Old Second Bancorp, Inc.

Morning, everyone, and thank you for joining us today for Old Second Bancorp Incorporated's second quarter 2025 earnings call. On the call today are Jim Ecker, the company's chairman, president, and CEO, Brad Adams, the company's COO and CFO, and Gary Collins, the vice chairman of our board. I will start with a reminder that Old Second's 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 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 also be discussing certain non-GAAP financial measures. These non-GAAP measures are described and reconciled to their GAAP counterparts in our earnings release, which is available on our website at oldsecond.com, on the homepage, and under the Investor Relations tab. So I will now turn it over to Jim Ecker. Over to you.

Good morning, everyone, and thank you for joining us. I have several prepared opening remarks. We'll give you my overview of the quarter and then turn it over to Brad for additional details. I will then conclude with certain summary comments and thoughts about the future before we open it up to Q&A. Net income was $21.8 million, or $0.48 per diluted share in the second quarter. Return on assets was 1.53%. Second quarter, 2025, return on average tangible common equity was 15.29%. ratio is 54.54%. Second quarter earnings were significantly impacted by a couple of items. The first being a $531,000 in MSR mark-to-market losses for a penny per share and an $810,000 charge in merger-related expenses or one cent per diluted share primarily related to the bank court financial merger, which closed on July 1st. Despite these items, profitability on the second remains exceptionally strong, and book values continue to compound heading into the July 1st close of the Evergreen Bank Reposition. The tangible equity ratio increased by 49 basis points from last quarter, from 10.34% to 10.83%, and has increased by 144 basis points over the like period one year ago. Common Estuary Tier 1 was 13.77% in the second quarter, We feel really good both about profitability and our balance sheet positioning at this point. Brad will provide additional color on our capital positioning in his comments. Our financials continue to reflect a very strong net interest margin with pre-provision net revenues increasing from exceptionally strong levels. For the second quarter of 2025 compared to last quarter, tax equivalent income on average earning assets increased $1.7 million. while interest expense on average interest-bearing liabilities increased 343,000. Ventures margin improved 22 basis points year-over-year on a tax-equivalent basis and decreased three basis points compared to last quarter. Total cost of deposits was 84 basis points for the second quarter compared to 82 basis points for both the prior WINT quarter and for the second quarter of last year. The loan-to-deposit ratio is 83.3% as of June 30th compared to 81.2% last quarter and 87.9% as of June 30th of last year. I'll let Brad talk about that more in a moment. Second quarter of 2025 reflected an increase in total loans of $58.4 million from last quarter driven by growth in construction and leased portfolios during the quarter. The tax equivalent loan yield reflected a three basis point decrease during the second quarter of 2025 compared to the late quarter and a four basis point decline for the quarter year over year. Asset quality was largely stable this quarter with non-performing assets essentially flat and only a modest increase in classified assets as well. We recorded a $1.2 million increase growth charge-off in the second quarter of 2025, of which the majority was associated with a single C&I credit, which was fully reserved for. One property was moved to Oriel during the quarter, with a favorable outlook regarding its fifth position this year. The allowance for credit losses on loans increased to $43 million as of June 30th, or 1.08% of total loans from 41.6 million at March 31st, which was 1.05% total. Unemployment and GDP forecasts used in future locked 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 Fed projections. The impact of the global tariff volatility was considered within our modeling. Provision levels Quarter-over-link quarter reflects no material change. Hit-up projections continue to be aligned with the prior quarter's assumptions for allowance allocations. Non-income continued to perform very well in the second quarter compared to the prior year-light quarter. After excluding $893,000 in debt benefits and bullying realized in 2024, as wealth management fees increased $324,000 for 11.7%, and service charges on deposits increased 280,000, or 11.2%. Mortgage banking income reflected a slight increase in the second quarter of 2025 compared to the prior linked quarter, and a decrease in the prior light quarter, primarily due to volatility of mortgage servicing rights mark-to-market valuations. Excluding the impact of mortgage servicing rights mark-to-market