Old Second Bancorp, Inc.

Good morning everyone and thank you for joining us today for Old Second Bank Calls Incorporated's first quarter 2025 earnings call. On the call today are Jim Ecker, the company's chairman, president and CEO, Brad Adams, the company's chief operating officer and chief financial officer, and Gary Collins, the vice chairman of our board. I will start with a reminder that all second comments today will contain forward-looking statements about the company's business, strategies and prospects, which are based on management's existing expectations in the current economic environment. These statements are not a guarantee of future performance and results may differ materially from those projected. Management would ask you to refer to the company's SEC filing for a full discussion of the company's risk factors. The company does not undertake any duty to update such forward-looking statements. On today's call, we will be discussing certain non-GAAP financial measures. These non-GAAP measures are described and reconciled to their GAAP counterparts in our earnings race, which is available on our website at oldsecond.com, on the home page, and under the Investor Relations tab. Now I'd like to turn the call over to Mr. Jim Eckert.

Good morning, everyone. Thank you for joining us. As customary, I have a couple of prepared opening remarks. We'll give my own view of the quarter and then turn it over to Brad for some additional details. I will then conclude with certain summary comments and thoughts about the future before we open it up to questions. Net income was $19.8 million, or 43 cents per diluted share in the first quarter of 2025. Our way was 1.42%. First quarter of 2025 return on average tangible common equity was 14.70%, and the tax equivalent efficiency ratio was 55.48%. First quarter 2025 earnings were significantly impacted by several items. 575,000 MSR marks to market losses, or about a penny per diluted share, 446,000 in merger-related expenses, or just shy of one cent per diluted share, related to costs of the first merchant's five branch acquisitions, as well as costs related to pending merger with Bancorp Financial and Evergreen Bank Group. Also, a $2.4 million provision for credit losses in the absence of significant loan growth, which reduced after-tax earnings by 4 cents per diluted share. However, despite all this, profitability of the old sector remains exceptionally strong, and balance sheet strengthening continues with our tangible equity ratio increasing 30 basis points from last quarter, from 10.04% to 10.34% in the first quarter of 2025. Tangible equity ratio increased by 130 basis points over the length period one year ago. Common equity tier one was 13.47% in the first quarter of 2025, increasing from 12.82% last quarter, and we feel very good both about profitability and our balance sheet positioning at this point. Our financials continue to reflect a very strong net interest margin, even as market interest rates have declined. Pre-provision net revenues remain stable and exceptionally strong. For the first quarter of 2025, compared to the prior year light period, tax-equivalent income on average earning assets increased $221,000, or 0.3%, while interest expense on average interest-bearing liabilities decreased $2.9 million, or 21.3%. The decrease in interest expense is primarily due to the deposits acquired related to the first merchant branch purchase, which closed in December of 24, which resulted in the paydown of our higher rate other short-term borrowings, which improved our margin significantly year over year. Net interest margin improved 30 basis points year over year on both the GAAP and tax equivalent basis, and improved approximately 20 basis points compared to the prior rent quarter. First quarter of 2025 reflected a decrease in total loans of $41.1 million from the prior late quarter, primarily due to net paydowns in commercial, commercial real estate owner-occupied, and multifamily portfolios during the quarter. Furthermore, we have purposely reduced our purchase participation portfolio, which declined $46 million or more than 10% in the quarter. Since the West Suburban acquisition, our purchase participation portfolio has declined $376 million or nearly 49% as we have intentionally repositioned our loan book. The historical trend holds seconds for our banks to realize loan growth in the second and third quarters of the year due to seasonal construction and business activities. Currently, activity within loan committee remains relatively modest to prior periods, primarily due to many customers waiting to see how market volatility, including any market interest rate changes or changes due to the current over the coming three to six months. Tax-equivalent loan yields reflected a five basis points decrease in the first quarter of 2025 compared to one quarter, but a four basis points increase year-over-year. Total cost of deposits was 82 basis points for the first quarter of 2025 compared to 89 basis points for the prior mid-quarter and 71 basis points for the first quarter of 2024. Net interest margin has improved due to the more favorable funding position we are now in, even after considering the impact of market interest rate changes on the variable portions of both the loan and security portfolios. The loan-to-deposit ratio is an excellent shape at 81.2% as of March 31, 2025, compared to 83.5% last quarter and 86.1% as of March 31, 2024. I'll let Brad talk about this more in a moment. This quarter reflected a positive change regarding our loan portfolio credit remediation efforts. Specifically, we recorded $4.4 million of gross loan charge-offs in the first quarter of 2025, 3.4 of which was one C&I loan that was downgraded two quarters ago. We have now addressed the entire balance of this credit, as are the financials, collateral field on it, and bankruptcy declarations. resulted in a significant charge in this relationship, excluding balances collateralized by cash held at old seconds and the successful liquidation of equipment through an auction. This credit was discussed the last few quarters, and with fully addressing it this quarter, we should now be able to focus on any remediation or recovery efforts if the potential is there. Last quarter, we recorded $1.7 billion in Oriole valuation expense on two properties, which were both sold in the first quarter of 2025. Our total Oriel balances are now down or have declined $18.7 million quarter over. That quarter was contributed to a 27.2% reduction in non-performing assets since year end 2024. Substandard and criticized loans increased in the first quarter of 2025. Total criticized loans now total $163.7 million. and decreased 42% or $84 million from one year ago. In the first quarter of 2024, criticized loans were $200 million. First quarter of 2025, balances represented a decline in their lowest levels in three years since May of 2022, so we're very pleased with this performance. Classified and non-accrual balances continue to improve significantly on both a year-over-year and a quarter basis. Total classified assets declined by $52.2 million, or 37% year-over-year as of March 31, 2025. Special mention loans also continued to improve dramatically. These balances are now down 51% from a year ago. The allowance for credit losses on loans decreased $41.6 million as of March 31, 2025, or 1.05% of total loans. from 43.6 million at year end, which is 1.1% of total loans. Unemployment and GDP forecast used in future loss rate assumptions remain fairly static from last quarter, with no material changes in the unemployment assumptions on the upper end of the range based on recent stat projections. The impact of the global tariff volatility was considered within our modeling. And provision level quarter over late quarter reflects the reduction in our wealth allocation on substandard loans, which largely relates to the 42% reduction in criticized assets year over year. Non-entry think-outs continue to perform well, with growth in the first quarter of 2025 compared to the prior year of late quarter of 528,000, or 20.6%. and wealth management fees, and $304,000 or 12.6% in service charges and deposits. Mortgage banking income reflected a decrease in the first quarter of 2025 compared to the prior lint quarter and prior year lint quarter, primarily due to the impact of mortgage servicing rights market to market valuations. Excluding the impact of mortgage servicing rights market to market, mortgage banking income was flat quarter over lint quarter, and slightly more than the prior year length period. Other income increased in the first quarter of 2025 compared to the prior length quarter and prior years in the length quarter, with the length quarter variance primarily due to incentives received on two vendor contracts in 2025. Expense disciplines continue to be strong, with total non-interest expense for the first quarter of 2025 at $183,000 more than the prior length quarter. Our efficiency ratio continues to be excellent. As the tax equivalent efficiency ratio adjusted to exclude core deposit and tangible amortization acquisition cost, the word of cost was 55.48% compared to 54.61% for the fourth quarter of 2024. As we look forward to the balance of the year, we're focused on doing more of the same, which is managing liquidity, managing capital, and also building commercial loan origination capabilities for the long term. The goal is obviously to continue to create a more stable long-term balance sheet, and that's to be treated more loans with less securities in order to maintain the returns on equity commensurate with our recent performance. With that, I'll turn it over to Brad for additional comments.

