Old Second Bancorp, Inc.

Good morning, everyone, and thank you for joining us today for Old Second Bancorp, Inc.' 's fourth 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 specialty lending, 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 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 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 under the Investor Relations tab. Now I will turn it over to Jim Eckert.

Good morning, and thank you for joining us, and thanks for your patience as we work through some technical difficulties there. I have several prepared opening remarks, give you my overview of the quarter, then turn it over to Brad for additional details. We will then conclude with summary comments and thoughts about the future before we open it up to Q&A. From a GAAP perspective, net income was $28.8 million, or 54 cents per diluted share in the fourth quarter. and ROA was 1.64%. Fourth quarter 2025 return on average tangible common equity was 16.15%, and the tax equivalent efficiency ratio was 53.98%. Fourth quarter earnings were impacted by a couple of material adjusting items, the first being a 428,000 pre-tax loss on mortgage servicing rights and a $2.5 million in pre-tax Acquisition related expenses driven by 1.5 million of computer and data processing related to the core systems conversion as well as systems related to acquired operations. Excluding those two items, net income of the fourth quarter was 30.8 million or 58 cents per diluted share. Tangible book value per share increased 61 basis points to $14.12. The tangible equity ratio increased 61 basis points from last quarter from 10.41% to 11.02% and is 98 basis points higher than the like period one year ago. Common equity tier one was 12.99% in the fourth quarter, increasing from 12.44% last quarter and increasing 17 basis points from one year ago. Our financials continue to reflect an exceptionally strong net interest margin at 5.09% for the fourth quarter, which is a four basis point improvement from last quarter and 41 basis point increase over the prior year light quarter on a tax equivalent basis. Pre-provision net revenues decreased from both interest earning deposits and securities balance declines coupled with a decline in rates. The total cost of deposits was 115 basis points for the fourth quarter compared to 133 basis points for the prior linked quarter and 89 basis points from the fourth quarter of 2024. For the fourth quarter of 2025 compared to last quarter, tax equivalent income on average earning assets decreased $1.8 million, while interest expense on average interest-bearing liabilities decreased $2 million. Loan-to-deposit ratio now sits at 93.9%. as of year end compared to 91.4% last quarter and 83.5% as of 12-31-2024. The fourth quarter of 2025 experienced a slight increase in total loans, excuse me, a slight decrease in total loans of 12.4 million from last quarter. Tax equivalent loan yields declined 11 basis points during the fourth quarter of 2025 compared to the link quarter but reflected a 48 basis point increase for the quarter year over year. The decrease in yield comparison to the prior quarter is primarily a function of Fed rate cuts working through the portfolio. Asset quality trends were relatively unchanged. Non-performing loans increased $4.8 million, and classified assets increased by $10 million. In general, our collateral position is very good on Q4 downgraded credits. We recorded a $6 million of net loan charge-offs in the fourth quarter of 2025, with the majority or 75% of those stemming from the PowerSport portfolio and commercial real estate owner occupied. With regards to PowerSports, I would say that losses given default are running a bit higher than we expected. However, yields in that portfolio are much higher than expected, and the contribution margin is both above expectations and improving. Due to the nature of 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. This is the nature of what is a very good business. Investors should know that the contribution margin is now at a multi-year high in this business, and we're very bullish on our 2026 performance. The allowance for credit losses on loans was $72.3 million last as of December 31, 2025, or 1.38% of total loans, from $75 million at September 30, 2025, which was 1.43% of total loans. 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 length quarter exclusive of day two purchase accounting impacts decreased 3 million and were largely driven by the PowerSports portfolio net charge off levels with other losses associated with previously allocated provisions. Non-interest income reflected a slight decrease in the fourth quarter compared to the prior quarter, but continued to perform well compared to the prior year light quarter. Non-interest income in the third quarter of 2025 reflected a $430,000 death benefits on a bully policy, which was not experienced in the fourth quarter of 2025. Mortgage banking income was flat compared to the link quarter and declined $668,000 compared to the like prior year period, primarily due to the volatility of mortgage servicing rights mark-to-market valuations. Excluding the impact of mortgage servicing right mark-to-market adjustments, mortgage banking income increased nominally quarter over link quarter and from the prior year-like period. Other income decreased nominally in the fourth quarter of 2025 compared to the prior link quarter, but increased $550,000 compared to the prior year-like quarter, driven largely by PowerSport service fees. Non-interest income increased $544,000 compared to the prior year light quarter as wealth management fees increased $238,000 or 7.2% and service charges on deposits increased $198,000 or 7.5%. Total non-interest expenses for the fourth quarter of 2025 declined $10.2 million from the prior link quarter. Fourth quarter experienced a decrease of $9.3 million and acquisition-related costs. Our efficiency ratio continues to be excellent, and the tax equivalent efficiency ratio adjusted to exclude core deposit intangibles, amortization, OREO costs, and the adjustments to net income, as noted earlier, was 51.28% for the fourth quarter, compared to 52.1% for the third quarter, 2025. So our focus continues to be on the optimization of the balance sheet to perform and withstand the variability of the current and future interest rates. We continue to reduce reliance on wholesale funding as we allow the legacy Evergreen Bank brokered CDs to run off and reprice higher cost deposits in the falling interest rate environment. With that, I'll turn it over for Brad for additional color.