adjustments, mortgage banking income increased not only quarter over linked quarter, and from the prior year-like period. Other income has collapsed in the second quarter compared to the prior mid-quarter and higher compared to the prior year-like quarter. Expense discipline continues to be strong with a total non-interest expense for the second quarter of 2025 at $1.1 million left in the prior mid-quarter. Our efficiency ratio continues to be excellent as the tax equivalent efficiency ratio adjusted to exclude core deposit and tangible amortization acquisition costs and OREO costs with 54.54% compared to 55.48% for the first quarter of 2025. Our focus now is on the effective integration of Evergreen Bank and optimizing the balance sheet for its impact. We have pulled the bulk of the acquired security portfolio from Evergreen and reduced reliance on wholesale funding within the legacy Evergreen Bank. as it was merged in the old second. Nothing really has changed relative to our expectations in terms of financial performance and targets associated with the transaction. Cost-based estimates are on target, and earnings expectations are maybe biased slightly higher. Next quarter will, of course, be slightly nutty in case of the fall of acquisition-related expenses. With that, I'll turn it over to Brad for additional comments. Thank you, Jim. Marriage spend count increased by $1.3 million, or 2.1%, to $64 million for the quarter end of June 30th, relative to the prior quarter, $62.9 million. Also increased $4.5 million, or almost 8%, from the year-ago-like quarter. Taxes put on yield increased 16 basis points and loan yields were 3 basis points lower in the second quarter due to 2025 compared to the first quarter. Total yield on interest-earning assets decreased two basis points over the following quarter to $568. Interest-bearing deposits and total interest-bearing liability costs increased a two basis point increase. The end result was a three basis point increase from the tax put on end to $485 for the quarter ended from $488 last quarter. We believe there continues to be exceptional margin performance. Average deposits increased $51 million of 1.1%. there. Old seconds should continue to build capital. This is evidenced by the 144 basis point improvement in the TV ratio over the past year, which means we have added $1.78 into the book value over the last 12 months. Pretty strong performance. Evergreen will absorb some of the capital cushion, however, private negotiated transaction at a modest discounted market. Our perceptions on capital returns continue to evolve, given the Evergreen Bank acquisition consumed significantly less capital than almost any other potential deal we could have done. Our financials will remain relatively uncluttered by the impact of purchase accounting going forward. My interest expense was particularly on track with the previous quarter, decreasing $1.1 million, primarily due to heavy and lower Oreo expenses in the current quarter. My interest expense is running higher year over year, increasing $5.5 million compared to the same quarter last year, primarily due to higher salaries and employee benefits, as well as access to thought, computer, data processing, and court-positive intangibles. Most of the core positive intangible expense related to the five branches we acquired late last year. Overall, we are hopeful we can keep core expense growth exclusive of acquisitions in the kind of 4% area. Not a lot going on in terms of this quarter. I think it's pretty transparent. The trends remain very strong. Still feel very good, as Jim mentioned, about the estimates we put forward as it relates to Evergreen. He also mentioned by quite a heighter I think that from a rate standpoint, things feel roughly balanced to me in terms of status quo versus some level of recession and or rate cuts. I don't see rate cuts happening after a recession. Obviously, there's some butterfly somewhere that's flapping its wings that can make things very different than that expectation. But as we sit here right now, I feel exceptionally good about how we're positioned. And I believe that while it's difficult to give a margin forecast for next quarter, given we're not done with the fair value marks, I'm very bullish that our margin will remain at exceptionally strong levels over the remainder of the year and into next. With that, I would like to turn the call back over to Jim. Thank you, Brad. In closing... Brad mentioned he feels this is a very solid quarter for the company. We remain confident in our positioning and extremely excited with what the Evergreen Bank transaction will add for us. We're off to a strong start for the first half of 2025, and we are extremely optimistic about the rest of the year ahead as we welcome the Evergreen team and its product offerings. That concludes our prepared comments this morning, so I'll turn it over to the moderator and open it up to questions.