Thank you, Jim. I'll be relatively brief this morning. There's an awful lot of complexity here in my mind. Net interest income increased by $1.3 million, or 2.1%, to $62.9 million for the quarter ended, relative to the prior quarter's total of $61.6 million. An increase of $3.1 million, or 5.2%, from the year-ago quarter. Exceptionally pleased with the ability to grow net interest income from the levels that we saw over these comparable periods. Taxable and security deals increased by 18 basis points during the quarter. although the loan yield for about five basis points lower. The increase in security yields largely relates to some maturities and relatering effects that we started on early in the quarter. As we've talked about in the past, we've done an exceptionally good job on making sure that we've got pretty significant large chunks of cash maturing on a regular basis as we can step into a different rate world. Overall, we're exceptionally well positioned. I'm pleased with what we've been able to accomplish there. The total yield on interest-earning assets decreased by only two basis points over the quarter to 570. The tab was more than offset by a 13-basis point decline in the cost of interest-earning deposits and a 35-basis point decrease in the cost of interest-earing liabilities in the aggregate. The end result was a 20-basis point increase in the taxable equivalent amount to 488 for the quarter from 468 that quarter. Obviously, this was the exceptional margin performance and surprised us a bit. Of course, that surprise was largely allocated to deposit flows during the quarter. Deposit growth accelerated throughout the quarter and has been exceptionally strong. Obviously, you can see the power of the ability to grow deposits in an environment such as this. As we sit here today, I'm exceptionally pleased with our liquidity position as we approach the potential closure of the Evergreen Bank Group transaction. This gives us a ton of flexibility and I obviously feel very good about where we are. Overall period in total deposits increased by $84 million. I don't have any grand prognostications this quarter and always feel like a more balanced person in general when I believe the curve accurately reflects the balance of risk in the greater economy. Relative to the last quarter and many times over the last few years, expectations have become much more realistic relative to absolute economic conditions and federal deficit constraints. We have been on the sidelines as it relates to the securities portfolio here recently because we see outside risk for spreads widening in the near term. As a result of the rate cuts to date and their impact on market indices, margin trends for 2025 are expected to be stable and modestly down from here. Sustained success on the deposit front positions us exceptionally well to rank profitability beyond our initial expectations as it relates to the pending merger with Evergreen. This is perhaps my largest area of optimism, as the loan-to-deposit ratio is quite low at 81% and gives us some room on the absorption of those assets and doing better on the margin side than perhaps we initially expected. Old seconds should continue to build capital, as evidenced by the 130 basis point improvement in the TCE ratio over the past year, which means we have added an astonishing $1.75 of tangible book value over the last 12 months, particularly in profit when you consider the branch purchase, which is done with cash. Evergreen will absorb some of this capital push, and however, old seconds will still have an exceptionally strong and flexible capital position. Buyback is in place and is on the table after the merger is finalized. Non-interest expense was materially on track this previous quarter, increasing only $183,000, primarily due to salaries and employee benefit increases due to annual raises and the increased payroll tax associated with the front load of FICA in the first part of the year. Non-interest expense is running higher year-over-year, increasing $6.3 million compared to the quarter ended March 31, 2024. due, again, to higher salaries and benefits, expense occupancy costs, for deposit intangibles, and OREO-related expenses. OREO-related expenses were high in the first quarter. They were high in the fourth quarter, but they should come down back to normalized levels beginning in the second quarter. Much of the year-over-year increase is attributable to the five branches acquired in late 2004 from First Merchants, in addition to the OREO operating expense increase that we talked about. For 2025, employee benefit expenses are expected to be a bit of a drag, as we talked about. Overall, we are hopeful we can keep expense growth in the 4% range consistent with our expectations shared last quarter. That's really all I have with that. I'll turn it back over to Jim. Okay, thanks, Brad.