation of these non-GAAP financial measures (a) provides important supplemental information that contributes to a proper understanding of our operating performance, (b) enables a more complete understanding of factors and trends affecting our business, and (c) allows investors to evaluate our performance in a manner similar to management, the financial services industry, bank stock analysts, and bank regulators. Management uses non-GAAP measures as follows: in the preparation of our operating budgets, monthly financial performance reporting, and in our presentation to investors of our performance.  However, we acknowledge that these non-GAAP financial measures have a number of limitations. Limitations associated with non-GAAP financial measures include the risk that persons might disagree as to the appropriateness of items comprising these measures and that different companies might calculate these measures differently.  These disclosures should not be considered an alternative to our GAAP results.  A reconciliation of non-GAAP financial measures to the most directly comparable GAAP financial measures is presented below or alongside the first instance where each non-GAAP financial measure is used.

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Results of Operations

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Net interest income

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Net interest income, which is our primary source of earnings, is the difference between interest income and fees earned on interest-earning assets, such as loans and investment securities, as well as accretion income on purchased loans, and interest incurred on interest-bearing liabilities, such as deposits and borrowings.  Net interest income depends upon the relative mix of interest-earning assets and interest-bearing liabilities, the ratio of interest-earning assets to total assets and of interest-bearing liabilities to total funding sources, and movements in market interest rates.  Our net interest income can be significantly influenced by a variety of factors, including overall loan demand, economic conditions, credit risk, the amount of nonearning assets including nonperforming loans, the amounts of and rates at which assets and liabilities reprice, variances in prepayment of loans and securities, early withdrawal of deposits, exercise of call options on borrowings or securities, a general rise or decline in interest rates, changes in the slope of the yield-curve, and balance sheet growth or contraction.  Our asset and liability committee (“ALCO”) seeks to manage interest rate risk under a variety of rate environments by structuring our balance sheet and off-balance sheet positions.  This process is discussed in more detail in the section entitled “Interest Rate Risk” in “Quantitative and Qualitative Disclosures about Market Risk.”

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Our net interest income increased $51.3 million, or 21.2%, to $293.0 million for 2025, from $241.6 million for 2024.  The increase in 2025 was primarily driven by the higher interest rate environment through much of 2025 as well as the acquisition of Bancorp Financial, which resulted in increased loan income from the acquired loan portfolio.  Our net interest margin, which is net interest income divided by total interest-earning assets, was 4.96% for the year ended 2025, compared to 4.61% for the year ended 2024, an increase of 35 basis points.  Our net interest margin on a taxable equivalent (TE) basis was 4.98% for the year ended 2025, compared to 4.63% for the year ended 2024, an increase of 35 basis points.  Average interest earning assets increased $667.5 million during 2025 as volume increased from the loan portfolio acquired from Bancorp Financial and rates reflected significant growth, impacting net interest income.  The increase in interest expense in 2025 compared to 2024 was due primarily to an expense increase in all interest bearing deposit categories due to higher rates and the interest bearing deposits assumed from the Bancorp Financial acquisition, partially offset by lower average balances in our short-term funding (overnight FHLBC advances) throughout 2025.

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Our average earning assets increased $667.5 million, or 12.7%, to $5.91 billion in 2025, from $5.24 billion in 2024.  The increase was primarily attributable to an increase in our loan portfolio due to the acquisition of Bancorp Financial. Our average earning assets decreased $185.4 million, or 3.4%, to $5.24 billion in 2024, from $5.43 billion in 2023.  The decrease was primarily attributable to a decrease in our securities portfolio.

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Our average interest bearing liabilities increased $545.1 million, or 17.0%, to $3.75 billion for 2025, from $3.21 billion in 2024, due primarily to an increase in all deposit categories, partially offset by a significant decrease to other short term borrowings.  The increase in average interest bearing deposits is a result of the deposits assumed from the Bancorp Financial acquisition. Average interest bearing deposits increased by $768.2 million, or 27.3%, to $3.58 billion in 2025, compared to $2.81 billion in 2024.  Our average borrowings decreased $223.2 million to $171.5 million in 2025 from $394.7 million in 2024, driven by a decrease of $224.1 million in average other short-term borrowings due to a reduction in overnight FHLBC advances throughout 2025. Partially offsetting the decrease in our average borrowings was an increase of $7.5 million in notes payable due to FHLB long-term putable advances that were assumed in the Bancorp Financial acquisition.

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The following table sets forth certain information relating to our average Consolidated Balance Sheets and reflects the yield on average interest earning assets and cost of average interest bearing liabilities for the years indicated obtained by dividing the related interest by the average balance of assets or liabilities.  Average balances are derived from daily balances.

