Old Second Bancorp, Inc.

Good morning everyone and thank you for joining us today for Old Second Bancorp Incorporated's third 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, Darren Campbell, the company's head of national speciality lending and Gary Collins, the vice chairman of our board. I will start with a reminder that all seconds 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 filings 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 release, which is available on our website at oldsecond.com, on the homepage and under the Investor Relations tab. I will now turn the call over to Mr. Jim Ecker. Sir, the floor is yours.

Okay, good morning, everyone. Thank you for joining us. I have several prepared opening remarks. I'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 questions. From a GAAP perspective, net income was $9.9 million, or $0.18 per diluted share, in the third quarter of 2025. Return on assets was 0.56%. Third quarter 2025 return on average tangible common equity was 6.16%, and tax equivalent efficiency ratio was 64.46%. As expected, a lot of noise this quarter. Third quarter 2025 earnings were significantly impacted by the July 1st completion of our acquisition of Bancorp Financial and its wholly owned bank subsidiary, Evergreen Bank Group. Adjusting items. impacting net income for the third quarter of 2025 included the following. As it relates to the Evergreen acquisition, we had day two provision on non-PCD loans of $13.2 million pre-tax, or $0.19 per diluted share. We also had acquisition-related costs of $11.8 million pre-tax, or $0.17 per diluted share. We also had a $389,000 dollar MSR mark to market losses pre-tax, or about a penny a share, and 430,000 of fully death benefit proceeds recorded due to the death of retired executive, also a penny a share. Excluding all adjusting items, net income for the third quarter of 2025 was 28.4 million, or 53 cents per diluted share. The quarter included favorable impacts of the Evergreen acquisition, within net interest margin as 1.3 million of loan purchase accounting accretion was recorded, partially offset by additional core deposit intangible amortization of $233,000 and time deposit fair value amortization of $227,000. Net purchase accounting accretion income will be a very small contributor on a go-forward basis, especially relative to the size of the acquisition itself. The bulk of loan fair value adjustments were concentrated in the solar loan portfolio, which featured a very low contractual coupon. Market conditions warranted holding onto the solar book. On a core basis, profitability a little second improved, and perhaps somewhat surprisingly, tangible book value increased this quarter, despite the impacts of the acquisition. The tangible equity ratio declined by only 42 basis points from last quarter, from 10.83% to 10.41%. but remains 27 basis points higher than the like period one year ago. Common equity Tier 1 was 12.44% in the third quarter, decreasing from 13.77% last quarter, but a decline of only 42 basis points from one year ago. With the relatively tame level of capital dilution, despite the usage of $49 million of cash consideration, we now expect the earned back period associated with Evergreen to be significantly shortened from the three years estimated at announcement. Our financials continue to reflect exceptionally strong net interest margin at 5.05%. That is a 20 basis point improvement for last quarter and 41 basis points year over year on a tax equivalent basis. Pre-provisioned net revenues increased for both loan growth and acquisition impacts. The total cost of deposits was 133 basis points for the third quarter. compared to 84 basis points for the prior link quarter, and 92 basis points for the third quarter of 2024. For the third quarter of 2025, compared to last quarter, tax equivalent income on average earning assets increased $28.8 million, while interest expense on average interest-bearing liabilities increased $10.3 million. The loan-to-deposit ratio is 91.2%. as of September 30th, 2025, compared to 83.3% last quarter and 89.4% as of September 30th of last year. I'll let Brad talk about this more in a moment. The third quarter of 2025 reflected an increase in total loans of $1.27 billion from last quarter, primarily due to $1.19 billion of loans acquired with Bancorp Financial. Tax equivalent loan yields reflected a 67 basis point increase during the third quarter of 2025 compared to the link quarter and a 47 basis point increase over the quarter year over year. The increase in yield is primarily a function of higher yielding consumer credits we recorded as part of the legacy Evergreen PowerSport portfolio. Asset quality softened modestly this quarter. Non-performing loans increased only modestly, but classified assets increased 38.4 million. In general, our collateral position is very good on these downgraded credits. Provision levels relate to ratings changes primarily within the C&I portfolio as certain industries have softened, most notably transportation and warehousing. Our office and CRE portfolios remain largely the same in terms of ratings momentum. Importantly, as a percentage of total loans, NPL's classified and criticized loan levels are little changed. We recorded 5.1 million of net loan charge-offs in the third quarter, with the majority stemming from the PowerSports portfolio and a couple of small losses related to collateral values in the struggling trucking and transportation industry. With regards to PowerSports, I would say that losses given default are running a little bit higher than we expected. However, loan yields are much higher than expected, and the contribution margin is both above expectations and improving. Due to the nature of the power sports business, gross charge-offs are anticipated to run at a higher rate than Old Second has historically experienced, especially in a higher interest rate environment like today. This is the nature of what is a very good business. The allowance for credit losses on loans increased to $75 million as of September 30, 2025, or 1.43% of total loans, from 43 million at June 30th, 2025, which was 1.08% of total loans. 30.7 million of the increase is associated with day one and day two allowances recorded on the acquired loans. PCD loans recorded from Evergreen increased the ACL by 17.6 million as of day one, and the non-PCD loan credit mark recorded provision expense for day two increased ACL by 13.1 million. Unemployment and GDP forecast use and 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 Fed projections. The impact of the global tariff volatility continues to be considered within our modeling. Provision levels Quarter over linked quarter exclusive of day one and two purchase accounting impacts increased $6.5 million, reflecting the new consumer mix in our portfolio post-acquisition and an increase in historical loss rates as our net charge-offs to average loans increased to 39 basis points for the third quarter of 2025 from eight basis points for the prior linked quarters. Non-interest income continued to perform very well in the third quarter of 2025 compared to the linked quarter and prior year-like quarter, excluding $430,000 in debt benefits on BOLI realized during the quarter of 2025. Non-interest income increased $2.1 million compared to the prior year-like quarter as wealth management fees increased $728,000 or 26.1% and service charges on deposits increased $274,000 or a little better than 10%. Mortgage banking income improved in the third quarter of 2025 compared to both the prior linked quarter and prior year-like quarter, primarily due to the volatility of mortgage servicing rights mark-to-market valuations. Excluding the impact of mortgage servicing rights mark-to-market adjustments, mortgage banking income increased nominally quarter-over-quarter and from the prior year-like period. Other income increased $513,000 in the third quarter of 2025 compared to the prior link quarter and was nominally lower compared to the prior year-like quarter. Total non-interest expense for the quarter was $19.7 million more than the prior link quarter, $11.8 million of which is related to acquisition costs, including $8.4 million of additional salary and benefits expense based on the addition of evergreen employees. Our efficiency ratio continues to be excellent as the tax equivalent efficiency ratio adjusted to exclude core deposit and tangible amortization, OREO cost, and the adjustment to net income as noted earlier was 52.1% compared to 54.54% for the second quarter of 2025. Our focus today is now on effective integration of Evergreen Bank and optimizing the balance sheet for its impact. We did sell the bulk of the acquired securities portfolio just after legal closed. Brad will talk about that. And we continue to reduce reliance on wholesale funding as we allow the legacy Evergreen brokered CDs to run off. I'll now turn it over to Brad for additional comments. Thanks, Jim.

