Old Second Bancorp, Inc.

Good morning, everyone, and thank you for joining us today for Old Second Bancorp, Inc.'s second quarter 2026 earnings call. On the call today are Jim Eccher, 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. Okay, good morning and thank you for joining us.

As customary, I have several prepared opening remarks, give my overview of the quarter, 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. From a GAAP perspective, net income was $28.2 million, or $0.54 per diluted share in the second quarter, and return on assets was 1.65%. Second quarter 2026 return on average tangible common equity was 15.58% and the tax equivalent efficiency ratio was 51.72%. Excluding all adjusting items which include MSR valuation adjustments and the costs related to the 2025 acquisition of Bancorp Financial and its wholly owned subsidiary Evergreen Bank Group, net income for the quarter was $28.7 million, or $0.55 per diluted share. Second quarter earnings were impacted by $9.2 million of net loan charge-offs, which primarily included two credits that we discussed at length on last quarter's earnings call. A commercial and industrial charge-off of $3 million in the warehousing and distribution business that has seen its cash flow position erode over the last year. A commercial real estate investor charge-off of $2.8 million that was an office property located in a western suburb of Chicago. This was an acquired credit. It was restructured into an AB note in 2023 due to challenges facing the office market. At the time of the restructure, the B note was fully secured by the value of the underlying collateral, but has recently experienced a decline in value, and based on an updated valuation, the B note's collectability is now in doubt and was charged off. The B note was previously fully allocated for prior quarters, and a portion of the note was accounted for in purchase accounting adjustments as a result of the acquisition of Evergreen Bancorp. The property continues to produce cash flow adequately to support the A note at this time. Net charge-offs related to the PowerSport business totaled $2.8 million, which is a $1.1 million reduction from the prior quarter. as seasonality related to this loan portfolio usually results in higher usage of ATVs and UTVs that are collateral for these loans during the spring and summer months. I would note that the contribution margin in this business has continued to trend higher and remains robust. Tangible book value per share increased to $14.77 at the end of the quarter from $14.35 at last quarter The Tangible Equity Ratio increased 12 basis points from last quarter from 1107 to 11.19% and is 36 basis points higher than the like period one year ago. Common Equity Tier 1 was 13.28% in the second quarter of 2026, increasing from 13.13% last quarter but decreased 49 basis points from one year ago. This decline is primarily due to stock repurchases of approximately $40.2 million during 2026. Our financials reflect an exceptionally strong net interest margin of 5.23% for the second quarter. That's a nine basis point improvement for last quarter and 38 basis point increase over the prior year light quarter on a tax equivalent basis. Pre-provision net revenues increased in the second quarter. from the prior quarter primarily due to day count, higher average balances, and lower average time deposit balances. Total cost of deposits was 100 basis points for the second quarter compared to 105 basis points for the prior linked quarter and 84 basis points for the second quarter of 2025. For the second quarter of 2026 compared to last quarter, tax equivalent income on average earning assets increased $2.8 million. while interest expense on average bearing liabilities increased $658,000. The loan-to-deposit ratio stands at 96.4% as of June 30th compared to 93.2% last quarter and 83.3% as of June 30th, 2025. Total loans increased $60.6 million during the second quarter, partially reversing seasonal declines in the previous quarter. tax equivalent loan yields increased 12 basis points during the second quarter of 2026 compared to the link quarter and reflected a 63 basis point increase for the quarter year over year. The increase in yield in comparison to the prior quarter is driven by higher short-term rates and repricing of lower yielding loans that were originated in 2021 and 2022. Turning to credit asset quality, Trends improved during the quarter despite the elevated charge-offs. Non-performing loans decreased $19 million and classified assets declined $16.5 million. In general, our collateral position remains stable on classified assets. We recorded $9.2 million of net charge-offs in the second quarter, with the majority stemming from the PowerSports portfolio and one relationship each in commercial real estate investor and commercial. Overall, we're pleased with the credit trends as NPAs declined 25% in the quarter. The allowance for credit losses on loans was $70.4 million as of June 30th, or 1.34% of loans from $72.1 million at March 31st, 2026, which was 1.39% of loans. Unemployment and GDP forecasts using the 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 global terror volatility in the war in Iran continues to be considered within our modeling. Provision levels quarter over link quarter decreased by 2.5 million to 7.5 million and were partially driven by significant movements and delinquencies when compared to the forecast period resulting in a negative qualitative adjustments. Additionally, some larger charge-offs taken during the quarter had been provided for or allocated for in prior quarters. Broadly, we are encouraged at the positive credit trends with the reduction in non-performing assets and classified assets quarter over late quarter. The office portfolio continues to be under pressure broadly with valuations coming in at steep discounts to prior levels and rents declining broadly. The good news is we don't have anything classified in that vertical and very much of it, or on a relative basis, it only represents about 3% of the portfolio. Non-interest income increased $631,000 or 5% in the quarter compared to the prior linked quarter and a $2.4 million increase or 21.7% from the prior year-like quarter. Wealth management had a strong quarter. Income was up there, $245,000 quarter over linked quarter and increased 525,000 compared to the prior year link quarter. Mortgage banking income increased $97,000 compared to the link quarter. It increased 543,000 compared to the like period a year ago, primarily due to the changes in mortgage servicing rights, mark-to-market valuations. MSR valuation was flat quarter over link quarter, however, excluding the impact of Mortgage servicing rights, mark-to-market adjustments, mortgage banking income increased to $164,000 over the prior year-like period. Other income declined $176,000 in the second quarter compared to the prior link quarter and increased to $551,000 compared to the prior year-like quarter, driven largely by PowerSport loan service fees and dealer chargebacks and lease syndication fees. Total non-interest expense for the second quarter increased $1 million from the prior link quarter, driven by higher officer incentive and employee insurance costs within salaries and employee benefits. Elevated OREO expenses as the first quarter of 2026 realized net gains on property sales, as well as gap insurance refunds related to legacy evergreen activity within other expense. Altogether, our efficiency ratio continues to be excellent as the tax equivalent efficiency ratio adjusted to exclude core deposit intangible amortization, Oreo costs, and the adjustments to net income as noted earlier was 50.8% for the second quarter compared to 51.7% for the first quarter. Overall, the bank continues to perform at an exceptionally high level. Operating leverage is strong. The margin is stable. and Fee Income businesses are performing well. We're doing a nice job of adding additional talent throughout the organization. Credit is on an improving trend, and I'm hopeful that we will soon be able to demonstrate the full earnings power of Old Second. I'll now turn it over to Brad for additional color.

