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.