Thank you very much. At this time, we'll be conducting our question and answer session. If you would like to ask a question, please press star 1 on your phone keypad now. A confirmation term will indicate that your line is in the key. You may press star 2 if you would like to remove your question from the key. For any participants using speaker equipment, it may be necessary to pick up your handset before you press the key. Please wait a moment while we poll for any questions. Thank you. Your first question is coming from Jeff Rulers of B.A. Davidson. Jeff, your line is live.

Thanks. Good morning. I just wanted to check in on the timing of conversion expected on Evergreen and on that expense run rate, the two-part conversion timing and then run rate, kind of looking at 52-53 on a core basis. Does that sound in the ballpark?

Yeah, I think so. Some of that relates to timing of the cost phase. The conversion, we expect to be kind of early fourth quarter type range, early to mid. By the time we report fourth quarter and kind of system closer to final run rate on operating expenses, and then first quarter should be relatively clean.

Got it. And then just to remind us, did that acquisition date that loan and deposit balances brought over?

I'll have that forever in mind. Yeah. They were just north of 90%, 90% of all deposits.

Well, the actual... The actual level? I think it was $1.3 billion. $1.2 billion. $1.2 billion.

Okay. Got it. And then this is the last one on the... You called out the interactive card theory that brought into Classified. If you could just wrap a little more detail about kind of geography or... your position on that one.

Yeah, it really stems from one large healthcare transaction in Oregon. We don't see a loss of this at all. We're in a very strong collateral position, 70% covered, low to value. The facility had some restrictions put on by the state of Oregon, which which caused a drag on their ability to lease up the facility. A lot of those restrictions have been freed up, and we expect cash flow to get broader in each subsequent quarter. So we've got a big sponsor behind this as well, so we don't see any loss given the fall here.

Gotcha. Okay, I'll step back. Thank you.

Thanks, Joe.

Thank you. Thank you very much. And your next question is coming from David Long of Raymond James. David, your line is live.

Good morning, everyone. Just first question relates to just overall commercial client sentiment.

You know, when we were back in April having this call, we were coming off of Liberation Day and and everything seems to be toned down a bit.

Just curious what you're hearing from your commercial customers and their appetite to grow their business and close some of the loans that may be in your pipeline.

Yes, I think first of all, Dave, I would say our commercial clients are weathering the tariff on certainly exceptionally well. Appetite for CapEx has been muted, I would say, for the first half of the year, and that shows up in pretty low levels of line utilization. We are seeing pockets of growth in our leasing group and some in commercial real estate. Even though we had a pretty good quarter from a loan growth perspective, that did not come with any growth in our responsive finance group. That group has been obviously very strong performer for us. Loan demand in that area has been It's been somewhat weak, although they are recording pretty strong second half pipelines. And then you couple that with Evergreen Bank, which is typically historically the very strong second and third quarter asset generator in the power sports area. So we're encouraged by low pipelines. low to mid-single-digit gold is possible still for 2025. Got it. Thanks, Tim. Appreciate it. And then as a follow-up, you mentioned the Evergreen deal and maybe having a little bit more of a positive bias than when the deal was announced.

Does that tie into the performance of that bank since you've announced the deal?

And then is it tying to that just any turnover worth noting with that transaction? Yes, they're performing well out of what we have assumed. I mean, the way it works is you basically have a software that you have to project in terms of what it's going to be and what level of profitability it's performing at, and you project it over one year, two years, three years. As a standalone entity, for better or worse, that's the kind of industry standard that was done, they are already a standalone entity performing at the profit levels. than what he had expected. It's a great asset. It's certainly free, but probably to our margin, which I hadn't as soon as it would be. That's difficult to say with fair values not completed. That's the bias right now. I think that's usually pretty good. I didn't get any credit. I was right on margin this quarter, even though I

Great. Thanks, Brad. Appreciate it. Yes.

Thank you very much. Our next question is coming from Nathan Race of Piper Sandler. Nathan, your line is live.

Hey, guys. Good morning. Thanks for taking my questions.

You're going to have to have a taxi, right?

No, I would not go in that arena with you. It's not going to be long enough. I was hoping to... talk about the outlook for charge-offs going forward. You know, obviously you're picking up a higher risk-reward business from Evergreen when you think about their lending specialty. So, you know, just curious with that business in the fold and, you know, all the improvement on the legacy old second side of things, how do you think about some of the charge-off trajectory going forward?

Yeah, Nate, I think we'll probably get to the final quarter for us. which is fully reserved for, but I think, you know, investors should know that in power sport and lending in general, you know, loss rates can run a little bit higher, but you have to look at that hand-in-hand with the contribution margin that that portfolio generates. So, you know, losses in that book could be anywhere between, let's say, one and one-half an average coupon today, a new asset's going on around 9%. So you have to look at both things hand in hand going forward.

Right. So if I was doing some quick back of the envelope map on their portfolio and overlaying that loss rate, am I in the ballpark of around kind of 30 basis points going forward of charge-offs?

Yeah, I think so. I think that's good.

Okay, great. And then obviously with Evergreen, you're picking up a higher beta deposit franchise, particularly relative to Legacy Old Second. So I was just curious, Brad, to maybe get your updated thoughts on how you think the margin responds following a 25 basis points type cut at some point going forward.

Yeah, I'll admit that.

