KBRA Comments on Old Second Bancorp, Inc.'s Proposed Acquisition of Bancorp Financial, Inc.

Rhea-AI Summary

Old Second Bancorp (NASDAQ: OSBC) has announced a definitive merger agreement to acquire Bancorp Financial's Evergreen Bank Group in a stock-and-cash transaction valued at ~$200 million. The deal, structured as 75% stock and 25% cash, is expected to close in 3Q25.

The acquisition will create a $7.1 billion asset institution, making it the second-largest bank in the Chicago MSA among banks under $10 billion in assets. Post-merger, Evergreen's significant consumer lending portfolio, particularly in powersports financing, will represent 21% of total loans. The combined entity's deposit mix will shift, with non-interest-bearing deposits declining from 37% to 31% and time deposits increasing from 16% to 26%.

Management projects cost savings of 30% on Evergreen's noninterest expense base by 2026, with an expected ROA around 1.5%. The pro forma entity will maintain strong capital levels with TCE and CET1 ratios of 9.6% and 11.7%, respectively. Credit quality metrics may slightly deteriorate due to consumer lending exposure, though Evergreen's loan portfolio maintains a weighted average FICO score of 717.

Positive

• Acquisition creates second-largest bank in Chicago MSA under $10B assets
• 30% cost savings expected on Evergreen's expenses by 2026
• Strong projected ROA of 1.5% post-merger
• High-yielding consumer loan portfolio (8.35% average rate)
• Robust capital ratios maintained (TCE 9.6%, CET1 11.7%)

Negative

• Deposit mix deterioration with NIB deposits declining from 37% to 31%
• Increased credit risk with consumer lending NCO ratio near 1.0%
• Higher funding costs due to increased time deposits (16% to 26%)
• Increased reliance on spread revenues due to fee income

Insights

Financial Analyst

Old Second Bancorp's $200 million acquisition of Bancorp Financial (Evergreen Bank) represents a strategic transformation that significantly diversifies its business model while strengthening its competitive position in the Chicago banking landscape. This transaction will increase OSBC's asset base by 26% to $7.1 billion, establishing it as the second-largest sub-$10 billion bank in the Chicago MSA.

The deal's financial structure reveals management's confidence in execution, with the 75% stock/25% cash consideration balancing shareholder value while maintaining strong capital ratios (projected 9.6% TCE and 11.7% CET1). The 1.3x P/TBV multiple appears reasonable given Evergreen's specialized lending platform and growth potential.

The most compelling strategic element is OSBC's entry into powersports financing through Evergreen's FreedomRoad Financial and Performance Finance divisions. This specialty lending vertical offers 8.35% loan yields with manageable credit losses (NCO ratio ~1.0%), resulting in risk-adjusted yields of approximately 7.35% – substantially higher than traditional commercial lending. The powersports portfolio's weighted average FICO of 717 with 56% of borrowers above 757 suggests disciplined underwriting despite the consumer lending category.

The transaction addresses OSBC's interest rate sensitivity by adding shorter-duration consumer loans (typical 5-year terms) while maintaining its strong 4.68% NIM. While non-interest-bearing deposits will decline from 37% to 31% and CDs will increase from 16% to 26%, OSBC's funding costs should remain competitive, especially in a declining rate environment where the higher-beta deposit base provides pricing relief.

Management's post-acquisition balance sheet optimization strategy – selling Evergreen's $123 million AFS securities and $62 million solar loan portfolio to potentially reduce $183 million in wholesale borrowings – demonstrates prudent financial management. Combined with projected 30% cost savings on Evergreen's expense base, this should support the projected 1.5% ROA, positioning OSBC in the top quartile of its peer group.

While integration risks exist, particularly in merging different lending cultures, the management team's M&A experience and the planned retention of key Evergreen executives (including Darin Campbell leading OSBC's Consumer Lending Division) mitigates these concerns. The conservative $28 million credit mark (2.3% of Evergreen's loans) further demonstrates prudent risk management.

Banking Industry Specialist

Old Second Bancorp's acquisition of Evergreen Bank represents a strategically significant transformation that goes beyond typical bank M&A. This $200 million transaction will establish OSBC as a $7.1 billion institution with a differentiated business model combining traditional commercial banking with specialized consumer finance.

The powersports lending platform (FreedomRoad Financial and Performance Finance) is the crown jewel of this acquisition. This specialty finance vertical has demonstrated remarkable resilience across economic cycles, with net charge-offs consistently below 1.5% since 2010 despite the discretionary nature of motorcycle and powersports purchases. The 8.5% risk-adjusted yield from this segment significantly outperforms traditional commercial lending returns, creating a powerful earnings engine when combined with OSBC's low-cost deposit franchise.