Thanks, Jim. I don't have a ton to talk about today. I would say that... We're pretty darn excited to close the year like this. Running at north of a 5% margin and RO8 handsomely above 1.5, and our ROTCE above 17.5 on an operating basis is pretty exceptional performance that we're proud of. EPS, some 30% over last year. Integration's fully done. Integration at the end of last year as well. That's a lot of work. and to close the year like that, this is especially gratifying. This quarter's not a lot of complexity to it. Most of the stuff that we talked about last quarter is still true, so I'll be relatively brief. Net interest income increased nominally this quarter relative to last quarter, both around the $83 million level. Loan yields decreased about 11 basis points, and securities yields decreased a bit more at 14 basis points. Total yield on interest-earning assets decreased eight basis points over the linked quarter. Cost of interest-bearing deposits decreased more at 24 basis points, and total interest-bearing liabilities decreased 15 basis points. The end result was a four basis point improvement in the tax equivalent NEM, which is obviously pretty awesome. Tax equivalent NEM for the fourth quarter of 2025 increased 41 basis points from 468 for the period last year. Average loans increased $60 million or $1.2 million over the linked quarter with average deposits declining $200 million, a level we expected. Deposit runoff is largely concentrated in high beta, effectively wholesale deposit captions as planned. Loan origination activity in the fourth quarter, you may not know, was actually very good and activity remains robust. Certainly the market environment marginal spread is far more favorable than it was in the first half of the year, and certainly at this time last year. Payoffs, especially in the participation book, have resulted in relatively flat balance sheet growth in the fourth quarter. This is interesting. Balances in the CRE loan participations acquired with West Suburban declined by $53 million in the fourth quarter of this year. the largest one-quarter runoff that we have seen to date in that portfolio. This was a significant headwind to growing the balance sheet this quarter. Organic activity remains exceptionally strong. Other than that, everything I said last quarter remains true to the best of my knowledge. Balance sheet is exceptionally well positioned and margin trends feel stable. We may tick down modestly in the first quarter, but I expect to still be above five. Loan growth being targeted in the mid-single-digit level for next year. Expense growth will be modest. Pretty inflationary trends in employee benefits and salaries are going to be moderated by the realization of the cost saves associated with Evergreen. Buyback is on the table that we haven't done anything this quarter. It's becoming inevitable. I don't have anything to add about the tax rate other than it was really high this quarter. Please don't ask me about that. There isn't a lot of complicated stuff to go over beyond that, so I'll turn the call back over to Jim.

Okay, thanks, Brad. In closing, we're very proud of the year we just concluded, and we believe the level of performance is reflective of the strength of the bank we are building. We're optimistic about next year, or this year, and all the opportunities that are in front of Old Second. I would like to thank our team for their hard work and execution in 2025, including integrations and systems conversions and upgrades that have made us a much better old second. I could not be more excited about the things we can accomplish next year. That concludes our prepared comments this morning, so I'll turn it over to the moderator and we can open it up to questions.

Thank you. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Once again, that is star 1 to ask a question. One moment please while we poll for questions. Your first question for today is from Jeff Rulis with DA Davidson.

Thanks. Good morning. On the expense side, I just wanted to see if those cost savings, Brad, I couldn't tell. Are those fully captured, or is there a tail in the 26 that leads to that muted expense growth from your perspective?

There's a tail in the 26. Employee benefits are up. are expected to be up solidly in the double digits next year just with inflationary trends that we're seeing in health insurance. We've done a lot of things to restructure to keep those costs contained, but we've got a couple of branch closings that are scheduled and some other expense initiatives. All in all, it's going to look like we're just kind of doing a good job. Not as good as flat, but not as bad as it would be just on a pure apples to apples basis. So it kind of feels like a 3% type level as we get those final cost days run through.

Gotcha. Thanks. And then on the credit front, Jim, I guess the charge off from the power sports, and you really outlined that clearly very profitable on the margin front. Just wanted to see on the net charge off pace, I think we talked about kind of 30 basis point level, a little higher. Is anything that front-end loaded, or could we expect kind of 30, 40 going forward? And then secondly, on the credit side, is that 30 to 89-day bucket a little bit of an increase? Anything to note on that balance? Thanks.

Yeah, good question. I think we need to be accustomed to a little bit higher net charge-off rate due to power sports. That's just the nature of that business. I think if you If you look at the six million in charge-offs, four and a half was power sport related. So only one and a half in the legacy book, which is more in line with our historical trends. But given that we're in a higher interest rate environment, we expect power sports to have maybe elevated charge-offs in the next couple of quarters. And I think we have to look at that hand-in-hand with the contribution margin, which I mentioned was at a multi-year high. Obviously, that's flowing through the margin and profitability. As it relates to 3089, we had a couple of larger loans that were just past maturity. We had a couple loans that obviously migrated into non-accrual that we're working through. One has a very low loan to value. The other is a mixed-use property in Chicago that has been very slow to lease up. It's going to take another couple of years to work through that one.

Okay, thank you.

Thank you.

Your next question for today is from Nathan Race with Piper Sandler.

Hey, Nate. Hi. Hi, this is Adam Kroll. I'm for Nathan Race. Good morning, and thanks for taking my questions. Good morning.

I was jumping in my time machine there. 2027, I have no comment on at this point. I was just curious if you had the purchase accounting accretion number for the quarter? The few hundred thousand. I've talked about that before. It's down substantially from last quarter. The thing that I would really like people to focus on is that the amount of purchase accounting that we have in our numbers this year in aggregate, is less than the amount of purchase accounting that we're getting off the solar loan book. I mean, it's nothing. I think there's $150,000. It's not something that I really think is material to anyone's understanding of Volt Second at this point. It was down substantially at link quarter. But the thing to keep in mind here is that the purchase accounting impact on the PowerSports portfolio is negative for the next two years. So the go-forward business is better than what you're trying to isolate as the unrepeatable portion in the current periods.