Thanks, Jim. I'll be brief. There's not a lot controversial from my corner of the world, or confusing for that matter. Net interest income increased to $83.3 million for the quarter. relative to last quarter's $81.1 million and increased by $19 million or almost 30% from the year ago like quarter. The interesting thing about this quarter is tax equivalent loan yields increased by 12 basis points and the securities yields increased by six basis points. That is the fundamental driver of what I guess I would call a margin surprise increase of nine basis points relative to our expectations of giving back a few. and that largely stemmed from interest rate increases along the curve, particularly in SOFR and overnight index swap rates that began after kind of instability in the Middle East kicked up and price of oil went up and all that, none of which could have been expected. Worked out well, I guess. Obviously, the margins, ridiculously good at this point. You know, 5.23 relative to 5.14 last quarter, 38 basis points up year over year. We did have some loan growths this quarter on an average basis. It was only 14 million. Obviously, Jim went through the period end. Deposit runoff was a little higher than expected. Deposit funding costs came down, which I did not expect. I would say that both loan and deposit market competition is very robust right now. We are seeing that both in terms of pricing and structure on the loan side and we are seeing deposit competition pretty significantly above the Fed funds curve and the Treasury curve at this point. So things are pretty aggressive out there. Loan origination activity in the second quarter reflected a seasonal increase of 60 million and the pipeline remains strong. Certainly The market environment, including pricing challenges due to tariffs and the uncertainty with the war in Iran, results in some reluctance on borrowers to invest in capital projects. So we're still kind of in a wait and see mode on that front. Overall, I still feel pretty good about loan growth on a full year basis. I don't see much of a reason to step down what we talked about before. Maybe a little bit more of a bias toward the low single digit level. From a stock repurchase perspective, We acquired 732,000 shares during the second quarter at an average price of $2,108. That results, obviously, in a reduction to equity and growth in the Treasury stock of $15.4 million. This enhanced EPS in the quarter by about a penny. Year-to-date repurchases under the stock repurchase program totaled 1.9 million shares at an average price of $20.31. We had exhausted the previously approved stock repurchase program which was 5% at the time pre-Evergreen. And the Board of Directors have approved a new plan to repurchase approximately 2.5 million shares through June 30, 2027. I would expect that we will continue to be active and aggressive in the repurchase of shares given our extremely strong capital position that far outstretches our projected capital needs over the next 12 to 24 months. Margin trends still feel very good and very stable in the near term. If you pinned me down and hit me with a rock, I would say we'd probably give back a few basis points, but my track record is starting to look pretty poor on that prognostication. I realize I've been saying that for the last few quarters and it hasn't happened. Obviously, rates along the curve went up quite a bit, as I said. Those trends remain stable here, and high-cost deposit attrition slows. I would expect that few basis points of contraction to occur, but it may not. Loan growth for 2026, still target low to mid-single digits, as I said. Expense growth will continue to be modest in the quarters ahead. And that's it from my end. I turn the call back over to Jim.