I've got a lot less words than Jim, a lot less fancy ones, too. I'll be relatively brief today. I know people have some questions here. Net interest income increased by $18.5 million or 29% to $83 million for the quarter ended September 30th. It's relative to $64 million last quarter. It's also up 37% from the year-ago quarter. Tax equivalent loan yields increased by 67 basis points. Obviously, that's reflective of the change in the portfolio composition with the addition of Evergreen. The securities yields were effectively flat in the third quarter compared to last quarter. Overall, total yield on interest-earning assets increased 66 basis points. Cost of interest-bearing deposits increased by 61 basis points, again, reflecting the addition of Evergreen. And total interest-bearing liabilities increased by 60 basis points. The end result of that was the 20 basis point increase in the NIM that Jim mentioned, and we're now at 5.05 for the quarter ended. That's up from 485 last quarter. Obviously, we feel like this continues to be exceptional margin performance. The NIMS at the last year is up 41 basis points. I think that's a trend that's a lot different than people may have expected from us given the decline in rates that we've seen so far. Average loans increased 1.26 billion or 32% over link quarter. Average deposits increased 1.08 billion or 22%. In addition to that or underlying that, we had organic loan growth of $72 million in the third quarter compared to balances at the prior end. I guess I should say here that Evergreen doesn't really look like the deal that I had spent the last two years preparing the balance sheet to absorb. It was far less diluted to capital than the generic deal I had in my mind but it will also be far more accretive when all is said and done. The net result of my wrongness is that we are both far better prepared for falling rates than I expected to be and far more profitable. This is the kind of wrongness that I can rally behind, by the way. As we sit here today, the balance sheet remains prepared to capitalize upon strategic opportunities that may arise. I would note that systems conversions related to Evergreen are complete as of two days ago, and at this point, it appears to be the best we have ever done. The net interest margin is above 5%, and weirdly enough, I still feel really good about it. Capital will build quickly from here, but return on TCE is at very strong levels, approaching 17%. Tangible book value per share is $13.51. and earnings have positive catalysts to push substantially above the $2 run rate of the last couple of quarters. This is all relative to a stock price that is sub-$18. I'll let others do that math. But it is top decile performance at this point for Old Second. Some had expressed concern that Old Second had failed to find growth opportunities in the last year or two. I believe we have found it the right way. This is a highly cyclical industry, and growth opportunities don't always come in a straight line. But if you look back over the last seven years, our earnings per share are up 4x in terms of run rate. That's relative to a 3x growth in the bank over that same timeframe. I'm really proud of how we've managed that growth. Over the last five years, we have more than doubled not only the size of the bank, but also earnings per share. We also just announced a 17% increase in the common dividend. At this point, we are also well-reserved for our new business mix and prepared for any economic environment. Non-interest expense trends reflected Evergreen deal costs as expected. Operating costs increased $20 million over the prior one quarter and $8 million excluding acquisition costs. Much of this increase is the result of the larger bank requiring more workforce facilities and operating expenses in general. Non-interest expenses running higher year over year, again, due to the same reasons. Also included is the five branches that we acquired in late 2024 from First Merchants. Overall, we are hopeful that we can keep core expense growth in the 4% area into 2026, exclusive of the impacts of Evergreen. Much of that relates to increases in human benefits expense, particularly insurance, which we're running solidly into the high teens in terms of our expectations at this point. Cost saves related to Evergreen are still to come. We are extremely excited about how the conversion has gone and optimistic that we can achieve those ahead of schedule. I'm sure, as I said, there are a lot of questions. We've got a lot going on this quarter. But I would like everyone to know that relative to my personal baseline anyway, I'm in a really good mood. With that, I'd like to turn the call back over to Jim. Jim?