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1 Tax equivalent basis is calculated using a marginal tax rate of 21% in 2025, 2024 and 2023.  See the discussion entitled “Non-GAAP Financial Measures” on page 48 and the table on page 50 that provides a reconciliation of each non-GAAP measure to the most comparable GAAP equivalent.

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2  Interest income from loans is shown on a tax equivalent basis, which is a non-GAAP financial measure, discussed below, and includes net fees of $4.0 million for 2025, net costs of $1.8 million for 2024, and net costs of $2.7 million for 2023.  Nonaccrual loans are included in the above stated average balances.

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For purposes of discussion, net interest income and net interest income to interest earning assets have been adjusted to a non-GAAP (TE) basis to more appropriately compare returns on tax-exempt loans and securities to other earning assets.  The table below provides a reconciliation of each non-GAAP (TE) measure to the GAAP equivalent:

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The following table allocates the changes in net interest income to changes in either average balances or average rates for interest earning assets and interest bearing liabilities.  Interest income is measured on a tax-equivalent basis using a 21% marginal rate for all periods presented.  Interest income not yet received on nonaccrual loans is reversed upon transfer to nonaccrual status; future receipt of interest income is a reduction to principal while in nonaccrual status.

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Analysis of Year-to-Year Changes in Net Interest Income1

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1  The changes in net interest income are created by changes in both interest rates and volumes.  In the table above, volume variances are computed using the change in volume multiplied by previous year’s rate. Rate variances are computed using the change in rate multiplied by the previous year’s volume.  The change in interest due to both rate and volume has been allocated between factors in proportion to the relationship of absolute dollar amounts of the change in each.

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Provision for credit losses

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The provision for credit losses is the expense necessary to maintain the ACL at levels appropriate to absorb our estimate of credit losses expected over the life of our loan portfolio and unfunded lending commitments.

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We recorded a $27.6 million provision for credit losses in 2025, an increase of $14.8 million from 2024. The increase in provision expense over the prior year was primarily due to the $13.2 million of Day Two non-PCD provision expense in relation to the Bancorp Financial acquisition and increased current year charge offs within the newly acquired powersport loan segment.  The 2024 provision for credit losses of $12.8 million compared to $16.5 million in 2023 was primarily due to the decrease in loans of $61.6 million in 2024, and lower current-year net charge offs, as well as improved asset quality and economic factors.

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For additional discussion of the credit provision and allowance for credit losses, see the section below “Allowance for Credit Losses” in this Item 7. Management’s Discussion and Analysis of Financial Condition.

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Noninterest income

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N/M - Not meaningful

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Our total noninterest income increased $2.5 million, or 5.8%, to $46.4 million for 2025, compared to $43.8 million for 2024.  The increase in 2025 from 2024 was primarily due to:

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Partially offsetting the increase in noninterest income for 2025, compared to 2024, was lower mortgage banking earnings of $701,000. The decrease in mortgage banking revenue was driven by mark to market losses of $1.9 million in 2025, compared to mark to market losses of $723,000 recorded in 2024, primarily due to change in market interest rates and prepayment speeds. Also offsetting the increase in noninterest income in 2025, compared to 2024, was a $422,000 decrease in the cash surrender value of BOLI due to changes in market interest rates on Corporate-Owned Life Insurance (“COLI”) investments and a $475,000 reduction in death benefit proceeds realized on BOLI in 2025 compared to 2024.

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Noninterest expense

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Our total noninterest expense increased by $44.3 million, or 27.7%, in 2025 compared to 2024.  The increase was primarily due to:

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Efficiency Ratio

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The efficiency ratio presented above and reconciled below measures how much it costs an institution to generate one dollar of revenue. We utilize this measure in evaluating employee performance incentives as well as in comparison against peer performance, to set and assess operational standards. The following table provides a reconciliation of the non-GAAP efficiency ratio to the most comparable GAAP equivalent.

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Reconciliation of Adjusted Efficiency Ratio Non-GAAP Financial Measures

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1  See discussion entitled “Non-GAAP Financial Measures” on page 48.

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Income taxes

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Our provision for income taxes includes both federal and state income tax expense (benefit).  An analysis of the provision for income taxes for the three years ended December 31, 2025, is detailed in Note 11 of the consolidated financial statements and our income tax accounting policies are described in Note 1 to the consolidated financial statements.