I'll let you pontificate on that.

be $13. It's now $16. And that happened, like, in the last two weeks. And somebody just told me the price increases at Walmart in the last 30 days. I mean, you know, my interest rate prognosticator newsletter has a really hard time seeing our rate cut this year. I don't see a basis for it. I think people will flock for it. You know, here we are also in a land of mean stocks running again. Jim had to exit the call for a little bit to go buy some GameStop and cold, I think. So he'll be back in just a second. So it's against my moral fiber and something approximating religion to think about a rate cut this year. It doesn't make any sense to me. You know, whereas before we had said we'd lose somewhere between to 7 basis points for every 25 basis point cut. I would say that's 25% lighter conservatively on a pro forma basis. But there's more margins movement for us right now just in balance sheet movements. As Jim mentioned, we sold the entire securities portfolio and reduced the wholesale funding. All those assets were limited. They were being carried at a net negative margin contribution. So there are There are a number of things going on under the hood that are more powerful than movement and expected interest rate within the Fed futures curve. Put it this way, we gave up three basis points this quarter despite something that rocked maybe 40 basis points in movement out the SOFR curve. So I think we're less sensitive than maybe people expect at this point. I have been somewhat surprised at the margin durability given what the curve has done over the last year. I think that if he had three beers in me, I would probably raise what I believe the long-term margin for is for old seconds on a stand-alone basis before Evergreen was added to it. So this is, if you know me, this is about as bullish as I found, monotone and all. make me assume there's a rate cut this year, I would say Forbates is going to give up. Man, I answered that with a lot of worry. Yeah, and I would say that we're three weeks after the close, right, of Evergreen, and, you know, you're right, they are higher paid funding shop, but we started bringing high-yield money markets down and deposit levels have been remarkably I would agree with Brad right now. Things are about as good as we could have hoped.

Got it. That's a really helpful color and thoughts. So, Brad, just maybe start for the third quarter. Given the repositioning of some of the trade portfolio at Evergreen and some of the other impacts on the deal, how do you think it was arranged to the margin for the third quarter?

Hey, I'm going to go with flat, but there's a wider margin there than typical of me. So it's flat plus or minus 10 basis points instead of plus or minus 5. And bearing in mind when I answer that, flat is more direct than flat, and it went up by 20 basis points. So without the fair value margin being done, it's difficult to say with any precision, but it doesn't feel like down, is what I'd say.

Okay. That's helpful. Sounds like you're more cheating on the margin outlook than tax rates, so I'll leave it there.

Thanks, guys.

Thank you very much. And your next question is coming from David Conrad of KBW. David, your line is live.

Yeah, hey, good morning. Just a little bit of a follow-up to that recent discussion. Just maybe add a little color to... absence of what you paid down in wholesale deposits, kind of what is their cost of funds bringing over, and maybe the leverage you guys have over the next year plus of just working down that with your strong deposit franchise. I mean, you can see what their cost of funds were in their standalone financials in the four range. Where do I expect to be by the end of the next quarter? I would expect reliance on and that's something with a 4% handle, to be $100 to $200 million less. So I'll let you master that. But in aggregate, the overall handling cost of funds within Evergreen should be down somewhere between 30 and 70 basis points. Again, there's movements here, and I'm speaking about a quarter that is only a third of the way done, so it's a little difficult. Decisions are being made on the flyer, for example. Nobody's asked me yet, but I don't think you'd be able to sell that sort of total portfolio that we had mentioned previously, because marks those feet that it actually becomes a pretty good asset.

So, you know, we're learning as we go here, but that's about as precise as I can get at this point.

But moving past this quarter, I guess, can your deposit growth, you know, absorb their loan growth or you continue to kind of fund marginally with that set of assets? If I had to guess, I would say we would be at a 90% loan-to-deposit ratio and an overall cost of funds that's substantially better than A-plus-B. I wrote previously about a desire to take up some supplemental small deposit franchise. Equivalent to, say, a first merchant's franchise that we did prior. That would meaningfully basically return us to where we were before. So there's certainly room for that. Will it come to fruition?

I don't know. Hope so. Got it. Thank you.

Thank you very much. Your next question is coming from Terry McEvoy of Stevens. Terry, your line is live.

Thanks. Maybe just to follow up, Brad, on that last question, would your preference be to wait until Evergreen is integrated before your next transaction or something along the lines like you just mentioned became for sale? Would you take a serious look this year?

I think we're always looking, but... I think there was a period of risk of like a palace coup and me falling out a window or something like that. You know, people would be very upset with me internally. Acquisitions are a lot of work. And, you know, you hear things about the industry of it's only four branches or it's only five branches or it's only ten branches. And that is a wild understatement on the amount of work that's involved. This one does have some advantages that help us, namely a similar core that makes things a little bit easier, but there are a whole lot of I's and a whole lot of D's that need to be dotted and crossed so you get it right. It's a lot better than the use of these, but small misgust and conversions can put you in the newspaper, as we've seen even from deals around this town in the last couple of years. a perfect world, we'd like to pause here, digest, feel integrated, and start growing organically a little better. But as you know, M&A timelines are unpredictable. Rarely do seller-buyer timelines come into alignment. So we'll continue to be opportunistic, but we've got plenty to do today.