From a competitive standpoint, this transaction creates a uniquely positioned regional bank with specialized capabilities typically found only in larger institutions or non-bank lenders. The powersports lending market has high barriers to entry due to specialized underwriting knowledge and dealer relationship requirements. Evergreen's established position in this niche provides OSBC with immediate scale and expertise that would be difficult to build organically.

The balance sheet transformation is equally significant. Post-merger, OSBC will have a more balanced loan portfolio with 21% consumer exposure, reducing concentration risk while maintaining strong commercial relationships. Management's plan to divest $185 million in securities and solar loans demonstrates discipline in optimizing the combined entity's earning assets and funding structure.

While the deposit mix will shift toward higher-cost time deposits (increasing from 16% to 26%), this actually creates a more balanced liability structure that should perform well across rate cycles. In declining rate environments, the higher-beta deposit base provides immediate repricing benefits, while OSBC's strong core deposit franchise (31% non-interest bearing post-merger) provides structural advantages during rising rate periods.

The financial impact extends beyond the projected 1.5% ROA. The transaction creates a more resilient earnings model with reduced cyclicality through diversification. The 30% cost savings target appears achievable given the complementary nature of the businesses and branch overlap. Integration risks are mitigated by retaining key Evergreen executives, including Darin Campbell leading consumer lending operations.

From a strategic perspective, this acquisition positions OSBC to capitalize on the growing trend of financial services specialization while maintaining the advantages of a traditional banking model. The combination creates a uniquely positioned regional bank with both the scale to compete effectively in the Chicago market and the specialized capabilities to generate superior risk-adjusted returns.

NEW YORK--(BUSINESS WIRE)-- On February 25, 2025, Old Second Bancorp, Inc. (NASDAQ: OSBC) ("Old Second" or "the company") (KBRA senior unsecured debt rating: BBB / Stable Outlook), the parent company of Old Second National Bank, announced a definitive merger agreement with privately-owned Bancorp Financial, Inc., the parent company of Evergreen Bank Group ("Evergreen"). Under the agreement, Bancorp Financial, Inc. would merge with and into OSBC in a stock-and-cash transaction (75% stock / 25% cash) valued at ~$200 million or 1.3x P/TBV at deal announcement (based on OSBC's closing stock price on February 24, 2025). The acquisition is expected to close in 3Q25, subject to customary regulatory approvals, with minimal changes to the pro forma Board of Directors (BOD) and the management team. However, Evergreen will add two members to the BOD, including Darin Campbell, who will lead OSBC’s Consumer Lending Division, leveraging his extensive experience in Evergreen’s powersports consumer lending vertical. Overall, the transaction aligns well with Old Second's business model, in our view, enhancing asset generation while leveraging its high-quality, low-cost core deposit base. Additionally, it diversifies the franchise by expanding consumer lending, a segment that has demonstrated favorable risk-adjusted returns across various interest rate and credit cycles. The acquisition also strengthens Old Second's market position in the greater Chicago metro area, particularly in the western suburbs. With pro forma assets of $7.1 billion, Old Second would become the second-largest bank in the Chicago MSA among institutions with less than $10 billion in assets.

From a balance sheet perspective, given the relative size of the deal (26% of total assets) and Evergreen’s significant concentration in consumer lending—particularly indirect lending through its powersports divisions (FreedomRoad Financial and Performance Finance), which accounted for 67% of total loans as of 4Q24—the pro forma balance sheet is expected to change significantly. Evergreen’s loan book is primarily funded by market-rate deposits, with certificates of deposit (CDs) comprising 64% of total deposits. Post-merger, the combined entity would have a more diversified loan portfolio, with commercial lending representing the largest segment. CRE exposure would remain at a comfortable level and is projected to be below the peer group average at 208% of total risk-based capital. However, consumer lending would become a more significant component, increasing to 21% of total loans. Management expects this level to be maintained despite potential growth opportunities. Additionally, Old Second’s deposit mix is expected to deteriorate slightly, with non-interest-bearing (NIB) deposits declining from 37% to 31% on a pro forma basis, while higher-cost time deposits will increase from 16% to 26% of total deposits. Following the closing of the transaction, management plans to proactively reposition the balance sheet by selling Evergreen's entire AFS securities portfolio ($123 million) and purchased solar loan portfolio ($62 million). Proceeds from these sales may be used to de-leverage wholesale borrowings, as Evergreen reported ~$183 million in brokered deposits and FHLB borrowings as of YE24, thereby enhancing the funding mix. Importantly, the liquidity and capital profile is expected to remain strong, with a loan-to-deposit ratio of 86%, $1.4 billion in cash and securities (20% of assets), and pro forma TCE and CET1 ratios of 9.6% and 11.7%, respectively. The maintenance of solid capital levels is supported, in part, by minimal interest rate marks ($13 million markdown on loans), given Evergreen's shorter duration and higher-yielding loan portfolio.