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Our income tax expense totaled $27.4 million for the year ended December 31, 2025, compared to an income tax expense of $27.7 million in 2024 and $32.7 million for 2023.  The decrease in income tax expense in 2025, compared to 2024, is commensurate with the decrease in our pretax income.  Income tax expense reflected all relevant statutory tax rates and GAAP accounting.  Our effective tax rate was 25.5% for 2025, 24.5% for 2024, and 26.3% for 2023.  Any changes in tax rates will be recorded in the period enacted.

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The determination of whether we will be able to realize our deferred tax assets is highly subjective and dependent upon judgment concerning management’s evaluation of both positive and negative evidence, including forecasts of future income, available tax planning strategies, and assessments of both current and future economic and business conditions.  Management considered both positive and negative evidence regarding our ability to ultimately realize the deferred tax assets, which is largely dependent on our ability to derive benefits based on future taxable income.  For all periods presented, management determined that the realization of the deferred tax asset was “more likely than not” as required by GAAP.

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Financial condition

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General

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Our total assets were $6.90 billion at December 31, 2025, an increase of $1.25 billion, or 22.2%, from December 31, 2024.  Our total cash and cash equivalents increased $24.7 million, driven by cash received from securities activity and the increase in other short term borrowings, as well as net cash received with the Bancorp Financial acquisition.

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Our loans increased by $1.27 billion, or 31.9%, to $5.25 billion for the year ended December 31, 2025, compared to 2024.  This increase is primarily due to the $1.20 billion of loans acquired in our acquisition of Bancorp Financial and $76.1 million of net organic loan growth.

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Our total securities decreased by $71.2 million, or 6.1%, for the year ended December 31, 2025, compared to 2024, primarily due to $279.6 million of paydowns, maturities, and calls and $7.5 million of strategic sales, excluding the sale of Bancorp Financial’s $117.6 million available-for-sale securities portfolio after the acquisition closed.  These decreases in 2025 were partially offset by security purchases of $191.6 million as well as the $25.6 million reduction of unrealized losses recorded in 2025. We recorded pretax net security gains of $7,000 in 2025 compared to no pretax net gains or losses in 2024.

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Our total liabilities were $6.01 billion at December 31, 2025, an increase of $1.03 billion, or 20.6%, from December 31, 2024.  Total deposits increased by $827.3 million, or 17.3%, to $5.60 billion for the year ended December 31, 2025, compared to $4.77 billion for the year ended December 31, 2024, primarily due to the deposits assumed from the acquisition of Bancorp Financial.

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At December 31, 2025, total stockholders’ equity was $896.8 million, compared to $671.0 million at December 31, 2024. The increase in stockholders’ equity primarily stems from the acquisition of Bancorp Financial, which resulted in $7.9 million of additional common stock outstanding and $132.6 million of additional paid in capital, as well as net income of $80.3 million recorded in 2025, and the $18.4 million decrease in accumulated other comprehensive losses due to the reduction in unrealized losses in the available for sale securities portfolio.

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Investments

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As shown below, the overall composition of our securities portfolio was largely consistent in 2025 compared to 2024, as well as in 2024 compared to 2023.

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Securities Available-for-Sale Portfolio

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Our investment portfolio serves as both an important source of liquidity and as a source of income.  Accordingly, the size and composition of the portfolio reflects our liquidity needs, loan demand and interest income objectives.  We will adjust the size and composition of the portfolio from time to time.  While a significant portion of the portfolio consists of readily marketable securities to address future liquidity needs, other parts of the portfolio may reflect funds invested pending future loan demand or to maximize interest income without undue interest rate risk.

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Some of our holdings of U.S. government agency mortgage-backed securities (“MBS”) and collateralized mortgage obligations (“CMOs”) are issuances of government-sponsored enterprises, such as Fannie Mae and Freddie Mac, which are not backed by the full faith and credit of the U.S. government.  Some holdings of MBS and CMOs are issued by Ginnie Mae, which do carry the full faith and credit of the U.S. government. We also hold some MBS and CMOs that were not issued by U.S. government agencies and are typically credit-enhanced via over-collateralization and/or subordination.  Holdings of ABS also includes securities backed by student loans issued under the U.S. Department of Education’s (“DOE”) FFEL program, which generally provides a minimum 97% U.S. DOE guarantee of principal.  These ABS securities also have added credit enhancement through over-collateralization and/or subordination.  The majority of holdings issued by states and political subdivisions are general obligation or revenue bonds that have S&P or Moody’s ratings of AA- or higher.  Other state and political subdivision issuances are unrated and generally consist of smaller investment amounts that involve issuers in our markets.  The credit quality of these issuers is monitored, and none have been identified as posing a material risk of loss.  We also hold collateralized loan obligation (“CLOs”) securities that are generally backed by a pool of debt issued by multiple middle-sized and large businesses.  Our CLO S&P or Moody’s ratings distribution consists of 100% rated AAA or AA. CLO credit enhancement is achieved through over-collateralization and/or subordination.