I appreciate that. And then you mentioned repurchasing 327,000 shares in a private sale. Did that happen after the deal, and were the sellers connected to the bank that sold, or was that separate, and then I guess the appetite for incremental buyback?

It was a private equity investment, and it was subsequent to the deal closing.

The execution price was $18 per share, of course. It's a viable option for us, Gary. Great. Thanks for taking my question.

Okay. Thank you very much. Just a reminder, if there are any remaining questions, you can join the community now by pressing star 1 on your phone keypad. Our next question is coming from Brian Martin of Stanley. Brian, your line is live.

Hey, good morning, guys.

Hey, Brian. Hey, Brian.

I'll leave the tax question, Brad, since it sounds like you don't want to end on that anyhow. So maybe just one back for the margin, Brad, just bigger picture. You know, once things reset in third quarter and you get through some of the noise, which sounds like you're more optimistic than pessimistic, but just directionally from there, how should we be thinking about the margin kind of in a flat rate environment? I mean, who knows what happens at the Fed, but once you kind of reset and get through the noise that you're talking about this quarter, um, Can you give any thoughts just directly how the margin, kind of what the picture takes on the outlook thereafter?

I mean, a flat rate environment along the curve, meaning that we don't see this withdraw in SOFR and overnight index rates that we've seen over the last 90 days, but truly flat along the curve, our margin is stable and durable. It's slightly higher with what Evergreen brings to the table. obviously different first scenarios from that, from totally stable, which, you know, doesn't really exist in nature. Things always move in one direction or another. But I feel very good about what our margin outlook is. We're not offside on any of that. We do have a subject issue that we'll have to deal with next year that will be a negative demotion. I don't know what the plan is for that yet. But assuming that that is taken care of in a way that's not deleting the margin, then I would say our margin is both stable and durable.

Gotcha. And you talked about just kind of the long-term floor, you know, maybe being raised. How are you thinking about that long-term floor and where the margin is, you know, if you look prospectively?

Well, you heard me say it before that I do not believe that there is a pathway back to a 0% interest rate world and that banks like us are fundamentally better positioned, even though there aren't any banks like us. And I had said previously, and save everybody's time going back to your transcripts, I said previously that I believed that our margins were probably around 4%. If you tie me down and maybe answer the question today, which you kind of are, it's probably more like $425,000 would be my guess at an absolute score.

Gotcha. Well, I appreciate all the color. And then how about just in terms of, you know, once you've given some of the noise that's going to play out here in the year from the deal, you know, can you talk about what, you know, when you get to that maybe first quarter of next year with the deal closed, integrated, kind of how you're thinking about ROA, just to be kind of back into kind of how we should think about things. But what do you think ROA is going to trend to in 26, whether it's going to be a point to a quarter or a year, Brad? You know, whatever you can offer just in terms of your outlook from where we stand today.

I think you're confusing me now. Are we talking about a big stuff plan again, or are we talking about – Are we still talking about stable interest rates? What are we talking about here?

We'll go with your scenario, Brett. I don't know, just like you don't know. I guess I'm just wondering where you think ROA is going to land, you know, in your thinking. It sounds like probably no rate cuts, so we'll go with that. That's fine.

I would feel very comfortable with a level 150 ROA. Level 150.

Okay. Okay. And then I think you answered the question about buyback. You're on the table at this point. Okay, and then this last one was loan growth. Sounds like you're a bit more optimistic on loan growth.

Yeah.

Second and third quarter are generally our better quarters. Brian, you know that. But I'm more curious about having more lending verticals to help sustain that growth has been encouraging. To be fair, we did not have as many payoffs or paydowns in the second quarter, but it was one of our stronger origination quarters than we've had in some time. So, you know, I would expect some growth again in the third quarter and then probably some stabilization in the fourth and first quarter.

Okay. Perfect. Well, thank you guys for answering the questions.

Thanks, Brian.

Thank you very much. Well, we appear to have reached the end of our question and answer session. I will now turn the call back over to Jim for any closing remarks.

Okay. Thanks, everyone, for joining us this morning and for your interest in our company. We look forward to speaking with you again next quarter. Goodbye.

Thank you very much. This does conclude today's conference. You may disconnect your phone lines at this time and have a wonderful day. We thank you for your participation.