With respect to financial performance, a key benefit of the proposed transaction is the anticipated reduction in Old Second's asset sensitivity, better positioning the company for a declining interest rate environment. Evergreen’s primary lending segment, powersports loans, is generally structured with five-year terms, resulting in a shorter duration than most community banks. However, its higher-beta deposit base—primarily CDs—provides pricing relief in the event of lower interest rates. Assuming no further rate movements before the expected closing, OSBC’s NIM of 4.68% during 4Q24 is projected to remain largely unchanged, despite the notable anticipated increase in total deposit costs (1.54% based on 4Q24 financials). Nevertheless, OSBC is expected to maintain one of the strongest core deposit bases in the KBRA-rated bank universe, in terms of mix and cost. The resilience of the pro forma NIM is primarily driven by the strong loan yields from Evergreen's powersports segment, which recorded an average rate of 9.48% on 4Q24 originations, contributing to an above-average loan yield of 8.35% for the target bank during the quarter. Given the maintenance of a healthy NIM on a pro forma basis, and projected cost savings of 30% on Evergreen's noninterest expense base, which is expected to be fully phased in by 2026, the combined entity’s earnings power is projected to improve, with ROA around 1.5%, positioning it in the top quartile of its rating category. However, reliance on spread revenues is expected to increase, given Evergreen's limited fee income, which accounted for only 5% of total revenues in 2024.

Lastly, credit quality metrics are expected to modestly deteriorate due to the higher-risk nature of consumer lending, with Evergreen reporting an NCO ratio of nearly 1.0% in 2024. However, management remains confident in the leadership and expertise of the team, supported by a proven track record, including an NCO ratio that has remained at or below 1.5% since 2010. This stability reflects conservative underwriting, as a majority of these loans are backed by strong borrower credit profiles, with a weighted average FICO score of 717, and 56% of loans having a FICO score of 757 or higher. As such, credit losses are expected to rise, though they are offset by favorable risk-adjusted yields, which have averaged approximately 8.5% (powersports yields net of charge-offs) in recent quarters. Moreover, this portfolio has historically outperformed all other consumer lending categories (excluding credit cards) within the banking industry over the long term. Additionally, we believe that OSBC’s management team conducted a thorough due diligence process and is expected to record a conservative credit mark on the Evergreen loan portfolio, projected at $28 million, or 2.3% of total loans at closing.

Overall, we view integration risks as comparatively minimal for this in-market transaction, particularly given the similar cultures and long-standing familiarity between management teams. Additionally, KBRA takes comfort in OSBC’s established track record of successful M&A execution throughout its operating history. Assuming effective integration of the target bank, we consider the proposed transaction neutral to OSBC’s ratings in the intermediate term, while acknowledging the longer-term strategic benefits to the institution.

To access ratings and relevant documents for Old Second Bancorp, Inc., click here.

About KBRA

KBRA, one of the major credit rating agencies, is registered in the U.S., EU, and the UK. KBRA is recognized as a Qualified Rating Agency in Taiwan, and is also a Designated Rating Organization for structured finance ratings in Canada. As a full-service credit rating agency, investors can use KBRA ratings for regulatory capital purposes in multiple jurisdictions.

Doc ID: 1008305

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John Rempe, Senior Director

+1 301-969-3045

john.rempe@kbra.com

Richard Veon, Analyst

+1 646-731-1366

richard.veon@kbra.com

Ian Jaffe, Senior Managing Director

+1 646-731-3302

ian.jaffe@kbra.com

Business Development Contact

Justin Fuller, Managing Director

+1 312-680-4163

justin.fuller@kbra.com

Source: Kroll Bond Rating Agency, LLC

FAQ

What is the value and structure of Old Second Bancorp's acquisition of Bancorp Financial?

The acquisition is valued at approximately $200 million, structured as 75% stock and 25% cash, representing 1.3x P/TBV at announcement.

How will OSBC's loan portfolio composition change after the Evergreen acquisition?

Consumer lending will increase to 21% of total loans, with commercial lending remaining the largest segment and CRE exposure at 208% of total risk-based capital.

What are the expected financial metrics for OSBC after the Evergreen merger?

The combined entity projects an ROA of 1.5%, with pro forma TCE of 9.6% and CET1 ratio of 11.7%, maintaining a loan-to-deposit ratio of 86%.

How will OSBC's deposit structure change following the Evergreen acquisition?

Non-interest-bearing deposits will decrease from 37% to 31%, while time deposits will increase from 16% to 26% of total deposits.

What is the credit quality profile of Evergreen's consumer loan portfolio joining OSBC?

The portfolio has a weighted average FICO score of 717, with 56% of loans having a FICO score of 757 or higher, maintaining NCO ratios at or below 1.5% since 2010.