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The following table presents the expected maturities or call dates and weighted average yield (nontax equivalent) of securities by major category as of December 31, 2025.  Weighted average yield is based on amortized costs and not calculated on a tax equivalent basis. Securities not due at a single maturity date are shown only in the total column.

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Securities Portfolio Maturity and Yields

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As of December 31, 2025, net unrealized losses on available-for-sale securities totaled $43.1 million, which, after the impact of the related deferred income taxes, resulted in an overall decrease to equity capital of $31.0 million.  As of December 31, 2024, net unrealized losses on available-for-sale securities totaled $68.6 million, which after the impact of the related deferred income taxes, resulted in an overall decrease to equity capital of $49.4 million.

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Loans

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The following table presents the composition of the loan portfolio at December 31 for the year indicated:

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Loan Portfolio

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1 The “Other” class includes consumer loans, such as collector cars, manufactured homes, and solar loans, as well as overdrafts.

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Our total loans were $5.25 billion as of December 31, 2025, an increase of $1.27 billion from $3.98 billion as of December 31, 2024. This increase was primarily due to the $1.20 billion portfolio acquired from Bancorp Financial, which significantly expanded our consumer lending and added the powersport loan segment. Excluding the acquisition, the Bank achieved organic loan growth, net of paydowns, of $76.1 million from 2024. The largest organic loan increases, net originations, were in leases for $56.5 million and commercial real estate – investor for $27.2 million. Partially offsetting these organic increases, we experienced net reductions in construction of $32.4 million and multifamily of $40.8 million.  We recorded total loan originations, excluding renewals, of $1.36 billion in 2025.

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We strive to serve customers in and around our geographic locations and continue to seek opportunities in our primary lending markets; however, our markets remain very competitive for new loan business.

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Management continues to emphasize loan portfolio quality, and credit remediation continued in 2025. The increase of nonaccrual and classified loans as of December 31, 2025, compared to the prior year end, is due to larger relationships with mixed use commercial real estate that have been downgraded in 2025, discussed in the “Asset Quality” section below.  We recorded net loan charge-offs of $16.2 million in 2025, $14.2 million in 2024, and $23.3 million in 2023.

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The quality of our loan portfolio is in large part a reflection of the economic health of the communities in which we operate.  Our local communities have been relatively stable in the past five years.  While there are no significant concentrations of loans where the customers’ ability to honor loan terms is dependent upon a single economic sector, the real estate categories represented 56.5% and 67.2% of the portfolio at December 31, 2025 and 2024, respectively.  Our lending exposure is diversified across each of our segments presented above. In 2025, excluding the Bancorp Financial acquisition, we experienced a net increase in the overall portfolio, and leases and commercial real estate – investor continue to be the largest segments of growth. We had no concentration of loans exceeding 10% of total loans that were not otherwise disclosed as a category of loans at December 31, 2025.  We remain committed to overseeing and managing our loan portfolio to avoid unnecessarily high credit concentrations in accordance with the general interagency guidance on risk management.  Consistent with those commitments, management monitors our asset diversification and anticipates that the percentage of real estate lending in relation to the overall portfolio will decrease in the future.

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The following table sets forth the remaining contractual maturities for loan categories at December 31, 2025:

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Maturity and Rate Sensitivity of Loans to Changes in Interest Rate

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1 The “Other” class includes consumer loans, such as collector cars, manufactured homes, and solar loans, as well as overdrafts; the “One Year or Less” column includes demand notes.

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Asset Quality

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Nonperforming loans consist of nonaccrual loans and loans 90 days or more past due and accruing. Remediation work is ongoing in all relevant segments. Nonperforming loans increased year over year by $22.5 million, or 74.4%, to $52.8 million at December 31, 2025, but decreased by $38.5 million to $30.3 million at December 31, 2024, compared to December 31, 2023. Nonperforming assets, which includes nonperforming loans plus other real estate owned and repossessed assets, totaled $55.6 million as of December 31, 2025, compared to $52.4 million as of December 31, 2024, and $73.9 million as of December 31, 2023.  Nonperforming credit metrics increased in 2025, largely due to increased nonaccrual loans, and management continues to work these loans. Nonperforming loans as a percent of total loans increased to 1.0% as of December 31, 2025, from 0.8% as of December 31, 2024, and 1.7% December 31, 2023. Our nonperforming loans by performance metric is shown in the following table.

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Risk Elements

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The following table sets forth the amounts of nonperforming assets by performance metric at December 31 for the years indicated:

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